UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number: 0-25750
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PENFED BANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 61-1275478
------------------------- --------------------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
215 W. Shelby Street, Falmouth, KY 41040
-------------------------------------- ----------------
(Address of principal executive offices) os (Zip Code)
(606) 654-6961
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Registrant's telephone number, including area code)
N/A
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Former name, former address and former fiscal year,
if changed since last report
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
---- ----
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7,1996
----------------------------- -------------------------
Common Stock, $0.01 Par Value 316,953 Common Share
PENFED BANCORP, INC.
INDEX
Part I Financial Information Page
Item 1 Consolidated Financial Statements
Consolidated Statements of Financial Condition,
March 31, 1996 and December 31, 1995 1
Consolidated Statements of Income, Three-Months
Ended March 31, 1996 and 1995 2
Consolidated Statements of Cash Flows,
Three-Months Ended March 31, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II Other Information 13
Signatures 14
PENFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31
1996 December 31
ASSETS (unaudited) 1995
----------- ----------
Cash and balances with banks $ 351,782 $ 248,547
Interest-bearing deposits in other
depository institutions 486,675 347,413
Investment securities, held to maturity 350,000 250,000
Mortgage-backed securities, held to maturity 559,961 578,671
Federal Home Loan Bank capital stock 228,400 224,500
Loan receivable, net 24,825,091 24,339,783
Office property and equipment, at cost,
less accumulated depreciation 367,752 379,033
Real Estate Owned 85,408 59,948
Mortgage servicing rights 7,178 0
Other assets 112,707 122,455
----------- -----------
Total assets $27,374,954 $26,550,350
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $ 4,040,160 $ 3,630,984
Certificates of deposit 16,753,122 16,289,193
Advances from Federal 1,350,000 1,400,000
Home Loan Bank Other liabilities 116,400 127,195
----------- -----------
Total liabilities 22,259,682 21,447,372
Stockholders' equity:
Preferred stock, 500,000 shares authorized
and unissued
Common stock, $.01 par value, 2,000,000 shares
authorized; 345,000 shares issued; 316,953
shares outstanding at March 31, 1996 3,450 3,450
Additional paid in capital 3,111,343 3,109,755
Retained income, substantially restricted 2,289,280 2,235,233
Employee Stock Ownership Plan (236,320) (244,260)
Treasury stock (52,480) (1,200)
----------- -----------
Total stockholders' equity 5,115,273 5,102,978
----------- -----------
Total liabilities and stockholders' equity $27,374,954 $26,550,350
----------- -----------
1
PENFED BANCORP,INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
March 31
-------------------------------
1996 1995
----------- -----------
Interest on loans $ 547,862 $ 406,995
Interest on investment
securities 13,276 9,932
Interest on
interest-bearing deposits
in other depository
institutions 5,382 3,430
Other interest income 3,907 14,844
----------- -----------
Total interest income 570,427 435,201
Interest on savings deposits
and advances:
NOW accounts 2,967 1,530
Savings accounts 19,179 20,281
Certificates 250,008 213,400
Federal Home Loan Bank
Advances 20,573 42,525
----------- -----------
Total interest income 292,727 277,736
----------- -----------
Net interest income 277,700 157,465
----------- -----------
Provision for loan losses 3,000 3,000
----------- -----------
Net interest income after
provision of loan losses 274,700 154,465
----------- -----------
Noninterest income 31,069 6,477
----------- -----------
Other expenses:
Salaries and benefits 78,444 54,342
Occupancy expense 18,502 19,697
Equipment and data
processing 14,141 11,077
Professional services 21,527 8,819
Federal insurance premium 10,564 10,319
State ad valorem taxes 4,959 5,189
Other 21,610 13,114
----------- -----------
Total other expenses 169,746 122,557
----------- -----------
Income before income
taxes 136,023 38,385
Income tax expense 41,988 12,950
----------- -----------
Net income $ 94,035 $ 25,435
=========== ===========
Net income per share $.30 $0.08
=========== ===========
Weighted average common
share outstanding 318,214 317,400
2
PENFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months
ended March 31,
-------------------------------
1996 1995
----------- -----------
Cash flows from
operating activities: $ 39,470 $ 4,532
----------- -----------
Cash flows from investing
activities:
Securities ( 81,290) (103,015)
