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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities and Exchange Act
of 1934
--------------------
For the Quarterly Period Ended June 30, 1996 Commission File #0-21942
FIRST PALM BEACH BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0418027
(State of Incorporation) (I.R.S. Employer Identification No.)
215 South Olive Avenue
West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (561) 655-8511
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
--- ---
The number of shares outstanding of the issuer's common stock, par
value $.01 per share, was 5,183,187 at July 31, 1996.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
Index
Part I. Financial Information
- - ------------------------------
Item 1 Financial Statements Page
----
Consolidated Statements of Financial Condition
as of September 30, 1995 and June 30, 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the
Three and Nine Months ended June 30, 1995 and 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Changes in
Stockholders' Equity for the Nine Months ended
June 30, 1995 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-5
Consolidated Statements of Cash Flows for the
Nine Months ended June 30, 1995 and 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
Notes to Unaudited Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 11-17
Part II. Other Information
- - ---------------------------
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2 Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3 Default upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4 Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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Part I - Financial Information
FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1995 and June 30, 1996
(Dollars in thousands)
(Unaudited)
Sept. 30, June 30,
1995 1996
----------- -----------
Assets
- - ------
Cash and amounts due from
depository institutions $ 11,254 $ 19,319
Interest earning deposits 13,878 11,544
---------- ----------
Total cash and cash equivalents 25,132 30,863
Securities available-for-sale 32,443 38,362
Securities held-to-maturity 48,498 6,982
Mortgage-backed and related
securities available-for-sale 81,460 74,372
Mortgage-backed and related
securities held-to-maturity 156,982 133,237
Loans receivable - net of allowance
for loan losses 821,939 1,099,636
Real estate owned 549 2,471
Office properties and equipment, net 17,763 21,719
Federal Home Loan Bank stock 8,558 10,054
Accrued interest receivable 6,778 8,795
Goodwill - 2,873
Other assets 8,743 8,660
---------- ----------
Total assets $1,208,845 $1,438,024
========== ==========
Liabilities and Stockholders' Equity
- - ------------------------------------
Deposit accounts $ 878,670 $1,081,595
Advances from Federal Home Loan Bank 171,125 201,050
Securities sold under agreements
to repurchase 18,427 10,000
Advances from borrowers for taxes
and insurance 14,981 12,013
Other liabilities 21,412 20,102
Deferred income taxes (381) (342)
---------- ----------
Total liabilities $1,104,234 $1,324,418
Stockholders' equity:
Preferred stock ($.01 par value)
authorized 1,000,000 shares;
none outstanding - -
Common stock ($.01 par value) authorized
10,000,000 shares; issued 5,496,375 shares;
outstanding 5,133,063 and 5,181,187
(net of treasury stock) at September 30, 1995
and June 30, 1996, respectively 55 55
Additional paid in capital 51,733 52,682
Retained earnings, substantially restricted 66,592 72,917
Treasury stock, at cost
(363,312 shares at September 30, 1995
and 315,188 shares at June 30, 1996) (7,283) (6,706)
Common stock purchased by:
Employee stock ownership plan (2,509) (1,959)
Recognition and retention plans (621) (341)
Unrealized decrease in fair value on
available-for-sale securities
(net of applicable income taxes) (3,356) (3,042)
---------- ----------
Total stockholders' equity 104,611 113,606
---------- ----------
Total liabilities and stockholders' equity $1,208,845 $1,438,024
========== ==========
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on Pages 8, 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1995 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30, June 30, June 30,
Interest Income: 1995 1996 1995 1996
- - ---------------- -------- -------- -------- --------
Loans $ 14,451 $ 22,181 $ 38,966 $ 61,672
Securities available-for-sale 495 951 2,324 2,529
Securities held-to-maturity 943 130 2,444 764
Trading securities - - 153 -
Mortgage-backed and related
securities available-for-sale 2,457 1,197 7,922 3,817
Mortgage-backed and related
securities held-to-maturity 2,813 2,265 7,073 7,197
Other 168 208 465 618
-------- -------- -------- --------
Total interest income 21,327 26,932 59,347 76,597
-------- -------- -------- --------
Interest Expense:
- - -----------------
Deposits 10,116 12,547 27,500 35,549
Advances from Federal Home Loan Bank 2,548 2,964 6,143 8,995
Securities sold under agreements
to repurchase 423 143 2,058 562
-------- -------- -------- --------
Total interest expense 13,087 15,654 35,701 45,106
-------- -------- -------- --------
Net interest income 8,240 11,278 23,646 31,491
Provision for loan losses 167 1,429 325 3,013
-------- -------- -------- --------
Net interest income after
provision for loan losses 8,073 9,849 23,321 28,478
-------- -------- -------- --------
Other Income:
- - -------------
Servicing income and other fees 624 774 1,898 2,329
Net gain (loss) on sale of loans and
mortgage-backed and related
securities 36 (84) 4 (51)
Net gain (loss) on sale of securities
available-for-sale (360) - (334) 811
Net realized and unrealized gain
on trading securities - - 89 -
Net gain on sale of loan servicing - 460 - 460
Net gain on sale of property - - 975 -
Miscellaneous 359 410 1,006 1,063
-------- -------- -------- --------
Total other income 659 1,560 3,638 4,612
-------- -------- -------- --------
Other Expenses:
- - ---------------
Employee compensation and benefits 3,300 3,628 10,478 11,333
Voluntary early retirement program - - 2,361 -
Occupancy and equipment 1,013 1,284 3,202 3,414
Federal deposit insurance premium 450 600 1,293 1,620
Provision for losses and net losses
(gains) on sale of real estate owned 99 37 110 29
Advertising and promotion 179 195 573 436
Miscellaneous 835 1,140 2,650 3,073
