<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 2054
---------------------------------
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [Fee Required]
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended SEC Commission File
December 31, 1995 Number 0-15334
PALFED, Inc.
------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0821295
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
107 Chesterfield Street South, Aiken, South Carolina 29801
- ---------------------------------------------------- ---------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (803) 642-1400
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
-----------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ x ]
The aggregate market value of the registrant's outstanding Common Stock held by
non-affiliates of the registrant on March 15, 1996 was $64,262,113. There were
5,222,142 shares of Common Stock outstanding on March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the year ended December 31, 1995
(Parts I, II and IV)
2. Proxy Statement for the 1996 Annual Meeting of Shareholders (Part
III).
Page 1 of ____ sequentially numbered pages
The Index to Exhibits is on page 42.
<PAGE>
PALFED, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
No.
PART I
Item 1. Business............................................... 1
Item 2. Properties............................................. 32
Item 3. Legal Proceedings...................................... 32
Item 4. Submission of Matters to a Vote of Security Holders.... 32
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.................................... 35
Item 6. Selected Financial Data................................ 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 35
Item 8. Financial Statements and Supplementary Data............ 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant..... 37
Item 11. Executive Compensation................................. 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 37
Item 13. Certain Relationships and Related Transactions......... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 38
SIGNATURES
(i)
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PART I
ITEM 1. BUSINESS.
PALFED, Inc. ("PALFED", together with its subsidiaries, the "Company"),
is a South Carolina corporation that was incorporated on March 7, 1986 to own
all the outstanding stock of Palmetto Federal Savings Bank of South Carolina
("Palmetto Federal" or the "Bank"). PALFED acquired all of the stock of
Palmetto Federal on January 27, 1987.
As a savings and loan holding company, the primary business of PALFED is
to manage the business of Palmetto Federal and its other subsidiaries and
affiliates. Palmetto Federal is a federally-chartered stock savings bank which
was chartered in 1951 and converted from a federal mutual savings and loan
association to a federal stock savings bank in 1985. PALFED Investment
Services, Inc. ("PALFED Investment"), a wholly-owned subsidiary of PALFED,
offers retail securities brokerage services and consumer insurance products. At
December 31, 1995, the Company had total assets of approximately $646 million.
At December 31, 1995, PALFED and its subsidiaries had approximately 246 full-
time employees and 50 part-time employees.
BANKING AND BANK-RELATED SERVICES
GENERAL
Palmetto Federal primarily engages in attracting deposits from the
general public and, using these funds, loan repayments, other borrowings, and
proceeds from the sale of securitized mortgage loans, makes loans for the
purchase, financing or improvement of real estate. Palmetto Federal also
engages in consumer lending and other fee generating financial services.
Palmetto Federal operates 19 branch offices, all of which are located in south
central and southern South Carolina. The Bank also operates seven mortgage
lending offices. The Bank's deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") which is supervised by the Federal
Deposit Insurance Corporation ("FDIC"). The operations of the Company and the
Bank are subject to regulation by the Office of Thrift Supervision ("OTS"), the
FDIC and the Federal Reserve Board ("FRB"). Palmetto Federal is a member of the
Federal Home Loan Bank System ("FHLBS").
LENDING AND INVESTMENT ACTIVITIES
GENERAL The principal lending activity of Palmetto Federal is the
origination of single family residential mortgage loans. Additionally, the Bank
operates under an investment policy which primarily is aimed at originating long
term fixed rate mortgage loans in accordance with Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
underwriting guidelines for sale in the secondary market. The Bank's adjustable
rate mortgages generally are made in accordance with FNMA underwriting
guidelines, however, the Bank's present investment policy is to retain these
loans in its portfolio. Palmetto Federal also originates construction loans on
single family and, to a lesser extent, multi-unit dwellings and conventional
mortgage loans on multi-unit dwellings and on commercial and other type
properties. In addition, Palmetto Federal offers mobile home, automobile, home
improvement and unsecured consumer loans. The Bank also offers a home equity
line of credit secured by the borrower's residence.
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From 1991 through 1993, the Bank capped the aggregate levels of consumer,
commercial, commercial real estate, non-residential and land loans at the March,
1991 levels in response to increased OTS risk-based capital requirements and to
lower the overall level of credit risk in its portfolio. In 1994, the Bank
discontinued this limit on the aggregate level of its commercial and consumer
loans and changed its lending strategy to increase the origination of higher
yielding consumer and commercial loans, including commercial real estate loans
greater than $1.0 million. These loans typically involve more risk than
associated with residential lending. Commercial mortgages outstanding increased
from $109.5 million at December 31, 1994 to $128.1 million at December 31, 1995.
The 1995 originations included eight commercial real estate loans of $1.0
million or greater, totalling $13.1 million, compared to only one loan of this
scope in 1994.
In 1995, the Bank continued to expand its lending markets to reduce
reliance on the Central Savannah River Area ("CSRA") market area. In 1995, 40%
or $42.9 million of the Bank's permanent residential mortgage and construction
loans were originated in the CSRA market compared to 61% or $72.8 million in
1994. The Lexington mortgage office, which opened in 1994, originated $8.4
million in loans or 7.9% of the 1995 total compared to $1.3 million or 1.1% of
the 1994 total. The Charleston office originated $19.8 million in loans or
18.6% of the 1995 total compared to $12.9 million in loans or 10.8% of the 1994
total.
Palmetto Federal reviews and annually revises, as necessary, its
underwriting and lending practices and loan policies in response to regulatory
changes. Underwriting guidelines, including loan to value ratios, are
established for each type of loan. The Bank's underwriting standards and
guidelines for each loan type are reviewed annually with any amendments or
revisions presented to the Board of Directors for approval. These guidelines
are in addition to the requirements of outside agencies and investors. The
Bank's lending policies are reviewed for compliance with applicable regulations
and rules, including Federal Truth-In-Lending, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Fair Housing Act, the Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, and applicable state
usury requirements.
At December 31, 1995, the Bank held approximately $207.7 million in
permanent 1-4 single family first mortgage loans, $28.9 million of which
exceeded a 80% loan to value ratio without private mortgage insurance and $8.6
million of which exceeded a 90% loan to value ratio. These higher loan to value
ratio loans constitute increased risk to the portfolio, but the Bank's loss
experience for these loans has not been significant.
2
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The following tables are a comparison of Palmetto Federal's loan
portfolio at the dates indicated. Loans held for sale are classified as
permanent residential mortgage loans.
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage $ 149,622 $ 58,049 $ 207,671 42.7%
Construction 15,051 23,063 38,114 7.8
Second mortgage 29,027 23,286 52,313 10.8
Commercial 71,817 56,234 128,051 26.3
Loans collateralized by other property
or unsecured:
Consumer 6,405 33,180 39,585 8.1
Commercial 8,082 7,998 16,080 3.3
Loans collateralized by savings accounts 0 4,769 4,769 1.0
------- ------- ------- ------
Total gross loans $ 280,004 $ 206,579 $ 486,583 100.0%
------- ------- ------- ------
------- ------- ------- ------
57.5% 42.5% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 0 $ 77,843 $ 77,843
---- ------- -------
---- ------- -------
0% 100.0% 100.0%
---- ----- -----
---- ----- -----
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
---------------------------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage $ 115,450 $ 90,854 $ 206,304 44.2%
Construction 7,747 25,911 33,658 7.2
Second mortgage 30,194 25,457 55,651 11.9
Commercial real estate 50,588 58,946 109,534 23.5
Loans collateralized by other property
or unsecured:
Consumer 3,978 38,554 42,532 9.1
Commercial 8,304 6,873 15,177 3.3
Loans collateralized by savings accounts 0 3,784 3,784 0.8
----- ------- ------- ----
Total gross loans $216,261 $250,379 $466,640 100.0%
------- ------- ------- -----
------- ------- ------- -----
46.3% 53.7% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 0 $106,273 $106,273
--- ------- -------
--- ------- -------
0% 100.0% 100.0%
--- ----- -----
--- ----- -----
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
December 31, 1993
----------------------------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage $ 132,122 $ 71,644 $ 203,766 43.6%
Construction $ 1,314 $ 25,499 $ 26,813 5.8%
Second mortgage 30,368 26,785 57,153 12.3
Commercial 61,090 49,197 110,287 23.7
Loans collateralized by other property
or unsecured:
Consumer 8,229 39,698 47,927 10.3
Commercial 9,008 7,516 16,524 3.6
Loans collateralized by savings accounts $ 0 3,447 3,447 0.7
-------- ------- ------- -----
Total gross loans $ 242,131 $ 223,786 $ 465,917 100.0%
-------- -------- ------- ------
-------- -------- ------- ------
52.0% 48.0% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 0 $106,563 $106,563
-------- ------- -------
-------- ------- -------
0% 100.0% 100.0%
--- ----- -----
--- ----- -----
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992
----------------------------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage $ 119,198 $ 76,385 $ 195,583 41.3%
Construction 2,197 10,651 12,848 2.7
Second mortgage 30,195 29,689 59,884 12.6
Commercial 63,061 67,797 130,858 27.6
Loans collateralized by other property
or unsecured:
Consumer 5,248 45,766 51,009 10.8
Commercial 11,248 8,837 20,085 4.2
Loans collateralized by savings accounts 0 3,974 3,974 0.8
-------- ------- ------- -----
Total gross loans $ 231,142 $ 243,099 $ 474,241 100.0%
-------- -------- ------- ------
-------- -------- ------- ------
48.7% 51.3% 100.0%
---- ---- -----
---- ---- -----
Mortgage-backed securities $ 36,695 $ 88,434 $ 125,129
-------- ------- -------
-------- ------- -------
29.3% 70.7% 100.0%
--- ----- -----
--- ----- -----
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
December 31, 1991
----------------------------------------------------
% of
Loan
Variable Fixed Total Portfolio
-------- ----- ----- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage $109,183 $ 94,232 $203,415 38.6%
Construction 0 19,946 19,946 3.8
Second mortgage 51,888 31,286 83,174 15.8
Commercial 82,614 46,183 128,797 24.5
Loans collateralized by other property
or unsecured:
Consumer 5,022 57,592 62,614 11.9
Commercial 13,090 11,097 24,187 4.6
Loans collateralized by savings accounts 0 4,373 4,373 0.8
-------- -------- -------- -----
Total gross loans $261,797 $264,709 $526,506 100.0%
-------- -------- -------- -----
-------- -------- -------- -----
49.7% 50.3% 100.0%
-------- -------- --------
-------- -------- --------
Mortgage-backed securities $ 0 $ 61,249 $ 61,249
---- -------- --------
---- -------- --------
0% 100.0% 100.0%
---- ----- -----
---- ----- -----
</TABLE>
LOAN MATURITIES. The following table sets forth certain information at
December 31, 1995 regarding the dollar amount of loans and mortgage-backed
securities maturing in Palmetto Federal's portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of repayment
and no stated maturity and overdrafts are reported as due by December 31, 1995.
<TABLE>
<CAPTION>
Payments Due Within
---------------------------------------------------------------------
More than
1 Year 1-2 Years 2-3 Years 3-5 Years 5 Years Total
------ --------- --------- --------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage $ 71,140 $ 71,160 $ 71,160 $ 83,673 $ 90,902 $388,035
Real estate construction 38,114 0 0 0 0 38,114
Installment, commercial,
and loans collateralized
by savings accounts(1) 25,535 10,886 10,886 10,691 2,436 60,434
-------- -------- -------- -------- -------- --------
Total $134,789 $ 82,046 $ 82,046 $ 94,364 $ 93,338 $486,583
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
- -------------------
(1) Includes second mortgage equity cashline.
5
<PAGE>
The following table sets forth loans due after one year which have fixed
rates or floating or adjustable rates.
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------
Floating or
Adjustable Rate Fixed Rate
---------------- ----------------------
% of % of
Total Loan Total Loan
Amount Portfolio Amount Portfolio
------ --------- ------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage $168,643 34.66% $148,252 30.47%
Real estate construction 0 -- 0 --
Installment, commercial, and loans
collateralized by savings accounts 9,083 1.87 25,816 5.31
------- ----- ------- ----
Total $177,726 36.53% $174,068 35.78%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
CONSTRUCTION LOANS. Palmetto Federal provides construction financing for
single family, multi-family and nonresidential commercial real estate.
Construction loans are generally made for periods of six months to one year.
This period may be extended subject to negotiation and the payment of an
extension fee. Typically, interest rates on construction loans for loan terms
over one year are tied to an indexed rate and are adjustable monthly or
quarterly during the term of the loan. The Bank's policies allow residential
construction loans to builders for both presold and "spec" homes for up to an
85% loan to value ratio. The Bank also makes a combined construction/permanent
loan to individuals which combines a construction loan with a permanent mortgage
loan for up to a 95% loan to value ratio. As of December 31, 1995, the Bank had
approximately $3.6 million of single family construction loans, including loans
in process, that exceeded an 80% loan to value ratio. At December 31, 1995,
total construction loans comprised approximately 7.8% or approximately $38.1
million of the Bank's loan portfolio. Included in the Bank's total construction
loans were approximately $33.1 million in single family residential construction
loans, of which approximately $18.1 million were loans to builders for "spec"
homes. The Bank's loss experience for this loan category has been minimal.
COMMERCIAL REAL ESTATE LOANS. Commercial real estate loans made by
Palmetto Federal are secured by office buildings, shopping centers, multi-family
apartment and condominium projects with more than four dwelling units.
Permanent commercial real estate loans are generally made for up to 80% of the
appraised value of the properties securing the loan with interest rates
determined by market conditions. In certain cases the appraised value of the
financed projects is based on the ultimate use of the project rather than its
present use (e.g., the appraisal of a project of rental units may be based on
the proposed future sale of such units as condominiums). Generally, the
majority of the Bank's loan charge-offs have been in this loan category. As of
December 31, 1995, the Bank had approximately $128.1 million in commercial real
estate loans, which comprised approximately 26.3% of the Bank's loan portfolio.
Palmetto Federal also makes commercial real estate loans for land
acquisition, development and/or construction costs. Such loans for residential
projects are generally made for periods of up to three years while loans for
commercial projects are generally made for periods of up to two years.
Typically, such loans with a term over one year are tied to an indexed rate and
are adjustable monthly or quarterly during the term of the loan. Generally,
Palmetto Federal's loan underwriting policies for acquisition, development and
construction project loans are the same as for permanent commercial real estate
loans, however, loans made to finance the sale of foreclosed property may be
made at higher loan to value ratios and favorable interest rates to expedite the
reduction of the Bank's foreclosed property. Certain land acquisition,
development
6
<PAGE>
and/or construction loans made prior to 1987 were in an amount equal to 100% of
the aggregate costs of the financed project, including land acquisition costs,
development costs, construction costs and interest costs. Palmetto Federal
generally does not require a developer to obtain a completion bond guaranteeing
the completion of the financed project in the event that the developer, for any
reason, is unable to perform. In any instance in which it has not obtained a
completion bond, however, Palmetto Federal generally requires a personal
guarantee by the developer.
SECOND MORTGAGE LOANS. Second mortgage residential loans comprised
approximately $52.3 million or 10.8% of the Bank's loan portfolio at December
31, 1995. The Bank's second mortgage loans consist of approximately $23.3
million in term loans primarily for home improvements and approximately $29.0
million in home equity line of credit loans. These loans typically have a
maximum loan to value ratio of 90%.
CONSUMER AND MOBILE HOME LOANS. At December 31, 1995, consumer loans
constituted 8.1% or approximately $39.6 million of Palmetto Federal's loan
portfolio. The consumer loan portfolio is made up of mobile home, automobile
and unsecured loans. During 1995, the Bank originated approximately $1.7
million in mobile home loans. The Bank makes mobile home loans for new mobile
homes for up to 90% of the purchase price of the home, not to exceed 120% of
dealer's cost. Mobile home and automobile loans represented 56.1% and 15.2%,
respectively, of Palmetto Federal's consumer loan portfolio at December 31,
1995. Palmetto Federal also offers Personal CashLine, which is an unsecured
consumer loan. At December 31, 1995, this revolving line of credit represented
7.1% of Palmetto Federal's consumer loan portfolio.
LOAN SALES AND PURCHASES. As economic conditions dictate, Palmetto Federal
engages in selling its fixed-rate loans in the secondary mortgage market to
reduce the gap between the maturities of its interest-earning assets and
interest-bearing liabilities. Palmetto Federal sells loans primarily on a
nonrecourse basis and at December 31, 1995 the Bank was servicing approximately
$237.1 million of loans sold to investors on a nonrecourse basis. At December
31, 1995 Palmetto Federal also was servicing approximately $5.3 million of loans
that it sold on a recourse basis prior to 1988. Loans sold on a recourse basis
generally have terms which require Palmetto Federal to repurchase the loans if
the borrower becomes 120 days past due or if a breach of representation and
warranty occurs (as defined in the applicable servicing agreements). Effective
October 1, 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights", which requires
that the right to service mortgage loans for others be recognized as an asset,
whether that servicing right is acquired or originated. Servicing rights of
$153,000 were recorded during 1995 as a result of adopting this standard,
resulting in a gain of $101,000, net of related income taxes. See Note 1 of the
Consolidated Financial Statements, included in the Company's Annual Report to
Shareholders for the year ended December 31, 1995 (the "1995 Annual Report") and
incorporated herein by reference.
Palmetto Federal ordinarily retains the servicing of these loans for which
it generally receives a fee payable monthly of one-quarter to one-half of one
percent per year of the unpaid principal balance of each loan. The Bank's
servicing fees were $898,000, $816,000 and $498,000 in 1995, 1994 and 1993,
respectively. During 1992 Palmetto Federal sold approximately $150 million in
mortgage servicing rights. The only servicing rights sold in 1993 related to an
existing commitment from the 1992 sale. The Bank sold no significant servicing
rights in 1991, 1994 or 1995.
LOAN FEES. It is the general policy of Palmetto Federal to issue loan
commitments for a fee to qualified borrowers for a specified time period. These
commitments are generally for a period of 60 days. With management approval
commitments may be extended for up to six months. Palmetto Federal had
commitments to originate loans in a principal amount of approximately $13.5
million at December 31, 1995.
In addition to interest earned on loans and fees for issuing loan
commitments, Palmetto Federal receives loan fees for originating loans. Loan
origination fees are a percentage of the principal amount of the mortgage loan
and are charged to the borrower by Palmetto Federal for creation of the loan.
Loan fees, as
7
<PAGE>
well as certain narrowly defined origination costs, are deferred and amortized
as an adjustment to the yield over the life of the related loan. The net
deferred fees are reflected in interest income over the appropriate amortization
period. In the case of adjustable rate mortgages, a substantial portion of the
net deferred fee on each individual loan is recognized as income over the first
adjustment period. Any remaining net deferred fees or costs associated with
loans that are sold are recognized as adjustments to the gains or losses on the
sales of such loans. Therefore, for loans originated and held by Palmetto
Federal, the loan origination fees are not separately identified in results of
operations, nor are the fees being recognized as income immediately upon closing
of the loans but are included in net interest income as an adjustment of yield.
LOAN DELINQUENCIES AND CLASSIFIED ASSETS
LOAN DELINQUENCIES. Palmetto Federal's collection procedures provide that
when a loan becomes 15 days delinquent the borrower is contacted by mail and
payment requested. If the delinquency continues, subsequent efforts are made to
contact and request payment from the delinquent borrower. In certain instances
Palmetto Federal may develop a repayment schedule with the borrower to enable
the borrower to restructure his or her financial affairs.
The accrual of interest income on loans in excess of 90 days past due is
generally suspended and previously recognized interest income reversed.
Additionally, the Bank discontinues the accrual of interest on any loan when it
determines the collection of interest is less than probable. If a nonaccrual
loan is restructured, the Company's policy is that the loan may accrue interest
only if the Bank's evaluation of the borrower's financial condition supports
full repayment of the restructured loan. If a loan continues in a delinquent
status for an additional 60 to 90 days, Palmetto Federal will initiate
foreclosure proceedings. All property acquired as the result of foreclosure or
by deed in lieu of foreclosure is classified as "real estate acquired in
settlement of loans" until such time as it is sold or otherwise disposed of by
Palmetto Federal.
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting By
Creditors For Impairment of a Loan," as amended by SFAS No. 118, "Accounting By
Creditors For Impairment of a Loan - Income Recognition and Disclosures, an
Amendment of SFAS No. 114." Under this new standard, a loan is considered
impaired, based on current information and events, if it is probable that the
Company will be unable to collect the scheduled payments of principal and
interest when due according to the contractual terms of the loan. The minimum
nonpayment period before management considers a loan to be impaired is 90
days. The types and characteristics of loans that are measured using SFAS
No. 114 include individual loans greater than $500,000 or a group of related
loans to a single borrower aggregating more than $500,000. These loans are
typically collateral dependent commercial real estate loans. All other
loans generally are measured under net realizable value techniques or, as
in the case of small homogeneous loans, under a methodology which includes
loan classifications and historical charge-offs. Impaired loans typically
are not charged off until foreclosure on the collateral property.
Occasionally, an impaired loan is partially charged off as part of a loan
restructuring. Nonaccrual loans are typically 90 days or more delinquent
and may include loans within the scope of SFAS No. 114. Impaired loans
may include accruing loans which have a specific valuation allowance or
which have been restructured. Also under this standard, in-substance foreclosed
loans continue to be measured at the fair value of the collateral, however,
these loans are classified as loans receivable rather than as foreclosed real
estate, as was the case previously. Therefore, in-substance foreclosures of
$3.2 million at December 31, 1994 have been reclassified from investment in real
estate to loans receivable. See Note 1 of the Consolidated Financial
Statements, included in the Company's 1995 Annual Report and incorporated herein
by reference.
The amounts and categories of Palmetto Federal's nonperforming assets
(nonaccrual loans and foreclosed real estate ("REO")) and restructured loans,
changes in the components of nonperforming assets and restructured loans, and
additional information concerning the Bank's nonperforming assets and
restructured loans is set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations (hereinafter referred to as
"Management's Discussion and Analysis") -- Nonperforming Assets and Restructured
Loans," included in the Company's 1995 Annual Report and incorporated herein by
reference.
The additional interest income that would have been earned during the year
ended December 31, 1995 if the restructured loans noted above had been current
in accordance with their original terms and had been outstanding throughout the
year ended December 31, 1995 was approximately $222,000. The amount of interest
income on the restructured loans included in net earnings for the year ended
December 31, 1995 was approximately $428,000. Although restructured loans
include loans which are considered to be earning assets, there is more than
normal risk associated with these loans due to the fact that some were made to
facilitate
8
<PAGE>
the sale of foreclosed real estate and some were restructured with terms that
either extend the maturity or reduce the stated interest rate.
Potential problem loans represent loans that are current as to payment of
principal and interest, but where management has doubts about the borrowers'
ability to comply with present repayment terms. These loans are not included in
nonperforming assets. At December 31, 1995, potential problem loans totalled
approximately $9.4 million.
Management of Palmetto Federal establishes an allowance for possible loan
losses each year based on its estimate of losses in the loan portfolio. The
loan loss allowance is charged against Palmetto Federal earnings in the year in
which the allowance is established. Loan charge-offs are charged against the
loan loss allowance. At December 31, 1995, the loan loss allowance was $8.4
million or approximately 1.8% of total loans. Additional information concerning
Palmetto Federal's loan loss allowances for 1995 is set forth in "Management's
Discussion and Analysis -- Nonperforming Assets and Restructured Loans,"
appearing in the Company's 1995 Annual Report and incorporated herein by
reference.
The determination of the adequacy of the Bank's allowance for loan losses
is based upon management's assessment of risk elements in the portfolio, factors
affecting loan quality and assumptions about the economic environment in which
the Bank operates. The Bank utilizes a loan classification system in assessing
the overall quality of its loan portfolio to determine an adequate allowance for
the level of loan losses, with specific emphasis on the Bank's larger loans.