Loans receivable (459,848) (1,044,772)
Purchases equipment 0 (133,676)
---------- ----------
Net cash used investing
activities: (541,138) (1,281,463)
Cash flows from financing
activities:
Deposits 873,105 (106,464)
Advances from FHLB (50,000) (1,100,000)
Net proceeds from stock
conversion 0 2,239,735
---------- ----------
Net cash used in financing
activities 823,105 1,033,271
Net cash and cash
equivalents 242,497 (243,660)
Cash and cash equivalents at
beginning of period 595,960 901,500
----------- -----------
Cash and cash equivalents
at end of period $ 838,457 $ 657,840
=========== ===========
3
PENFED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
The accompanying consolidated financial statements of Penfed Bancorp, Inc. (the
"Corporation") and Pendleton Federal Savings Bank (the subsidiary, "Savings
Bank") have been prepared in accordance with the instructions for Form 10-QSB
and therefore do not include certain information or footnotes necessary for the
presentation of financial position in accordance with generally accepted
accounting principles. However, in the opinion of management, the consolidated
financial statements reflect all adjustments (which consist of normal recurring
accruals) necessary for a fair presentation of the results for the unaudited
periods. The results of operations for the three months ended March 31, 1996
are not necessarily indicative of the results which may be expected for the
entire year. The consolidated financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
year ended December 31, 1995.
Allowance for Loan Losses:
An analysis of the changes in the loan loss allowance for the three months ended
March 31, 1996 follows:
Three Months Ended
1996 1995
Beginning balance $106,063 $94,063
Provision 3,000 3,000
-------- -------
Ending balance 109,063 97,063
======== =======
Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
Accounting for Mortgage Servicing Rights, an amendment to SFAS 65. The Company
elected to adopt SFAS 122 for its financial statement reporting in the first
quarter of 1996. SFAS 122 prohibits retroactive application. Accordingly, the
Company's financial statement reporting for the year of 1995 was accounted for
under the original SFAS 65. As a consequence, the Company's 1996 results are not
directly comparable to the results of 1995. Net income for 1996 was increased by
approximately $7,000 as a result of the adoption.
4
Mortgage Servicing Rights continued
FAS 122 eliminates the accounting distinction between servicing rights acquired
through purchase transactions and those acquired through origination activities.
Recognition of mortgage servicing rights related to loan origination activities
was not permitted for periods prior to the adoption of FAS 122. When a mortgage
banking enterprise purchases or originates a mortgage loan with a definitive
plan to sell the loan and retain the mortgage servicing rights, FAS 122 requires
that a portion of the loan be allocated to the mortgage servicing rights based
on its fair value relative to the fair value of the loan including the mortgage
servicing rights. To determine the fair value of the servicing rights created
during 1995, the Company used the market prices of comparable servicing sale
contracts when available, or alternatively, a valuation model that calculates
the present value of estimated future cash flows. The estimates of future cash
flows are based on assumptions that market participants would use in estimating
future net servicing income. These assumptions included estimates of the cost of
servicing per loan, the discount rate, float rate, and inflation rate, ancillary
income per loan, prepayment speeds and default rates.
Mortgage servicing rights are amortized over the estimated life of the related
loans in proportion to estimated net servicing income.
To evaluate potential impairment at the end of each quarter, the
postimplementation mortgage servicing portfolio is disaggregated based on its
predominant risk characteristics. The Company has determined those risk
characteristics to be loan type and interest rate. The resulting segments of
the portfolio are then valued using the same model as was originally used to
determine the fair value at origination using current assumptions. The
calculated value is then compared with the book value of each segment to
determine if a reserve for impairment is required.
Effect of Implementing New Accounting Standards:
None
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The primary business of Pendleton Federal Savings Bank is the origination of
residential real estate loans and funding such loans through deposits and other
borrowings. The largest component of the Bank's net income is net interest
income, which is the difference between interest income and interest expense.