-------- -------- -------- --------
Total other expenses 5,876 6,884 20,667 19,905
-------- -------- -------- --------
Income before provision for
income taxes 2,856 4,525 6,292 13,185
Provision for income taxes 1,148 1,835 2,516 5,296
-------- -------- -------- --------
Net income $ 1,708 $ 2,690 $ 3,776 $ 7,889
======== ======== ======== ========
Earnings per share:
Primary and fully diluted $ 0.34 $ 0.53 $ 0.75 $ 1.55
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on Pages 8, 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1995 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 30, 1995 and 1996
(Dollars in thousands)
(Unaudited)
Unrealized
(Decrease)
Increase
In Fair
Common Common Value on
Additional Stock Stock Available- Total
Common Paid-in Retained Treasury Purchased Purchased for-Sale Stockholders'
Stock Capital Earnings Stock by ESOP by RRP Securities Equity
----- ------- -------- ----- ------- ------ ---------- ------
Nine months ended June 30, 1995
- - -------------------------------
Balance at September 30, 1994 $55 $51,935 $61,999 $(3,718) $(3,174) $(1,111) $(5,524) $100,462
Net income - - 3,776 - - - - 3,776
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to held-to-maturity,
net of income taxes - - - - - - (44) (44)
Change in unrealized losses of
securities available-for-sale
and mortgage-backed and related
securities available-for-sale,
net of income taxes - - - - - - 2,009 2,009
Amortization of deferred compensation
Employee Stock Ownership Plan and
Recognition and Retention Plan - 372 - - 495 551 - 1,418
Purchase of Treasury Stock at cost
(83,600 shares) - - - (1,460) - - - (1,460)
Exercise of stock options by certain
directors and employees - (686) - 1,288 - - - 602
Declaration of three quarterly
dividends of $0.05 per share - - (790) - - - - (790)
--- ------- ------- ------- ------- ----- ------- --------
Balance at June 30, 1995 $55 $51,621 $64,985 $(3,890) $(2,679) $(560) $(3,559) $105,973
=== ======= ======= ======= ======= ===== ======= ========
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on Pages 8, 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1995 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 30, 1995 and 1996
(Dollars in thousands)
(Unaudited)
Unrealized
(Decrease)
Increase
In Fair
Common Common Value on
Additional Stock Stock Available- Total
Common Paid-in Retained Treasury Purchased Purchased for-Sale Stockholders'
Stock Capital Earnings Stock by ESOP by RRP Securities Equity
----- ------- -------- ----- ------- ------ ---------- ------
Nine months ended June 30, 1996
- - -------------------------------
Balance at September 30, 1995 $55 $51,733 $66,592 $(7,283) $(2,509) $(621) $(3,356) $104,611
Net income - - 7,889 - - - - 7,889
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to held-to-maturity,
net of income taxes - - - - - - (37) (37)
Change in unrealized losses on
securities available-for-sale
and mortgage-backed and related
securities available-for-sale,
net of income taxes - - - - - - 351 351
Amortization of deferred compensation
Employee Stock Ownership Plan and
Recognition and Retention Plans - 485 - - 550 280 - 1,315
Issue 299,478 shares of Treasury Stock
for purchase of PBS Financial Corp. - 496 - 6,130 - - - 6,626
Purchase of Treasury Stock at cost
(254,353 shares) - - - (5,615) - - - (5,615)
Exercise of stock options by certain
directors and employees - (32) - 62 - - - 30
Declaration of three quarterly dividends
of $0.10 per share - - (1,564) - - - - (1,564)
--- ------- ------- ------- ------- ----- ------- --------
Balance at June 30, 1996 $55 $52,682 $72,917 $(6,706) $(1,959) $(341) $(3,042) $113,606
=== ======= ======= ======= ======= ===== ======= ========
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on Pages 8, 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1995 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1995 and June 30, 1996
(Dollars in thousands)
(Unaudited)
June 30, June 30,
1995 1996
-------- --------
Cash flow from (for) operating activities:
Net Income $ 3,776 $ 7,889
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,049 813
Employee Stock Ownership Plan and Recognition
and Retention Plan compensation expense 1,418 1,315
Accretion of discounts, amortization of
premiums, and other deferred yield items (682) (534)
Amortization of goodwill - 97
Provision for loan losses 325 3,013
Provision for losses and net (gains) losses
on sales of real estate owned 110 29
Sale of trading securities 5,003 -
Net realized and unrealized (gain)
loss on trading securities (89) -
Net (gain) loss on sale of:
Loans (76) 34
Mortgage-backed and related securities 72 17
Other securities 334 (811)
Office properties and equipment (975) -
Decrease in loans held-for-sale 24 -
Change in assets and liabilities net of
effects from purchase of PBS Financial Corp.:
Increase in accrued interest receivable (1,307) (1,440)
Decrease in other assets 356 57
Increase (decrease) in other liabilities
Net of change in dividends payable 432 (3,084)
--------- ---------
Net cash provided by operating activities 9,770 7,395
--------- ---------
Cash flow from (for) investing activities:
Loan originations and principal payments
on loans (169,049) (216,035)
Principal payments received on mortgage-
backed and related securities 30,568 29,361
Purchases of:
Loans (5,381) (3,682)
Mortgage-backed and related securities
held-to-maturity (49,883) -
Securities held-to-maturity (13,475) -
Securities available-for-sale (59,906) (236,988)
Office properties and equipment (1,070) (4,332)
Proceeds from sales of:
Loans 13,060 20,554
Mortgage-backed and related securities
available-for-sale 39,837 8,187
Securities available-for-sale 86,050 138,803
Real estate acquired in settlement of loans 468 1,172
Office properties and equipment 1,307 -
(Purchase) Sale of Federal Home Loan Bank stock 551 (526)
Proceeds from maturities of securities 9,974 144,818
Cash acquired through purchase of PBS Financial
Corp. net of cash payments relating
to purchase - 9,873
Other investing activities (1,348) (3,365)
--------- ---------
Net cash used for investing activities $(118,297) $(112,160)
--------- ---------
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on Pages 8, 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1995 Annual Report to Stockholders.