This system involves an ongoing review of the Bank's commercial, real estate and
consumer loan portfolios and includes factors such as the cash flow and
financial status of the borrower, the existence and the value of the collateral
and general economic conditions. This system is dependent upon management's
estimates and judgments and there can be no assurance that the Bank will not
have to increase its allowance for possible loan losses in the future as a
result of adverse markets for real estate and economic conditions generally in
the Bank's primary market areas, future increases in nonperforming assets or for
other reasons which would adversely affect the Bank's results of operations. In
addition, the Bank's principal regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and the carrying value of its other nonperforming assets, including foreclosed
real estate. Such agencies may require the Bank to recognize additions to the
allowance for loan losses based on their judgments at the time of their
examination. The following table describes the Bank's allocation of its
allowance for estimated loan losses.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------------ ----------------- ----------------- ---------------- ----------------
Allocation % Loans % Loans % Loans % Loans % Loans
of Allowance for to Total to Total to Total to Total to Total
Loan Losses: Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------- ------------------ ----------------- ----------------- ----------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans collateralized
by real estate:
Permanent residential $2,141 42.7% $1,545 44.5% $2,509 43.6% $ 1,961 41.1% $ 2,053 38.6%
Construction 564 7.8 539 7.3 442 5.8 196 2.7 203 3.8
Second mortgage 780 10.8 832 12.0 941 12.3 912 12.7 846 15.8
Commercial 4,037 26.3 4,148 22.9 4,712 23.7 3,986 27.7 5,005 24.5
Loans collateralized
by other property
or unsecured:
Consumer 585 8.1 695 9.2 800 10.3 812 10.8 657 11.9
Commercial 238 3.3 397 3.3 422 3.6 305 4.2 246 4.6
Savings accounts 72 1.0 57 0.8 57 0.7 60 0.8 44 0.8
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
Total allowance $8,417 100.0% $8,213 100.0% $9,883 100.0% $ 8,232 100.0% $9,054 100.0%
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
------ ----- ----- ----- ----- ----- ------ ----- ----- -----
</TABLE>
9
<PAGE>
The Company maintains both specific and general loan loss allowances on
its loan portfolio. The following table details changes in the general and
specific loan loss allowances for 1995.
<TABLE>
<CAPTION>
Specific General Total
-------- ------- -----
(in thousands)
<S> <C> <C> <C>
Balance December 31, 1994 $1,289 $6,924 $8,213
Provision for estimated losses 1,129 193 1,322
Charge-offs (1,706) (64) (1,770)
Recoveries 481 171 652
------ ------ ------
Balance December 31, 1995 $1,193 $7,224 $8,417
------ ------ ------
------ ------ ------
</TABLE>
CRITICIZED ASSETS. OTS regulations require thrifts to monitor and
classify their assets to establish a mechanism of early identification of
problem loans and to calculate and provide for prudent valuation allowances.
Institutions are also required to classify their own assets and to establish
prudent general allowances for loan losses. An institution also is required to
set aside adequate valuation allowances to the extent an affiliate possesses
assets requiring classification and poses a risk to the institution. OTS
regulations also require institutions to establish loss allowances for off-
balance sheet items when a loss becomes probable and estimable. The
determination of the individual asset classification depends on the degree of
risk associated with the asset and the likelihood of repayment or orderly
liquidation. The portion of a loan or other asset classified as loss is
considered uncollectible and a specific valuation allowance is established for
the portion of the asset so classified. For the portion of assets classified as
loss, the OTS permits institutions either to establish specific allowances for
losses of 100% of the amount classified or to charge-off such amount. A
doubtful asset has a high possibility of loss, but certain pending factors
preclude the estimation of a specific valuation allowance. Palmetto Federal
classifies an asset as substandard if the asset exhibits a defined weakness and
is inadequately protected either by the paying capacity of the borrower or the
value of the underlying collateral. Special mention loans have some credit
deficiencies as potential weaknesses that if not corrected could increase the
risk of financial loss. The Bank's total criticized assets include its
nonperforming assets and restructured loans as well as its potential problem
loans. The following table summarizes the Bank's criticized assets at December
31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Special mention $ 9,867 $11,050 $12,470
Substandard 25,450 30,138 40,904
Doubtful 0 0 755
Loss 1,462 1,822 4,265
------ ------ ------
$36,779 $43,010 $58,394
------ ------ ------
------ ------ ------
</TABLE>
10
<PAGE>
INVESTMENT ACTIVITIES
The Company invests in mortgage-backed and related securities.
Included in the Company's securities portfolio are mortgage-backed securities
which are insured or guaranteed by FNMA or Government National Mortgage
Association ("GNMA"). Mortgage-backed securities increase the quality of the
Company's assets by virtue of the guarantees that back them, require less
capital under risk-based capital rules than nonguaranteed mortgage loans, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. The returns and other
information concerning such securities are outlined below.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Average yield for period 6.61% 5.85% 6.58%
Average rate at end of period 6.76% 6.72% 6.88%
Interest income earned $ 6,335 $ 6,237 $ 8,035
Average balance for the period 95,803 106,602 122,134
Fair value at end of period 79,181 101,909 106,561
Amortized cost at end of period 77,736 108,621 106,151
Net unrealized gain (loss) $ 1,445 $ (6,712) $ 410
</TABLE>
Through an investment policy approved by its Board of Directors,
Palmetto Federal invests funds necessary to comply with liquidity regulations
and other funds not needed currently for loans in short-term investments. At
December 31, 1995, Palmetto Federal held investments in United States Treasury
and agency securities with a fair value of approximately $39.9 million. In 1995
the Bank received proceeds of $76.9 million from the sale of loans, investment
and mortgaged-backed securities. See Note 2 of the Consolidated Financial
Statements, included in the Company's 1995 Annual Report and incorporated herein
by reference.
The following table sets forth information for Palmetto Federal with
respect to yields on loans, yields on investments and cost of funds on deposits
and borrowings for the periods indicated.
<TABLE>
<CAPTION>
For The Years Ended December 31,
----------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average yields on:
Loans receivable 8.90% 8.49% 8.48% 9.26% 10.34%
Mortgage-backed securities 6.61 5.85 6.58 7.15 7.71
Investment portfolio 5.85 5.40 3.99 5.45 7.02
All interest-earning assets 8.24 7.73 7.76 8.54 9.81
Weighted average rate paid on:
Retail savings deposits 2.66 2.66 2.87 3.74 4.87
Brokered time deposits -- 9.55 6.98 9.18 9.33
Retail time deposits 5.80 4.94 5.27 6.19 7.64
Interest-bearing demand deposits 2.40 2.09 2.64 3.70 4.31
FHLB advances and other borrowed money 6.58 5.72 6.20 6.79 7.91
All interest-bearing liabilities 5.10 4.36 4.81 5.80 7.14
Net interest margin (difference between
average rates on all interest-earning
assets and interest-bearing
liabilities) 3.14 3.37 2.95 2.74 2.67
Net yield (net interest income as a
percentage of average interest
earning assets) 3.26% 3.37% 2.79% 2.54% 2.32%
</TABLE>
11
<PAGE>
The following table sets forth information for the Bank with respect to
weighted average contractual yields on loans, yields on investments and the cost
of funds on deposits and borrowings at December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average yields on:
Loans receivable 8.87% 8.34% 8.25% 8.90% 9.94%
Mortgage-backed securities 6.76 6.72 6.88 6.46 7.11
Investment portfolio 5.50 5.72 4.73 5.34 6.12
All interest-earning assets 8.20 7.80 7.78 8.14 9.17
Weighted average rate paid on:
Retail savings deposits 2.65 2.71 2.71 3.04 4.50
Brokered time deposits -- -- 9.38 8.31 8.71
Retail time deposits 6.07 4.90 4.92 5.69 7.00
Interest bearing demand deposits 2.42 2.10 2.39 2.46 3.22
FHLB advances & other borrowed money 6.56 6.72 5.98 6.46 7.29
All interest-bearing liabilities 5.22 4.73 4.45 5.27 6.56
Net interest margin 2.98% 3.07% 3.33% 2.87% 2.61%
</TABLE>
The tables below set forth the book value of the Company's investments
at the dates indicated, the weighted average yields on investments for the years
ended on the dates indicated and the periods to maturity from December 31, 1995.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Market Market Market
Cost Value Cost Value Cost Value
----- ------- ----- ------- ----- -------
U.S. Treasury and agency
obligations:
held-to-maturity $ 8,940 $ 8,879 $39,105 $36,011 $ 6,282 $ 6,372
U.S. Treasury and agency
obligations:
available-for-sale 31,230 31,060 4,988 4,884 14,928 15,092
Corporate obligations 0 0 1,998 1,825 100 99
Other investments 0 0 3 62 25 88
------- ------- ------- ------ ------ ------
Total $ 40,170 $ 39,939 $46,094 $42,782 $21,335 $21,651
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------
Weighted average yield on
investments for the year 5.53% 5.30% 4.15%
---- ---- ----
---- ---- ----
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Periods to maturity from December 31, 1995
------------------------------------------------------
Held to Maturity Available for Sale
---------------------- ------------------------
Weighted Weighted
Average Average
Cost Yield Cost Yield
---- ----- ---- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency obligations:
1 year or less $ 0 -- % $ 5,996 4.90%
1-5 years 2,960 5.12 21,829 5.55
5-10 years 5,980 5.41 3,000 5.70
after 10 years 0 -- 405 7.41
Corporate obligations:
1 year or less 0 -- 0 --
1-5 years 0 -- 0 --
5-10 years 0 -- 0 --
after 10 years 0 -- 0 --
Other investments:
1 year or less 0 -- 0 --
1-5 years 0 -- 0 --
5-10 years 0 -- 0 --
after 10 years 0 -- 0 --
--- ---- --- ----
Total $8,940 5.37% $31,230 5.46%
------ ---- ------- ----
------ ---- ------- ----
</TABLE>
ASSET/LIABILITY MANAGEMENT
Asset and liability management is the process by which Palmetto Federal
attempts to maximize net interest income while minimizing the adverse effect of
interest rate changes. The Company's Asset/Liability Committee sets loan and
deposit rates, reviews the interest sensitivity gap of the Bank and sets
policies and strategies to improve the interest rate risk exposure of the
portfolio and to increase the level of net interest income. Additional
information concerning the Bank's asset and liability management is included in
"Management's Discussion and Analysis -- Asset/Liability Management," appearing
in the Company's 1995 Annual Report and incorporated herein by reference.
13
<PAGE>
The following static gap table sets forth in summary form the repricing
attributes of Palmetto Federal's interest-earning assets and interest-bearing
liabilities. Static gap is a simple measure of the difference between interest-
sensitive assets and interest-sensitive liabilities repricing for a particular
time period. A negative gap position indicates that cumulative interest-
sensitive assets are less than cumulative interest-sensitive liabilities and
indicates that net income would decrease if market rates increased. The time
periods in the table represent the time before an asset or liability matures or
can be repriced.
<TABLE>
<CAPTION>
More
0 to 3 3 to 6 6 to 12 1 to 3 3 to 5 than 5
Months Months Months Years Years Years Total
-----------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets
Balloon and adjustable rate loans $120,394 $61,340 $84,167 $2,982 $6,990 $2,243 $278,116
Fixed rate mortgage and mortgage-
backed securities 6,212 10,187 19,525 81,063 42,422 51,439 210,848
Consumer and commercial loans 13,882 3,326 6,216 19,978 9,807 2,234 55,443
Investments 42,961 8,929 948 2,787 622 3,031 59,278
------- ------ ------ ------ ------ ------ -------
Total Interest-Sensitive Assets 183,449 83,782 110,856 106,810 59,841 58,947 603,685
------- ------ ------- ------- ------ ------ -------
Interest-Sensitive Liabilities
Regular savings 35,371 0 0 0 0 0 35,371
IFA accounts 12,205 0 0 0 0 0 12,205
NOW accounts 61,569 1,239 2,482 6,272 6,272 10,455 88,289
Fixed maturity deposits 113,046 42,573 85,148 83,318 30,520 0 354,605
------- ------ ------ ------ ------ ------ -------
Total Deposits
(excluding accrued interest) 222,191 43,812 87,630 89,590 36,792 10,455 490,470
------- ------ ------ ------ ------ ------ -------
FHLB advances and other
borrowed money 65,168 15,000 17,600 0 0 0 97,768
------ ------ ------ ------ ------ ------ ------
Total Interest-Sensitive Liabilities 287,359 58,812 105,230 89,590 36,792 10,455 588,238
------- ------ ------- ------ ------ ------ -------
Interest Sensitivity Gap (103,910) 24,970 5,626 17,220 23,049 48,492 $15,447
-------- ------ ----- ------ ------ ------ -------
-------- ------ ----- ------ ------ ------ -------
Cumulative Gap $(103,910) $(78,940) $(73,314) $(56,094) $(33,045) $15,447
-------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------
Ratio of cumulative gap to total
interest-sensitive assets (17.21)% (13.08)% (12.14)% (9.29)% (5.47)% 2.56%
</TABLE>
14
<PAGE>
SOURCES OF FUNDS
GENERAL. Palmetto Federal's principal sources of funds are deposits,
principal and interest payments on loans, investment and mortgage-backed
securities, proceeds from sales of investment and mortgage-backed securities,
FHLB advances, other borrowings and retained earnings. Loan repayments are a
relatively stable source of funds, while deposit flows are significantly
influenced by general interest rates and economic conditions.
The following table sets forth the average amount of and the average
rate paid on the following deposits.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1995 1994 1993
------------------- ------------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ----- ------- ------ ------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits $ 31,074 2.66% $ 31,409 2.66% $ 29,808 2.87%
Time deposits 365,020 5.80 325,360 4.96 345,341 5.33
Interest-bearing demand
deposits (including non-interest-
bearing demand deposits) 98,666 1.71 115,615 1.56 115,762 1.94
------- ------- -------
Total deposits $494,760 4.79% $472,384 4.36% $490,911 4.38%
------- ------- -------
------- ------- -------
</TABLE>
DEPOSIT ACTIVITIES. The primary sources of deposits for Palmetto
Federal are time deposits and various types of short-term money market and
checking (NOW) accounts and other savings alternatives that are responsive to
market conditions. The ability of Palmetto Federal to attract and maintain
deposits and Palmetto Federal's cost of funds have been, and will continue to
be, significantly affected by money market conditions. See "Management's
Discussion and Analysis -- Asset/Liability Management," included in the
Company's 1995 Annual Report and incorporated herein by reference. Palmetto
Federal currently does not use brokered deposits as a source of funds.
15
<PAGE>
The following table sets forth deposit account balances, excluding accrued
interest payable, by account type, original term and weighted average interest
rate at the date indicated.
<TABLE>
<CAPTION>
At December 31, 1995
-----------------------------------------------------
Weighted Percentage
Type of Average of Total
Account Amount Interest Rate Deposits
- ------- ---------- ------------- ----------
(in thousands)
<S> <C> <C> <C>
NOW accounts $ 88,815 5.73% 17.91%
Money market deposit
accounts 10,795 3.12 2.18
Passbook and commercial
savings 33,052 2.65 6.67
Time Deposits
Jumbo certificates 54,060 6.31 10.90
Other time deposits:
60 day 19,308 3.69 3.89
6 month 33,426 5.58 6.74
8 month 14,168 5.69 2.86
12 to 15 month 112,798 6.17 22.74
18 to 24 month 46,053 6.04 9.29
30 month 20,282 6.25 4.09
36 to 48 month 7,202 6.01 1.45
60 month or more 49,169 7.05 9.92
Other 6,727 5.35 1.36
------- ------ ------
Total $495,855 4.98% 100.00%
------- ---- ------
------- ---- ------
</TABLE>
The following table sets forth the time deposits of Palmetto Federal
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------
<S> <C> <C> <C>
Rate 1995 1994 1993
------ -------- -------- --------
Less than 4.00% $ 20,943 $ 67,689 $160,681
4.01 - 6.00% 165,733 201,388 94,596
6.01 - 8.00% 165,057 52,195 36,735
Above 8.00% 11,460 20,088 41,384
-------- ------- --------
$363,193 $341,360 $333,396
-------- -------- --------
-------- -------- --------
</TABLE>
16
<PAGE>
The following table sets forth the amount and scheduled maturities of time
deposits at December 31, 1995.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------
Less Than After
One Year 1-2 Years 2-3 Years 3 Years Total
-------- --------- --------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Less than 5.25% $ 35,324 $ 1,371 $ 1,131 $ 382 $ 38,208
5.25 - 7.00% 192,047 38,137 8,831 24,912 263,927
7.01 - 9.00% 16,787 27,674 3,451 5,746 53,658
9.01 - 11.00% 48 2,148 4,755 449 7,400
------- ------- ------ ------ -------
Total scheduled
maturities $244,206 $69,330 $18,168 $31,489 $363,193
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
</TABLE>
As of December 31, 1995, the Bank had approximately $81.6 million in
retail certificates of deposits with maturities between one to three years with
a weighted average rate of 5.97%. The Bank also had approximately $37.5 million
in retail certificates of deposit at December 31, 1995 with maturities of
greater than three to six years with a weighted average rate of 5.41%.
The following table sets forth the maturities of time certificates in
amounts of $100,000 or more.
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------ ------- --------- -------
(dollars in thousands)
$20,271 $14,655 $19,797 $28,222 $82,945
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
BORROWING ACTIVITIES. At December 31, 1995, Palmetto Federal had advances
totalling approximately $91.5 million from the Federal Home Loan Bank of Atlanta
("FHLBA") at rates from 5.73% to 9.10% payable at various dates through July
1997.
17
<PAGE>
The short-term borrowings by Palmetto Federal at the end of and during the
periods indicated and the maximum amount outstanding at any month-end during
each period are set forth in the following table.
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1995 1994 1993
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Total short-term borrowings at the
end of period:
FHLBA advances $ 81,500 $ 98,200 $ 71,600
Weighted average interest rate at
end of period:
FHLBA advances 6.59% 6.38% 4.09%
Average amounts outstanding:
FHLBA advances $ 82,135 $ 88,792 $ 70,630
Maximum amount outstanding at any
month:
FHLBA advances $ 90,200 $ 98,200 $107,800
</TABLE>
PALFED INVESTMENT SERVICES
PALFED Investment Services, Inc., formerly PALFED Financial Services, Inc.
("PALFED Investment"), a wholly-owned subsidiary of PALFED, offers retail
securities brokerage services and sells tax-deferred annuities and consumer
insurance products. Net pre-tax income in 1995 of PALFED Investment was
approximately $300,000 on revenues of $757,000.
PALFED Investment sells certain tax deferred annuities through Family
Financial Life Insurance Company ("Family Financial"), a Louisiana insurance
company that is directly or indirectly controlled by service corporations or
subsidiaries of savings institutions and their holding companies. PALFED
Investment also sells annuities through other insurance companies.
Additionally, Palmetto Federal sells credit life and mortgage insurance through
Family Financial. PALFED Investment owns, directly or indirectly, approximately
19 percent of the outstanding stock of Family Financial with an investment in
Family Financial stock of approximately $612,000. PALFED Investment received
approximately $26,000 in dividends and distributions from Family Financial in
1995. W. Barry Adams, Executive Vice President of Palmetto Federal and Senior
Vice President of PALFED Investment, serves as a director of Family Financial.
EFFECTS OF PURCHASE ACCOUNTING
Palmetto Federal acquired First Federal Savings and Loan Association of
Beaufort, South Carolina ("First Federal") in August, 1982. This acquisition,
accounted for using the purchase method of accounting, increased the assets and
liabilities of Palmetto Federal by approximately $107 million each and added
seven branches to its system, two of which have since been closed. In December
1993, the Company changed its method of amortizing goodwill by adopting the
provisions of SFAS No. 72, "Accounting For Certain Acquisitions of Banking or
Thrift Institutions", effective January 1, 1993. SFAS 72 (issued after the
First Federal acquisition) requires goodwill to be amortized over the estimated
life of the interest-earning assets acquired using the level yield method. The
Company believes the change in accounting principle is preferable because it
provides a better matching of the amortization of goodwill with the amortization
of purchased discount on the acquired interest-earning assets from the First
Federal acquisition. The change in accounting principle resulted in a $10.5
million noncash charge to 1993 earnings, reflecting the cumulative effect of
this
18
<PAGE>
change for the periods prior to January 1, 1993. This change also reduced the
amount of goodwill amortization recognized in 1993 by approximately $649,000.
Management reviews the amortization periods (estimated lives) of the intangible
assets periodically and makes adjustments as needed.
The following table sets forth the actual effect on the Company's
operations for 1982 through 1995 of the First Federal acquisition and the sale
or repayment of loans acquired in such acquisition. The table also reflects the
pro forma effect on future periods' results of operations of the accretion and
amortization of the valuation adjustments recorded in connection with Palmetto
Federal's acquisition of First Federal on the basis of certain assumptions as to
the fair value of the assets and liabilities and an assumption that there will
be no sales of or prepayments on the acquired loans. If these assumptions are
not realized, the actual effects of the accretions and amortization of these
valuation adjustments will vary.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Income
----------------------------------------------------------
Amortization Amortization
Accretion of of Other
of Loan Intangibles Premiums and Net
Actual Discounts and Goodwill Discounts Effect
- ------ ----------- ------------ ------------ ------
<S> <C> <C> <C> <C>
1982 - 1991 $25,007,651 $ (8,313,551) $201,992 $ 16,896,092
1992 101,705 (956,880) 12,396 (842,779)
1993 125,545 (10,761,947) 12,396 (10,624,006)
1994 57,915 (260,825) 12,396 (190,514)
1995 77,765 (281,391) 12,396 (191,230)
Pro Forma
- ---------
1996 32,539 (242,255) 12,396 (197,321)
1997 28,471 (239,506) 12,396 (198,639)
1998 11,263 (227,874) 12,396 (204,214)
1999 20,336 (234,007) 12,396 (201,275)
2000 - 2007 53,810 (1,706,764) 21,840 (1,631,114)
----------- ------------- -------- -------------
Total $25,517,000 $(23,225,000) $323,000 $ 2,615,000
----------- ------------- -------- -------------
----------- ------------- -------- -------------
</TABLE>
19
<PAGE>
REAL ESTATE DEVELOPMENT
Palmetto Service Corporation ("PSC"), a wholly-owned subsidiary of
Palmetto Federal, has engaged in real estate development activities since 1980,
but currently is not engaged in any new real estate development activities.
Woodside Development Company of Aiken, Inc. ("WDC"), a wholly-owned subsidiary
of PSC, was the original developer of the Woodside Plantation development.
Effective November 1993, PSC transferred to WDC certain real estate properties
in projects it previously developed. PSC currently provides real estate
appraisal services in the Bank's market areas, engages in real estate brokerage
services, and has investments in two real estate partnerships. At December 31,
1995, Palmetto Federal's investment in PSC was approximately $5.8 million and it
had extensions of credits (including intercompany receivables and accounts
payable) of approximately $289,000 to PSC and WDC.
At December 31, 1995, PSC and WDC had a total investment as set forth
below in the following real estate developments and partnerships:
Woodside Plantation $4,482,000
The Rapids 944,000
Other developments 287,000
Real estate partnerships 720,000
----------
$6,433,000
----------
----------
WOODSIDE PLANTATION. Woodside Plantation is a single family planned
unit development of over 2,000 acres that includes a country club, two
eighteen hole golf courses and over 1,800 single family lots as well as
developed outparcels. Since the project's inception in 1986 through December
31, 1993, WDC developed 913 homesites and sold 693 homesites and certain
outparcels at Woodside Plantation providing revenues after closing costs of
approximately $27.3 million. In December 1990, WDC sold the Woodside Plantation
clubhouse, related golf courses, tennis and swimming facilities and amenities to
Woodside Plantation Country Club, Inc. ("WPCC"), a subsidiary of Club
Corporation of America, for approximately $6.8 million. Concurrent with the
sale of the club and related amenities, WDC entered into a membership agreement
with WPCC to purchase a minimum of 85 club memberships each year through
December 31, 1995, payable in quarterly installments of approximately $96,000.
In October 1993, WDC sold the assets of Woodside Cable, an operating division
that provided cable television services, for approximately $1.1 million.
In December 1993, WDC sold the remaining developed lots at Woodside
Plantation, together with seven outparcels, the development and sales offices at
Woodside Plantation, and the stock of Woodside Realty, Inc., a wholly-owned
subsidiary of WDC that provided real estate brokerage services for Woodside
Plantation, for approximately $4.1 million. In addition, the purchaser,
Woodside Development Limited Partnership (the "Purchaser"), assumed liabilities
of approximately $850,000 related to the obligation of WDC to purchase
memberships at Woodside Plantation Country Club. The Purchaser also entered
into a two year option agreement to acquire from WDC approximately 1,000 acres
of undeveloped land at Woodside Plantation. At December 31, 1995 WDC owned
approximately 1,000 acres of undeveloped acreage and two outparcels at Woodside
Plantation.
Palmetto Federal provided nonrecourse financing to the Purchaser of the
developed lots and other assets of WDC in an aggregate amount of approximately
$3.6 million. In addition, Palmetto Federal subsequently provided the Purchaser
a $500,000 construction loan to build townhouses at Woodside Plantation and six
separate construction loans in an aggregate amount of approximately $976,000 for
further construction at Woodside Plantation.
