FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended SEC Commission File
September 30, 1996 Docket Number 0-15334
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PALFED, INC.
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(Exact name of registrant as specified in its
charter)
South Carolina 57-0821295
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(State or other jurisdiction o (IRS Employer
incorporation or organization) identification
number)
107 Chesterfield Street South
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Aiken, South Carolina 29801
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (803) 642-1400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes..X... NO......
There were 5,227,739 shares of Common Stock outstanding on September 30, 1996.
PALFED, Inc.
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Quarterly Report on Form 10-Q
For The Quarter Ended SEPTEMBER 30, 1996
Table of Contents
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PART I - FINANCIAL INFORMATION
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Item Page
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1. Financial Statements
Consolidated Statements of Financial
Condition as of September 30, 1996
and December 31, 1995. 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1996 and 1995. 4
Consolidated Statements of Cash
Flows for the Three and Nine Months Ended
September 30, 1996 and 1995. 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II - OTHER INFORMATION
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Item
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4. Submission of Matters To a Vote of
Security Holders 17
5. Other Information 17
6. (a) Exhibits 17
(b) Reports on Form 8-K 17
Exhibit 11.1 18
SIGNATURES 19
2
Consolidated Statements of Financial Condition
(Unaudited)
PALFED, Inc. and Subsidiaries September 30 December 31
- ----------------------------- 1996 1995
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(in thousands, except share data)
ASSETS
Cash and due from banks $11,291 $15,471
Interest-bearing deposits with other banks 4,133 5,854
Investment and mortgage-backed securities:
Available-for-sale 31,805 55,550
Held-to-maturity 61,266 62,293
Loans receivable, net 508,649 464,281
Investment in real estate, net 15,282 14,448
Investment in Federal Home Loan Bank stock 10,884 10,884
Premises and equipment, net 5,902 5,350
Accrued interest, net of allowance of
$512 and $1,052, respectively 3,943 4,256
Other assets 6,747 7,637
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$659,902 $646,024
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing accounts $28,701 $27,333
Savings and NOW accounts 113,220 105,329
Certificates of deposit 373,011 363,193
Accrued interest payable 6,427 891
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Total deposits 521,359 496,746
Federal Home Loan Bank advances 73,700 91,500
Other liabilities 12,039 6,293
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Total liabilities 607,098 594,539
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Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value; authorized
10,000,000 shares; 5,227,739 and 5,142,166
shares issued; 5,227,739 and 5,101,297
shares outstanding, respectively 5,228 5,142
Additional paid-in capital 28,095 26,904
Retained earnings 21,559 20,626
Unamortized deferred compensation relating
to incentive stock grants (1,165)
Unrealized loss on debt securities, net of
income tax benefit of $552 and $456,
respectively (913) (884)
Treasury stock, at cost (40,869 shares) ___ (303)
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Total stockholders' equity 52,804 51,485
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$659,902 $646,024
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The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
PALFED, Inc. Sept 30 Sept 30 Sept 30 Sept 30
and Subsidiaries 1996 1995 1996 1995
(in thousands, except per share data)
Interest income:
Loans receivable $11,055 $10,407 $32,209 $30,267
Mortgage-backed securities 1,081 1,524 3,244 4,962
Investment securities 570 795 1,857 2,385
Other 58 94 182 278
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Total interest income 12,764 12,820 37,492 37,892
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Interest expense:
Deposits 6,159 6,188 18,199 17,578
Other borrowings 870 1,538 3,100 5,391
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Total interest expense 7,029 7,726 21,299 22,969
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Net interest income 5,735 5,094 16,193 14,923
Provision for estimated losses
on loans 313 451 899 898
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Net interest income after provision
for estimated loan losses 5,422 4,643 15,294 14,025
Noninterest income:
Checking transaction fees 611 638 1,812 1,972
Financial services fees 209 217 664 635
Late charge and other fees 77 116 353 396
Gain on sales of investment and
mortgage-backed securities
and loans 177 172 766 253