(Continued)
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1995 and June 30, 1996
(Dollars in thousands)
(Unaudited)
June 30, June 30,
1995 1996
-------- --------
Cash flow from (for) financing activities:
Purchase of treasury stock at cost $ (1,460) $ (5,615)
Exercise of stock options 602 30
Net increase (decrease) in:
NOW accounts, demand deposits, and
savings accounts (15,954) 42,986
Certificates of deposit 173,242 56,102
Advances from Federal Home Loan Bank (11,025) 29,925
Securities sold under agreement to repurchase (34,252) (8,427)
Advances by borrowers for taxes and insurance (1,674) (3,183)
Dividends paid on stock (525) (1,322)
-------- --------
Net cash provided by financing activities 108,954 110,496
-------- --------
Net increase in cash and cash equivalents 427 5,731
Cash and cash equivalents, beginning of period 19,145 25,132
-------- --------
Cash and cash equivalents, end of period $ 19,572 $ 30,863
======== ========
Supplemental disclosure of cash flows
Supplemental disclosure of cash flow
information:
Cash paid for income taxes $ 2,656 $ 5,158
======== ========
Cash paid for interest on deposits
and other borrowings $ 35,204 $ 44,839
======== ========
Supplemental schedule of noncash investing
and financing activities:
Real estate acquired in settlement of loans
and in-substance foreclosed loans $ 887 $ 399
======== ========
Change in unrealized loss (gain) on
available-for-sale securities,
net of income taxes $ (1,965) $ (314)
======== ========
The Company purchased all of the stock of
PBS Financial Corp. for $6.6 million.
In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $110,169
Goodwill acquired 2,970
Stock issued and cash paid for purchase (7,733)
--------
Total liabilities assumed $105,406
========
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on Pages 8, 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1995 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles
(GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all
material adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation have been included. The results of
operations and other data for the three and nine months ended June 30,
1996 are not necessarily indicative of results that may be expected
for the entire fiscal year ending September 30, 1996.
The unaudited consolidated financial statements include the accounts
of First Palm Beach Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, First Federal Savings and Loan Association of the Palm
Beaches (the "Association"), and the Association's wholly-owned
subsidiaries - The Big First, Inc., Retail Investment Corporation,
First Corporate Center, Inc., First Federal Mortgage Corporation and
PBS Service Corporation. Material intercompany accounts and
transactions have been eliminated in financial statement
consolidation. Certain amounts included in prior periods'
consolidated financial statements have been reclassified to conform to
the current period's presentation.
(2) Conversion to Stock Ownership
The Company was organized in May 1993 as the holding company for the
Association in connection with the Association's conversion (the
"Conversion") from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan
association. On September 29, 1993, the Company completed its initial
public offering and sold 5,496,375 shares of common stock at $10.00
per share to depositors, borrowers, and the employees of the
Association during the subscription offering. The proceeds from the
Conversion after recognizing Conversion expenses and underwriting
costs of $2.5 million were $52.5 million and are recorded as common
stock and additional paid-in capital in the accompanying consolidated
statements of financial condition. The Company utilized $25.2 million
of the net proceeds to purchase all of the capital stock of the
Association.
In connection with the Conversion, the Association established for
eligible employees an Employee Stock Ownership Plan ("ESOP"). The
ESOP borrowed $4.2 million from the Company and purchased 423,200
common shares issued in the Conversion. The Association is expected
to make scheduled discretionary cash contributions to the ESOP
sufficient to service the amount borrowed. The $4.2 million in stock
issued by the Company was reflected as a charge to unearned
compensation and a credit to common stock and paid-in capital. The
unamortized balance of unearned compensation is shown as a deduction
from stockholders' equity. The unpaid balance of the ESOP loan is
eliminated in consolidation. For the quarters ended June 30, 1996 and
1995, ESOP expenses of $336,000 and $225,000, respectively, were
recognized. For each of the nine months ended June 30, 1996 and 1995,
ESOP expenses of $938,000 and $827,000, respectively were recognized.