Consequently, the Bank's earnings are primarily dependent on its interest
income, which is determined by (1) the difference ("interest rate spread")
between rates of interest earned on interest-earning assets and rates paid on
interest-bearing liabilities, and (2) the relative amounts of interest-earning
assets and interest-bearing liabilities.
Because most deposit accounts react more quickly to market interest rate
movements than do traditional mortgage loans, sharp increases in rates can
adversely affect the Bank's earnings over time.
Financial Condition
Total assets increased by 3.1% during the quarter ended March 31, 1996. Loan
receivable and investment securities increased 2.0% and 40.0%, respectively.
Mortgage-backed securities decreased 3.2%. Deposits increased 4.4% and Federal
Home Loan Bank advances decreased 3.6%.
Due to the continuing marketing efforts of the Bank to take advantage of
opportunities for lending growth in its market areas, the Bank's loans
receivable balance increased during the first quarter. Fixed rate loans are
generally sold in the secondary market; therefore their origination does not
result in increases to the Bank's loan portfolio. During the quarter, the Bank
was able to increase its loans receivable balance by originating adjustable rate
mortgage loans that are retained in the Bank's loan portfolio. Future increases
in the Bank's loans receivable balances will be funded through increased
deposits or Federal Home Loan Bank advances, if required. Investment securities
increased due to a purchase of a SBA pool.
6
The Bank experienced an increase in deposits due to new depositors opening
accounts. Management will continue to monitor deposit levels in light of
prevailing interest rates and other factor and may choose to increase deposit
rates in the future to preserve market share or obtain required levels of cash
flows. To the extent that the Bank elects to increase deposit rates in order to
attract and/or maintain deposits and to fund future loan growth and other
operating needs, interest income may be adversely affected. Currently, however,
management does not anticipate the necessity of offering above-market interest
rates on deposits.
Stockholders' equity decreased from 19.2% of assets at December 31, 1995 to
18.7% of assets at March 31, 1996. This is due primarily to assets increasing
at a higher rate than stockholder's equity.
Although the level of non-performing loans increased in the first quarter as
compared to the first quarter of the prior year, (see table below) overall the
Bank continued to experience low loan losses. The following table sets forth
information with respect to the Bank's nonperforming assets for the periods
indicated. During the periods shown, the Bank had no restructured loans with
the meaning of Statement of Financial Accounting Standards No. 15.
At March 31,
------------------------
1996 1995
--------------- -------
(Dollars in thousands)
Loans accounted for on a
non-accrual basis $ 712 $ 282
Accruing loans which are
contractually past due 90 days
or more 0 23
----- -----
Total of non-accrual and 90 days
past due loans $ 712 $ 305
===== =====
Other real estate owned 85 23
----- -----
Total nonperforming assets $ 797 $ 328
===== =====
Ratio of nonperforming loans
to total loans 2.9% 1.4%
===== =====
Ratio of nonperforming assets
to total assets 2.9% 1.4%
===== =====
Ratio of allowance for loan losses
to total loans .4% 0.4%
===== =====
Ratio of allowance for loan losses
to nonperforming loans 15.3% 31.8%
===== =====
7
The Bank's total nonperforming loans and total nonperforming assets at March 31,
1996 increased $407,000 and $469,000, respectively as compared to March 31,
1995. Nonperforming loans at March 31, 1996 increased due to a general increase
in delinquencies, however all nonperforming loans are collateralized by
residential property. Based on management's review of the value of the
underlined collateral and other factors, no losses are expected. The Bank owns
two pieces of real estate acquired through foreclose at March 31, 1996 and does
not expect to incur any loss on deposition of this property.
The Bank's allowance for loan losses increased $12,000 from March 31, 1995 to
March 31, 1996 and the provision for loan losses remained constant at $3,000 in
the first quarter of 1996 as compared to the first quarter of 1995. (See
"Allowance for Loan Losses" of the Notes to the Consolidated Financial
Statements).
Results of Operations
Three Months Ended March 31, 1996, Compared to March 31, 1995. The
Corporation's net income for the quarter ended March 31, 1996 increased 241.5%
as compared to the first quarter of 1995 due to a increase in net interest
income of 76.4% and an in increase in noninterest income of 268.9%, offset by an
increase in interest expense of 5.4%, an increase in other expenses of 38.5% and
an increase in income tax expense of 224.2%.