Real estate operations (288) (342) (463) (863)
Other 288 191 677 608
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Total noninterest income 1,074 992 3,809 3,001
------ ------ ------ ------
Noninterest expenses:
Compensation and employee benefits 2,449 2,148 7,429 6,531
Occupancy and equipment 764 667 2,228 1,946
Federal insurance premiums and
assessments 3,657 355 4,364 1,039
Professional and outside service
fees 335 260 1,035 859
Data processing 208 222 626 659
Advertising and public relations 139 69 562 567
Other 375 227 864 708
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Total noninterest expenses 7,927 3,948 17,108 12,309
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Income (loss) before provision
(benefit) for income taxes (1,431) 1,687 1,995 4,717
Provision (benefit) for income
taxes (453) 619 749 1,663
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Net income (loss) $ (978) $ 1,068 $ 1,246 $ 3,054
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------ ------ ------ ------
Earnings (loss) per share $ (0.19) $ 0.21 $ 0.24 $ 0.59
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The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
(Unaudited)
PALFED, Inc. For the nine months ended Sept 30,
and Subsidiaries 1996 1995
(in thousands)
Operating Activities:
Cash flows from operating activities :
Net income $ 1,246 $ 3,054
Adjustments to reconcile net income to cash
provided by operations:
Depreciation 596 589
Amortization of goodwill and intangibles,
loan fees, deferred income, and
premiums and discounts 46 149
Provision for estimated losses on loans,
real estate and accrued interest receivable 1,648 2,125
(Gain) loss on sales of real estate (230) (297)
Gain on sales of loans (474) (346)
(Gain) loss on sale of assets available for sale (293) 93
Changes in:
Accrued interest receivable, net (259) (1,188)
Accrued interest payable 5,536 6,237
Other assets 424 1,570
Other liabilities (excluding deferred
income) 5,161 1,436
Other, net 1,163 158
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Net cash provided by operating activities 14,564 13,580
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Investing activities:
Cash flows from investing activities :
Purchases of investment and mortgage-backed
securities (6,852)
Principal payments and maturities of investment
and mortgage-backed securities 8,005 10,781
Purchases of assets available-for-sale (7,998) (9,754)
Principal collections on assets available-
for-sale 12,641 3,458
Proceeds from sales of assets available-for-sale 57,001 50,023
Loans originated (net of payments received) (85,939) (41,822)
Proceeds from sales of foreclosed real estate 2,419 2,683
Purchase of premises and equipment (1,143) (749)
Other, net (407) (215)
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Net cash provided (used) by investing
activities (22,273) 14,405
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Financing activities:
Cash flows from financing activities :
Net increase in deposit accounts 19,077 13,729
Proceeds from FHLB advances and other
borrowed money 84,900 35,000
Repayments of FHLB advances and other
borrowed money (102,700) (82,000)
Payment of cash dividend (313)
Treasury stock issued 108
Other, net 736 1,323
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Net cash provided (used) by financing
activities
1,808 (31,948)
Net decrease in cash and cash equivalents (5,901) (3,963)
Cash and cash equivalents, beginning of period 21,325 18,331
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Cash and cash equivalents, end of period $15,424 $14,368
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Supplemental disclosures of cash flow information:
Cash paid for:
Interest $15,763 $16,732
Income taxes 1,217 800
Supplemental schedule of noncash investing and
financing activities:
Securitizations of mortgage loans $17,312 $19,931
Real estate acquired through foreclosure 4,471 7,529
Financed sales of foreclosed real estate 1,677 5,430
Issuance of common stock as compensation 81 77
The accompanying notes are an integral part of these consolidated financial
statements.
PALFED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accounting and reporting policies of PALFED, Inc. and Subsidiaries (the
"Company") conform to generally accepted accounting principles and to general
practice within the thrift industry. They reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the
consolidated financial position and results of operations for the interim
periods presented. These adjustments are of a normal and recurring nature.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements, the related notes, and the report of
independent accountants included in the Company's Annual Report to Shareholders
for the year ended December 31, 1995. The year end consolidated statement of
financial condition data was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. The results of operations for the three and nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for a full year.