20
<PAGE>
Due to slower than anticipated lot sales, the Purchaser was unable to
service its acquisition debt and completed a restructuring of the indebtedness
to the Bank in September 1995. The restructuring included the following terms:
(1) the Company received 35 lots in return for a $492,000 reduction of the debt;
(2) the Company agreed to accrue and contribute up to $330,000 toward joint
marketing efforts over three years related to the 35 lots it received in the
restructuring; (3) the Company agreed to grant a two year extension until
December 31, 1997 of the Purchaser's option to purchase the remaining
undeveloped acreage; (4) the Company agreed to make the third and fourth quarter
1995 payments under the membership agreement to WPCC in the amount of $184,500;
and (5) the Purchaser agreed to bring the membership obligation current by
payment of $189,000. The Company paid $110,000 toward joint marketing in 1995.
The Company continues to have a significant concentration of risk
related to Woodside Plantation, exclusive of loans to individual homeowners at
Woodside Plantation, comprised of real estate held for development, acquisition
and development loans, foreclosed real estate and a 50 percent interest in a
partnership. The carrying values of these components were as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Undeveloped land: 1,000 acres and 2 outparcels $ 4,483 $ 4,483
Loans to WPCC 4,454 4,584
Loans to Woodside Development Limited Partnership 3,311 3,100
35 lots received in loan restructuring 492
Development loan to unrelated borrower 525
Investment in and loans to partnership 613 698
-------- --------
$13,878 $12,865
-------- --------
-------- --------
</TABLE>
The ability of WPCC to repay its loans to the Bank also is based in part
on real estate sales at Woodside Plantation, which provides additional
memberships for the Woodside Plantation County Club. Pursuant to the membership
agreement with WPCC, WDC and subsequently Woodside Development Limited
Partnership paid an aggregate of $1.9 million from 1991 through 1995 to WPCC for
club memberships. Additionally, the membership agreement provides for a
contingent liability to purchase club memberships through December 31, 2000,
related to the number of lots sold in Woodside Plantation from January 1, 1996
to December 31, 2000. WPCC presently is in discussions with the Bank to modify
its loans from amortizing to interest only payments for 1996.
THE RAPIDS. PSC has developed The Rapids project, a planned unit
development of single family homesites located in North Augusta, South Carolina.
In 1991, PSC sold part of the land and completed development of all of the 115
homesites it planned to develop at this project. Since the project's inception
in 1986 through December 31, 1995, PSC has sold 77 homesites and 4 outparcels
providing revenues after closing costs of $3.7 million. At December 31, 1995,
Palmetto Federal had two outstanding construction loans to PSC for the
construction of "spec" homes on two of the homesites at this project. WDC has
38 homesites and two outparcels remaining held for sale at this project.
OTHER DEVELOPMENTS. WDC owns 5 single-family lots held for sale in two
communities in Aiken County, South Carolina known as Southwood and Midland
Valley. The lots in these two projects were developed by PSC in prior years.
REAL ESTATE PARTNERSHIPS. PSC has investments in two active real estate
partnerships totalling $326,000 at December 31, 1995. In 1995 these
partnerships had a net loss of approximately $193,000. The Bank had one
outstanding loan to these partnerships of $344,000 at December 31, 1995.
21
<PAGE>
REGULATION
GENERAL
The Company is a savings and loan holding company subject to
regulations, examination, supervision and reporting requirements of the OTS. As
a savings association, Palmetto Federal is subject to extensive regulation by
the OTS. The lending activities and other investments of Palmetto Federal must
comply with various federal regulatory requirements, including regulations that
require the maintenance of reserves against deposits, limiting the nature of
loans and interest that may be charged thereon and restricting investments and
other activities. In addition, federal and state regulatory agencies also have
the authority to prevent a savings association from paying a dividend or
engaging in any other activity that, in the opinion of the regulators, would
constitute an unsafe or unsound practice. The OTS and FDIC periodically examine
Palmetto Federal for compliance with various regulatory requirements, and
Palmetto Federal must file reports with the OTS describing its activities and
financial condition. Palmetto Federal is also subject to examination by the
FDIC and must meet certain reserve requirements promulgated by the FRB. This
supervision and regulation is intended primarily for the protection of
depositors and the federal deposit insurance fund.
The Company also is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
include the filing of annual, quarterly and other reports with the Securities
and Exchange Commission ("SEC").
FEDERAL SAVINGS AND LOAN HOLDING COMPANY REGULATION
As the owner of all of the stock of Palmetto Federal, the Company is a
savings and loan holding company subject to regulation by the OTS under the Home
Owners' Loan Act (the "HOLA"). As a unitary savings and loan holding company
owning only one savings association, the Company generally is allowed to engage
and invest in a broad range of business activities not permitted to commercial
bank holding companies or multiple savings and loan holding companies; provided
that Palmetto Federal continues to qualify as a "Qualified Thrift Lender." See
"Regulation of Palmetto Federal - Qualified Thrift Lender ("QTL") Test." In the
event of any acquisition by the Company of another insured institution
subsidiary, except for a supervisory acquisition, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage.
The Company is prohibited from directly or indirectly acquiring control
of any savings institution or savings and loan holding company without prior
approval from the OTS or from acquiring more than 5% of any voting stock of any
savings institution or savings and loan holding company which is not a
subsidiary. No entity can acquire more than 10% of the stock of the Company
without prior OTS approval (unless the acquisition is for investment purposes
only and for not more than 24.9% of the Company's stock, and the required
filings are made with the OTS). The HOLA provides that no company may acquire
"control" of a savings association without the prior approval of the OTS.
"Control" is generally denoted by a greater than 25% ownership interest in the
savings association or its holding company. Any company that acquires such
control becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS.
REGULATION OF PALMETTO FEDERAL
SUPERVISORY AGREEMENT. In connection with the 1992 OTS Report of
Examination, which noted certain deficiencies and concerns regarding Woodside
Plantation, the level of criticized assets and capital levels, the OTS exercised
its discretion to treat Palmetto Federal as an institution requiring more than
normal supervision under the provisions of OTS Regulatory Bulletin ("RB") 3a-1.
This OTS designation entailed asset growth limitations, third party contract
limitations, and senior executive officer hiring notification and approval
provisions.
22
<PAGE>
Effective March 23, 1993, Palmetto Federal entered into a Supervisory
Agreement with the OTS to ensure the correction of deficiencies noted by the OTS
in the 1992 Examination. The Supervisory Agreement contained provisions related
to the management and reduction of Palmetto Federal's loans to and investments
in Woodside Plantation; adoption and implementation of procedures and policies
regarding the identification and reporting of troubled debt restructurings and
accrual of interest on delinquent loans; preparation of detailed plans for
disposing of troubled assets; preparation of strategic plans and capital
maintenance plans for the Bank; and maintenance of a $7.2 million level of
general valuation allowances. The Bank submitted to the OTS within the time
periods provided in the Supervisory Agreement the budgets, strategic plans and
appraisals mandated by the Supervisory Agreement. The Bank also adopted and
implemented the policies and procedures regarding the reporting of troubled debt
restructurings required by the Supervisory Agreement.
Following the 1994 OTS Examination, the OTS terminated the restrictions
of RB 3a-1 in August 1994. In December 1994, the OTS terminated the remaining
provisions of the Supervisory Agreement, subject to the Bank's continuing the
policies and procedures that encompassed the intent of the Supervisory Agreement
and continuing to adhere to the projections contained in the Bank's plans
previously submitted to the OTS. Both actions by the OTS significantly reduced
the level of regulatory restrictions on the Bank's operations. Additionally,
the termination of the RB 3a-1 restrictions lowered the FDIC insurance premium
rate paid by the Bank.
REGULATORY CAPITAL REQUIREMENTS. OTS regulations (the "Regulatory
Capital Regulations") specify capital standards for thrifts consisting of three
components, a "core capital" requirement, a "tangible capital" requirement and a
"risk-based capital" requirement. The Regulatory Capital Regulations require
savings associations to maintain core capital in an amount not less than 3% of
adjusted total assets (the "leverage ratio") and to maintain tangible capital in
an amount not less than 1.5% of adjusted total assets. Under the Regulatory
Capital Regulations, thrifts are required to maintain capital equal to 8% of
risk-weighted assets. The OTS requires assets to be weighted on the basis of
risk and assigned a weighing factor of between 0% and 100%. Approximately one-
half of risk-based capital must consist of core capital and one-half may consist
of other preferred stock, a portion of general loan loss reserves and other
hybrid capital instruments such as convertible and subordinated debentures.
In determining compliance with the new capital standards, all of a
savings association's investments in and extensions of credit to any subsidiary
engaged in activities not permissible for a national bank are deducted from the
savings association's capital. The required deduction from capital for
investments in subsidiaries engaged in activities not permitted for a national
bank is phased in through July 1, 1996. At December 31, 1995, Palmetto Federal
had approximately $6.2 million in investments in and extensions of credit to a
subsidiary engaged in activities not permissible for national banks.
23
<PAGE>
At December 31, 1995, Palmetto Federal complied with its capital
requirements as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Stockholder's equity $48,968 $48,968 $48,968
Additions:
Unrealized losses on debt securities,
net of related income tax 884 884 884
Qualifying general valuation allowances --- --- 5,291
Deductions:
Goodwill and other intangible assets (2,650) (2,650) (2,650)
Non-includable portions of investment
in subsidiaries (3,827) (3,827) (3,827)
Non-includable portion of nonresidential
construction and land loans --- --- (241)
----- ----- ------
Regulatory capital 43,375 43,375 48,425
Minimum regulatory requirement 9,586 19,172 33,865
------- ------- --------
Excess amount $33,789 $24,203 $14,560
-------- ------- --------
-------- ------- --------
Actual capital ratio 6.8% 6.8% 11.4%
Minimum regulatory capital ratio 1.5% 3.0% 8.0%
Fully phased-in regulatory capital $40,959 $40,959 $46,009
Fully phased-in regulatory capital requirement 9,547 19,095 33,659
------- ------- -------
Excess Amount $31,412 $21,864 $12,350
------- ------- -------
------- ------- -------
</TABLE>
Included in the calculations of the Bank's capital requirements are
judgments and estimates of management. These judgments and estimates are
subject to review and scrutiny by the OTS and FDIC.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") made a number of changes affecting the
federal depository insurance funds and the operations of federally insured
banks and savings institutions and their affiliates. FDICIA required each
federal regulator, including the OTS, to adopt a system of prompt corrective
action indexed to an association's capital level. Effective December 19, 1992,
the OTS promulgated final regulations for a system of prompt corrective action,
which provides for certain mandatory supervisory actions as well as additional
discretionary supervisory actions if an institution's capital falls below
certain levels. Under these regulations, each depository institution must be
classified into one of five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, or critically
undercapitalized) based on such institution's capitalization with respect to
the capital measures established by the applicable regulatory agency. All
institutions are prohibited from making any capital distributions or paying a
management fee to any controlling person if such action would cause the
institution to fall into one of the undercapitalized categories. The OTS at
its discretion may reclassify a savings association's capital category to the
next lowest level (but not to the "critically undercapitalized" level) if it
deems that association to be in an unsafe and unsound condition or if the
savings association has received and not corrected a less than satisfactory
rating for any of the equivalent CAMEL rating categories for asset quality,
management, earnings or liquidity in the most recent examination of the savings
association. The regulation also requires the regulators to take certain
specified actions for institutions that are determined to fall within any of
the three categories below the "adequately capitalized" level. These actions
range from prohibiting an institution from making any capital distributions or
paying management fees if the action would cause the institution to fall into
the "undercapitalized category" to the appointment of a
24
<PAGE>
conservator or receiver for an institution that becomes "critically
undercapitalized". Management believes Palmetto Federal is presently considered
"well capitalized" under the FDIC's prompt corrective action guidelines.
FDICIA directed the OTS and other federal banking agencies to revise their
risk-based capital standards to ensure that the standards (i) take adequate
account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities, and (ii) reflect the actual performance and expected
risk of loss of multifamily mortgages. Institutions with an "above-normal"
degree of interest rate risk are required to maintain an additional amount of
capital. In March 1995, the OTS delayed indefinitely the implementation of the
interest rate risk component of the risk-based capital standard, which had been
scheduled to be effective September 30, 1994. As calculated at September 30,
1995 (the latest date for which information is available), Palmetto Federal
would have no additional capital requirements under this interest rate risk
rule.
SAFETY AND SOUNDNESS STANDARDS. The Federal Deposit Insurance Act, as
amended by FDICIA and the Riegle Community Development and Regulatory
Improvement Act of 1994, required each federal banking agency to prescribe, for
all insured depository institutions and their holding companies, standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
asset quality, earnings, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal bank regulatory agencies adopted, effective August 9, 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation,
fees, and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal stockholders. In
addition, the agencies adopted regulations that authorize, but do not require,
an agency to order an institution that has been given notice by an agency that
it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If, after being so notified, an institution fails to submit
an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan or fails in any material respect to implement an
accepted compliance plan, the agency must issue an order directing action to
correct the deficiency and may issue an order directing other actions of the
types to which an undercapitalized association is subject under the "prompt
corrective action" provisions of FDICIA. If an institution fails to comply
with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties. The federal bank regulatory
agencies also proposed guidelines for asset quality and earnings standards.
LIQUIDITY REQUIREMENTS. As a member of the FHLBS, Palmetto Federal is
required to maintain average daily balances with the FHLBA of liquid assets
(cash, certain time deposits, bankers' acceptances, highly rated corporate debt
and commercial paper, securities of certain mutual funds and specified U.S.
government, state or federal agency obligations) equal to not less than a
specified percentage (currently 5%) of the average daily balance during the
preceding calendar month of its net withdrawable accounts plus short-term
borrowings. Member institutions are also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%)
of the average daily balance during the preceding calendar month of the total
of their net withdrawable accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet liquidity requirements.
At December 31, 1995 the long-term liquidity ratio of Palmetto Federal was 7.9%
and the Bank was in compliance with its short-term liquidity requirement.
25
<PAGE>
NONRESIDENTIAL REAL ESTATE LOANS LIMIT. OTS regulations limit investments
by a thrift in nonresidential real estate (i.e., loans secured by nonresidential
real property) to 400% of the thrift's capital. At December 31, 1995, Palmetto
Federal was in compliance with this limit.
LOANS TO ONE BORROWER. With certain exceptions, the statutory provision
limiting the ability of national banks to make loans to a single borrower is
now applicable to savings associations in the same manner and to the same
extent as it applies to national banks. In general, national banks may make
loans to one borrower equal to 15% of the bank's unimpaired capital and
unimpaired surplus, plus an additional 10% of capital and surplus for loans
secured by readily marketable collateral. At December 31, 1995, the current
limit of 15% of capital and surplus equated to a limit of approximately $8.2
million.
EQUITY RISK INVESTMENTS. In addition to the Regulatory Capital
Requirements, Palmetto Federal is subject to an "equity risk" regulation which
limits the aggregate amount of its equity risk investments, which are defined
to include investments in real estate, service corporations, operating
subsidiaries and equity securities, as well as land loans and nonresidential
construction loans with loan-to-value ratios greater than 80%. The regulation
also imposes certain qualitative restrictions on otherwise permissible
investments in equity securities. Under the regulation, the equity risk
investments of thrift institutions which meet their minimum regulatory capital
requirements and have "tangible capital" (i.e., equity capital, as determined
in accordance with generally accepted accounting principles, minus goodwill and
other intangible assets, plus qualifying subordinated debt and qualifying
nonpermanent preferred stock) equal to or greater than 6% of total assets may
make aggregate equity risk investments in an amount up to three times their
tangible capital. A thrift institution that meets its regulatory capital
requirements and has tangible capital of less than 6% of total assets may make
aggregate equity risk investments in an amount equal to the greater of 3% of
total assets or two and one-half times tangible capital. Regulatory approval
is required if an institution's equity risk investments exceed the foregoing
limitations or for any equity risk investments by institutions which fail to
meet their minimum Regulatory Capital Requirements. At December 31, 1995,
Palmetto Federal's level of equity risk investments complied with the foregoing
requirements.
QUALIFIED THRIFT LENDER ("QTL") TEST. If Palmetto Federal maintains an
appropriate level of certain investments ("Qualified Thrift Investments") and
otherwise qualifies as a Qualified Thrift Lender ("QTL"), it will continue to
enjoy full borrowing privileges from the FHLBA. If Palmetto Federal should in
the future fail to maintain its status as a QTL (in three of four calendar
quarters in two of every three years), Palmetto Federal would be subject to
certain penalties, including conversion to a bank charter or compliance with
the restrictions imposed for noncompliance.
Under the OTS regulations implementing the QTL Test, Palmetto Federal must
maintain at least 65% of portfolio assets in Qualified Thrift Investments.
Qualified Thrift Investments must equal or exceed 65% of portfolio assets on a
monthly average basis in nine out of every twelve months. Qualified Thrift
Investments include (i) domestic residential or manufactured housing loans,
(ii) home equity loans, (iii) mortgage-backed securities backed by residential
or manufactured housing collateral, (iv) obligations issued by the federal
deposit insurance agencies, and (v) shares of stock issued by any federal home
loan bank. At December 31, 1995, approximately 68.2% of Palmetto Federal's
portfolio assets were invested in Qualified Thrift Investments.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA"),
Palmetto Federal has an affirmative obligation consistent with its safe and
sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does
it limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of an institution, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. In its most recent CRA
examination of
26
<PAGE>
Palmetto Federal in 1993, the OTS assigned the Bank an "Outstanding" regulatory
evaluation for the Bank's fulfillment of the requirements of the CRA.
DIVIDENDS. OTS regulations limit the payment of dividends on common stock
by Palmetto Federal to PALFED. Interest on deposit accounts must be paid prior
to payment of dividends on common stock. Income appropriated to bad debt
reserves and deducted for federal income tax purposes cannot be used to pay cash
dividends without the payment of federal income taxes by Palmetto Federal on
the amount of such income removed from reserves at the then current income tax
rate. Under regulations enforced by the OTS, Palmetto Federal is not permitted
to pay dividends on its common stock if its regulatory capital would thereby be
reduced below the amount required for the liquidation account or the Regulatory
Capital Requirements prescribed for institutions insured by the FDIC. Under OTS
regulations, the ability of a savings association to make capital distributions,
such as dividends, is tied to an institution's capital or "Tier" ranking.
Currently, Palmetto Federal is a "Tier 1" institution and may pay dividends up
to fifty percent of the Bank's net income to PALFED. During the year ended
December 31, 1995, Palmetto Federal did not pay or declare any dividends to
PALFED.
TRANSACTIONS WITH AFFILIATES. Transactions between Palmetto Federal and
an affiliate are subject to the Federal Reserve Act, as amended (the "FRA").
FRA Section 23A limits the aggregate amount of certain transactions with any
single affiliate to 10% of the capital and surplus of the financial institution
and the aggregate amount of such transactions with all affiliates to 20% of the
institution's capital and surplus. Certain transactions with affiliates, such
as loans to affiliates or guaranties, acceptances and letters of credit issued
on behalf of affiliates, are required to be collateralized by collateral in an
amount and of a type described in the statute. The purchase of low quality
assets from affiliates is generally prohibited.
FRA Section 23B requires all transactions with affiliates, including loans
and asset purchases, to be on arms-length terms. FRA Section 22(h), which is
also applicable to thrifts, relates to limits on loans and extensions of credit
by Palmetto Federal to executive officers, directors and 10% shareholders of
the Bank. The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") also imposed three additional rules on thrifts: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate, other than securities of a subsidiary; and (iii) the OTS
may for reasons of safety and soundness impose more stringent restrictions on
savings associations than those set forth in Sections 23A, 23B and 22(h) of the
FRA.
The OTS has implemented Sections 23A, 23B and 22(h) of the FRA and the
FIRREA restrictions on transactions with affiliates and has imposed further
restrictions on such transactions in its regulations. The additional
restrictions, in part, require that a savings association retain detailed
records of transactions with affiliates and in certain circumstances, to notify
the OTS prior to any transactions with affiliates. The FDICIA amended Section
22(h) of FRA to impose a new ceiling on the aggregate amount of credit that may
be extended to all insiders. In addition, the OTS has replaced its former
conflict of interest rule, which overlapped with, but was not consistent with
the FRA, with a new rule governing extensions of credit to insiders. This new
rule institutes the lending limitations in Sections 22(h) and 22(g) of the FRA
by incorporating Regulation O of the FRB so that it is now applicable to thrifts
and their insiders.
DEPOSIT INSURANCE
As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured members. Under the FDIC's
risk-based premium system, the deposit insurance premium assessed against
Palmetto Federal generally depends upon the amount of Palmetto Federal's
deposits and the risk that Palmetto Federal poses to the SAIF. Under these
risk-related insurance regulations, an institution is classified according to
capital and supervisory factors. Institutions are assigned to one of three
capital groups: "well capitalized," "adequately capitalized" or "under
capitalized." Within each capital group, institutions are assigned to one of
three supervisory subgroups. There are nine combinations of groups and
27
<PAGE>
subgroups (or assessment risk classifications) to which varying assessment rates
are applicable. These rates range from 23 cents per $100 of domestic deposits
to 31 cents per $100 of domestic deposits. Palmetto Federal has been notified
that its SAIF assessment rate is 26 cents for the period from January 1, 1996 to
June 30, 1996.
Deposit insurance premiums for members of both the Bank Insurance Fund
("BIF") and the SAIF were established for each fund to achieve a 1.25%
designated ratio of reserves to insured deposits. The BIF reached the 1.25%
reserve level in 1995 and in August 1995, the FDIC reduced the premiums for BIF
member banks. In November 1995, the FDIC announced that, beginning in 1996, it
would further reduce the deposit insurance premiums for 92% of all BIF members
that are in the highest capital and supervisory categories to $2,000 per year,
regardless of deposit size. Given the failure of the SAIF to attain the 1.25%
ratio, the FDIC retained the existing premium rate of 23 cents to 31 cents per
$100 of deposits for SAIF members.
In 1995, members of the Banking Committees of the U.S. House of
Representatives and the Senate agreed on a proposal to recapitalize the SAIF.
Under the proposal, which was part of the budget bill, all SAIF-member
institutions will pay a special assessment to the SAIF of approximately 80 basis
points (80 cents per $100 of deposits), the amount that would enable the SAIF to
attain its designated reserve ratio of 1.25%. The special assessment would be
based on the assessable deposits held as of March 31, 1995. BIF-insured
institutions holding SAIF-insured deposits would receive a 20% reduction in the
assessment rate and would pay a special assessment of 64 basis points. The
agreement also provides that the assessment base for the bonds issued in the
late 1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation would be expanded to include deposits of
both BIF-insured and SAIF-insured institutions, with BIF-insured institutions
paying approximately 75% of the interest on such obligations. If an 80 basis
point assessment were levied on the assessable deposits of the Bank held at
March 31, 1995, the special assessment of Palmetto Federal would total $3.9
million. The Company cannot predict either the final details of any legislation
or the effective dates thereof.
In addition to deposit insurance premiums, savings institutions also must
bear a portion of the administrative costs of the OTS through an assessment
based on the level of total assets of each insured institution.
FEDERAL HOME LOAN BANK SYSTEM
Palmetto Federal continues to be a member of the FHLBS, which consists of
12 regional Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLBA, Palmetto
Federal is required to acquire and hold shares of capital stock in the FHLBA in
an amount at least equal to the greater of 1.0% of its residential mortgage
loans or 5% of outstanding FHLBA advances. Palmetto Federal was in compliance
with this requirement with an investment in FHLBA stock at December 31, 1995 of
approximately $10.9 million valued at cost.
The FHLBA serves as a reserve or central bank for member institutions
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLBS. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLBA. Long-term advances may be made only for
the purpose of providing funds for financing residential housing. As of
December 31, 1995 Palmetto Federal had approximately $91.5 million in advances
from the FHLBA.
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<PAGE>
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the FRB, a thrift institution must maintain
average daily reserves equal to a percentage of deposits specified by the FRB.
Because required reserves must be maintained in the form of vault cash or in a
non-interest-bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of December 31, 1995 Palmetto Federal met these reserve
requirements.