Net interest income before provision for loan losses increase by 76.4%. Total
interest income increase 31.1%, due to an increase in the effective rate earned
on interest-earning assets. Even though the trend for interest rates was lower
for the March 31, 1996 quarter as compared to the same period in 1995,
competitive conditions in Pendelton Federal's market area have allowed the Bank
to maintain near the same interest rate this quarter as compared to the same
period last year. Total interest expense increased 5.4% as a result of an
increase in the effective rate paid on interest-bearing liabilities, and also
due to the increase in the balance of interest-bearing deposits.
Noninterest income increased 268.9% for the quarter ended March 31, 1996 as
compared to the first quarter of 1995. The primary reason for this increase is
income earned on loans sold to Freddie Mac, which increased 266.2%.
Other expenses increased by 38.5% for the quarter ended March 31, 1996 as
compared to the first quarter of 1995. Salaries and benefits increased 44.4%
due primarily to the implementation of the Employee Stock Option Plan and
Management Recognition Plan. Professional services increased 144.1% due to
increased reporting requirements associated with being a public company.
8
The increase in net interest income along with the increase in noninterest
income, offset by the increase in other expenses, combined to result in an
increase in income before income taxes of 235.7%. Income taxes increased by
224.2% as result of higher profits.
Liquidity and Capital Resources
Liquidity
Pendleton Federal is required by federal regulations to maintain specified
levels of "liquid" assets consisting of cash and other eligible investments. The
current level of liquidity required by the OTS if 5% of the sum of net
withdrawable savings and borrowings due within one year. The Bank's regulatory
liquidity at March 31, 1996 and December 31, 1995 was 7.37% and 6.24%,
respectively. Management believes that the Bank has an adequate level of
liquidity to meet anticipated cash flow needs.
Capital Resources
The Office of Thrift Supervision ("OTS") imposes regulation which provide that
savings associations must maintain certain levels of capital. The regulations
include a leverage limit, a tangible capital requirement and a risk-based
capital requirement. Specifically, the regulations provide that savings
associations must maintain tangible capital equal to 1.5% of adjusted total
assets, core capital equal to 3% of adjusted total assets and a combination of
core and supplementary capital equal to 8% of risk weighted assets. Pendleton
Federal is in compliance with these capital regulations.
The OTS capital regulations also require savings associations to maintain
capital based on the amount of their exposure to losses from changes in market
interest rates ("interest rate risk"). The calculation performed by the OTS
indicates that the Bank has no additional capital requirement resulting from
excessive exposure to interest rate risk. The OTS has also proposed an
amendment to its core capital requirement to conform to the leverage capital
requirements applicable to national banks. The Bank does not expect such
amendment, if adopted, to cause the Bank to fall below its capital requirements.
The following table summarizes the Bank's capital requirements and position at
March 31, 1996 and December 31, 1995 in accordance with the capital standards
imposed by the OTS. Amounts are in thousands.
9
March 31, December 31,
1996 1995
------------- -------------
Amount % Amount %
------- ---- ------- ----
Tangible capital $5,108 18.7 $5,103 19.2
Tangible capital
requirement 411 1.5 398 1.5
------ ---- ------ ----
Excess $4,697 17.2 $4,705 17.7
====== ==== ====== ====
Core capital $5,108 18.7 $5,103 19.2
Core capital
requirement 821 3.0 797 3.0
------ ---- ------ ----
Excess $4,287 15.7 $4,307 16.2
====== ==== ====== ====
Tangible capital $5,108 $5,103
Allowance for loan loss 109 106
------ ---- ------ ----
Total capital
(core and supplemental) 5,217 33.0 5,209 33.9
Risk-based requirement 1,267 8.0 1,228 8.0
------ ---- ------ ----
Excess $3,950 25.0 $3,981 25.9
====== ==== ====== ====
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes there
to presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Effect of Implementing New Accounting Standards
See "Notes to the Consolidated Financial Statements for discussion of new
accounting standards.