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are summarized as follows:
September 30, 1996 December 31, 1995
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Amortized Fair Amortized Fair
Cost Value Cost Value
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(in thousands)
Available-for-sale
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Investment securities $ 19,499 $ 19,141 $ 31,230 $ 31,060
Mortgage-backed securities 12,636 12,664 24,383 24,490
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$ 32,135 $ 31,805 $ 55,613 $ 55,550
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Held-to-maturity
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Investment securities $ 6,960 $ 6,897 $ 8,940 $ 8,879
Mortgage-backed securities 54,306 54,375 53,353 54,691
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$ 61,266 $ 61,272 $ 62,293 $ 63,570
-------- -------- -------- --------
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6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS RECEIVABLE
Loans receivable are summarized as follows at the indicated dates:
September 30 December 31
1996 1995
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(in thousands)
Loan collateralized by real estate:
Permanent residential mortgage $231,868 $207,671
Construction 53,881 38,114
Second mortgage 56,073 52,313
Commercial 137,917 128,051
Loans collateralized by other property:
Consumer 36,882 39,585
Commercial 13,924 16,080
Loans collateralized by savings accounts 4,502 4,769
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535,047 486,583
Less:
Loans in process (17,493) (13,141)
Unamortized yield adjustments (1,107) (744)
Allowance for estimated losses (7,798) (8,417)
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$508,649 $464,281
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Changes in the allowance for estimated loan losses are summarized as follows for
the quarters and nine months ended September 30:
Quarters Nine Months
1996 1995 1996 1995
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(in thousands)
Balance, beginning of period $ 7,914 $ 8,077 $ 8,417 $ 8,212
Provisions 313 451 899 898
Charge-offs (521) (432) (1,867) (1,255)
Recoveries 92 124 349 496
Reclassifications 131
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Balance, end of period $ 7,798 $ 8,351 $ 7,798 $ 8,351
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At September 30, 1996 the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totalled approximately $10.3
million, of which $5.5 million related to loans with a corresponding valuation
allowance of $1.0 million. The impaired loans at September 30. 1996, were
measured for impairment using the fair value of the collateral as substantially
all of these loans were collateral dependent. For the nine months ended
September 30, 1996, the average recorded investment in impaired loans was
approximately $11.5 million. The interest income recognized on impaired loans
during the nine months ended September 30, 1996 was $550,000. Impaired loans
are summarized as follows:
Sept. 30 Dec. 31
1996 1995
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(in thousands)
Construction loans $ 775 $ 844
Commercial real estate loans 9,248 11,300
Residential mortgage 231 899
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$10,254 $13,043
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES
The "Small Business Job Protection Act of 1996" tax bill signed by the President
in August 1996 repealed the bad debt reserve method for thrifts effective
January 1, 1996. Prior to the repeal of the bad debt reserve provision, thrifts
generally received more favorable tax deductions for bad debts. The legislation
forgives recapture of bad debt reserves taken through 1987, but requires thrifts
to recapture or repay bad debt deductions taken after 1987 over 6 years
beginning in 1996. Thrifts meeting certain home mortgage lending tests will be
allowed to defer repayment for an additional 2 years.
As of December 31, 1995, PALFED's bad debt reserves subject to recapture, for
which deferred taxes have previously been provided, totalled $3.0 million. The
Company is obtaining the necessary data to determine whether it will qualify for
the additional 2 year deferral.
5. COMMITMENTS AND CONTINGENCIES
The Company has salary continuation agreements with nine officers which grant
these officers the right to receive up to three times their average annual
compensation for the five years preceding a change of control of the Company and
a change of duties or salary for such officers. The maximum contingent
liability under these agreements is approximately $2.5 million at September 30,
1996.