In 1993, the Association established two Recognition and Retention
Plans ("RRPs") which purchased in the aggregate 211,600 shares of
common stock in the Conversion and contributed $2.1 million to fund
the purchase of the RRP shares. Awards which were made at the date of
Conversion vest in three equal annual installments commencing on
September 29, 1994, the first anniversary date of the effective date
of these awards. As of June 30, 1996, two-thirds of the awards made
under the RRPs had vested.
8
10
The aggregate purchase price of these shares is amortized as
compensation expense over the vesting period. The unamortized cost of
the RRPs is reflected as a reduction of stockholders' equity. For the
quarters ended June 30, 1996 and June 30, 1995, RRP expense of
($80,000) and $30,000 was recognized. For the quarter ended June 30,
1996 and June 30, 1995, the Association reversed an over accrual of
RRP expense of $260,000 and $150,000, respectively. For the nine
months ended June 30, 1996 and June 30, 1995, RRP expense of $280,000
and $551,000 was recognized. Approximately $160,000 of the RRP
expense for the nine months ended June 30, 1995 resulted from the
early retirement of certain officers because, upon retirement, all
unvested shares immediately vest.
In 1993, the Company adopted stock option plans for the benefit of
directors, officers, and other key employees of the Association. The
number of shares of common stock reserved for issuance under the stock
option plans was equal to 10% of the total number of common shares
issued pursuant to the Conversion. Under the stock option plans, the
option exercise price cannot be less than the fair value of the
underlying common stock as of the date of the option grant, and the
maximum option term cannot exceed ten years. The stock options
awarded to non-employee directors may be exercised at any time after
grant. At June 30, 1996, there were 106,710 options outstanding to
non-employee directors, and 53,000 options are available for future
grants.
The stock options granted to officers and employees are exercisable in
three equal installments. The first installment of options became
exercisable on September 29, 1994. At June 30, 1996, 134,256 stock
options were outstanding to officers and employees and 21,968 options
were available for future grants.
(3) Earnings Per Share
Earnings per share of common stock for the quarter ended June 30, 1996
and 1995 were determined by dividing net income for the period by the
weighted average number of shares of common stock and common stock
equivalents outstanding which were 5,096,957 and 5,105,306,
respectively, excluding unallocated shares held by the ESOP. Earnings
per share of common stock for nine months ended June 30, 1996 and 1995
were determined by dividing net income for the period by the weighted
average number of shares of common stock and common stock equivalents
outstanding which were 5,099,101 and 5,051,187, respectively,
excluding unallocated shares held by the ESOP. Stock options are
regarded as common stock equivalents and, therefore, are considered in
both primary and fully diluted earnings per share calculations.
Common stock equivalents are computed using the treasury stock method.
Including stock options in the calculation of primary earnings per
share had a dilutive effect of $0.01 for the three month period ended
June 30, 1996 and no dilutive effect for the three month period ended
June 30, 1995. For the nine months ended June 30, 1996 and 1995, the
dilutive effect of stock options on primary earnings per share was
$0.04 and $0.01, respectively.
(4) Commitments and Contingencies
Commitments to originate mortgage loans of $43.4 million at June 30,
1996 represent the total principal amounts which the Association plans
to fund within the normal commitment period of 60 to 90 days. As of
June 30, 1996, the Association had no commitments to purchase mortgage
pool or investment securities.
(5) Accounting for Impairment of Loans
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The
Statement generally requires all creditors to account for impaired
loans, except those loans that are accounted for at fair value or at
the lower of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate.
In October 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." This Statement amends SFAS No. 114 to allow a creditor
to use existing methods for recognizing interest income on an impaired
loan. SFAS No.
9
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118 does not change the provisions in SFAS No. 114 that require a
creditor to measure impairment based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or
at the market price of the loan or the fair value of the collateral if
the loan is collateral dependent. The Association adopted the
provisions of SFAS No. 114 as amended by SFAS No. 118 effective
October 1, 1995.
An analysis of the changes in the allowance for loan losses for the
nine months ended June 30, 1996 and fiscal year ended September 30,
1995, is as follows:
Fiscal Nine
Year Months
Ended Ended
Sept. 30, June 30,
1995 1996
--------- --------
Balance at beginning of period $ 1,956 $ 2,157
Increase in allowance due to acquisition
of PBS Financial Corp. - 2,253
Current provision 261 3,013
Charge-offs - net (60) (3,546)
Reclassification to allowance
for repossessed collateral - (480)
------- -------
Ending balance $ 2,157 $ 3,397
======= =======
At June 30, 1996 the Association had one impaired loan:
June 30, 1996
------------------------
Loan Related
Balance Allowance
------- ---------
Impaired loan balances and related
allowances for loan losses $ 1,434 $ 300
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion should be read in conjunction with the Notes to Unaudited
Consolidated Financial Statements contained herein and with Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in First Palm Beach Bancorp, Inc.'s 1995 Annual Report to
Stockholders.
General
First Palm Beach Bancorp, Inc. (the "Company") was formed as the holding
company for First Federal Savings and Loan Association of the Palm Beaches (the
"Association") in connection with the Association's conversion (the
"Conversion") from a federally chartered mutual savings and loan association to
a federally chartered stock savings and loan association on September 29, 1993.