CERTAIN RESTRICTIONS ON ACQUISITION OF PALFED
REGULATORY RESTRICTIONS
Federal laws and regulations contain a number of provisions which affect
the direct or indirect acquisition of savings institutions such as Palmetto
Federal and, consequently, PALFED. FIRREA repealed the Change in Savings and
Loan Control Act and amended the Change in Bank Control Act ("CIBCA") to, among
other things, apply to savings institutions. The OTS regulations which
implement CIBCA require prior approval of the OTS for acquisitions of control of
savings institutions or savings and loan holding companies. Control is
conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the institution or holding company or
controls in any manner the election of a majority of the directors of the
insured institution or the holding company. Control is rebuttably presumed to
exist if, among other things, a person acquires more than ten percent of any
class of voting stock (or 25% of any class of stock) and is subject to any of
certain specified "control factors". See "Regulation - Federal Savings and Loan
Holding Company Regulation."
RESTRICTIONS IN THE ARTICLES OF INCORPORATION AND BYLAWS
Several provisions of PALFED's Articles of Incorporation and Bylaws
concerning matters of corporate governance and certain rights of shareholders
might be deemed to have a potential "antitakeover" effect. These provisions
may have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors, but which individual shareholders of PALFED
may deem to be in their best interest or in which shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors and management more difficult.
BOARD OF DIRECTORS. The Board of Directors of PALFED is divided into three
classes, each of which contains approximately one-third of the aggregate number
of the members of the Board. Each class serves a staggered term, with
approximately one-third of the total number of directors being elected each
year. A classified board of directors could make it more difficult for
shareholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the board of
directors. Since the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year.
CUMULATIVE VOTING. The Articles of Incorporation of PALFED prohibit
cumulative voting for the election of directors.
BUSINESS COMBINATION PROVISION. PALFED's Articles of Incorporation
provide that PALFED may engage in certain "Business Combination" transactions
(as defined) with an "Interested Shareholder" (as defined) only if approved by
the holders of not less than 80% of the outstanding PALFED stock, unless (i)
the Business Combination is approved by a majority of the "Continuing
Directors" or (ii) the consideration to be received by the shareholders of
PALFED satisfies certain "fair price" criteria. If either of the above two
29
<PAGE>
exemptions to the 80% shareholder vote required is present, the shareholder vote
required to approve the Business Combination will be lower. The primary purpose
of this supermajority shareholder vote requirement for a Business Combination is
to discourage attempts by other corporations or groups to acquire control of
PALFED through the acquisition of a substantial number of shares followed by a
forced merger. In such a situation shareholders may not receive a fair price
for their shares as determined through arms-length negotiations. This provision
is designed to prevent a purchaser from utilizing two-tier pricing and similar
tactics in an attempt to take over PALFED, and helps to assure that all
shareholders of PALFED will be treated equally if a merger or other business
combination is effected.
AUTHORIZED SHARES. The Articles of Incorporation authorize the
issuance of 10,000,000 shares of common stock and 5,000,000 shares of
preferred stock. Shareholders of PALFED do not have preemptive rights to
subscribe for or to purchase additional shares of PALFED stock which may be
issued. The Board of Directors has sole authority to determine the terms of
any one or more series of the preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to
fix voting rights for a series of preferred stock, the Board has the power to
issue a series of preferred stock to persons friendly to management in order
to attempt to block a post-tender offer merger or other transaction by which
a third party seeks control, and thereby assist management to retain its
position.
ANTI-TAKEOVER EFFECTS OF MANAGEMENT CONTRACTS AND STOCK PLANS
Certain provisions of the Company's executive salary continuation
agreements, stock option plans, restricted stock grant plan, and the Employee
Savings and Stock Ownership Plan, particularly those pertaining to payments,
benefits and acceleration of vesting periods in the event of a change in
control, may discourage an unfriendly takeover attempt as a result of the
increased cost to be incurred by the Company and the amount of Common Stock
which would be controlled directly by the directors, officers and employees of
the Company and its subsidiaries and indirectly through the Company's stock
plans.
SOUTH CAROLINA CONTROL SHARE ACQUISITION ACT
Sections 35-2-101 through 35-2-111 of the Code of Laws of South Carolina
1976 (the "Control Share Acquisition Act" or the "Act") provide that if a person
acquires in one or a series of related transactions an amount of stock equal to
one-fifth or more of all of the voting power of a corporation subject to the Act
in a "control share acquisition" (as defined in the Act), such shares have only
such voting rights as are accorded them by resolution adopted by the majority of
shareholders of the corporation. As a South Carolina corporation, PALFED is
subject to the Control Share Acquisition Act.
Under the Control Share Acquisition Act, "control shares" are shares
that except for the Act would have voting power that would entitle a person
immediately after acquisition of such shares to exercise or direct voting power
in the election of directors within any of the following ranges of voting power,
(1) one-fifth or more but less than one-third of all voting power, (2) one-third
or more but less than a majority of all voting power, or (3) a majority or more
of all voting power. Pursuant to the Act, a person who makes a control share
acquisition may deliver to a corporation subject to the Act an acquiring person
statement which sets forth (i) the identity of the acquiring person, (ii) a
statement that the acquiring person statement is given pursuant to the Act,
(iii) the number of shares owned by the acquiring person, and each other member
of the acquiring person group, and (iv) the range of voting power (more than
one-fifth but less than one-third, more than one-third but less than a majority,
or a majority or more) under which the control share acquisition falls. Upon
receipt of an acquiring person statement, then the voting rights to be accorded
the control shares must be presented at the next annual or special meeting of
shareholders.
30
<PAGE>
TAXATION
PALFED and its subsidiaries file consolidated federal income tax returns
on a December 31 tax year. Savings institutions, such as Palmetto Federal, that
meet certain definitional tests and other conditions prescribed by the Internal
Revenue Code of 1986, as amended (the "Code"), are allowed to establish a bad
debt reserve and may take additions to that reserve as a deduction in computing
taxable income. The amount of the deduction for additions to the bad debt
reserve is based upon the greater of (1) actual loss experience ("the experience
method") or (2) a percentage of taxable income before such deduction ("the
percentage method"). The Tax Reform Act of 1986 set the applicable percentage
at 8% for tax years beginning after December 31, 1986. During 1991 through 1995
PALFED used the experience method.
The bad debt deduction is available only to the extent that the
accumulated bad debt reserve does not exceed 6% of qualifying real property
loans. In addition, the deduction is further limited to the amount by which 12%
of savings accounts at year-end exceeds the sum of surplus, undivided profits,
and reserves at the beginning of the year. Neither of these limitations has
restricted PALFED from making the maximum addition to its bad debt reserve in
the past. No assurance can be given that the maximum addition will be available
in the future. The allowable deduction under either the experience method or
the percentage method is only available if at least 60% of the total dollar
amount of the assets of the company are qualifying assets. As of December 31,
1995, qualified assets of Palmetto Federal exceeded 60% of total assets,
allowing PALFED to utilize these methods. During 1994, the Internal Revenue
Service completed an examination of the Company's consolidated federal income
tax returns through 1991. The examination resulted in an income tax refund of
$1.2 million and interest on the refund of approximately $800,000, net of
related fees and expenses. Subsequent to the completion of the IRS examination,
Palmetto Federal filed amended South Carolina state income tax returns and
received funds and related interest of approximately $275,000.
PALFED and its subsidiaries are subject to South Carolina state income
taxes which are imposed at a rate of 6% of taxable income. South Carolina
taxable income is computed in the same manner as federal taxable income with
certain modifications.
ACCOUNTING FOR INCOME TAXES. PALFED uses the "two difference" method of
accounting for income taxes relating to its bad debt reserves. This method
allows PALFED to record an income tax benefit related to the book reserve, but
recognize no deferred tax liability with respect to the tax base year reserve,
unless it becomes apparent that this temporary difference will reverse in the
foreseeable future. The following events would cause this temporary difference
to become taxable: (1) loss of thrift status by failing to meet the 60% test of
Section 7701(a)(19) of the Code; and (2) conversion of Palmetto Federal's
charter from a thrift to a bank charter. The cumulative amount of this
temporary difference for which PALFED is not required to recognize a deferred
tax liability is equal to the amount of its tax base year reserve as of December
31, 1987 of approximately $2.9 million. A deferred tax liability should be
recognized only with respect to amounts in excess of this tax base year reserve.
See Notes 1 and 8 to the Company's Consolidated Financial Statements, included
in the Company's 1995 Annual Report and incorporated herein by reference.
31
<PAGE>
ITEM 2. PROPERTIES.
The Company's corporate headquarters is located at 107 Chesterfield
Street South, Aiken, South Carolina. Palmetto Federal also operates an
operations center and 19 full service banking offices. The Bank's mortgage
lending division operates seven mortgage lending offices in Aiken, Beaufort,
Charleston, Hilton Head Island, North Augusta, and Lexington, South Carolina,
and in Martinez, Georgia. The Bank leases its branches that are located in
Kroger's Supermarkets in North Augusta and Aiken, and its branch located in a
Wal-Mart Superstore in Columbia. Palmetto Federal also leases its Beaufort,
Barton and Charleston branches and each of its mortgage lending offices.
The information set forth in Note 11 of the Company's Consolidated
Financial Statements, included in the Company's 1995 Annual Report is
incorporated herein by reference.
DATA PROCESSING SYSTEMS. Palmetto Federal owns and leases data
processing equipment consisting of computers, terminals and communications
equipment. Palmetto Federal also owns personal computers used for new account
setup, accounting spreadsheets, personnel records, and word processing.
Palmetto Federal conducts in-house data processing of its deposits and loans on
a mainframe computer through the use of applications software licensed by a
third party vendor. The system, which operates in both an on-line, real-time
environment as well as a proof-of-deposit environment, supports teller terminals
and video display terminals located in Palmetto Federal offices and branches.
ITEM 3. LEGAL PROCEEDINGS.
The Bank is periodically involved as plaintiff or defendant in various
legal actions incident to its business, none of which are believed by management
to be material to the financial condition of the Company or its subsidiaries.
On August 3, 1995, the Company and Palmetto Federal filed suit against
the United States in the U.S. Court of Federal Claims seeking damages arising
out of the breach of agreements with the Federal Home Loan Bank Board for the
inclusion of supervisory goodwill in Palmetto Federal's regulatory capital. The
suit relates to the 1982 acquisition by Palmetto Federal of First Federal and
the supervisory goodwill arising from that acquisition. No prediction can be
made as to whether the suit will be successful, or if successful, what damages
might be awarded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted by the Company to a vote of its shareholders
during the fourth quarter ended December 31, 1995.
32
<PAGE>
EXECUTIVE OFFICERS OF PALFED AND ITS SUBSIDIARIES
The executive officers of PALFED and its subsidiaries are as follows:
<TABLE>
<CAPTION>
Position(s) with
Name Age PALFED or Palmetto Federal
---- --- --------------------------
<S> <C> <C>
W. Barry Adams 47 Executive Vice President,
Community Banking and Marketing,
of Palmetto Federal, Senior Vice
President of PALFED Investment
Patrick D. Cunning 49 Director, Executive Vice President,
Asset Management, of Palmetto Federal,
President of PSC and WDC
Joe W. DeVore 62 Executive Vice President and Senior
Lending Officer of Palmetto Federal
Howard M. Hickey, Jr. 48 Executive Vice President, General
Counsel and Corporate Secretary
Holly Z. Johnson 39 Senior Vice President, Director of Human
Affairs and Training, of Palmetto
Federal
Darrell R. Rains 39 Executive Vice President, Treasurer and
Chief Financial Officer
Michael B. Smith 39 Senior Vice President and Controller
John C. Troutman 56 President and Chief Executive Officer
</TABLE>
Messrs. Troutman, Rains, Hickey and Smith serve in the same capacity for
Palmetto Federal as they do for PALFED.
W. Barry Adams was named an Executive Vice President, Community Banking
and Marketing, of Palmetto Federal in 1992. From 1984 to 1992 he was a Senior
Vice President, Deposit Services, of Palmetto Federal. Mr. Adams joined
Palmetto Federal in 1974.
Patrick D. Cunning is an Executive Vice President of Palmetto Federal
and serves as President of Woodside Development Company of Aiken, Inc. and
Palmetto Service Corporation. Prior to being named President of Palmetto
Service Corporation, Mr. Cunning was Chief Appraiser and Vice President of
Palmetto Service Corporation, which he joined in 1975.
Joe W. DeVore was named Executive Vice President and Senior Lending
Officer of Palmetto Federal in January 1995. Mr. DeVore previously served as
Senior Vice President and Senior Lending Officer of Palmetto Federal since June
1990. Prior to being named Senior Lending Officer, Mr. DeVore was Senior Vice
President, Consumer/Commercial Lending of Palmetto Federal. He joined Palmetto
Federal in December 1981.
33
<PAGE>
Howard M. Hickey, Jr. has served as General Counsel of PALFED since 1986
and as Secretary of PALFED since April 1988. Mr. Hickey joined Palmetto Federal
in 1986 as a Vice President and General Counsel, was named Senior Vice President
in 1988, and was named an Executive Vice President, Regulatory Affairs,
Compliance and Security in 1992.
Holly Z. Johnson has served as Senior Vice President of Human Affairs
and Training of Palmetto Federal since January 1994. Ms. Johnson joined
Palmetto Federal in 1986 as Director of Human Resources, was named Assistant
Vice President in 1987 and was named Vice President in 1990.
Darrell R. Rains serves as Executive Vice President, Chief Financial
Officer and Treasurer of PALFED. Prior to being named an Executive Vice
President in 1992, Mr. Rains had served as Senior Vice President and Chief
Financial Officer of PALFED since April 1990 and as Treasurer of PALFED since
1989. Mr. Rains joined Palmetto Federal in June 1984.
Michael B. Smith has served as Senior Vice President since January 1994.
Mr. Smith joined PALFED in April 1989 as Vice President and Controller. From
December 1987 to April 1989, he was an agency accountant with the Federal Home
Loan Bank of Atlanta.
John C. Troutman became the President and Chief Executive Officer of
PALFED and Palmetto Federal on March 1, 1993. Prior to 1993, he held a number
of positions with Citizens and Southern National Bank (now NationsBank), most
recently as the Southeast Florida Commercial Division Manager for NationsBank.
From 1989 to 1992 he was Regional Executive Vice President, East Coast of
Florida for Citizens and Southern National Bank of Florida.
34
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PALFED's Common Stock is traded in the over-the-counter market and is
quoted in the Nasdaq National Market under the symbol "PALM". As of March 15,
1996, there were approximately 624 shareholders of record. The following table
sets forth the high and low closing prices of the Company's Common Stock for the
periods indicated as reported on the Nasdaq National Market System.
<TABLE>
<CAPTION>
Price Range of Common Stock
---------------------------
High Low
-------- --------
1995
----
<S> <C> <C>
First Quarter $ 9.63 $ 7.00
Second Quarter 11.25 8.63
Third Quarter 12.25 11.00
Fourth Quarter 13.25 11.00
1994
----
First Quarter $ 7.25 $ 6.50
Second Quarter 10.75 6.25
Third Quarter 11.13 8.75
Fourth Quarter 9.75 6.87
</TABLE>
The Company's ability to pay dividends is limited only by certain
requirements generally imposed on South Carolina corporations. Under South
Carolina law, corporations generally may pay dividends only out of unreserved
and unrestricted earned surplus. Payment of dividends by the Bank to the
Company is subject to certain restrictions and would require prior notice to and
approval of the OTS. PALFED paid no cash dividends in 1994 or 1995.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth under "Selected Financial Data"
appearing on page 1 of the Company's 1995 Annual Report is incorporated herein
by reference in response to the information required by this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information set forth under "Management's Discussion and Analysis"
appearing on pages 6 through 18 of the Company's 1995 Annual Report is
incorporated herein by reference in response to the information required by this
Item.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of PALFED, Inc. and
Subsidiaries, together with a report thereon of Coopers & Lybrand L.L.P. dated
February 2, 1996, which report includes an explanatory paragraph concerning
changes in the Company's methods of accounting for impaired loans and mortgage
servicing rights in 1995 and its methods of accounting for certain investments
and the amortization of goodwill in 1993, appearing on pages 19 to 42 of the
Company's 1995 Annual Report are incorporated herein by reference in response
to the information required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PALFED has not, within the twenty-four months preceding its financial
statements as of December 31, 1995, filed or been required to file a Form 8-
K (i) reporting a change of accountants, or (ii) reporting a disagreement on any
matter of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors of PALFED and the executive
officers who are directors of PALFED is set forth in PALFED's Proxy Statement
for the 1996 Annual Meeting of Shareholders to be held on April 23, 1996 (the
"1996 Proxy Statement") under the caption entitled "Election of Directors--
Information as to Nominees and Other Directors" and is incorporated herein by
reference in response to the information required by this Item.
Information concerning executive officers of PALFED is contained in a
separate section entitled "Executive Officers of PALFED and its Subsidiaries" in
Part I of this Report and is incorporated herein by reference in response to the
information required by this Item.
The information concerning compliance with section 16(a) of the
Exchange Act appearing on page 5 of the 1996 Proxy Statement under the heading
"Reports of Beneficial Ownership" is incorporated herein by reference in
response to the information required by this Item.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth at pages 13 to 17 in the 1996 Proxy
Statement under the heading entitled "Executive Compensation and Other
Information" is incorporated herein by reference in response to the information
required by this Item.
Pursuant to Item 402(a)(9) of Regulation S-K, as promulgated by the
SEC, the material appearing in the 1996 Proxy Statement on pages 9 to 12 under
the headings "Compensation Committee Report" and "Shareholder Return" shall not
be deemed to be "soliciting material" to be "filed" with the SEC or to be
subject to Regulations 14A or 14C, other than as provided in Item 402, or to the
liabilities of Section 18 of the Exchange Act, and no general incorporation of
such material by reference, whether made before or after the date hereof, shall
be deemed to specifically request that it be treated as soliciting material or
specifically incorporate it by reference into a filing under the Securities Act
of 1933, as amended, or the Exchange Act within the meaning of Item 402(a)(9).
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the security ownership of the Company's Common
Stock is set forth in the 1996 Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference in response to the information required by this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Transactions with
Officers and Directors" on pages 17 and 18 in the 1996 Proxy Statement is
incorporated herein by reference in response to the information required by this
Item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS.
The consolidated financial statements of PALFED, Inc. and
Subsidiaries contained in the Company's 1995 Annual Report
incorporated by reference in this report are listed below in response
to the information required by this item:
Page
----
(1) Financial Statements:
Consolidated Statements of
Financial Condition 19
Consolidated Statements of Operations 20
Consolidated Statements of
Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 24
Report of Independent Accountants 42
(2) Financial Statement Schedules:
All schedules have been omitted as the required information is either
inapplicable or shown in the consolidated financial statements or notes thereto.
(3) Exhibits:
3.1 Restated Articles of Incorporation of PALFED, Inc.(1)
3.2 Bylaws of PALFED, Inc., as amended.(2)
10.1* Amended and Restated Incentive Stock Option Plan.(3)
10.2* PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)
10.3* PALFED, Inc. Amended and Restated Director Stock Plan.(5)
10.4* PALFED, Inc. 1993 Stock Option Plan.(6)
37
<PAGE>
10.5* PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)
10.6* PALFED, Inc. 1995 Stock Option Plan (8)
10.7 Membership Agreement dated December 27, 1990 between Woodside
Development Company of Aiken, Inc. and Woodside Plantation
Country Club, Inc. for the purchase of club memberships.(9)
10.8 Option Agreement dated December 30, 1993 by and between Woodside
Development Company of Aiken, Inc. and Woodside Development
Limited Partnership.(10)
10.9* Form of Executive Salary Continuation Agreement dated as of
November 22, 1994 among PALFED, Inc., Palmetto Federal Savings
Bank of South Carolina and each of the following officers: John
C. Troutman, W. Barry Adams, Patrick D. Cunning, Joe W. DeVore,
Howard M. Hickey, Jr., Holly Z. Johnson, John Mullen, III,
Darrell R. Rains and Michael B. Smith.(11)
11 Statement Regarding Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31,
1995 (except for those portions which are expressly incorporated
by reference in this filing) is furnished for the information of
the SEC and is not to be deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for PALFED, Inc. Employee Savings and
Stock Ownership Plan (to be filed by amendment).
- ----------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's
Registration Statement on Form S-2, File Number 33-65338, filed with the
Commission on July 1, 1993.
(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's
Annual Report on Form 10-K for the year ended December 31, 1992, filed with
the Commission on April 14, 1993.
(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-23667, filed with the
Commission on August 10, 1988.
(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-
Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-65482, filed with the Commission on September 16, 1994.
(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-
Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-48334, filed with the Commission on June 3, 1995.
(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65484, filed with the
Commission on July 2, 1993.
(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65480, filed with the
Commission on July 2, 1993.
(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 333-00615, filed with the
Commission on February 1, 1996.
38
<PAGE>
(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's
Annual Report on Form 10-K for the year ended December 31, 1990, as amended
by Form 8, filed with the Commission on May 24, 1993.
(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1993, filed with the
Commission on March 31, 1994.
(11) Incorporated by reference to Exhibit 10.8 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1994, filed with the
Commission on March 31, 1995.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
fourth quarter ended December 31, 1995.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ John C. Troutman March 26, 1996
---------------------------------
John C. Troutman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Albert H. Peters, Jr. March 26, 1996
--------------------------------
Albert H. Peters, Jr.,
Chairman of the Board
By: /s/ John C. Troutman March 26, 1996
--------------------------------
John C. Troutman, President
and Chief Executive Officer
By: /s/ Darrell R. Rains March 26, 1996
--------------------------------
Darrell R. Rains, Executive Vice
President, Treasurer and Chief
Financial Officer
By: /s/ Michael B. Smith March 26, 1996
--------------------------------
Michael B. Smith, Senior Vice President
and Controller
By: /s/ William F. Cochrane March 26, 1996
--------------------------------
William F. Cochrane,
Director
By: /s/ Patrick D. Cunning March 26, 1996
--------------------------------
Patrick D. Cunning,
Director
[Signatures continued on next page]
40
<PAGE>
By: /s/ J. Cleveland Holmes March 26, 1996
---------------------------------
J. Cleveland Holmes,
Director
By: /s/ Edward Larry Hutto March 26, 1996
--------------------------------
Edward Larry Hutto,
Director
By: /s/ Harold D. Kingsmore March 26, 1996
--------------------------------
Harold D. Kingsmore,
Director
By: /s/ R. Bruce McBratney March 26, 1996
--------------------------------
R. Bruce McBratney,
Director
By: /s/ Ambrose L. Schwallie March 26, 1996
--------------------------------
Ambrose L. Schwallie,
Director
By: /s/ Charles E. Simons, III March 26, 1996
--------------------------------
Charles E. Simons, III,
Director
By: /s/ Neil W. Trask, Jr. March 26, 1996
--------------------------------
Neil W. Trask, Jr.,
Director
* * *
41
<PAGE>
Sequentially
Numbered
Page
------------
INDEX TO EXHIBITS
-----------------
3.1 Restated Articles of Incorporation of PALFED, Inc.(1)
3.2 Bylaws of PALFED, Inc., as amended.(2)
10.1* Amended and Restated Incentive Stock Option Plan.(3)
10.2* PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)
10.3* PALFED, Inc. Amended and Restated Director Stock Plan.(5)
10.4* PALFED, Inc. 1993 Stock Option Plan.(6)
10.5* PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)
10.6* PALFED, Inc. 1995 Stock Option Plan (8)
10.7 Membership Agreement dated December 27, 1990 between Woodside
Development Company of Aiken, Inc. and Woodside Plantation Country
Club, Inc. for the purchase of club memberships.(9)
10.8 Option Agreement dated December 30, 1993 by and between Woodside
Development Company of Aiken, Inc. and Woodside Development Limited
Partnership.(10)
10.9* Form of Executive Salary Continuation Agreement dated as of November
22, 1994 among PALFED, Inc., Palmetto Federal Savings Bank of South
Carolina and each of the following officers: John C. Troutman, W.
Barry Adams, Patrick D. Cunning, Joe W. DeVore, Howard M. Hickey, Jr.,
Holly Z. Johnson, John Mullen, III, Darrell R. Rains and Michael B.
Smith.(11)
11 Statement Regarding Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31, 1995
(except for those portions which are expressly incorporated by
reference in this filing) is furnished for the information of the
SEC and is not to be deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for PALFED, Inc. Employee Savings and Stock
Ownership Plan (to be filed by amendment).
- ------------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's
Registration Statement on Form S-2, File Number 33-65338, filed with the
Commission on July 1, 1993.
(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1992, filed with the
Commission on April 14, 1993.
42
<PAGE>
(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-23667, filed with the
Commission on August 10, 1988.
(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Post-Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-65482, filed with the Commission on September 16, 1994.
(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Post-Effective Amendment No. 1 to Registration Statement on Form S-8, File
Number 33-48334, filed with the Commission on June 3, 1995.
(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65484, filed with the
Commission on July 2, 1993.