Concurrent with the 1990 sale of the Woodside Plantation Country Club ("WPCC"),
the Company had entered into an agreement with WPCC to purchase club memberships
through December 31, 2000. In 1993, the purchaser of the remaining lots and
certain other real estate at Woodside Plantation assumed the Company's
obligations under this agreement, however, the Company remains contingently
liable under this agreement. The Company's maximum contingent liability over
the remaining term of the agreement, which is directly related to the number of
lot sales at Woodside Plantation, is approximately $1.5 million.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The amounts of financial instruments with off-balance-sheet risk are as follows
at the dates indicated:
September 30 December 31
1996 1995
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(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate loans: $ 36,943 $ 13,460
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Unused lines of credit: $ 35,938 $ 31,639
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Standby letters of credit $ 531 $ 713
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
As a result of a special $3.3 million charge to recapitalize the Savings
Association Insurance Fund, the Company incurred a net loss of $1.0 million or
$0.19 per common share for the three months ended September 30, 1996 compared to
earnings of $1.1 million or $0.21 per common share for the three months ended
September 30, 1995. The net earnings for the nine months ended September 30,
1996 were $1.2 million or $0.24 per common share compared to $3.1 million or
$0.59 per common share for the comparable period in 1995. The decrease in
quarterly and year-to-date earnings resulted from a special assessment of $3.3
million to recapitalize the SAIF which was enacted by the United States Congress
on September 30, 1996.
In September, Palmetto Federal opened its 20th and 21st branches in Lexington
and Mt. Pleasant, South Carolina. The Mt. Pleasant branch is the Bank's third
in the Charleston, South Carolina area and the Lexington branch is the second in
the Columbia, South Carolina market area.
COMPARISON OF 1996 AND 1995 OPERATING RESULTS
NET INTEREST INCOME
Net interest income was $5.7 million for the quarter ended September 30, 1996,
an increase of $641,000 or 12.6% compared to the quarter ended September 30,
1995. Total interest income decreased $56,000 due to a decrease of $ 7.2
million or 1.2% in the level of average interest-earning assets caused by
increased sales of investment and mortgage-backed securities which occurred
earlier in 1996, partially offset by an increase in the yield on these assets
from 8.43% during the 1995 quarter to 8.49% during the 1996 quarter. Total
interest expense decreased $697,000 due to a decrease in the rate paid on
average interest-earning liabilities from 5.21% during the 1995 quarter to 4.81%
during the 1996 quarter and a decrease of $9.3 million or 1.6% in the level of
interest-bearing liabilities.
For the nine months ended September 30, 1996, net interest income increased by
$1.3 million or 8.5% to $16.2 million compared to the nine months ended
September 30, 1995. Total interest income decreased $400,000 or 1.1%, while
total interest expense decreased $1.7 million or 7.3% from the 1995 period.
The following table presents information with respect to interest income from
interest-earning assets and interest expense from interest-bearing liabilities,
expressed in both dollars (in thousands) and rates, for the periods indicated.
Averages are computed using month-end balances for the periods presented.
9
Nonaccruing loans have been included in average loans receivable for purposes of
calculating the average yield on loans receivable.
Interest Interest
Income/ Yield/ Income/ Yield/
Nine Months Ended September 30, 1996 Expense Rate 1995 Expense Rate
- ----------------------------------------------------------------------------------------
Average Interest-Earning:
Assets:
Interest-bearing deposits $ 3,482 $ 182 5.17% $ 6,534 $ 278 5.68%
Loans receivable 483,393 32,209 8.88 455,520 30,267 8.86
Mortgage-backed securities 64,741 3,244 6.68 99,713 4,962 6.63
Total investments 30,574 1,266 5.52 43,422 1,795 5.51
FHLB stock 10,884 591 7.20 10,884 590 7.23
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Total 593,074 37,492 8.43% 616,073 37,892 8.20%
- ----------------------------------------------------------------------------------------
Liabilities:
Retail savings deposits $ 32,103 $ 619 2.58% $ 31,039 $ 629 2.71%
Retail time deposits 372,286 16,233 5.82 364,781 15,668 5.74
Demand deposits 104,621 1,347 1.72 98,785 1,281 1.73
FHLB Advances 68,590 3,100 6.04 108,235 5,391 6.66
- ----------------------------------------------------------------------------------------
Total 577,600 21,299 4.93% 602,840 22,969 5.09%
- ----------------------------------------------------------------------------------------
Net interest income $16,193 $14,923
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Net interest margin 3.50% 3.11%
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Net yield 3.64% 3.23%
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The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected Palmetto Federal's interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) change in
volume (change in volume multiplied by old rate); (2) change in rates (change in
rate multiplied by old volume); (3) change in rate-volume (change in rate
multiplied by the change in volume).