On that date, the Company issued and sold 5,284,775 shares of common stock, par
value $0.01 per share, at $10.00 per share to complete the Conversion. An
additional 211,600 shares were purchased by the Association's Recognition and
Retention Plans ("RRPs") at $10.00 per share. Net proceeds to the Company
after $2.5 million in expenses and underwriting costs were $52.5 million. The
Company used $25.2 million of the net proceeds to purchase all the capital
stock of the Association, and lent $4.2 million to the Association's Employee
Stock Ownership Plan ("ESOP"). The remaining proceeds of $23.0 million were
advanced to the Association under a note agreement carrying an interest rate
tied to the one month short term credit advance of the Federal Home Loan Bank
("FHLB") of Atlanta. The rate on the note was 5.58% during the quarter ended
June 30, 1996 and the balance on the note at June 30, 1996 was $354,300.
On December 8, 1995 (the "Effective Date"), the Company completed the
acquisition of PBS Financial Corp. ("PBS") by means of the merger (the
"Merger") of PBS with and into the Company, pursuant to an Agreement and Plan
of Merger between the Company and PBS dated as of May 31, 1995 (the
"Agreement"). Concurrently with the Merger, Palm Beach Savings and Loan,
F.S.A. ("Palm Beach Savings"), the savings and loan subsidiary of PBS, merged
with and into the Association in accordance with a Plan of Merger and
Combination dated as of May 31, 1995 between Palm Beach Savings and the
Association. In conjunction with and as a part of the Merger, each of the
283,700 shares of PBS Class A common stock issued and outstanding and 419,300
shares of PBS Class B common stock issued and outstanding at the Effective Date
was converted into (i) .426 of a share of the Company's common stock and (ii) a
cash payment of $0.75 per share of PBS common stock. Based on an aggregate of
703,000 shares of PBS Class A and Class B common stock issued and outstanding,
the Company issued in the aggregate 299,478 shares of the Company's common
stock and made $527,250 in cash payments. Also in conjunction with the Merger,
the Company paid $88,544 in exchange for all outstanding PBS Options, and
$459,536 in exchange for all outstanding PBS Warrants.
The Company's consolidated results of operation are primarily those of the
Association.
The Association's principal business has been, and continues to be, attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations and borrowings, primarily in one-to-four
family, owner-occupied, residential mortgage loans, consumer loans, and, to a
lesser extent, construction loans, commercial real estate loans, and
multi-family residential mortgage loans. In addition, the Association invests
in mortgage-backed securities, securities issued by the U. S. Government and
government agencies, and other investments permitted by federal laws and
regulations. The Association is a member of the FHLB system and its deposits
are insured to the applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC"). The Association is subject to regulation by the
Office of Thrift Supervision (the "OTS") as its chartering agency and the FDIC
as its deposit insurer.
The Association has 32 full-service branches in Palm Beach, Martin, Broward and
Dade Counties, Florida. Two loan production offices are located in Palm Beach
County. During the nine month period ended June 30, 1996, the
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Association opened seven full-service branch locations in Palm Beach, Broward
and Dade Counties, Florida. As a result of the PBS merger, two additional
locations were added in Palm Beach County.
In January 1996, the Association signed leases with Albertson's for six
supermarket branches in Albertson's stores. All of the locations will be in
South Florida and will complement four existing Winn Dixie supermarket branches
already operated by the Association in Martin and Palm Beach Counties. The
Association intends to open additional supermarket locations at Albertson's in
the future. As of June 30, 1996, four branches in Albertson's stores had been
opened.
The Association has five wholly-owned subsidiaries: First Federal Mortgage
Corporation which provides mortgage brokerage services to the Association; The
Big First, Inc. which develops residential real estate; Retail Investment
Corporation which previously collected rent and commissions from Liberty
Securities Corporation which offered mutual funds and annuities to customers of
the Association; First Corporate Center, Inc. which engages in maintenance and
management of improved real estate; and PBS Service Corporation which was
acquired in the Merger. Only First Federal Mortgage Corporation is currently
active.
The Association's results of operations depend primarily on net interest
income, which is the difference between the interest income earned on its loans
and investment portfolio, and its cost of funds, consisting of the interest
paid on deposits and borrowings. The Association's operating results also are
affected, to a lesser extent, by fee income and by gains or losses on the sale
of loans, securities and mortgage-backed securities held for sale, and real
estate owned. The Association's operating expenses consist primarily of
employee compensation, occupancy expenses, FDIC insurance premiums and other
general and administrative expenses. The Association's results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Liquidity and Capital Resources
The Association's most liquid assets are cash, amounts due from depository
institutions and interest-bearing deposits. The levels of these assets depend
on the Association's lending, investing, operating and deposit activities
during any given period. At June 30, 1996, cash, amounts due from depository
institutions and interest-earning deposits totaled $30.9 million.
The Association's primary sources of funds are deposits, proceeds from
principal and interest payments on loans, proceeds from the amortization of,
the maturing of and sales of securities, advances from the FHLB and securities
sold under agreements to repurchase ("reverse repurchase agreements"). While
maturity and scheduled amortization of loans and securities are predictable
sources of funds, deposit inflows and mortgage prepayments are greatly
influenced by local market conditions, general interest rates and regulatory
changes.