10
Possible BIF-SAIF Premium Disparity
The Federal Deposit Insurance Corporation ("FDIC") has lowered the deposit
insurance assessment rate for most commercial banks insured by the Bank
Insurance Fund ("BIF") to 0.04% of insured deposits. The FDIC has indicated
that the assessment rate for SAIF-insured institutions will not fall below .23%
of insured deposits until approximately the year 2002. This decrease in BIF
rates has resulted in a substantial disparity in deposit insurance premiums paid
by savings institutions, such as the Bank, which are insured by the Savings
Association Insurance Fund ("SAIF") and institutions insured by the BIF. The
lower rates paid by BIF-insured institutions are likely to give them a
significant competitive advantage over SAIF-insured institutions such as the
Bank.
To alleviate this disparity, one proposal being considered by the U.S.
Department of Treasury, the FDIC, and the U.S. Congress provides that a one-time
assessment estimated to be 80 basis points be imposed on all SAIF-insured
deposits to cause the SAIF insurance fund to reach its designated reserve ratio
(currently 1.25%). Once this occurs, the two funds would be merged into one
fund. There can be no assurance that this proposal or any other proposal will
be implemented or that premiums for either fund will not be adjusted in the
future by the FDIC or legislative action.
The payment of a special assessment would severely and negatively impact the
Bank's results of operations, resulting in a net charge of up to approximately
$106,000, after adjusting for tax benefits. However, if such a special
assessment is imposed and the SAIF is recapitalized, it could have the effect of
reducing the Bank's insurance premiums in the future, thereby creating equal
competition between BIF-insured and SAIF-insured institutions.
In addition, another proposal under consideration by Congress would require
savings associations to convert their charters to that of commercial banks in
connection with a merger of the BIF and the SAIF. Under current tax laws, a
savings association converting to a commercial bank charter must recapture into
taxable income the portion of the tax debt reserve that exceeds the 1988 tax
loan loss reserve. Under the proposal, $126,566 of the Bank's bad debt reserve
would be required to be recaptured into taxable income. If this legislation is
enacted into law, the Bank would also no longer be allowed to use the reserve
method for tax loan loss provisions, but would be required to change to the
charge-off method for tax purposes. No certainty exists that the pending
legislation will be enacted into law.
11
Asset/Liability Management
Pendleton Federal's future financial performance depends to a large extent on
how successful the Bank is in limiting the sensitivity of the Bank's earnings
and net asset value to changes in interest rates. Such sensitivity may be
analyzed by examining the amount by which the market value of the Bank's
portfolio equity changes given an immediate and sustained change in interest
rates. At December 31, 1995, (the most recent report available) the Bank's
market value of portfolio equity would decrease by $311,000 or 6.0% and increase
by $363,000 or 7.0% given a 200 basis point immediate and sustained increase or
decrease, respectively, in interest rates. Based on this analysis, management
believes that the Bank has an acceptable level of interest rate risk and is
adequately protected from the effects of interest rate fluctuations.
Management believes that interest rate risk is one of the most significant
factors affecting the Bank's future ability to generate earnings consistently.
Accordingly, management has focused on strategies to reduce the Bank's interest
risk in recent years. These strategies include the origination of its portfolio
of adjustable rate mortgage loans with greater interest rate sensitivity than
long term fixed rate mortgage loans, the sale of long term fixed rate loans in
the secondary market and increasing the balance of transaction accounts.
Sources of non-interest income such as loan servicing fees and service charges
on deposits are also emphasized.
12
PENFED BANCORP, INC.
PART II
OTHER INFORMATION
ITEM 1 Legal Proceeding
None
ITEM 2 Changes in Securities
None
ITEM 3 Defaults Upon Senior Securities
None
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
None
13
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.
PENFED BANCORP, INC.
May 9, 1996 /s/ David C. Wills
- - ------------ -------------------------------------
Date David C. Wills
President and Chief Executive Officer
(Duly Authorized Officer)
May 9, 1996 /s/ Leann Banta
- - ------------ -------------------------------------
Date Leann Banta
Secretary and Controller
(Principal Financial Officer)
14