(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 33-65480, filed with the
Commission on July 2, 1993.
(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's
Registration Statement on Form S-8, File Number 333-00615, filed with the
Commission on February 1, 1996.
(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's Annual
Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8,
filed with the Commission on May 24, 1993.
(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual Report on
Form 10-K for the year ended December 31, 1993, filed with the Commission on
March 31, 1994.
(11) Incorporated by reference to Exhibit 10.8 to PALFED's Annual Report on
Form 10-K for the year ended December 31, 1994, filed with the Commission on
March 31, 1995.
43
<PAGE>
EXHIBIT 11
PALFED, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the years ended December 31
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding 5,095,811 5,136,668 2,112,398
Stock options outstanding 184,233 186,000 136,000
Shares assumed repurchased (117,474) (152,946) (111,807)
--------- --------- ---------
Average common and common equivalent
shares (1) 5,162,570 5,169,722 2,136,591
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ---------------
(1) Stock options outstanding less shares assumed repurchased are common
equivalent shares.
<PAGE>
EXHIBIT 13
<PAGE>
[LOGO] PALFED, INC.
1 9 9 5 A N N U A L R E P O R T
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Selected Financial Data........................... 1
To Our Shareholders............................... 2
Management's Discussion and Analysis of Financial
Condition and
Results of Operations............................ 6
Consolidated Financial Statements................. 19
Notes to Consolidated Financial Statements........ 24
Report of Independent Accountants................. 42
Board of Directors................................ 44
Principal Officers................................ 46
Office Locations.................................. 47
Corporate Information............................. 48
</TABLE>
COMPANY PROFILE
- -----------------------------------------------------------------
PALFED, Inc. (together with its subsidiaries, the "Company") is a South Carolina
corporation whose principal subsidiary, Palmetto Federal Savings Bank of South
Carolina ("Palmetto Federal" or the "Bank") is a federal stock savings bank,
originally chartered in 1951. The Bank currently operates 18 banking and six
mortgage lending offices in South Carolina, one mortgage lending office in
Georgia and opened its nineteenth branch in Charleston, South Carolina in March
1996. The Company's other subsidiary is PALFED Investment Services, Inc., a
South Carolina corporation that offers retail securities brokerage services and
consumer insurance products.
EQUAL EMPLOYMENT OPPORTUNITY
- -----------------------------------------------------------------
It is the Company's policy to grant equal employment opportunities to all
qualified persons without regard to race, creed, color, religion, age, national
origin, citizenship status, physical or mental handicap, or veteran's status. To
deny a qualified person the chance to contribute to our effort because he or she
is a member of a minority group is unfair, not only to the individual but to our
Company and our nation as well. It is our intent and desire to provide equal
opportunities in employment, promotion, wages, benefits, and all other
privileges, terms and conditions of employment. This policy has the support of
the highest levels of our management team.
ANNUAL MEETING NOTICE
- -----------------------------------------------------------------
All stockholders are cordially invited to the Annual Meeting of Stockholders on
Tuesday, April 23, 1996 at 10:00 a.m. at the Aiken City Hall Meeting Room, 214
Park Avenue, Aiken, South Carolina, 29801.
MISSION
- -----------------------------------------------------------------
To be the Bank of Choice in every market we serve.
<PAGE>
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------
The selected financial data presented below for and as of the end of each of the
years in the five year period ended December 31, 1995 have been derived from the
Company's consolidated financial statements.
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
(dollars and shares in thousands, except per share
amounts)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Total interest income $ 50,530 $ 46,937 $ 48,191 $ 58,480 $ 62,357
Total interest expense 30,530 26,514 30,837 41,079 47,609
Net interest income 20,000 20,423 17,354 17,401 14,748
Provision for estimated losses on loans 1,322 2,329 6,289 6,557 4,793
Net interest income after provision for losses on loans 18,678 18,094 11,065 10,844 9,955
Noninterest income 4,178 3,334 1,400 8,422 9,493
Noninterest expenses 16,454 15,917 16,166 16,514 15,944
Provision (benefit) for income taxes 2,257 1,757 (1,069) 1,229 2,777
Income (loss) before cumulative effect of a change
in accounting principle 4,145 3,754 (2,632) 1,523 727
Cumulative effect of a change in accounting principle (10,454) 1,086
Net income (loss) $ 4,145 $ 3,754 $(13,086) $ 2,609 $ 727
- ---------------------------------------------------------------------------------------------------------
AT DECEMBER 31
Total assets $646,024 $662,425 $647,606 $746,362 $754,796
Interest-earning assets 598,863 618,019 592,945 652,090 678,765
Loans receivable 464,281 447,991 445,058 453,891 507,857
Mortgage-backed securities 77,844 106,273 106,563 125,129 61,249
Goodwill and intangible value of branch network 2,650 2,932 3,193 13,955 14,911
Deposits 496,746 478,249 477,218 520,613 541,474
FHLB advances and other borrowed money 91,500 135,800 119,459 181,264 171,027
Stockholders' equity $ 51,485 $ 45,156 $ 45,125 $ 39,375 $ 36,489
Number of deposit accounts 68,210 68,750 76,169 79,174 81,278
Number of banking offices 18 16 16 16 16
- ---------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (loss) $ 0.80 $ 0.73 $ (6.12) $ 1.80 $ 0.52
Cash dividends declared 0 0 0 0 0.10
Tangible book value $ 9.57 $ 8.32 $ 8.16 $ 17.33 $ 15.17
Shares used to compute income (loss) per share
outstanding 5,163 5,170 2,137 1,446 1,385
- ---------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average assets 0.64% 0.57% (1.93)% 0.35% 0.10%
Return on average stockholders' equity 8.54 8.35 (31.94) 6.86 1.98
Net interest margin 3.14 3.37 2.95 2.74 2.67
Average stockholders' equity to average assets 7.44 6.84 5.96 5.06 5.15
Dividend payout ratio 0 0 0 0 19.23
- ---------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.81% 1.83% 2.22% 1.82% 1.79%
Net charge-offs to average loans outstanding 0.24 0.90 1.03 1.48 0.61
Nonperforming assets to total loans and foreclosed real
estate 3.47 4.54 6.76 3.64 2.72
General allowance for loan losses to nonperforming
assets and restructured loans 26.35 19.31 16.84 17.46 14.20
Allowance for loan losses and stockholders' equity to
nonperforming assets and restructured loans 218.43 148.83 120.89 115.40 121.22
- ---------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL RATIOS
Tangible capital 6.8% 5.9% 5.6% 3.6% 3.1%
Core capital 6.8 6.3 6.1 5.0 5.0
Risk-based capital 11.4 11.2 10.5 9.3 8.5
- ---------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
TO OUR SHAREHOLDERS:
- -------------------------------------------------------------------------
We are pleased to report the second consecutive year of record earnings
for your Company. Earnings were $4,145,000, $0.80 per common share, for
the year ended December 31, 1995 compared to earnings of $3,754,000,
$0.73 per common share, for 1994, a 10% increase. On a pretax basis,
earnings were up 16% for 1995 compared to 1994.
Due to this improved performance, the
Company's Board of Directors voted to
resume payment of quarterly cash
dividends to stockholders by declaring a
$0.02 per common share dividend for the
first quarter of 1996. Our stock has
experienced excellent appreciation in
share value since our 1993 rights
offering and the resumption of a
quarterly dividend should further enhance
the value of PALFED stock.
We made excellent progress again in
1995 in reducing nonperforming assets.
Problem assets declined $8,435,000 or 24%
during 1995 after a 21% decrease in 1994.
At year-end, problem assets totaled $27.4
million compared to $35.9 million at
year-end 1994. This level of problem
assets is still too high and continues to
be one of our major priorities. Key
measures of bank performance are the
return on average assets and return on
average equity ratios. Although our
ratios improved for 1995 over 1994, we
are still below the high performance
level that is our near term goal to
attain.
[PHOTO]
JOHN C. TROUTMAN
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
An ongoing issue for the thrift
industry is the recapitalization of the
Savings Association Insurance Fund. This
legislation is tied up in the budget bill and has been unreasonably
delayed as its passage should have occurred in 1995. As a result of this
delay, this legislation could be carved out of the budget bill and placed
with other "must pass" legislation or as a stand alone bill. We support
the decision, should it be made in Washington, to consider this important
issue in separate legislation. Now that the die is cast for the one-time
assessment, PALFED is prepared to take the medicine and move on into the
future.
At the beginning of 1995 we formed a Strategic Alternatives Committee
of the Board of Directors to explore and evaluate the enhancement of
long-term shareholder value. The Committee has concluded that expansion
of the Company's franchise coupled with efforts to increase earnings can
best accomplish this goal. Mergers of superregionals and industry
consolidation have opened up excellent opportunities in our target market
areas. Branch sites are now available for expansion at a fraction of the
cost of starting DE NOVO branches several years ago. Accordingly, we will
continue to look at effective ways to grow the Bank. We recognize the
costs associated with new locations, but we are convinced that
investments made today will pay handsome dividends in the future.
2
<PAGE>
Recent expansion of our outstanding franchise has served us well in
light of the softness in our Aiken County and nearby markets because of
reductions in staff levels at the Savannah River Site. Our first
Charleston Branch, opened in March of 1995 in the West Ashley Community,
and our new branch in the heart of the Charleston financial district on
Meeting Street that opened on March 4, 1996, will be strong contributors
as we develop a presence in this exciting market. In addition, our recent
entry into the Columbia market with the first Wal-Mart Branch in South
Carolina and the two mortgage offices opened in Lexington, South Carolina
and Augusta-Martinez, Georgia in 1994 contribute every day to the
profitable growth we are experiencing.
The Board of Directors and officers and staff of your Company are very
proud of what we have accomplished in recent years. We appreciate the
support of our shareholders, customers and communities we serve. A Bank
is a living entity consisting of many parts, not merely a commodity. Our
Strategic Plan of earnings growth and franchise expansion as a
high-performance, independent community bank bodes well for our
customers, communities, employees and shareholders as "THE BANK OF
CHOICE" today and "SOUTH CAROLINA'S BANK" tomorrow.
John C. Troutman
President and
Chief Executive Officer
PALMETTO FEDERAL MANAGEMENT COMMITTEE
[PHOTO]
FRONT ROW L-R: DARRELL R. RAINS, HOLLY
Z. JOHNSON, PATRICK D. CUNNING
BACK ROW L-R: W. BARRY ADAMS, JOE W.
DEVORE, JOHN C. TROUTMAN, HOWARD M.
HICKEY, JR.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------
OVERVIEW
In 1995, PALFED, Inc. earned $4.1 million or $0.80 per common share, an increase
of 10% from 1994. In January 1996, the Company announced a dividend of $0.02 per
share to shareholders of record on February 15, 1996.
One of the Company's principal strategic goals is to expand and diversify the
Bank's franchise and during 1995, the Company expanded retail banking operations
in both existing and new markets. Historically, Palmetto Federal's primary
market areas were the South Carolina portion of the Central Savannah River Area
(the "CSRA") and the rural and coastal communities surrounding Beaufort, South
Carolina (the "Lowcountry"). The U.S. Department of Energy's Savannah River Site
("SRS"), which produced plutonium and tritium for use in nuclear weapons, is the
largest employer in the CSRA and in South Carolina. Employment at SRS is
approximately 17,000 people, down from approximately 22,000 in 1993. Funding
levels for SRS are uncertain based upon the current status of the Federal
budget. If adequate funding is not provided, additional reductions in employment
may be required which could have an adverse impact on the CSRA economy and the
Company.
Accordingly, the Company is diversifying its markets to become less reliant
on the CSRA economy. In February 1995, Palmetto Federal opened a new full
service branch in Charleston in the West Ashley community and in March 1996 the
Bank will open a branch in downtown Charleston. In November 1995, the Bank
opened a full service branch in the Wal-Mart Superstore at Harbison in Columbia.
These new branches follow the opening of two mortgage origination centers in
1994 in Lexington, South Carolina and in Augusta/Martinez, Georgia. In 1995, the
Lexington mortgage office originated approximately 8% of the Bank's permanent
residential mortgage and construction loans and the Charleston mortgage and
banking offices accounted for 18% of the 1995 volume in these types of loans.
The following map shows the principal banking center locations of Palmetto
Federal:
[MAP]
Reductions in the levels of problem assets (consisting of nonperforming
assets and restructured loans) and decreased charge-offs of loans enabled the
Company to reduce provisions for estimated losses on loans and real estate
operations expenses during 1995. During 1995 the Company reduced nonperforming
assets and restructured loans from $35.9 million to $27.4 million, a decrease of
$8.5 million or 24%. Accordingly, the Company reduced the provision for
estimated loan losses by $1.0 million or 43% in 1995. Real estate operations
expenses decreased $1.5 million or 59% in 1995. The Company's ratio of general
allowance for loan losses to nonperforming assets and restructured loans
increased from 19.3% to 26.3% during the same period.
Another key objective of the Company has been to decrease the level of
interest rate risk. A fundamental strategy has been to reduce the Company's
level of short term repricing Federal Home Loan Bank advances through funds
provided
6
<PAGE>
from selected longer term investment and mortgage-backed security sales. The
process resulted in a decrease of $44.3 million in advances and a decrease in
investments and mortgage-backed securities of $34.2 million. Management believes
this strategy also contributed to a reduction in interest rate risk as measured
by the sensitivity measure which improved by 46.0% from December 31, 1994 to
December 31, 1995.
During 1995 the Company filed suit against the United States in the Court of
Federal Claims seeking damages arising out of the breach of agreements with the
Federal Home Loan Bank Board for the inclusion of supervisory goodwill in
Palmetto Federal's regulatory capital. The suit relates to the 1982 acquisition
by Palmetto Federal of First Federal Savings and Loan Association of Beaufort
and the supervisory goodwill arising out of that acquisition. No prediction can
be made as to whether the suit will be successful, or if successful, what
damages might be awarded.
Legislative efforts to resolve the problems of the Savings Association
Insurance Fund ("SAIF") and the related deposit insurance premium disparity
between SAIF-insured institutions and institutions insured by the Bank Insurance
Fund ("BIF") are expected to result in a one-time special assessment on SAIF
deposits. The special assessment, as currently proposed, is expected to
approximate 80 basis points on total deposits as of March 31, 1995 and would
result in a pretax charge of approximately $3.9 million ($2.5 million net of
related income taxes or approximately $0.50 per common share). Following the
recapitalization of the SAIF, management anticipates the Bank's future deposit
insurance premiums will decrease by approximately 80% annually.
COMPARISON OF 1995 AND 1994 OPERATING RESULTS
NET INTEREST INCOME
The Company's primary determinant of earnings is net interest income. Net
interest income is a function of average levels of interest-earning assets,
their related yields, and average interest-bearing liabilities and their related
costs. During 1995, the Company's level of interest-earning assets increased
while average interest-bearing liabilities decreased, which improved earnings by
approximately $1.2 million. However, rates paid on liabilities increased faster
than rates earned on assets, which decreased earnings by approximately $1.6
million. As a result, net interest income decreased from $20.4 million in 1994
to $20.0 million in 1995.
7
<PAGE>
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.
Nonaccruing loans have been included in average loans receivable for purposes of
calculating the average yield on loans receivable.
<TABLE>
<CAPTION>
Interest Interest Interest
-------------------- -------------------- ----------------------
INCOME/ YIELD/ Income/ Yield/ Income/ Yield/
1995 EXPENSE RATE 1994 Expense Rate 1993 Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE ASSETS:
Interest-earning:
Interest-bearing
deposits $ 6,370 $ 360 5.65% $ 4,577 $ 153 3.34% $ 15,415 $ 415 2.69%
Loans receivable 456,939 40,677 8.90 444,634 37,752 8.49 450,710 38,221 8.48
Mortgage-backed
securities 95,803 6,335 6.61 106,602 6,237 5.85 122,134 8,035 6.58
Total investments
(taxable) 42,945 2,369 5.52 40,079 2,124 5.30 22,539 935 4.15
FHLB stock 10,884 789 7.25 10,873 671 6.17 10,502 585 5.56
- --------------------------------------------------------------------------------------------------------------------------------
Total
interest-earning 612,941 50,530 8.24% 606,765 46,937 7.73% 621,300 48,191 7.76%
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning
assets 39,187 50,457 57,153
- --------------------------------------------------------------------------------------------------------------------------------
Total average assets $ 652,128 $ 657,222 $ 678,453
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE LIABILITIES & EQUITY:
Interest-bearing:
Retail savings deposits $ 31,074 $ 827 2.66% $ 31,409 $ 836 2.66% $ 29,808 $ 854 2.87%
Brokered time deposits 1,862 178 9.55 12,467 871 6.98
Retail time deposits 365,020 21,169 5.80 323,498 15,971 4.94 332,874 17,528 5.27
Demand deposits 98,666 1,684 1.71 115,615 1,805 1.56 115,762 2,241 1.94
FHLB advances 104,042 6,850 6.58 135,069 7,724 5.72 149,292 9,253 6.20
Other borrowed money 56 -- -- 1,281 90 7.03
- --------------------------------------------------------------------------------------------------------------------------------
Total
interest-bearing 598,802 30,530 5.10% 607,509 26,514 4.36% 641,484 30,837 4.81%
- --------------------------------------------------------------------------------------------------------------------------------
Other 4,814 4,779 5,372
Stockholders' equity 48,512 44,934 31,597
- --------------------------------------------------------------------------------------------------------------------------------
Total average
liabilities and
equity $ 652,128 $ 657,222 $ 678,453
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 20,000 $ 20,423 $ 17,354
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.14% 3.37% 2.95%
- --------------------------------------------------------------------------------------------------------------------------------
Net yield 3.26% 3.37% 2.79%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
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).
<TABLE>
<CAPTION>
1995 vs 1994 1994 vs 1993
Increase (Decrease) Increase (Decrease)
Due to Due to
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
Changes In:
Interest income:
Loans receivable $ 692 $ 2,188 $ 45 $2,925 $ (516) $ 48 $ (1) $ (469)
Mortgage-backed securities (667) 857 (92) 98 (1,021) (890) 113 (1,798)
Investments 244 301 25 570 282 638 93 1,013
- ------------------------------------------------------------------------------------------------------
Total interest income 269 3,346 (22) 3,593 (1,255) (204) 205 (1,254)
- ------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 890 3,819 181 4,890 (811) (1,968) 75 (2,704)
Other borrowed money (1,777) 1,173 (270) (874) (962) (732) 75 (1,619)
- ------------------------------------------------------------------------------------------------------
Total interest expense (887) 4,992 (89) 4,016 (1,773) (2,700) 150 (4,323)
- ------------------------------------------------------------------------------------------------------
Net interest income (expense) $ 1,156 $(1,646) $ 67 $ (423) $ 518 $ 2,496 $ 55 $ 3,069
- ------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR ESTIMATED LOSSES ON LOANS
Due principally to the decrease in the level of problem assets during the year,
the provision for estimated loan losses decreased from $2.3 million in 1994 to
$1.3 million in 1995. Net charge-offs in 1995 were $1.1 million or $0.2 million
less than the provision, resulting in an increase in the allowance for estimated
losses on loans to $8.4 million or 1.81% of loans receivable at December 31,
1995 compared to $8.2 million or 1.83% of loans receivable at December 31, 1994.
NONINTEREST INCOME
Noninterest income increased by $844,000 or 25.3% in 1995 compared to 1994,
primarily due to a reduction in losses from real estate operations, an increase
in gains on sales of investment and mortgage-backed securities and loans, and an
increase in late charge and other fees, offset in part by a decrease in other
income.
The net results of real estate operations were a loss of $1.1 million
compared to a loss of $2.6 million in 1994. The favorable variance resulted
primarily from the decrease of $1.1 million in the provision for loss on
foreclosed real estate, a decrease of $176,000 in expenses associated with
foreclosed real estate, and a decrease of $139,000 in expenses associated with
real estate at Woodside Plantation.
Gains on sales of investment and mortgage-backed securities and loans
increased by $406,000 to $569,000 in 1995. The increase resulted from increased
sales of such assets. Additionally, in the fourth quarter of 1995, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights", resulting in a gain of $153,000.
Late charges on loans and other fees increased by $118,000 or 29.7% in 1995
primarily as a result of an increase of $98,000 in collections of reimbursable
fees from borrowers on credit bureau reports and appraisals.
Miscellaneous other income decreased $1.0 million during 1995 primarily due
to the 1994 receipt of $923,000, net of related expenses, in interest on federal
and state income tax refunds. Additionally, insurance commissions on credit life
insurance sales decreased by $64,000 or 40.5% and miscellaneous fees decreased
by $50,000 or 58.1%.
NONINTEREST EXPENSES
Noninterest expenses for 1995 were $16.4 million compared to $15.9 million for
1994, an increase of $537,000, or 3.4%. Compensation and employee benefits, the
largest component of this expense, increased $673,000 or 8.4% and advertising
and public relations increased by $296,000 or 67.6%. These increases were offset
primarily by decreases of $352,000 and $195,000 in professional and outside
service fees and federal insurance premiums and assessments, respectively.
Increases in compensation were due to: lower loan origination volume
resulting in $222,000 or 16.5% more in fixed costs associated with loan
originations recognized as current expense rather than deferred over the life of
the loans;
9
<PAGE>
$297,000 or 4.0% more in costs due to normal merit wage adjustments and
increased incentive program costs of $159,000 due to increased earnings.
Offsetting these increases were decreased medical and retirement expenses of
$50,000 or 6.0% primarily due to a change in the benefits provided by the
Company's pension plan.
The primary components of compensation and employee benefits for the years
ended December 31 follow:
<TABLE>
<S> <C> <C>
1995 1994
- -------------------------------------------------------------
(in thousands)
Salaries $ 7,736 $ 7,439
Incentive programs 563 404
Medical and retirement expenses 790 840
Payroll and other taxes 593 566
Other expenses 122 104
- -------------------------------------------------------------
9,804 9,353
Capitalized costs of loan originations (1,120) (1,342)
- -------------------------------------------------------------
Compensation and employee benefits $ 8,684 $ 8,011
- -------------------------------------------------------------
</TABLE>
Professional and outside service fees decreased by $352,000 to $1.2 million
in 1995. The decrease was primarily attributable to decreased consultant fees of
$155,000 and decreased legal fees of $111,000.
The $296,000, or 67.6%, increase in advertising and public relations resulted
from the introduction of a new multimedia advertising campaign to position
Palmetto Federal as "The Bank of Choice" in South Carolina. Management presently
anticipates advertising and public relations expenses to equal or exceed 1995
levels in 1996 as the Company continues to open new branches.
INCOME TAXES
The effective tax rate was 35.3% in 1995 compared to 31.9% in 1994. During 1994,
the Internal Revenue Service completed its audit of the Company's consolidated
federal income tax returns through 1991. The audit resulted in federal income
tax refunds of $1.2 million plus $162,000 in related state income tax refunds
which reduced the 1994 effective tax rate.
FOURTH QUARTER RESULTS OF OPERATIONS
Fourth quarter net income was $1.1 million for 1995 compared to $957,000 in
1994. The principal reasons for the increase in 1995 fourth quarter earnings
were:
1. A decrease of $585,000 or 73.5% in losses from real estate operations
resulting from declines in provisions for loss on foreclosed real estate,
repairs and other expenses associated with foreclosed real estate and real
estate acquired for development and resale.
2. An increase of $291,000 to $316,000 in gains on sales of investment and
mortgage-backed securities and loans resulting from increase sales activity
and the adoption of SFAS No. 122, "Accounting for Mortgage Servicing
Rights", which resulted in a gain of $153,000.
These positive factors were partially offset by reductions of $130,000,
$94,000 and $76,000 in net interest income, checking transaction fees and
financial services fees, respectively. Additionally, noninterest expenses
increased $339,000.
SEGMENT INFORMATION
The operations of the Company can be broken down into three segments- Banking,
Real Estate and Other. Information regarding these segments at December 31,
1995, 1994 and 1993 and for each of the years in the three-year period ended
December 31, 1995 is set forth in Note 15 to the consolidated financial
statements.
LENDING AND INVESTMENT ACTIVITIES
Loan originations declined slightly in 1995 from 1994 levels. In 1995, the Bank
originated loans of $172.2 million, compared to $186.4 million in 1994. The
decrease in loan originations would have been larger if not for the
contributions by the Bank's new offices.
Permanent residential mortgage and construction loan originations were $106.4
million in 1995 compared to $118.9 million in 1994, a decrease of $12.5 million
or 10%. Approximately 14.9% and 26.8% respectively, were adjustable rate
permanent residential mortgage loans which the Bank typically holds in its
portfolio. Fixed rate permanent residential loan originations, which the Bank
typically securitizes and sells in the secondary market, were $47.9 million and
$45.8 million in 1995 and 1994, respectively, an increase of $2.1 million.