For The Nine Months Ended
September 1996 vs. September 1995
Increase (Decrease)
----------------------------------
Rate/
Volume Rate Volume Total
------ ------- ------ -----
(in thousands)
Changes in:
Interest income:
Loans receivable............ $ 1,855 $ 82 $ 5 $ 1,942
Mortgage-backed securities.. (1,743) 38 (13) (1,718)
Investments and other....... (696) 96 (24) (624)
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Total interest income........ (584) 216 (32) (400)
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Interest expense:
Deposits.................... 522 96 3 621
FHLB advances............... (1,970) (506) 185 (2,291)
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Total interest expense....... (1,448) (410) 188 (1,670)
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Net interest income (expense) $ 864 $ 626 $(220) $ 1,270
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10
PROVISION FOR ESTIMATED LOSSES ON LOANS
The provision for estimated losses on loans was $313,000 for the quarter ended
September 30, 1996, compared to $451,000 for the 1995 quarter. Net charge-offs
for the 1996 quarter were $429,000 compared to $308,000 for the 1995 quarter.
For the comparable nine month periods, the provision for estimated loan losses
remained unchanged at $0.9 million while net charge-offs increased from
$759,000 in 1995 to $1.5 million in 1996. The 1996 net charge-offs include an
increase of $329,000 or 68.5% in consumer loans primarily related to increased
mobile home loan charge-offs and an increase of $185,000 in foreclosed mortgage
loan charge-offs. Additionally, 1995 charge-offs were reduced by $265,000 in
recoveries for in-substance foreclosed loans. Although charge-offs have
increased for the nine month period, the Company has not increased the
provision for estimated loan losses because of the overall decline in its
nonperforming assets and restructured loans, and the decline in the level of
assets classified as substandard during the twelve months ended September 30,
1996. The resulting allowance for estimated losses on loans at September 30,
1996 and 1995 was $7.8 million and $8.4 million, respectively. While
management uses its best judgment in establishing the allowance for loan
losses, there is no assurance that future higher provisions will not be
required. SEE NONPERFORMING ASSETS AND RESTRUCTURED LOANS.
NONINTEREST INCOME
Noninterest income was $1.1 million for the quarter ended September 30, 1996, an
increase of $82,000 or 8.3% over the 1995 quarter. Other noninterest income
increased by $97,000 or 50.8% during the comparable quarters primarily due to
the collection of $100,000 in interest from the Internal Revenue Service related
to an income tax refund. Real estate operations losses decreased by $54,000
during the comparable quarters primarily as a result of a decrease of $142,000
in foreclosed real estate expenses, a decrease of $109,000 in the provision for
estimated losses on foreclosed real estate and an increase of $50,000 in profits
from partnerships, partially offset by a decrease of $235,000 in net gains on
sales of foreclosed real estate. These improvements were offset by a decrease
of $39,000 in late charge and other fees.
For the nine months ended September 30, 1996, noninterest income increased by
$808,000 or 26.9% to $3.8 million from the 1995 period. For the comparable nine
month periods: gains on sales of investment and mortgage-backed securities and
loans increased from $253,000 in 1995 to $766,000 in 1996 due to increased
levels of sales and gains of $260,000 resulting from the adoption of Statement
of Financial Accounting Standards ("SFAS") No. 122; losses from real estate
operations decreased by $400,000 or 46.3% due primarily to decreases in
foreclosed real estate expenses and provisions for estimated losses on
foreclosed real estate, and; checking transaction fees decreased $160,000 or
8.1% due to decreases in fee generating accounts. Management currently
anticipates that new branches opened in 1996 will generate additional fee
income.