Under OTS regulations, the Association is required to maintain liquid assets of
at least 5% of the average daily balance of the sum of its net withdrawable
deposit accounts, plus short-term borrowings during the preceding calendar
month. For purposes of these regulations, liquid assets consist of cash,
amounts due from depository institutions, interest-bearing deposits and short
and intermediate term U. S. Government and government agency securities. The
Association historically has maintained a level of liquid assets in excess of
this regulatory requirement. The Association's liquidity ratio was 5.7% and
8.0% at June 30, 1996 and September 30, 1995, respectively. Liquidity
management for the Association is a daily and long-term function of the
Association's management strategy. If the Association requires liquid funds
beyond its ability to generate them internally, additional sources of funds are
available through the use of FHLB advances and reverse repurchase agreements.
The primary investment activity of the Association is the origination of
mortgage and consumer loans. During the nine months ended June 30, 1996 and
June 30, 1995, the Association originated mortgage and consumer loans in the
aggregate amount of $399.3 million and $253.0 million, respectively. A primary
component of the Association's strategic plan is to continue
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increasing its originations of mortgage and consumer loans. During the nine
months ended June 30, 1996 the Association continued indirect lending through
automobile dealers. Indirect loans typically carry more credit risk than
residential mortgage and direct consumer loans. Indirect loans have produced
higher delinquency rates and more repossessed assets, resulting in increased
loan loss provisions. Repossessed automobiles included in other assets
increased from $371,000 at September 30, 1995 to $1.6 million at June 30, 1996.
Notwithstanding these risks, management has concluded that shifting assets from
investments to indirect loans, as well as mortgage and direct consumer loans,
will lead to long-term growth in the value of the Company by improving the
operating results of the Association. The Association also invests in U. S.
Treasury and agency securities, collateralized mortgage obligations, municipal
bonds and FHLB overnight funds. During periods when the Association's loan
demand is lower, the Association may purchase short-term investment securities
to obtain a higher yield than otherwise would be available.
At June 30, 1996, the Association had outstanding commitments to originate
$43.4 million of mortgage loans and had no commitments to purchase mortgage
pool or investment securities. Management is of the opinion that the
Association will have sufficient funds available to meet all of these
commitments. At June 30, 1996, certificates of deposits scheduled to mature in
one year or less after June 30, 1996 totaled $591.6 million. Based on the
Association's past experience and current market conditions, management is of
the opinion that a significant portion of these funds will remain with the
Association.
The Treasury Department, the FDIC and Congress have proposed that savings and
loans which are insured by the Savings Association Insurance Fund ("SAIF") pay
a special assessment of 85 to 90 basis points of insured deposits to
sufficiently capitalize SAIF to a reserve ratio of 1.25 percent of insured
deposits. If the Association was subject to the special assessment, as
presently proposed, on the basis of June 30, 1996 deposits, the special
assessment of the Association would range from approximately $9.2 million to
$9.7 million.
Congress is also considering a proposal that in the future banks and thrifts
will have the same charter. The Association has not provided deferred taxes
for income tax bad debt reserves prior to September 30, 1988 of $21,912,000.
If this legislation passes Congress and savings associations are converted to
banks, the Association may be required to recapture its loan loss reserve and
provide deferred taxes on the $21,912,000 of bad debt reserves.
No assurance can be given, however, as to when or whether the proposed
legislation will be adopted or as to the nature or extent of the effect, if
any, on capital that will be experienced by the Association and other SAIF
member institutions.
At June 30, 1996, the Association exceeded each of the three OTS capital
requirements. The Association's ratios were: 7.40% tangible capital ratio;
7.40% core capital ratio; and 13.05% risk-based capital ratio. The OTS minimum
regulatory capital ratio requirements at June 30, 1996 were 1.5%, 3.0%, and
8.0%, respectively.
Changes in Financial Condition
Total assets increased $229.0 million to $1.438 billion at June 30, 1996 from
$1.209 billion at September 30, 1995. At the time of the Merger, assets of PBS
were approximately $109.0 million.
Cash and cash equivalents, securities held-to-maturity, securities
available-for-sale, mortgage-backed and related securities held-to-maturity and
mortgage-backed and related securities available-for-sale decreased $60.7
million to $283.8 million at June 30, 1996 from $344.5 million at September 30,
1995. Loans receivable increased by $277.7 million to $1.1 billion at June 30,
1996 from $822.0 million at September 30, 1995. Approximately $78.5 million of
the increase was a result of the Merger. Loans originated amounted to $399.3
million (which included $250.9 million of mortgage loans and $148.4 million of
consumer loans) during the nine months ended June 30, 1996 compared to $253.0
million during the nine months ended June 30, 1995.
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This increase reflects the Association's efforts to increase mortgage and
consumer loan production. Indirect automobile loan balances increased to
$149.5 million at June 30, 1996 from $76.4 million at September 30, 1995.
Deposits increased $203.0 million from $879.0 million at September 30, 1995 to
$1.082 billion at June 30, 1996. Approximately $103.8 million of the increase
was a result of the Merger. The increase also resulted, in part, from periodic
short-term offerings of certificates of deposits at a rate of 25 basis points
higher than the advertised rates of other local financial institutions. These
short-term offers were made to raise funds to support continued loan
originations. The average interest rate paid on deposits increased to 4.79% as
of June 30, 1996 from 4.77% as of September 30, 1995.