10
<PAGE>
In 1995, the Bank continued to expand its lending markets to reduce reliance
on the CSRA market area. In 1995, 40% or $42.9 million of the Bank's permanent
residential mortgage and construction loans were originated in the CSRA market
compared to 61% or $72.8 million in 1994. The Lexington office originated $8.4
million in loans or 7.9% of the 1995 total compared to $1.3 million or 1.1% of
the 1994 total. The Charleston office originated $19.8 million in loans or 18.6%
of the 1995 total compared to $12.9 million in loans or 10.8% of the 1994 total.
The Bank originated $65.8 million in consumer, commercial and commercial real
estate loans in 1995, compared to $67.5 million in 1994. During 1995, the Bank
changed its lending strategy to increase the origination of larger commercial
real estate loans, including those loans greater than $1.0 million. These loans
typically involve more risk than associated with residential lending. Commercial
mortgages outstanding increased from $109.5 million at December 31, 1994 to
$128.1 million at year end. The 1995 originations included eight commercial real
estate loans of $1.0 million or greater, totalling $13.1 million, compared to
only one loan of this scope in 1994.
Palmetto Federal's investment activities consist primarily of the purchase
and sale of mortgage-backed securities, collateralized mortgage obligations and
government agency securities. Investment and mortgage-backed securities
decreased $34.2 million or 22.5% to $117.8 million at December 31, 1995 as
management used the proceeds from securities sales to repay higher costing
Federal Home Loan Bank advances. The market value of the Bank's investment and
mortgage-backed securities portfolio improved from an unrealized loss of $9.7
million at December 31, 1994 to an unrealized gain of $1.2 million at December
31, 1995.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting For
Certain Debt and Equity Securities", which included a transition provision
allowing all entities to reassess the appropriateness of the classifications of
all securities held and account for any resulting reclassifications at fair
value. In response to the Special Report, the Company transferred securities
with a carrying value of $42.8 million from held-to-maturity to
available-for-sale.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is the process by which Palmetto Federal attempts
to maximize net interest income while minimizing the adverse effects of
potential interest rate changes (interest rate risk). The Company presently does
not utilize financial derivative products such as futures, options or interest
rate swaps as part of its asset and liability management process, however, the
Company has invested in low risk (as defined by the Federal Financial
Institutions Examination Council) collateralized mortgage obligations.
The Company's Asset and Liability Committee makes weekly pricing and
marketing decisions on deposit and loan products in conjunction with managing
the Company's interest rate risk. The Investment Committee of the Board of
Directors reviews the Bank's investment and mortgage-backed securities
portfolios, FHLB advances and other borrowings as well as the Company's asset
and liability policies.
The Company currently uses two methods to analyze interest rate risk, static
gap and balance sheet modeling. Static gap is a simple measure of the difference
between interest-sensitive assets and interest-sensitive liabilities repricing
for a particular time period. A negative gap position indicates that cumulative
interest-sensitive assets are less than cumulative interest-sensitive
liabilities and indicates that net interest income would decrease if market
rates increased. A positive gap position would indicate the reverse. At December
31, 1995, Palmetto Federal's cumulative one year negative gap position was $77.9
million or 12.1% of interest-sensitive assets compared to $112.8 million or
18.5% of interest-sensitive assets at December 31, 1994.
Because rate changes in adjustable rate mortgages and certain securities and
liabilities tend to lag changes in interest rates, management also utilizes
computer asset and liability simulation models as another analytical tool to
estimate the effects of interest rate changes on net interest income and net
portfolio value ("NPV") that would result from possible changes in interest
rates. Management utilizes these simulation models to analyze the estimated
impact of various strategies on the Bank's interest rate risk exposure before
implementing such strategies. Palmetto Federal's NPV ratio change, referred to
as the "sensitivity measure", decreased from 1.89% at December 31, 1994 to 1.02%
at December 31, 1995, indicating a decrease in interest rate risk. Management's
objective is to maintain the sensitivity measure at or below 2.0%. The Office of
Thrift Supervision ("OTS") uses a similar computer simulation model to calculate
interest rate risk on institutions it regulates.
REAL ESTATE DEVELOPMENT ACTIVITY
At December 31, 1995, real estate acquired for development and sale (including
partnership interests) totalled $6.4 million compared to $6.5 million in 1994.
Approximately $4.5 million of the total consists of 2 outparcels and
approximately 1,000 acres of undeveloped land surrounding a golf course at
Woodside Plantation in Aiken, South Carolina. Approximately $944,000 relates to
2 houses and 38 single family lots in the Rapids subdivision in North Augusta,
South Carolina.
11
<PAGE>
The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual homeowners, comprised of
real estate held for development, acquisition and development loans, foreclosed
real estate and a 50% interest in a partnership. The carrying values of these
components were as follows at December 31:
<TABLE>
<S> <C> <C>
1995 1994
- -------------------------------------------------------------
(in thousands)
1,000 acres and 2 outparcels $ 4,483 $ 4,483
WPCC loans 4,454 4,584
Woodside Development L.P. loans 3,311 3,100
35 lots received in restructuring 492
Development loan to unrelated borrower 525
Investment in and loans to partnership
adjacent to Woodside Plantation 613 698
- -------------------------------------------------------------
$ 13,878 $ 12,865
- -------------------------------------------------------------
</TABLE>
The Company was the original developer of the Woodside Plantation project, a
development of over 2,000 acres planned to contain a country club, two eighteen
hole golf courses and over 1,800 single family lots as well as developed
outparcels. The Company sold the country club and golf courses in 1990. In
December 1993, the Company sold the remaining 219 lots and seven outparcels at
Woodside Plantation, along with the development and sales offices, to Woodside
Development L.P. (the "Purchaser") for approximately $4.1 million. In addition,
the Purchaser assumed liabilities of $850,000 related to the purchase of
memberships at Woodside Plantation Country Club ("WPCC"). The Purchaser also
entered into an option agreement to acquire approximately 1,000 acres of
undeveloped land at Woodside Plantation. In connection with this sale, Palmetto
Federal provided the Purchaser nonrecourse financing of approximately $3.6
million. Subsequently, the Purchaser obtained from the Bank a $500,000 line of
credit to build townhouses at Woodside Plantation and six separate construction
loans aggregating approximately $976,000 for construction of single family
residences.
Due to slower than anticipated lot sales, the Purchaser was unable to service
its acquisition debt and completed a restructuring of the indebtedness to the
Bank in September 1995. The restructuring included the following terms: (1) the
Company received 35 lots in return for a $492,000 reduction of the debt; (2) the
Company agreed to accrue and contribute up to $330,000 toward joint marketing
efforts over three years related to the lots it owns; (3) the Company agreed to
grant a two year extension until December 31, 1997 of the Purchaser's option to
purchase the remaining undeveloped acreage; (4) the Company agreed to make the
third and fourth quarter 1995 payments under the membership agreement to WPCC in
the amount of $184,500; and (5) the Purchaser agreed to bring the membership
obligation current by payment of $189,000. The Company paid $110,000 toward
joint marketing in 1995.
The Purchaser's ability to repay its indebtedness is primarily based on the
volume and timing of lot sales. Although there are no assurances that lot sales
will be sufficient to repay the debt under the restructured terms, the
Purchaser's business plan is targeted primarily to the national retiree market,
and therefore, future sales may be less reliant on the local economy.
Similarly, the ability of WPCC to repay its loans to Palmetto Federal depends
in part on the success of real estate sales, which in turn provides cash flow
through additional initiation deposits and membership fees to the Club. The
Company is presently in discussions with WPCC to modify its loans from
amortizing to interest-only payments for 1996.
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets and restructured loans, net of specific allowances,
decreased from $35.9 million or 5.4% of total assets at December 31, 1994 to
$27.4 million or 4.2% of total assets at December 31, 1995. The decrease was
primarily attributable to a 32.7% decrease in nonaccrual loans and a 25.6%
decrease in restructured loans.
The table below sets forth the amounts and categories of Palmetto Federal's
nonaccrual and restructured loans and foreclosed real estate at the dates
indicated. Restructured loans include loans restructured under the provisions of
both SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" and SFAS No. 114, "Accounting by
12
<PAGE>
Creditors for Impairment of a Loan". To make prior years comparable with 1995,
in-substance foreclosures of $3.2 million, $10.8 million, $5.1 million and $1.5
million have been reclassified as nonaccrual loans rather than as foreclosed
real estate as of December 31, 1994, 1993, 1992 and 1991, respectively.
<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
DECEMBER 31 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans $ 8,391 $ 12,466 $ 23,790 $ 12,209 $ 7,009
Foreclosed real estate 8,015 8,269 6,775 4,563 6,989
Restructured loans 12,210 16,412 17,158 25,511 27,291
- ----------------------------------------------------------------------------------------------
28,616 37,147 47,723 42,283 41,289
Less specific valuation allowances (1,192) (1,288) (2,223) (1,030) (3,717)
- ----------------------------------------------------------------------------------------------
$ 27,424 $ 35,859 $ 45,500 $ 41,253 $ 37,572
- ----------------------------------------------------------------------------------------------
General allowance for loan losses as a
percentage of the total 26.3% 19.3% 16.8% 17.5% 14.2%
- ----------------------------------------------------------------------------------------------
Total as a percentage of loans
receivable, net 5.9% 8.1% 10.2% 9.1% 7.4%
- ----------------------------------------------------------------------------------------------
Total as a percentage of total assets 4.2% 5.4% 7.0% 5.5% 5.0%
- ----------------------------------------------------------------------------------------------
</TABLE>
Potential problem loans represent loans that are current as to payment of
principal and interest, but where management has doubts about the borrower's
ability to comply with present repayment terms. These loans, which are primarily
commercial real estate loans, are not included in nonperforming assets and
restructured loans. These loans totalled approximately $9.4 million and $7.1
million at December 31, 1995 and 1994, respectively.
Changes in the components of nonperforming assets and restructured loans
during the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Restructured Nonaccrual Foreclosed
Loans Loans Real Estate Total
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
(in thousands)
December 31, 1994 $ 16,412 $ 12,466 $ 8,269 $ 37,147
Performing loans which became
nonperforming 2,437 3,588 2,404 8,429
Upgrades due to performance (4,380) (1,398) (5,778)
Sales (9,136) (9,136)
Charge-offs and other (340) (136) (476)
Cash repayments of principal (311) (1,259) (1,570)
Nonaccrual loans which became
restructured 23 (23)
Nonaccrual loans which became
foreclosures (6,614) 6,614
Restructured loans which became
nonaccrual loans (1,971) 1,971
- --------------------------------------------------------------------------------------------
December 31, 1995 $ 12,210 $ 8,391 $ 8,015 $ 28,616
- --------------------------------------------------------------------------------------------
</TABLE>
Although restructured loans include earning assets, there is more than normal
risk associated with these loans due to the fact that some were made to
facilitate the sale of foreclosed real estate and some were restructured because
the borrower could not meet the original loan terms. The following table lists
Palmetto Federal's five largest restructured loans at December 31, 1995. These
loans represent approximately 81% of the Bank's restructured loans.
13
<PAGE>
<TABLE>
<CAPTION>
Amount Description
- ----------------------------------------------------------------------------------
(in thousands)
<C> <S>
$ 3,314 Loan collateralized by the remaining 58 units in a 120 unit
condominium project in Hilton Head Island, South Carolina. The 1990
restructuring involved a new borrower, a decrease in the interest
rate, and a change in repayment terms. The loan is still considered
restructured because scheduled increases in the loan rate have been
delayed. Although the loan is performing, the borrower has declared a
Chapter 11 bankruptcy related to a dispute with the local homeowners'
association.
2,227 Loan collateralized by a 102 unit apartment complex in Myrtle Beach,
South Carolina. The 1994 restructuring included a principal charge-off
of approximately $624,000, a new borrower and new repayment terms.
2,144 Loans to finance the December 1993 sale of the remaining lots, seven
outparcels and the development and sales offices at Woodside
Plantation. See REAL ESTATE DEVELOPMENT ACTIVITIES.
1,195 Loan collateralized by a 40 unit townhouse type apartment complex in
Charleston, South Carolina. The 1994 restructuring included a
principal charge-off of approximately $314,000, a change in repayment
terms and a decrease in the interest rate.
1,057 Loan to commercial grading and asphalt company in Aiken, South
Carolina. The loan is collateralized by 97 acres and an asphalt plant
and other land totalling 101.26 acres. The 1993 restructuring arose
from a Chapter 11 bankruptcy and included a change in interest rate
and payment schedule.
- ----------------------------------------------------------------------------------
$ 9,937
- ----------------------------------------------------------------------------------
</TABLE>
The following table lists Palmetto Federal's nonaccrual loans greater than
$500,000 at December 31, 1995. These loans represent approximately 48% of the
Bank's nonaccrual loans.
<TABLE>
<CAPTION>
Amount Description
- ----------------------------------------------------------------------------------
(in thousands)
<C> <S>
$ 1,770 Loan made to acquire a 100 acre commercial site in Macon, Georgia and
a line-of-credit collateralized by a plantation of approximately 283
acres in Savannah, Georgia. The borrower reduced the principal balance
by $405,000 in 1995. In January 1996, the Bank sold $1.4 million of
this debt.
1,496 Loan collateralized by a 26,024 square foot office building located
within a commercial office park in Aiken, South Carolina. A 1994
restructuring involved a principal charge-off of approximately
$304,000, an interest rate decrease and a change in repayment terms.
763 Loan to consolidate the debts of the borrower, now deceased. The loan
is collateralized by a single family residence in Aiken, South
Carolina, common stocks, and other personal property.
- ----------------------------------------------------------------------------------
$ 4,029
- ----------------------------------------------------------------------------------
</TABLE>
The following table lists Palmetto Federal's five largest foreclosed
properties at December 31, 1995. These properties represent approximately 46% of
the Bank's foreclosed properties.
<TABLE>
<CAPTION>
Amount Description
- ----------------------------------------------------------------------------------
(in thousands)
<C> <S>
$ 1,394 Undeveloped commercial land comprised of three tracts of 76 acres, 13
acres and 13.86 acres, respectively. The tracts are located south of
Aiken, South Carolina adjacent to Woodside Plantation.
676 Sixteen single family residential lots and 75 acres of vacant land
south of Aiken, South Carolina.
665 Commercial property comprised of 2 parcels in St. John's, Michigan.
492 Thirty-five single family residential lots in Woodside Plantation
acquired in a 1995 debt restructuring. See REAL ESTATE DEVELOPMENT
ACTIVITIES.
454 Single family residence located in Aiken, South Carolina.
- ----------------------------------------------------------------------------------
$ 3,681
- ----------------------------------------------------------------------------------
</TABLE>
The Asset Classification and Review Committee, comprised of management and
the Chairman of the Board of Directors, reviews quarterly all loan relationships
and foreclosed real estate which have been adversely classified by the Credit
Adminstration Department, and is responsible for the appropriate classification
of assets in accordance with OTS regulations. Palmetto Federal uses the
quarterly classifications as well as historical charge-offs in its determination
of an appropriate allowance for loan losses. During 1995 the Credit
Administration Department established systematic monitoring mechanisms for
lending relationships whose outstanding balances exceed $100,000, exclusive of
debt collateralized by a primary residence.
The determination of individual asset classifications depends on the degree
of risk associated with the asset and the likelihood of repayment or orderly
liquidation. The portion of a loan or other asset classified as "loss" is
considered
14
<PAGE>
uncollectible and a specific valuation allowance is established in the amount of
that portion. A "doubtful" asset has a high possibility of loss but certain
pending factors preclude the estimation of a specific valuation allowance.
Palmetto Federal classifies an asset as "substandard" if the asset exhibits a
defined weakness and is inadequately protected either by the paying capacity of
the borrower or the value of the underlying collateral. "Special mention" assets
are those assets that have potential weaknesses which, if not corrected, could
increase the risk of financial loss. The Bank's total criticized assets include
its nonperforming assets and restructured loans of $27.4 million as well as its
potential problem loans of $9.4 million. The following table summarizes the
Bank's criticized assets at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Special mention $ 9,867 $ 11,050 $ 12,470
Substandard 25,450 30,138 40,904
Doubtful 0 0 755
Loss 1,462 1,822 4,265
- ------------------------------------------------------------------------
$ 36,779 $ 43,010 $ 58,394
- ------------------------------------------------------------------------
</TABLE>
The following table summarizes Palmetto Federal's loan loss experience for
each of the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans for the year $ 456,939 $ 444,914 $ 450,732 $ 499,816 $ 515,292
- ---------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of
the year $ 8,213 $ 9,883 $ 8,232 $ 9,054 $ 7,767
- ---------------------------------------------------------------------------------------------------
Charge-offs:
Permanent residential 124 404 344 550 207
Second mortgages 68 64 9 3 122
Commercial real estate 671 3,150 3,382 5,746 1,965
Consumer 829 564 766 870 1,019
Commercial 78 390 378 406 74
- ---------------------------------------------------------------------------------------------------
Total charge-offs 1,770 4,572 4,879 7,575 3,387
- ---------------------------------------------------------------------------------------------------
Recoveries:
Permanent residential 36 58 9 51 15
Second mortgage 10
Commercial real estate 441 332 142 87
Consumer 102 103 84 134 144
Commercial 73 70 6 11
- ---------------------------------------------------------------------------------------------------
Total recoveries 652 573 241 196 246
- ---------------------------------------------------------------------------------------------------
Net charge-offs for the year (1,118) (3,999) (4,638) (7,379) (3,141)
Provision for loan losses 1,322 2,329 6,289 6,557 4,793
Other (365)
- ---------------------------------------------------------------------------------------------------
Allowance for loan losses, end of the
year $ 8,417 $ 8,213 $ 9,883 $ 8,232 $ 9,054
- ---------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans 0.24% 0.90% 1.03% 1.48% 0.61%
- ---------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses in 1994 and 1995 reflected the decreases in
nonperforming assets and restructured loans and classified loans. The provision
for loan losses from 1991 through 1993 averaged $5.9 million due to the
significant increase in nonperforming assets and restructured loans as well as a
significant increase in classified assets. These increases were principally
caused by the general weakening of certain commercial real estate loans and
single family development loans, which resulted in increased delinquencies and
loan restructurings.
Charge-offs in 1995 declined principally due to a decline of $2.4 million in
commercial real estate loan charge-offs. In 1994, as in 1993 and 1992, portions
of several commercial real estate loans were charged-off as those loans were
restructured or written off as uncollectible. Charge-offs in other categories
declined as well in 1995, except for consumer loans, for which charge-offs
increased $265,000. This increase occurred primarily due to an increase of
$166,000 or 70.6% in mobile home loan charge-offs resulting from increased
collection efforts. The Company presently anticipates 1996 mobile home loan
charge-offs to remain at the 1995 level based on an analysis of this portfolio.
The provision for loan losses is a reflection of actual losses experienced
during the year and management's judgment as to the adequacy of the allowance
for loan losses to absorb future losses in loans currently outstanding. Some of
the factors considered by management in determining the amount of the provision
and resulting allowance include: (1) credit reviews of individual loans and
relationships; (2) net charge-offs over the prior three years; (3) growth in and
composition of the
15
<PAGE>
loan portfolio; (4) the current level of the allowance in relation to total
loans and to historical loss levels; (5) the level of classified assets; (6)
fair value of collateral property; and (7) management's estimate of future
economic conditions and the resulting impact on the Company.
Management's determination of the adequacy of the allowance for loan losses
requires the use of judgments and estimates that may change in the future.
Unfavorable changes in the factors used by management to determine the adequacy
of the allowance, or the availability of new information, could cause the
allowance for loan losses to be increased or decreased in future periods. In
addition, bank regulatory agencies, as part of their examination process, may
require additions to the allowance for loan losses based on their judgments and
estimates.
LIQUIDITY AND CAPITAL RESOURCES
Palmetto Federal's principal sources of funds are deposits, principal and
interest payments on loans, investment and mortgage-backed securities, proceeds
from sales of investment and mortgage-backed securities, FHLB advances, other
borrowings, and retained earnings. Palmetto Federal's liquidity 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 of 7.9% was in excess of the required amount
of 5.0% for December 1995.
Stockholders' equity increased by 14.0% from December 31, 1994 to December
31, 1995, principally due to earnings of $4.1 million and a net decrease of $2.0
million in the unrealized loss on debt securities. The stockholders' equity to
assets ratio increased from 6.82% at December 31, 1994 to 7.97% at December 31,
1995.
Management does not expect capital expenditures related to the opening of the
Charleston branch in March 1996 and the relocation of the Burton branch to
exceed $750,000.
SAIF ASSESSMENT
Deposit insurance premiums for members of both the Bank Insurance Fund ("BIF")
and the Savings Association Insurance Fund ("SAIF") were established for each
fund to achieve a 1.25% designated ratio of reserves to insured deposits. The
BIF reached the 1.25% reserve level in 1995 and in August 1995, the FDIC reduced
the premiums for BIF member banks. In November 1995, the FDIC announced that,
beginning in 1996, it would further reduce the deposit insurance premiums for
92% of all BIF members that are in the highest capital and supervisory
categories to $2,000 per year, regardless of deposit size. Given the failure of
the SAIF to attain the 1.25% ratio, the FDIC retained the existing premium rate
of 23 cents to 31 cents per $100 of deposits for SAIF members.
In 1995, members of the Banking Committees of the U.S. House of
Representatives and the Senate agreed on a proposal to recapitalize the SAIF.
Under the proposal, which was part of the budget bill, all SAIF-member
institutions will pay a special assessment to the SAIF of approximately 80 basis
points (80 cents per $100 of deposits), the amount that would enable the SAIF to
attain its designated reserve ratio of 1.25%. The special assessment would be
based on the assessable deposits held as of March 31, 1995. BIF-insured
institutions holding SAIF-insured deposits would receive a 20% reduction in the
assessment rate and would pay a special assessment of 64 basis points. The
agreement also provides that the assessment base for the bonds issued in the
late 1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation would be expanded to include deposits of
both BIF-insured and SAIF-insured institutions, with BIF-insured institutions
paying approximately 75% of the interest on such obligations. If an 80 basis
point assessment were levied on the assessable deposits of the Bank held at
March 31, 1995, the special assessment of Palmetto Federal would total $3.9
million. If deposit premiums for thrifts are reduced to those of the BIF, as is
currently proposed, pretax income could improve annually by $1.1 million. Since
the budget bill is stalled in negotiations between Congress and the White House,
the Company cannot predict either the final details of any legislation or the
effective dates thereof.
Portions of the proposal would also enact further changes, including the
merger of the SAIF and the BIF, elimination of the separate federal thrift
charter and other provisions intended to combine the savings and banking
industries. Such provisions raise significant questions such as the amount and
timing of any special assessment and whether the investment and operating powers
of thrifts and thrift holding companies will be conformed to those applicable to
banks and bank holding companies. The Company cannot predict which, if any, of
these changes will be included in the final legislation.
16
<PAGE>
REGULATORY MATTERS
The FDIC has categorized Palmetto Federal as "well capitalized" under the FDIC's
prompt corrective action guidelines. The following table illustrates Palmetto
Federal's regulatory capital as of December 31, 1995 as well as under the fully
phased-in requirements which become effective July 1, 1996.
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
<S> <C> <C> <C>
- ------------------------------------------------------------------------
(dollars in thousands)
Regulatory capital $ 43,375 $43,375 $48,425
Minimum regulatory requirement 9,586 19,172 33,865
- ------------------------------------------------------------------------
Excess amount $ 33,789 $24,203 $14,560
- ------------------------------------------------------------------------
Actual capital ratio 6.8% 6.8% 11.4%
- ------------------------------------------------------------------------
Minimum regulatory capital ratio 1.5% 3.0% 8.0%
- ------------------------------------------------------------------------
Fully phased-in regulatory capital $ 40,959 $40,959 $46,009
Fully phased-in regulatory requirement 9,547 19,095 33,659
- ------------------------------------------------------------------------
Excess amount $ 31,412 $21,864 $12,350
- ------------------------------------------------------------------------
Fully phased-in capital ratio 6.4% 6.4% 10.9%
- ------------------------------------------------------------------------
</TABLE>
The difference between the current regulatory capital amounts and the fully
phased-in amounts relates to a $6.2 million investment in a real estate
subsidiary which phases out of regulatory capital on July 1, 1996.