11
NONINTEREST EXPENSES
Noninterest expenses were $7.9 million (or $4.6 million without the SAIF
assessment) and $3.9 million for the quarters ended September 30, 1996 and 1995,
respectively. For the nine months ended September 30, 1996, noninterest
expenses increased by $4.8 million or 39.0% to $17.1 million (or increased by
$1.6 million to $13.8 million without the SAIF assessment).
Compensation and employee benefits expense increased by $301,000 or 14.0% and
$898,000 or 13.7% during the three and nine month periods, respectively. The
primary components of compensation and employee benefits are comprised as
follows:
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands)
Salaries and commissions $ 2,127 $ 1,967 $ 6,355 $ 5,791
Incentive programs 218 127 691 339
Medical and retirement 217 170 702 620
Payroll and other taxes 142 132 506 466
Other expenses 29 25 78 77
-------- -------- -------- --------
2,733 2,421 8,332 7,293
Capitalized costs of loan
originations (284) (273) (903) (762)
-------- -------- -------- --------
$ 2,449 $ 2,148 $ 7,429 $ 6,531
-------- -------- -------- --------
-------- -------- -------- --------
Salaries and benefits increased 14.0% during the quarter ended September 30,
1996, due to: an 8.1% increase in salaries and commissions arising from an
increase in number of employees due to the new branches, a 71.6% increase in
incentive program costs and a 27.6% increase in medical and retirement costs due
to increased medical claims under the Company's self-funded group insurance
plan.
During the quarter ended September 30, 1996, professional and outside service
fees increased by $75,000 or 28.8% primarily due to an increase of $31,000 or
35.6% in legal expenses. Occupancy and equipment expenses increased by $97,000
or 14.5% primarily due to expenses of $74,000 associated with the 4 new Palmetto
Federal branches opened in the past 12 months. During the third quarter of
1996, advertising and public relations expenses increased by $70,000 or 101.4%
compared to the third quarter of 1995, which included a reversal of a $50,000
marketing expense which had been previously accrued in the second quarter of
1995. Finally, other noninterest expense increased by $148,000 or 65.2% due
primarily to an estimated loss of $145,000 on a commercial checking account.
During the comparable nine month periods, occupancy and equipment expenses
increased by $282,000 to $2.2 million primarily as a result of costs related to
operating the new branches and offices opened in the last 12 months.
Professional and outside service fees increased by $176,000 or 20.5% during the
comparable nine month periods due to increased legal and consulting expenses and
other noninterest expenses increased $156,000 or 22.0% due
12
primarily to the aforementioned loss on a commercial checking account.
INCOME TAXES
The "Small Business Job Protection Act of 1996" tax bill signed by the President
in August 1996 repealed the bad debt reserve method for thrifts effective
January 1, 1996. Prior to the repeal of the bad debt reserve provision, thrifts
generally received more favorable tax deductions for bad debts. The legislation
forgives recapture of bad debt reserves taken through 1987, but requires thrifts
to recapture or repay bad debt deductions taken after 1987 over 6 years
beginning in 1996. Thrifts meeting certain home mortgage lending tests will be
allowed to defer repayment for an additional 2 years.
As of December 31, 1995, PALFED's bad debt reserves subject to recapture,
totalled $3.0 million. Because deferred taxes have previously been provided on
these reserves, this recapture will not impact the Company's earnings. The
Company is obtaining the necessary data to determine whether it will qualify
for the additional 2 year deferral.
LENDING ACTIVITIES
During the quarter ended September 30, 1996, the Company originated $56.3
million in loans compared to $43.2 million during the 1995 quarter.
Year-to-date originations were $173.9 million in 1996 compared to $116.1 million
in 1995, an increase of 49.8%. Quarterly originations in the Central Savannah
River Area and Lowcountry markets improved by 18% from 1995 to 1996 and
originations in the Lexington/Columbia market improved by 84%.