Advances from the FHLB and other borrowed funds increased by $21.5 million from
$189.6 million at September 30, 1995 to $211.1 million at June 30, 1996.
Stockholders' equity increased to $113.6 million at June 30, 1996 from $104.6
million at September 30, 1995. This increase was largely due to the issuance
by the Company in the Merger of 299,478 shares at a price of $22.125 per share
which resulted in an increase in stockholders' equity of approximately $6.6
million. The increase in stockholders' equity was also a result of net income
of $7.9 million.
Effective August 31, 1995, the OTS approved the Company's stock repurchase
program permitting the repurchase of up to 310,000 shares of the Company's
outstanding stock. During the quarter ended June 30, 1996, the Company made no
stock repurchases under this program. As of March 31, 1996, the Company had
repurchased 218,500 shares under this program at an average price, including
commissions, of $21.64 per share. The Company is permitted to purchase up to
91,500 additional shares under the repurchase program before OTS approval
expires on August 31, 1996. As of June 30, 1996 there was a total of 315,188
shares of common stock held in treasury. The Company increased its quarterly
dividend from $0.05 per share to $0.10 per share beginning in the quarter ended
December 31, 1995.
Interest Rate Sensitivity
The matching of assets and liabilities may be analyzed by examining the extent
to which assets and liabilities are "interest rate sensitive" and by monitoring
an institution's interest rate sensitivity "gap." An asset or liability is
"interest rate sensitive" within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined
as the difference between the aggregate amount of interest-earning assets
maturing or anticipated to reprice, based upon certain assumptions, within a
specified time period and the aggregate amount of interest-bearing liabilities
maturing or anticipated to reprice, based upon certain assumptions, within that
time period. A gap is considered negative when the amount of interest rate
sensitive liabilities maturing or repricing within a specified time frame
exceeds the amount of interest rate sensitive assets maturing or repricing
within that same time frame.
The Association's policy has been to manage its exposure to interest rate risk
by attempting to match the maturities of its interest rate sensitive assets and
liabilities, in part, by emphasizing the origination of adjustable rate
mortgages ("ARM") and short term residential construction loans. As of June
30, 1996, these loans made up approximately 57% of outstanding mortgage loans.
Approximately 10% of outstanding mortgage loans are loans with seven and ten
year fixed rates which become one year adjustable loans. These are classified
as ARM loans. The Association also manages its exposure by purchasing short
term securities and short average life and adjustable-rate collateralized
mortgage obligations. The Association's one year interest rate sensitivity gap
as a percentage of total assets was a negative 8.76% at June 30, 1996, as
compared to a negative 10.59% at September 30, 1995. During a period of rising
interest rates, a negative gap would tend to result in a decrease in net
interest income while a positive gap would tend to increase net interest
income. Interest rates generally increased during the nine months ended June
30, 1996.
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Asset Quality
The Company and the Association regularly review interest earning assets to
determine proper valuation of those assets. Management monitors the asset
portfolio by reviewing historical loss experience, known and inherent risks in
the portfolio, the value of any underlying collateral, prospective economic
conditions and the regulatory environment. During the nine months ended June
30, 1996, non-performing assets increased $6.4 million from September 30, 1995.
Non- performing assets related to the acquisition of PBS amounted to $3.1
million as of June 30, 1996. Substantially all of the increase in real estate
owned, net of related allowances, resulted from the acquisition of real estate
owned in the PBS transaction. The other $3.3 million increase in
non-performing assets related to the Association's assets. A developer
declared bankruptcy on development loans which now total $1.0 million. The
Association considers itself well secured on these loans. Repossessed assets
increased $749,000 since September 30, 1995 as a result of increased levels of
indirect lending.
The following table sets forth information regarding the Association's
non-performing loans, repossessed assets and real estate owned at the dates
indicated. The Association generally discontinues accruing interest on loans
that are 90 days or more past due, at which time the accrued but uncollected
interest is excluded from interest income.
ASSET QUALITY
(Dollars in thousands)
Sept. 30, June 30,
1995 1996
--------- --------
Non-performing mortgage loans
delinquent more than 90 days $ 1,761 $ 4,389
Non-performing other loans
delinquent more than 90 days 53 1,154
------- -------
Total non-performing loans $ 1,814 $ 5,543
Real estate owned,
net of related allowance 549 2,471
Repossessed assets, net of
related allowance 371 1,120
------- -------
Total non-performing assets $ 2,734 $ 9,134
======= =======
Non-performing loans to
total loans 0.21% 0.48%
Non-performing assets to
total assets 0.23% 0.64%
Allowance for loan losses to
non-performing loans 118.91% 61.29%
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RESULTS OF OPERATIONS
Comparison of results in this section are for the three month periods ended
June 30, 1996 and June 30, 1995, and between the nine month periods then ended.
General
Net income for the quarter ended June 30, 1996 was $2.7 million as compared to
$1.7 million for the quarter ended June 30, 1995, an increase of $1.0 million.