In March 1995, the OTS delayed indefinitely the implementation of the
interest rate risk component of the risk-based capital standard which was
scheduled to be effective September 30, 1994. As calculated at September 30,
1995 (the latest date for which information is available), Palmetto Federal
would have no additional capital requirement under this interest rate risk rule.
RECENT ACCOUNTING AND REPORTING CHANGES
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of", which the
Company adopted effective January 1, 1996. SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. The adoption of SFAS No. 121 did not have a
significant effect on the financial condition or results of operations of the
Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes optional alternative accounting methods
for stock-based compensation as well as new required disclosures. The Company
has elected to account for stock-based compensation under previously existing
accounting guidance. As such, SFAS No. 123 was adopted effective January 1,
1996, for disclosure purposes only and did not impact the Company's financial
position or results of operations.
EFFECT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements and related data have been
prepared in accordance with generally accepted accounting principles that
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, noninterest expenses do
reflect general levels of inflation.
COMPARISON OF 1994 AND 1993 OPERATING RESULTS
PALFED, Inc. recorded net earnings of $3.8 million or $0.73 per share in 1994
compared to a net loss of $13.1 million or $6.12 per share in 1993. The 1993
loss is primarily attributable to the cumulative effect of a change in
accounting principle of $10.5 million related to a change in the method of
amortizing goodwill. Total assets were $662.4 million and $647.6 million at
December 31, 1994 and 1993, respectively.
NET INTEREST INCOME
Net interest income in 1994 was $20.4 million, an increase of 17.7% over 1993.
Total interest income in 1994 was $46.9 million compared to $48.2 million in
1993, a decrease of $1.3 million. Total interest expense in 1994 was
17
<PAGE>
$26.5 million compared to $30.8 million in 1993. Increasing interest rates
caused an increase both in the yield on interest-earning assets and in the cost
of interest-bearing liabilities. A decrease in interest-earning assets offset
the decline in the costs of liabilities. Additionally, the Company experienced a
decrease of $879,000 in the provision for uncollected interest due to a decrease
in the level of nonperforming assets.
PROVISION FOR ESTIMATED LOSSES ON LOANS
Due to decreases in the levels of problem assets and slower loan growth during
the year, the provision for estimated loan losses decreased from $6.3 million in
1993 to $2.3 million in 1994. Net charge-offs in 1994 were $4.0 million or $1.7
million greater than the provision resulting in a decrease in the allowances for
estimated loan losses to $8.2 million.
NONINTEREST INCOME
Noninterest income increased by $1.9 million in 1994 compared to 1993. The
increase was primarily attributable to: (1) a loss from real estate operations
of $2.6 million in 1994 compared to a loss of $5.7 million in 1993; (2) an
increase of 26.4% in checking transaction fees to $2.8 million; (3) a decrease
of $1.7 million in gains on sales of investment and mortgage-backed securities
and loans in 1994; and (4) the receipt of $923,000, net of related expenses, in
interest on federal and state income tax refunds.
The decrease in the loss from real estate operations resulted primarily from
the 1993 sale of the Woodside Plantation project. This impact was offset by an
increase of $949,000 in the provision for losses on foreclosed real estate
during 1994.
Gains on sales of investment and mortgage-backed securities and loans
decreased due to the rapid increase in short term interest rates which occurred
during 1994. In prior years, declining interest rates allowed the Company to
realize gains on sales of its investment and mortgage-backed securities. The
1994 rate increases resulted both in declines in the market values of securities
available-for-sale and in a significant decrease in originations of fixed rate
mortgage loans which are typically sold in the secondary market.
NONINTEREST EXPENSES
Noninterest expenses for 1994 were $15.9 million compared to $16.2 million for
1993, a decrease of $249,000. The decrease is primarily attributable to: (1) a
decrease of $204,000 in data processing expenses in 1994 due to certain computer
and ATM equipment becoming fully depreciated; and (2) a $151,000 decrease in
advertising and public relations resulting from the lack of advertising expenses
for the Woodside Plantation project which the Company sold in December 1993.
Offsetting these decreases were increases of $193,000 in compensation and
employee benefits and of $158,000 in professional and outside service fees. The
net increase in compensation and benefits was primarily attributable to lower
loan origination volume resulting in $420,000 more in fixed costs of loan
originations recognized as current expenses rather than deferred over the life
of the loans and an increase of $383,000 in costs due to normal merit wage
adjustments and an increase of 6 full time equivalent employees. Offsetting
these increases were decreased medical and retirement expenses of $303,000
primarily due to a change in the Company's pension benefit formula and decreased
commissions of $274,000 due to significantly lower mortgage origination volume.
INCOME TAXES
During 1994, the Internal Revenue Service completed its audit of the Company's
consolidated federal income tax returns through 1991. The audit resulted in a
federal income tax refund of $1.2 million and a state income tax refund of
$162,000 which reduced the effective tax rate to 31.9%.
18
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<S> <C> <C> <C>
PALFED, INC.
AND SUBSIDIARIES DECEMBER 31 1995 1994
--------------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
--------------------------------------------------------------------------------------
Cash and due from banks $ 15,471 $ 11,277
Interest-bearing deposits with other banks 5,854 7,054
Investment and mortgage-backed securities:
Available-for-sale 55,550 33,020
Held-to-maturity 62,293 119,070
Loans receivable, net 464,281 447,991
Investment in real estate, net 14,448 14,720
Investment in Federal Home Loan Bank stock 10,884 10,884
Premises and equipment, net 5,350 5,157
Accrued interest, net 4,256 3,710
Other assets 7,637 9,542
--------------------------------------------------------------------------------------
$ 646,024 $ 662,425
--------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing accounts $ 27,333 $ 26,381
Savings and NOW accounts 105,329 109,864
Certificates of deposit 363,193 341,360
Accrued interest payable 891 644
--------------------------------------------------------------------------------------
Total deposits 496,746 478,249
Federal Home Loan Bank advances 91,500 135,800
Advance payments by borrowers for taxes
and insurance 899 622
Other liabilities 5,394 2,598
--------------------------------------------------------------------------------------
TOTAL LIABILITIES 594,539 617,269
--------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value; authorized 10,000,000 shares; issued
5,142,166 shares; 5,101,297 and 5,077,166 shares
outstanding,
respectively 5,142 5,142
Additional paid-in capital 26,904 26,938
Retained earnings 20,626 16,481
Unrealized loss on debt securities, net of income tax benefit of
$456 and $1,505, respectively (884) (2,925)
Treasury stock, at cost (40,869 and 65,000 shares, respectively) (303) (480)
--------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 51,485 45,156
--------------------------------------------------------------------------------------
$ 646,024 $ 662,425
--------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
(in thousands, except per share data)
Interest income:
Loans $ 40,677 $ 37,752 $ 38,221
Mortgage-backed securities 6,335 6,237 8,035
Investment securities 3,158 2,795 1,520
Other 360 153 415
--------------------------------------------------------------------------------
Total interest income 50,530 46,937 48,191
--------------------------------------------------------------------------------
Interest expense:
Deposits 23,680 18,790 21,494
Other borrowings 6,850 7,724 9,343
--------------------------------------------------------------------------------
Total interest expense 30,530 26,514 30,837
--------------------------------------------------------------------------------
Net interest income 20,000 20,423 17,354
Provision for estimated losses on loans 1,322 2,329 6,289
--------------------------------------------------------------------------------
Net interest income after provision for losses on
loans 18,678 18,094 11,065
--------------------------------------------------------------------------------
Noninterest income:
Checking transaction fees 2,621 2,824 2,234
Financial services fees 756 752 763
Late charge and other fees 515 397 558
Gain on sales of investment and mortgage-backed
securities and loans 569 163 2,140
Real estate operations (1,074) (2,596) (5,731)
Other 791 1,794 1,436
--------------------------------------------------------------------------------
Total noninterest income 4,178 3,334 1,400
--------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee benefits 8,684 8,011 7,818
Occupancy and equipment 2,629 2,516 2,625
Federal insurance premiums and assessments 1,401 1,596 1,624
Professional and outside service fees 1,186 1,538 1,380
Data processing 880 813 1,017
Advertising and public relations 734 438 589
Other 940 1,005 1,113
--------------------------------------------------------------------------------
Total noninterest expenses 16,454 15,917 16,166
--------------------------------------------------------------------------------
Income (loss) before provision (benefit) for
income taxes and cumulative effect of a change
in accounting principle 6,402 5,511 (3,701)
--------------------------------------------------------------------------------
Provision (benefit) for income taxes:
Current 359 (30) (1,215)
Deferred 1,898 1,787 146
--------------------------------------------------------------------------------
Net provision (benefit) for income taxes 2,257 1,757 (1,069)
--------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle 4,145 3,754 (2,632)
Cumulative effect of a change in accounting
principle (10,454)
--------------------------------------------------------------------------------
Net income (loss) $ 4,145 $ 3,754 $(13,086)
--------------------------------------------------------------------------------
Earnings (loss) per common and common equivalent
share:
Income (loss) before cumulative effect of a change
in accounting principle $ 0.80 $ 0.73 $ (1.23)
Cumulative effect of a change in accounting
principle (4.89)
--------------------------------------------------------------------------------
NET INCOME (LOSS) $ 0.80 $ 0.73 $ (6.12)
--------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES
Unrealized
Additional Gain (Loss) Total
Common Paid-In Retained on Debt Treasury Stockholders'
Stock Capital Earnings Securities, Net Stock Equity
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance, December 31, 1992 $1,467 $ 12,086 $ 25,822 $ 39,375
Issuance of common stock 3,671 14,795 18,466
Loss on treasury stock (9) (9)
Unrealized gain on debt securities
available-for-
sale, net $ 379 379
Net loss for the year ended December 31,
1993 (13,086) (13,086)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 5,138 26,881 12,727 379 45,125
Issuance of common stock 4 57 61
Purchase of treasury stock $ (480) (480)
Change in unrealized loss on debt
securities, net (3,304) (3,304)
Net income for the year ended
December 31, 1994 3,754 3,754
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 5,142 26,938 16,481 (2,925) (480) 45,156
Issuance of treasury stock (34) 177 143
Change in unrealized loss on debt
securities, net 2,041 2,041
Net income for the year ended
December 31, 1995 4,145 4,145
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $5,142 $ 26,904 $ 20,626 $ (884) $ (303) $ 51,485
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,145 $ 3,754 $(13,086)
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Cumulative effect of a change in accounting 10,454
principle
Provision for deferred income taxes 1,898 1,787 146
Depreciation 801 712 919
Amortization of goodwill and intangibles, loan
fees, 62 234 897
deferred income, and premiums and discounts
Provision for estimated losses on loans, real
estate 2,913 4,819 13,239
and accrued interest receivable
Stock dividends on FHLB stock (585)
(Gain) loss on sales of real estate (445) 84 (368)
Gain on sales of assets available-for-sale (569) (163)
Gain on sales of investment and mortgage-backed (1,998)
securities and loans
Proceeds from sales of mortgage-backed securities 185,571
Proceeds from sales of investments 73,680
Proceeds from sales of loans 14,210
Purchase of assets held for sale (84,492)
Principal payments and maturities of assets held 3,859
for sale
Proceeds from sales of real estate 5,119
Increase in investment in real estate (797)
Change in:
Accrued interest receivable, net (1,722) (1,414) (549)
Accrued interest payable 249 (225) (719)
Other assets (1,155) 1,390 3,093
Other liabilities (excluding deferred income) 3,120 (2,733) 564
Other, net 282 811 623
------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,579 9,056 209,780
------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
(in thousands)
INVESTING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of assets available-for-sale (10,763) (44,791)
Proceeds from sales of assets available-for-sale 76,928 59,348
Principal collections on assets available-for-sale 4,711 6,512
Increase in loans, net (67,786) (58,137) (131,942)
Purchases of mortgage-backed securities (11,043) (39,345)
Principal collections on investment and mortgage- 14,003 16,168 28,554
backed securities
Proceeds from sales of foreclosed real estate 3,366 4,877
Purchase of office premises and equipment (981) (1,375) (775)
Proceeds from sales of premises and equipment 1,182
Other, net (260) 20 (13)
--------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 19,218 (28,421) (142,339)
--------------------------------------------------------------------------------
FINANCING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 18,249 1,256 (42,676)
Proceeds from FHLB advances and other borrowed 68,200 123,100 72,923
money
Repayments of FHLB advances and other borrowed (112,500) (106,759) (134,728)
money
Proceeds from issuance of common stock 18,466
Purchase of treasury stock (480)
Other, net 248 355 (99)
--------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (25,803) 17,472 (86,114)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH 2,994 (1,893) (18,673)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,331 20,224 38,897
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 21,325 $ 18,331 $ 20,224
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 30,283 $ 26,739 $ 31,555
Income taxes 1,100 15
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Securitizations of mortgage loans $ 33,833 $ 41,593 $111,900
Loans foreclosed or in-substance foreclosed 9,017 3,099 11,368
Financed sales of foreclosed real estate 6,215 2,603 4,900
Transfers of investment and mortgage-backed
securities from held-to-maturity to
held-for-sale 85,781
Transfers of investment and mortgage-backed
securities from available-for-sale to
held-to-maturity 91,574
Transfers of investment and mortgage-backed
securities from held-to-maturity to
available-for-sale 42,842
Issuance of treasury stock as compensation 172
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
</TABLE>
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALFED, INC. Following is a description of the more significant
AND SUBSIDIARIES accounting and financial reporting policies followed by
the Company in preparing and presenting its consolidated
financial statements.
NOTE 1: PRINCIPLES OF CONSOLIDATION
SUMMARY OF The consolidated financial statements include the
SIGNIFICANT accounts of PALFED, Inc. ("PALFED"); its wholly owned
ACCOUNTING subsidiaries, Palmetto Federal Savings Bank of South
POLICIES Carolina ("Palmetto Federal" or the "Bank") and PALFED
Investment Services, Inc.; Palmetto Federal's subsidiary,
Palmetto Service Corporation ("PSC"); and PSC's
subsidiary, Woodside Development Company of Aiken, Inc.
(collectively referred to as the "Company"). All
significant intercompany accounts and transactions have
been eliminated.
PALFED is a savings and loan holding company. The
Company's principal line of business is community
banking. The Company also has lines of business in real
estate and retail securities brokerage. The principal
markets for the Company's products and services are
individuals and families, professionals, and small and
medium sized businesses in southwestern and coastal South
Carolina.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks
and interest-bearing deposits with other banks. Cash and
due from banks include all noninterest-bearing deposits
with other banks. Palmetto Federal is subject to the
reserve requirements established by the Federal Reserve
Bank system.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company classifies and accounts for debt and equity
securities as either held-to-maturity, trading, or
available-for-sale under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115,
"Accounting For Certain Investments in Debt and Equity
Securities". Securities classified as held-to-maturity
are securities that the Company has the positive intent
and ability to hold to maturity and are carried at
amortized cost. Trading securities are securities that
are bought and held principally for sale in the near term
and are reported at fair value, with unrealized gains and
losses included in earnings. Available-for-sale
securities are securities not classified as either
held-to-maturity or trading, including securities that
may be sold in response to changes in market interest
rates or prepayment rates or liquidity needs. These
assets are carried at fair value, with unrealized gains
and losses excluded from earnings and reported net of
related income taxes as a separate component of
stockholders' equity until realized.
Prior to December 31, 1993, the Company accounted for
debt and equity securities as follows: held-for-
investment securities were carried at amortized cost;
held-for-sale securities were carried at the lower of
cost or aggregate market value with unrealized losses
included in the consolidated statement of operations.
In November 1995, the Financial Accounting Standards
Board ("FASB") issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting For Certain
Debt and Equity Securities", which included a transition
provision allowing all entities to reassess the
appropriateness of the classifications of all securities
held and account for any resulting reclassifications at
fair value. Reclassifications from the held-to-maturity
category resulting from this one-time reassessment will
not call into question, or "taint", the intent of the
entity to hold other debt securities to maturity in the
future. In accordance with this Special Report, the
Company transferred securities with an amortized cost of
$42.8 million from held-to-maturity to
available-for-sale. The transfer was effected at the fair
value of the securities and the unrealized loss on these
securities at the time of transfer was approximately
$47,000.
Gains and losses on sales of securities are determined on
the specific identification method. Premiums are
amortized and discounts are accreted using the level
yield method over the estimated remaining term of the
security.
24
<PAGE>
<TABLE>
<S> <C>
LOANS RECEIVABLE
Loans receivable are reported at their outstanding unpaid
principal balances reduced by valuation allowances and
net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Provisions for estimated losses on loans are charged to
income when, in the opinion of management, the occurrence
of such losses are deemed to be probable. Losses are
usually anticipated when the estimated net realizable
value of the underlying collateral is determined to be
less than the carrying value of such assets. Management
evaluates the carrying value of its loan portfolio at
least quarterly and adjusts the allowances accordingly.
In addition to providing valuation allowances where a
decline in value has been identified, the Company also
establishes general allowances for losses based upon the
level of assets classified in accordance with Office of
Thrift Supervision ("OTS") regulations, historical losses
and general market conditions. While management uses its
best judgment in establishing the allowances for losses,
future adjustments to the allowances may be necessary if
economic conditions or other factors differ substantially
from the assumptions used in making the evaluations.
On January 1, 1995, the Company adopted SFAS No. 114,
"Accounting By Creditors for Impairment of a Loan", as
amended by SFAS No. 118, "Accounting By Creditors For
Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of SFAS No. 114". Under these
new standards, a loan is considered impaired, based on
current information and events, if it is probable that
the Company will be unable to collect the scheduled
payments of principal and interest when due according to
the contractual terms of the loan agreement.
The Company uses several factors in determining if a loan
is impaired under SFAS No. 114. Quarterly asset
classification procedures generally include a review of
significant loans and lending data, including loan
payment status and borrowers' financial data and
operating factors, such as cash flows and operating
income or loss. The measurement of impaired loans is
generally based on the present value of expected future
cash flows discounted at the historical effective
interest rate of the loan, except that collateral
dependent loans are measured for impairment at the fair
value of the collateral. The adoption of SFAS No. 114
resulted in no additional provision for credit losses at
January 1, 1995.
Also under these standards, loans which are considered to
be in-substance foreclosed continue to be measured at the
fair value of the collateral, however, these loans are
classified as loans receivable rather than as foreclosed
real estate, as was the case previously. Therefore,
in-substance foreclosures of $3.2 million at December 31,
1994 have been reclassified from investment in real
estate to loans receivable.
Interest income is recognized under the interest method.
The accrual of interest income on loans, including
impaired loans, in excess of 90 days past due is
generally suspended and previously recognized interest
income is reversed until the loans become current.
Additionally, the Bank discontinues the accrual of
interest on any loan when it is determined that
collection of interest is not probable.
Loan origination and commitment fees and certain direct
origination costs are recognized as an adjustment of the
yield over the life of the related loan.
The Company typically sells loans on a nonrecourse basis.
Gains and losses on sales of loans are recognized at the
time of sale, as determined by: (1) the difference
between the net sale proceeds and the book value of the
loans sold, and (2) the estimated present value
associated with excess or deficient servicing fees. Gains
and losses related to excess or deficient servicing fees
are amortized on the level yield method over the
estimated lives of the related mortgage loans as a
reduction or increase, respectively, of income on
servicing fees received.
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
In May 1995, the FASB issued SFAS No. 122, "Accounting
for Mortgage Servicing Rights", which the Company adopted
effective October 1, 1995. SFAS No. 122 requires that the
right to service mortgage loans for others be recognized
as an asset, whether that servicing right is acquired or
originated. The total cost of mortgage loans sold or
securitized is allocated to the loans and to the mortgage
servicing rights based upon their relative fair values.
The Company evaluates mortgage servicing rights for
impairment based on the fair value of those rights. The
servicing rights are stratified based on the weighted
average interest rates of the underlying loans on the
aggregate loan basis. The Company amortizes the mortgage
servicing rights over the period of and in relation to
the estimated net servicing income. Servicing rights of
$153,000 were recorded during 1995 as a result of
adopting this standard, resulting in a gain of $101,000,
net of related income taxes.
INVESTMENT IN REAL ESTATE
Investment in real estate includes real estate acquired
in settlement of loans ("REO"), real estate acquired for
development and sale, and equity in and loans to
partnerships.
Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis.
After foreclosure, valuations are periodically performed
by management and the real estate is carried at the lower
of cost or fair value minus estimated costs to sell.
Revenue and expenses from operations and additions to the
valuation allowance are included in real estate
operations.
Real estate acquired for development and sale is carried
at the lower of cost or estimated net realizable value.
Profits from the sales of real estate are recognized
under either the full accrual method or the percentage of
completion method, whichever is appropriate under the
terms and conditions of the sales transaction.
From time to time, as a result of the Company's various
investments in real estate, potential liabilities for
environmental remediation may arise. Liabilities are
recorded when environmental assessments and/or remedial
efforts are probable and the cost can be reasonably
estimated. At December 31, 1995 and 1994, no such
liabilities were recorded.
PREMISES AND EQUIPMENT
Premises and equipment consist principally of furniture,
fixtures and equipment and office buildings. Land is also
included in premises and equipment and is carried at
cost. Other premises and equipment are carried at cost
and are depreciated using straight-line and declining
balance methods over the estimated lives of the related
assets (20 to 40 years for buildings and 3 to 10 years
for equipment). Gains and losses on disposal are
reflected in income. Accumulated depreciation was $9.9
million and $9.1 million at December 31, 1995 and 1994,
respectively.
GOODWILL AND INTANGIBLE VALUE OF BRANCH NETWORK
The Company used the purchase method of accounting for
the acquisition of a savings institution in 1982. The
intangible value of branch network acquired of $5.4
million is being amortized on a straight-line basis over
25 years. Goodwill of $17.9 million resulting from the
acquisition is being amortized on the level yield method
over the estimated life of the long-term interest-earning
assets acquired. Management reviews the amortization
periods (estimated lives) of the intangible assets
periodically and makes adjustments as needed. Accumulated
amortization related to these intangible assets at
December 31, 1995 and 1994 was $20.6 million and $20.3
million, respectively.
Effective January 1, 1993, the Company changed its method
of amortizing goodwill by adopting SFAS No. 72,
"Accounting For Certain Acquisitions of Banking or Thrift
Institutions," which requires goodwill to be amortized
over the estimated life of the interest-earning assets
acquired using the level yield method. The Company
believes the change in accounting principle is preferable
because it provides a better matching of the revenues and
expenses which resulted from the acquisition in reporting
operating results. This change resulted in a $10.5
million noncash charge to 1993 earnings as the cumulative
effect of adopting SFAS No. 72. Prior to January 1, 1993,
the Company amortized goodwill over its estimated life on
a straight-line basis.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
ADVERTISING COSTS
The Company expenses the production costs of advertising
the first time the advertising takes place. The costs of
communicating the advertising, such as television air
time or print media space, is capitalized and amortized
over the period of use. Direct-response advertising is
expensed as incurred due to the relatively minor nature
of such costs.
At December 31, 1995 and 1994, no advertising costs were
reported as assets. Advertising expense was $335,000,
$236,000 and $319,000 in 1995, 1994 and 1993,
respectively.
INCOME TAXES
The Company uses the asset and liability approach for
financial accounting and reporting for income taxes.
Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities
are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income
taxes.
EARNINGS PER SHARE
Earnings per share is based on the weighted average
number of common shares outstanding, plus common stock
equivalents (principally equivalent common shares
calculated for stock options outstanding). Allocated
shares owned by the PALFED, Inc. Employee Savings and
Stock Ownership Plan are included in shares outstanding.
The weighted average number of shares used in the
computation for 1995, 1994 and 1993 was approximately
5,163,000, 5,170,000 and 2,137,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported
amounts of income and expenses during the reporting
periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain accounts have been reclassified in the 1994 and
1993 financial statements to conform to the 1995
presentation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amounts
approximate fair value.
Investment and mortgage-backed securities: Fair values
are based on quoted market prices or dealer quotes, where
available. If quoted market prices are not available,
fair values are estimated using quoted market prices for
similar securities.
Loans receivable: The fair values are estimated by
discounting the future cash flows using the current
interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities.
Accrued interest receivable and payable: The fair values
approximate the carrying values.
Investment in FHLB stock: The fair value approximates
the carrying value of this investment as this is the
amount which would be received upon sale of the stock.
Deposits: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar
remaining maturities.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
FHLB advances: The carrying amounts reported for
short-term advances approximate those liabilities' fair
values. The fair value of long-term advances is estimated
using the rates currently offered for these liabilities
of similar remaining maturities.