Loan originations by loan type for the quarterly and nine month periods follow:
Quarters Nine Months
1996 1995 1996 1995
----------------- ------------------
(in thousands)
Residential mortgage $20,551 $21,882 $ 68,899 $ 43,561
Construction 14,623 8,086 46,963 29,019
Second mortgage 4,078 642 14,716 2,150
Consumer 6,627 7,044 18,490 22,961
Commercial 10,420 5,570 24,882 18,429
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Totals $56,299 $43,224 $173,950 $116,120
------- ------- -------- --------
------- ------- -------- --------
REAL ESTATE DEVELOPMENT ACTIVITY
The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual homeowners, consisting of
real estate held for development, acquisition and development loans, foreclosed
real estate and a 50% interest in a partnership. During the quarter ended
September 30, 1996, the total carrying value of these components decreased from
$13.5 million to $13.2 million due primarily to repayment of loans resulting
from lot sales.
13
ASSET/LIABILITY MANAGEMENT
During the quarter ended September 30, 1996, management increased the level of
Federal Home Loan Bank ("FHLB") advances by 15% to $73.7 million in order to
help fund loan originations. However, for 1996, management has reduced FHLB
advances by 19.5% through increased deposits and sales of lower yielding
mortgage-backed and investment securities. Additionally, the weighted average
interest rate on advances has declined from 6.56% at December 31, 1995 to 5.75%
at September 30, 1996. Palmetto Federal has $6.8 million of advances maturing
in the next three months with a weighted average interest rate of 6.05%.
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets (nonaccrual loans and foreclosed real estate ("REO")) and
restructured loans, net of specific allowances, decreased from $27.4 million or
4.2% of total assets at December 31, 1995 to $22.7 million or 3.4% of total
assets at September 30, 1996. The decrease was attributable to a decrease in
nonaccrual loans offset by an increase in REO. The table below sets forth the
amounts and categories of Palmetto Federal's nonperforming assets and
restructured loans at the dates indicated.
Sept. 30 June 30 December 31 Sept. 30
1996 1996 1995 1995
-------- -------- ----------- --------
(dollars in thousands)
Nonaccrual loans $ 3,309 $ 5,342 $ 7,856 $ 8,136
Foreclosed real estate 8,884 8,310 8,015 7,937
Restructured loans 10,532 10,409 11,553 13,011
------- ------- -------- -------
$22,725 $24,061 $27,424 $29,084
------- ------- -------- -------
------- ------- -------- -------
General loan loss allowance
as a percentage of the total 29.6% 28.4% 26.3% 24.5%
------- ------- -------- -------
------- ------- -------- -------
Total as a percentage of loans
receivable, net 4.5% 4.9% 5.9% 6.4%
------- ------- -------- -------
------- ------- -------- -------
Total as a percentage of total assets 3.4% 3.8% 4.2% 4.5%
------- ------- -------- -------
------- ------- -------- -------
Changes in the components of nonperforming assets and restructured loans during
the three months ended September 30, 1996 were as follows:
Nonaccrual REO Restructured Total
Loans Loans
---------- -------- ------------ -------
(in thousands)
June 30, 1996 $ 5,342 $ 8,310 $ 10,409 $24,061
Performing loans which
became nonperforming 1,330 356 379 2,065
Upgrades due to performance (1,381) (1,381)
Sales (1,115) (1,115)
Net principal collections (223) (256) (479)
Charge-offs and write downs (219) (219)
Net changes in allowances (60) (147) (207)
Nonaccrual loans which became REO (1,480) 1,480 0
--------- -------- -------- -------
September 30, 1996 $ 3,309 $ 8,884 $ 10,532 $22,725
--------- -------- -------- -------
--------- -------- -------- -------
14
The $1.3 million in new nonaccrual loans comprises several loans, none of which
individually exceeds $298,000. The nonaccrual loans which became REO consists
primarily of a $714,000 commercial loan to a local asphalt company and a single
family mortgage loan of $557,000.
The $1.1 million of REO sold consisted of several properties, primarily single
family homes, none of which had a carrying value greater than $142,000.