Net income for the nine months ended June 30, 1996 was $7.9 million as compared
to $3.8 million for the nine months ended June 30, 1995, an increase of $4.1
million. The quarterly and nine month increases were attributable to
improvements in net interest income but were partially offset by increased
other expenses. The nine month period ended June 30, 1995 included a pre-tax
charge to earnings of approximately $2.4 million relating to a voluntary early
retirement program and a pre-tax gain of $975,000 on the sale of a parcel of
land in Vero Beach, Florida. The after-tax effect of these two items reduced
after-tax income by approximately $850,000 during the nine months ended June
30, 1995.
Net Interest Income
Net interest income before provision for loan losses was $11.3 million for the
quarter ended June 30, 1996 as compared to $8.2 million for the quarter ended
June 30, 1995. For the nine months ended June 30, 1996, net interest income
before provision for loan losses was $31.5 million was compared to $23.6
million for the nine months ended June 30, 1995. The increases for both the
three and nine month periods were primarily due to loan growth of $362.0
million to $1.1 billion at June 30, 1996 from $738.0 million at June 30, 1995.
Also, the annualized net interest margin, based on average interest-bearing
assets and interest-bearing liabilities was 3.22% for the nine months ended
June 30, 1996 and 2.80% for the nine months ended June 30, 1995.
Provision for Loan Losses
During the three months ended June 30, 1996, the provision for loan losses
increased to $1.4 million from $167,000 for the comparable period ended June
30, 1995. For the nine months ended June 30, 1996, the provision for loan
losses was $3.0 million as compared to $325,000 for the same period ended June
30, 1995. During fiscal years ended 1995 and 1996, the Association became more
active in the indirect lending market, and increases in loan loss provisions
reflect the additional credit risk typical of that type of lending. Based upon
the Association's charge off experience with its indirect lending portfolio,
loan loss provisions may increase in the future.
Other Income
Other income increased to $1.6 million for the quarter ended June 30, 1996 from
$659,000 for the quarter ended June 30, 1995. During the quarter, the
Association sold the servicing rights on approximately $40.0 million of
mortgage loans, recording a net gain of $460,000. Also, during the quarter
ended June 30, 1995, net losses on sale of securities of $324,000 were
recognized. For the nine month period ended June 30, 1996, other income
increased to $4.6 million as compared to $3.6 million for the nine months ended
June 30, 1995. During the nine months ended June 30, 1996, in addition to the
gain on sale of servicing of $460,000, there were net gains on sale of loans
and securities of $760,000. The nine months ended June 30, 1995 included a
gain on sale of property of $975,000. In November 1995, the Financial
Accounting Standards Board issued "A Guide to Implementation of SFAS No. 115 on
Accounting for Certain Investments in Debt and Equity Securities - Questions
and Answers" ("SFAS 115 Q&A Guide"). SFAS 115 Q&A Guide included a one-time
opportunity for entities which had previously adopted the provisions of SFAS
115 to reconsider their ability and intent to hold securities to maturity and
to allow such entities to transfer securities from the held-to-maturity
category to available-for-sale without calling into question the intent to hold
securities to maturity. SFAS 115 Q&A Guide required that any one-time
reclassification occur between November 15, 1995 and December 31, 1995. In
November 1995, the Association reclassified $10.5 million of municipal
securities and $20.0 million of U.S. Treasury notes from held-to-maturity to
available-for-sale. Subsequently, the Association sold
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$10.4 million of municipal securities and recognized a gain of approximately
$847,000 on the sale during the nine months ended June 30, 1996.
Other Expenses
Other expenses increased to $6.9 million for the quarter ended June 30, 1996 as
compared to $5.9 million for the quarter ended June 30, 1995. For the nine
months ended June 30, 1996, other expenses decreased to $19.9 million as
compared to $20.7 million for the nine months ended June 30, 1995. Other
expenses for the nine months ended June 30, 1995 included a $2.4 million
expense resulting from the voluntary early retirement program in the nine
months ended June 30, 1995. Both the quarter and nine month period ended June
30, 1996 reflect the expenses of adding ten additional branch locations and
closing one branch since June 30, 1995.
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Part II - Other Information
FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
Item 1 Legal Proceedings
Neither the Company nor its subsidiaries are involved in any
pending legal proceedings, other than routine legal matters occurring
in the ordinary course of business which in the aggregate involve
amounts which, in management's opinion, are not material to the
consolidated financial condition or results of operations of the
Company.
Item 2 Changes in Securities
Not applicable.
Item 3 Default upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Securities Holders
Not applicable.
Item 5 Other Information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
11 Statement Re: Computation of Per Share Earnings.
27 Financial Data Schedule (for SEC use only).
(b) There were no reports filed on Form 8-K during the
quarter ended June 30, 1996.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
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.
First Palm Beach Bancorp, Inc.
------------------------------
(Registrant)
Date: /s/ Louis O. Davis, Jr.
-------------------------------------
August 8, 1996 Louis O. Davis, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
Date: /s/ R. Randy Guemple
-------------------------------------
August 8, 1996 R. Randy Guemple
Treasurer and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description Page
- - ------ ----------- ----
11 Statement Re: Computation of Per Share Earnings . . . . . . . . . . . . . . . . . . . . . . . . . .
--
27 Financial Data Schedule (for SEC use only) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
--
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