The Bank's total criticized assets include its nonperforming assets and
restructured loans of $22.7 million as well as its potential problem loans of
$15.4 million. The following table summarizes the Bank's criticized assets as
of the dates indicated:
Sept. 30 June 30 Dec. 31 Sept. 30
1996 1996 1995 1995
-------- ------- -------- --------
(in thousands)
Special mention $14,523 $15,173 $ 9,867 $ 8,194
Substandard 22,181 23,912 25,450 29,903
Doubtful 0 29 0 15
Loss 1,438 1,331 1,462 1,366
------- ------- ------- -------
$38,142 $40,445 $36,779 $39,478
------- ------- ------- -------
------- ------- ------- -------
LIQUIDITY
Palmetto Federal's principal sources of funds are deposits, loan repayments,
proceeds from sales and principal payments of investment and mortgage-backed
securities and loans, FHLB advances, other borrowings, and retained earnings.
The liquidity of Palmetto Federal's operations is measured by the ratio of cash
and short-term investments as defined by the OTS regulations to the sum of
savings and borrowings payable in one year, less loans on savings. The Bank's
average liquidity level for September 1996 was 6.1% which was in excess of the
required amount of 5.0%.
REGULATORY MATTERS
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996
On September 30, 1996, the President signed legislation to recapitalize the SAIF
through a special assessment to bring it up to the same reserve level as the
Bank Insurance Fund ("BIF"). This assessment is 65.7 basis points per $100 of
deposits as of March 31, 1995 which equates to $3.3 million for Palmetto
Federal. The special assessment is tax deductible. Once the SAIF is
recapitalized, the FDIC is expected to reduce deposit insurance premiums
placing thrifts on an equal basis with BIF members.
15
In addition, the costs of the Financing Corporation ("FICO") bonds will be
shared by the bank and thrift industries. Previously, the thrifts paid the
entire cost of these bond payments. It is currently estimated that banks and
thrifts will pay 1.29 cents and 6.44 cents, respectively, per $100 of deposits.
After January 1, 2000, both banks and thrifts will pay 2.43 cents per $100 of
deposits. These rates are only for FICO interest and further premiums could be
assessed. Finally, the legislation contained regulatory provisions benefiting
both banks and thrifts, including expanding the authority of federal thrifts to
make consumer and commercial loans and liberalizing the qualified thrift lender
test.
At September 30, 1996, the intangible value of branch network which resulted
from the 1982 acquisition of First Federal Savings and Loan of Beaufort
totalled $2.4 million and had an estimated remaining life of approximately 11
years. Management periodically reviews the carrying value and the estimated
life of this asset. As a result of the SAIF assessment and its impact on
earnings of the acquired branches, management is reassessing the carrying value
of this intangible asset and the impact of the SAIF assessment on the branches
and deposits acquired from First Federal. Management expects to complete this
reassessment by December 31, 1996.
REGULATORY CAPITAL
As of September 30, 1996 Palmetto Federal's regulatory capital was 6.5% tangible
capital, 6.5% core capital and 10.5% risk-based capital, exceeding both the
regulatory minimum levels and the well capitalized standards. On July 1, 1996,
the deduction to regulatory capital for the investment in nonincludable
subsidiaries increased from 60% to 100% resulting in a decrease of $2.6 million
in each of the regulatory capital measures.
The Office of Thrift Supervision is conducting its regularly scheduled
examination of the Company and Palmetto Federal. Management expects to receive
the confidential Report of Examination during the quarter ending December 31,
1996.
16
Part II. Other Information
Item 4. Submission of Matters To a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Form of PALFED, Inc./Palmetto Federal Executive Salary
Continuation Agreement between PALFED, Inc./Palmetto Federal
and certain officers.
Exhibit 11.1 Statement regarding computation of per share data.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated October 21, 1996, reporting
the Board of Directors approval and adoption of amendments to the Bylaws of
the Company at their meeting on October 21, 1996.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALFED, Inc.
------------
(Registrant)
Date: November 12, 1996 /s/ John C. Troutman
------------------- -----------------------
John C. Troutman
President and Chief
Executive Officer
Date: November 12, 1996 /s/ Darrell R. Rains
------------------- -----------------------
Darrell R. Rains
Executive Vice President
and Chief Financial Officer
Date: November 12, 1996 /s/ Michael B. Smith
------------------- -----------------------
Michael B. Smith
Senior Vice President
and Controller