Commitments to originate loans, unused lines of credit
and standby letters of credit: The fair value of
commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit
worthiness of the counterparties. The fair value of
letters of credit is based on fees currently charged for
similar agreements with the counterparties at the
reporting date.
In October 1994, SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of
Financial Instruments" was issued and is effective for
the Company for financial statements issued for the year
ended December 31, 1995. SFAS No. 119 requires
disclosures about derivative financial instruments --
futures, forward, swap and option contracts, and other
financial instruments with similar characteristics. As of
December 31, 1995, the Company did not hold, and had not
issued, instruments which are subject to the disclosure
requirements of SFAS No. 119. Therefore, the adoption of
SFAS No. 119 had no impact on the Company's financial
statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of", which the Company
adopted effective January 1, 1996. SFAS No. 121
establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and
goodwill. The adoption of SFAS No. 121 did not have a
significant effect on the financial condition or results
of operations of the Company.
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123
establishes optional alternative accounting methods for
stock-based compensation as well as new required
disclosures. The Company has elected to account for
stock-based compensation under previously existing
accounting guidance. As such, SFAS No. 123 was adopted
effective January 1, 1996, for disclosure purposes only
and did not impact the Company's financial position or
results of operations.
NOTE 2: Investment and mortgage-backed securities are summarized
INVESTMENT AND as follows:
MORTGAGE-BACKED
SECURITIES
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
(in thousands)
December 31, 1995:
U.S. Treasury and agency obligations $ 31,230 $ 86 $ 256 $ 31,060
FNMA securities 13,783 108 76 13,815
FHLMC securities 6,171 35 37 6,169
GNMA securities 845 22 1 866
Other mortgage-backed securities 3,584 56 3,640
----------------------------------------------------------------------------------------
$ 55,613 $ 307 $ 370 $ 55,550
----------------------------------------------------------------------------------------
December 31, 1994:
U.S. Treasury and agency obligations $ 4,988 $ 3 $ 107 $ 4,884
Corporate notes 1,998 173 1,825
FNMA securities 17,863 1,431 16,432
FHLMC securities 4,321 357 3,964
GNMA securities 6,108 193 5,915
----------------------------------------------------------------------------------------
$ 35,278 $ 3 $2,261 $ 33,020
----------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
HELD-TO-MATURITY Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
(in thousands)
December 31, 1995:
U.S. government agency obligations $ 8,940 $ 5 $ 66 $ 8,879
FNMA securities 18,195 155 18,350
FHLMC securities 7,992 135 8,127
GNMA securities 10,784 198 1 10,981
Collateralized mortgage obligations 16,382 851 17,233
----------------------------------------------------------------------------------------
$ 62,293 $1,344 $ 67 $ 63,570
----------------------------------------------------------------------------------------
December 31, 1994:
U.S. Treasury and agency obligations $ 38,737 $ 1 $2,727 $ 36,011
FNMA securities 37,786 2 2,983 34,805
FHLMC securities 24,348 10 1,831 22,527
GNMA securities 13,384 8 635 12,757
Collateralized mortgage obligations 4,812 697 5,509
Other 3 59 62
----------------------------------------------------------------------------------------
$119,070 $ 777 $8,176 $111,671
----------------------------------------------------------------------------------------
The change in the unrealized gain (loss) on investment and mortgage-backed securities
for the years ended December 31, 1994 and 1995 is as follows:
</TABLE>
<TABLE>
<CAPTION>
Available- Held-To- Income Tax
For-Sale Maturity Effect Total
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------
(in thousands)
Balance at December 31, 1993 $ 575 $ (196) $ 379
Net change in unrealized losses (2,833) 964 (1,869)
Unrealized loss on securities
transferred from available-for-sale $(2,519) 856 (1,663)
Amortization of unrealized loss on
transferred securities 347 (119) 228
--------------------------------------------------------------------------------------
Balance at December 31, 1994 (2,258) (2,172) 1,505 (2,925)
--------------------------------------------------------------------------------------
Net change in unrealized losses 2,195 (745) 1,450
Unrealized loss on securities
transferred to available-for-sale 486 (165) 321
Amortization of unrealized loss on
transferred securities 409 (139) 270
--------------------------------------------------------------------------------------
Balance at December 31, 1995 $ (63) $(1,277) $ 456 $ (884)
--------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Proceeds from sales of investment and mortgage-backed securities and loans during the
years ended December 31, 1995, 1994 and 1993, as well as the gross profits and gross
losses realized, are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C> <C>
--------------------------------------------------------------------
(in thousands)
Investments
Proceeds from sales $ 73,680
Gross profits 195
Gross losses 51
Mortgage-backed securities and loans
Proceeds from sales $199,781
Gross profits 3,164
Gross losses 1,402
Available-for-sale securities
Proceeds from sales $63,265 $51,023
Gross profits 856 551
Gross losses 491 519
--------------------------------------------------------------------
The amortized cost and estimated market value of investments at
December 31, 1995, by contractual maturity, are shown below. For
mortgage-backed securities, expected maturities will differ from
contractual maturities because borrowers may have the right to
prepay obligations with or without call or prepayment penalties.
<CAPTION>
Held-to-maturity Available-for-sale
---------------- --------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------
(in thousands)
In one year or less $ 5,996 $ 5,999
After one year through five years $ 2,960 $ 2,954 21,828 21,620
After five years through ten years 5,980 5,925 3,000 2,970
After ten years 406 469
Mortgage-backed securities 53,353 54,691 24,383 24,492
----------------------------------------------------------------------------------
$62,293 $63,570 $55,613 $55,550
----------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
NOTE 3: Loans receivable are summarized as follows at December
LOANS 31:
RECEIVABLE
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C>
---------------------------------------------------------------
(in thousands)
Loans collateralized by real estate:
Permanent residential mortgage $ 207,671 $ 206,304
Construction 38,114 33,658
Second mortgage 52,313 55,651
Commercial 128,051 109,534
Loans collateralized by other property:
Consumer 39,585 42,532
Commercial 16,080 15,177
Loans collateralized by savings accounts 4,769 3,784
---------------------------------------------------------------
486,583 466,640
Less:
Loans in process (13,141) (9,564)
Unamortized yield adjustments (744) (872)
Allowance for estimated losses (8,417) (8,213)
---------------------------------------------------------------
$ 464,281 $ 447,991
---------------------------------------------------------------
Weighted average yield on loans 8.87% 8.34%
---------------------------------------------------------------
Changes in the allowance for estimated losses on loans are
summarized as follows for each of the years ended December 31:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1995 1994 1993
------------------------------------------------------------------------
(in thousands)
Balance, beginning of year $ 8,213 $ 9,883 $ 8,232
Provision 1,322 2,329 6,289
Charge-offs (1,770) (4,572) (4,879)
Recoveries 652 573 241
------------------------------------------------------------------------
Balance, end of year $ 8,417 $ 8,213 $ 9,883
------------------------------------------------------------------------
At December 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totalled
approximately $13.0 million, of which $6.1 million related to loans with
a corresponding valuation allowance of $1.1 million. The impaired loans
at December 31, 1995, were measured for impairment using the fair value
of the collateral as substantially all of these loans were collateral
dependent. The average recorded investment in impaired loans during 1995
was approximately $14.5 million. The interest income recognized on
impaired loans during 1995 was $743,000. Impaired loans are summarized
as follows at December 31:
</TABLE>
<TABLE>
<CAPTION>
1995
<S> <C> <C>
--------------------------------------------------
(in thousands)
Construction loans $ 844
Commercial real estate loans 11,300
Residential mortgage 899
--------------------------------------------------
$ 13,043
--------------------------------------------------
</TABLE>
31
<PAGE>
Troubled debt restructurings, resulting primarily from
commercial real estate loans, had principal balances of
approximately $6.1 million and $16.4 million at December
31, 1995 and 1994, respectively. The additional interest
income that would have been recorded if these loans had
been current in accordance with their original terms and
had been outstanding throughout the years would have been
$222,000 and $216,000 in 1995 and 1994, respectively. The
amount of interest income on these restructured loans
included in net earnings for 1995 and 1994 was
approximately $428,000 and $1.2 million, respectively.
The Company was servicing first mortgage loans of
approximately $237.1 million and $216.4 million at
December 31, 1995 and 1994, respectively, which had been
sold to investors on a nonrecourse basis, and
approximately $5.3 million and $6.2 million, at December
31, 1995 and 1994, respectively, which had been sold to
investors on a recourse basis. Mortgage loans serviced
for others are not included in the accompanying
consolidated statements of financial condition.
NOTE 4: The Company's investment in real estate is summarized as
INVESTMENT IN follows at December 31:
REAL ESTATE
<TABLE>
<S> <C> <C> <C>
1995 1994
-------------------------------------------------------------
(in thousands)
Acquired in settlement of loans ("REO") $ 8,286 $ 8,803
Less allowance for estimated losses (271) (534)
-------------------------------------------------------------
8,015 8,269
-------------------------------------------------------------
Acquired for development and sale 6,083 5,900
Less allowance for estimated losses (370) (330)
-------------------------------------------------------------
5,713 5,570
-------------------------------------------------------------
Equity in and loans to partnerships 720 881
-------------------------------------------------------------
$ 14,448 $ 14,720
-------------------------------------------------------------
</TABLE>
Real estate acquired for development and sale at December
31, 1995 consisted principally of 2 outparcels and
approximately 1,000 acres of undeveloped land at Woodside
Plantation, a real estate project located in Aiken, South
Carolina, subject to a purchase option that expires
December 31, 1997.
Changes in the allowance for estimated losses on real
estate are summarized as follows:
<TABLE>
<CAPTION>
Development
REO and Sale Total
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------
(in thousands)
Balance at December 31, 1992 $ 264 $ 110 $ 374
Provision for loss 949 4,120 5,069
Charge-offs (1,095) (4,000) (5,095)
--------------------------------------------------------------------------
Balance at December 31, 1993 118 230 348
Provision for loss 1,388 100 1,488
Charge-offs (1,062) (1,062)
Recoveries 90 90
--------------------------------------------------------------------------
Balance at December 31, 1994 534 330 864
--------------------------------------------------------------------------
Provision for loss 374 40 414
Charge-offs (637) (637)
--------------------------------------------------------------------------
Balance at December 31, 1995 $ 271 $ 370 $ 641
--------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Real estate operations for each of the years ended December 31
consists of the following:
<TABLE>
<S> <C> <C> <C> <C>
1995 1994 1993
------------------------------------------------------------------------
(in thousands)
Provision for estimated losses on real
estate held for development $ (40) $ (100) $ (4,120)
Real estate expenses, including
provision for estimated losses on REO (1,129) (2,515) (1,842)
Other 95 19 231
------------------------------------------------------------------------
$ (1,074) $ (2,596) $ (5,731)
------------------------------------------------------------------------
</TABLE>
NOTE 5: Accrued interest receivable was comprised of the
ACCRUED following at December 31:
INTEREST
RECEIVABLE
<TABLE>
<S> <C> <C> <C>
1995 1994
-----------------------------------------------------------
(in thousands)
Loans and mortgage-backed securities $ 4,633 $ 4,348
Less allowance for uncollected interest (1,052) (1,309)
-----------------------------------------------------------
3,581 3,039
Investments 675 671
-----------------------------------------------------------
$ 4,256 $ 3,710
-----------------------------------------------------------
</TABLE>
NOTE 6: A summary of certificates of deposit by interest rate at
DEPOSITS December 31 follows:
<TABLE>
<S> <C> <C> <C>
1995 1994
---------------------------------------------------------------
(in thousands)
Under 4.00% $ 20,943 $ 67,689
4.01% - 6.00% 165,733 201,388
6.01% - 8.00% 165,057 52,195
Above 8.00% 11,460 20,088
---------------------------------------------------------------
$ 363,193 $ 341,360
---------------------------------------------------------------
</TABLE>
A summary of certificates of deposits at December 31 by
contractual maturities follows:
<TABLE>
<S> <C> <C> <C>
1995 1994
---------------------------------------------------------------
(in thousands)
Within one year $ 244,206 $ 222,186
1-2 years 69,330 63,219
2-3 years 18,168 18,417
3-4 years 17,671 14,612
4-5 years 10,540 19,396
Over 5 years 3,278 3,530
---------------------------------------------------------------
$ 363,193 $ 341,360
---------------------------------------------------------------
</TABLE>
The aggregate amount of time deposits greater than or
equal to $100,000 was $82.9 million and $71.5 million at
December 31, 1995 and 1994, respectively. The weighted
average interest rate on savings deposits was 4.98% and
4.31% at December 31, 1995 and 1994, respectively.
33
<PAGE>
<TABLE>
<S> <C>
At December 31, 1995 and 1994, certain certificates of
deposit were collateralized by certain investment and
mortgage-backed securities aggregating $33.0 million and
$28.9 million, respectively.
Interest expense on savings deposits is summarized as
follows for the years ended December 31:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1995 1994 1993
---------------------------------------------------------------------------
(in thousands)
Regular and statement savings $ 827 $ 823 $ 854
NOW/IFA accounts 1,685 1,819 2,238
Certificates of deposit 21,289 16,238 18,480
---------------------------------------------------------------------------
23,801 18,880 21,572
Penalties for early withdrawal (121) (90) (78)
---------------------------------------------------------------------------
$ 23,680 $ 18,790 $ 21,494
---------------------------------------------------------------------------
</TABLE>
NOTE 7: Maturities and interest rates of FHLB advances were as
FEDERAL follows at December 31:
HOME LOAN
BANK ADVANCES
<TABLE>
<S> <C> <C> <C> <C> <C>
1995 1994
-------------------------- --------------------------
INTEREST Interest
AMOUNT RATE Amount Rate
-------------------------------------------------------------------------------------------------
(dollars in thousands)
One year $ 81,500 5.73% - 9.10% $ 98,200 4.65% - 9.95%
Two years 10,000 6.37% 27,600 7.09% - 9.10%
Three years 10,000 6.37%
-------------------------------------------------------------------------------------------------
$ 91,500 6.56% $ 135,800 6.72%
-------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, advances were
collateralized by $160.4 million and $207.7 million of
specifically identified unencumbered first mortgage loans
and mortgage-backed securities, respectively. The
weighted average interest rate on short term advances was
6.59% and 6.38% at December 31, 1995 and 1994,
respectively.
NOTE 8: Actual income taxes differ from income taxes computed at
FEDERAL AND the federal corporate statutory rate of 34% as shown
STATE INCOME below for the years ended December 31:
TAXES
<TABLE>
<S> <C> <C> <C> <C>
1995 1994 1993
-----------------------------------------------------------------------
(in thousands)
Tax expense (benefit) at statutory
federal income tax rate $ 2,177 $ 1,874 $ (1,258)
Amortization and accretion of discounts,
premiums and intangible assets related
to purchase adjustments not taxable 96 89 105
State income tax refund (53) (162)
Other, net 37 (44) 84
-----------------------------------------------------------------------
Provision (benefit) for income taxes $ 2,257 $ 1,757 $ (1,069)
-----------------------------------------------------------------------
</TABLE>
34
<PAGE>
Under the liability method of accounting for income
taxes, deferred income tax expense arises from temporary
differences between the tax basis of assets and
liabilities and their reported amounts in the financial
statements. The tax effects of temporary differences that
give rise to significant portions of deferred tax assets
and deferred tax liabilities at December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C>
-------------------------------------------------------------
(in thousands)
DEFERRED TAX ASSETS:
Allowance for loan losses $ 3,002 $ 3,817
Deferred loan fees 143 173
Basis difference in acquired assets 76 106
Unrealized securities losses 616 1,747
Deferred income 30 209
Other 250 298
-------------------------------------------------------------
$ 4,117 $ 6,350
-------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax bad debt reserve in excess of base
year reserve $ 1,034
Recognition of profits on sales of real
estate 137 $ 137
Differences in depreciation methods for
premises and equipment 90 142
Deferred loan fees 630
FHLB stock dividends not recognized for
tax 1,006 1,006
Unrealized securities gains 534 1,423
Other 29 36
-------------------------------------------------------------
$ 3,460 $ 2,744
-------------------------------------------------------------
</TABLE>
Sufficient sources of taxable income exist within the
carryback period under current tax law to realize all of
the Company's deferred tax assets. Accordingly,
management has determined that it is not necessary to
reduce the Company's deferred tax assets by a valuation
allowance at December 31, 1995.
The Company files a consolidated federal income tax
return. The Company is allowed to determine its bad debt
deduction for tax purposes based on either the experience
method or the percentage of taxable income method
(limited to 8.0% of taxable income before such
deduction). The Company used the experience method in
1995, 1994, and 1993 since this method provided a more
favorable bad debt deduction.
The Company accounts for income taxes relating to bad
debt reserves of the Bank using the "two-difference"
method. This method allows the Company to record an
income tax benefit related to the financial statement bad
debt reserve, but recognizes no deferred tax liability
with respect to the tax base year reserve, unless it
becomes apparent that this temporary difference will
reverse in the foreseeable future. The following events
would cause this temporary difference to become taxable:
(1) loss of thrift status by failing to meet the 60%
asset test of Internal Revenue Code Section 7701(a)(19);
or (2) conversion of the Bank's charter from a thrift to
a bank charter. The cumulative amount of this temporary
difference for which the Company is not required to
recognize a deferred tax liability is equal to the amount
of its tax base year reserve as of December 31, 1987 of
approximately $2.9 million. A deferred tax liability has
been recognized with respect to amounts in excess of this
tax base year reserve.
During 1994, the Internal Revenue Service completed an
examination of the Company's consolidated federal income
tax returns through 1991. The examination resulted in an
income tax refund of $1.2 million and interest on the
refund of approximately $800,000, net of related fees and
expenses. Both the refund and related interest were
received in 1994. Subsequent to the completion of the IRS
examination, Palmetto Federal filed amended South
Carolina state income tax returns and received refunds
and related interest of approximately $285,000 in 1994.
35
<PAGE>
<TABLE>
<S> <C>
NOTE 9: The Bank is subject to various regulatory capital
REGULATORY requirements administered by the federal banking
MATTERS agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and discretionary actions
by regulators that, if undertaken, could have an adverse
material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action,
Palmetto Federal must meet specific capital guidelines
that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
As of December 31, 1995, the FDIC categorized the Bank as
"well capitalized" under the regulatory framework for
prompt corrective action. There are no conditions or
events since that notification that management believes
have changed the Bank's classification.
The payment of dividends by the Bank to PALFED is subject
to certain restrictions and would require prior notice to
and approval of the OTS.
NOTE 10: The Company maintains a trusteed, noncontributory defined
EMPLOYEE BENEFIT benefit pension plan which covers substantially all
PLANS full-time employees with one year of service. The formula
used to determine benefits paid to retired employees is
based upon their length of service and their average
compensation during the final years of their employment.
The plan's assets are invested primarily in temporary
cash investments and certificates of deposit, and
corporate instruments. The plan also owns 21,118 shares
of PALFED common stock at December 31, 1995 and 1994 with
a fair value of approximately $251,000 and $150,000,
respectively. The Company funds pension costs based upon
the amount allowable or deductible for federal income tax
purposes. The actuarial method used in accounting for
pension costs is the projected unit credit method. The
actuarial calculations are determined by the Company's
consulting actuary.
The following tables set forth the plan's funded status
and certain amounts recognized in the Company's
consolidated financial statements at December 31, 1995,
1994 and 1993, respectively.
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C> <C>
------------------------------------------------------------------------
(in thousands)
Actuarial present value of accumulated
benefits including vested benefits of
$1,475, $1,403 and $1,069,
respectively: $ 1,604 $ 1,479 $ 1,131
------------------------------------------------------------------------
Fair value of plan assets $ 2,455 $ 1,892 $ 1,704
Projected benefit obligation (2,669) (2,141) (2,248)
Unrecognized prior service cost (368) (388) 58
Unrecognized net loss (from past
experiences different from assumed) 781 814 502
Additional transition liability
recognized (net of amortization) 1 1 1
------------------------------------------------------------------------
Prepaid pension costs $ 200 $ 178 $ 17
------------------------------------------------------------------------
Assumed rates used in actuarial
computations:
Weighted average discount rate 7.25% 7.50% 7.50%
Rate of increase in compensation 4.50% 5.00% 5.00%
Rate of increase in Social Security wage
base 4.00% 4.00% 3.50%
Expected return on plan assets 8.00% 6.00% 6.00%
------------------------------------------------------------------------
<CAPTION>
For the years ended December 31 1995 1994 1993
<S> <C> <C> <C> <C>
------------------------------------------------------------------------
Service cost $ 205 $ 246 $ 361
Interest cost 172 136 141
Expected return on assets (155) (107) (87)
Net amortization and deferral 23 6 23
------------------------------------------------------------------------
Net pension expense $ 245 $ 281 $ 438
------------------------------------------------------------------------
</TABLE>
36
<PAGE>
The Company maintains an Employee Savings and Stock
Ownership Plan ("401(k) Plan") for all full-time
employees with one year of service who choose to
participate. The 401(k) Plan takes employee contributions
along with the Company matching contribution and invests
those funds in one of four mutual funds or in shares of
PALFED common stock. At December 31, 1995, the 401(k)
Plan owned 199,060 allocated shares and owned no
committed-to-be-released shares, unearned or suspense
shares of PALFED common stock. At December 31, 1995,
there was no obligation to repurchase 401(k) Plan shares.
The Company's matching contribution varies according to
the level of net income attained by the Company. In 1993,
the Company's matching contribution was fixed. The
Company's expense was $126,000, $90,000 and $50,000 for
the years ended December 31, 1995, 1994, and 1993,
respectively.
The Company maintains an Executive Incentive Bonus Plan
(the "Plan") for certain officers who have been employed
by the Company for at least one year. Bonuses are awarded
considering the individual's contribution to the
Company's performance. The Company accrued bonus expense
of $424,000, $279,000 and $230,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, related
to this Plan.
NOTE 11: The Company has operating leases for certain branch
COMMITMENTS, banking facilities and equipment. Future minimum rental
CONTINGENCIES AND commitments under these leases as of December 31, 1995,
OTHER CONCENTRATIONS are approximately as follows:
<TABLE>
<S> <C> <C>
-----------------------------------------------------
1996 $ 371,000
1997 248,000
1998 115,000
1999 115,000
2000 91,000
Thereafter 64,000
-----------------------------------------------------
Total minimum payments required $ 1,004,000
-----------------------------------------------------
</TABLE>
Rental expense for the years ending December 31, 1995,
1994, and 1993 was approximately $454,000, $473,000 and
$471,000, respectively.
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 for salary
continuation under these agreements is approximately $2.5
million at December 31, 1995.
At December 31, 1995, the Company has outstanding
commitments to sell loans of $2.3 million.
Concurrent with the 1990 sale of the Woodside Plantation
Country Club ("WPCC"), the Company entered into an
agreement with WPCC to purchase club memberships through
December 31, 2000. The amount of the remaining commitment
is directly related to the number of future lot sales in
Woodside Plantation, subject to an annual limitation, and
depends upon whether full or partial memberships are
purchased. The maximum liability over the remaining term
of the agreement, assuming lot sales reach the annual
limitation and partial memberships are purchased, is
approximately $1.5 million. In 1993, the Company sold the
remaining lots and certain other real estate at Woodside
Plantation. The purchaser assumed the Company's
obligations under this agreement. The Company remains
contingently liable under this agreement.
The Company continues to have a significant concentration
of risk related to Woodside Plantation, exclusive of
loans to individual homeowners, comprised of acquisition
and development loans, real estate held for development,
a 50% interest in a partnership and foreclosed real
estate. The total carrying value of these assets was
$13.9 million and $12.9 million at December 31, 1995 and
1994, respectively.
Due to slower than anticipated lot sales, the purchaser
of the remaining lots was unable to service its
acquisition debt and completed a restructuring of the
indebtedness to the Bank in September 1995. The
purchaser's ability to repay its total indebtedness
(approximately $3.3 million at December 31, 1995) is
primarily based on the volume and timing of lot sales and
there are no assurances that lot sales will be
37
<PAGE>
sufficient to repay the debt under the restructured
terms. Similarly, the ability of WPCC to repay its loans
(approximately $4.5 million at December 31, 1995) to
Palmetto Federal depends in part on the success of real
estate sales, which provides cash flow through additional
initiation deposits and membership fees to WPCC. The
Company is presently in discussions with WPCC to modify
its loans from amortizing to interest-only payments
through December 31, 1996.
The deposits of Palmetto Federal are insured under the
Savings Association Insurance Fund ("SAIF") of the FDIC.
In 1995, members of the Banking Committees of the U.S.
House of Representatives and the Senate agreed on a
proposal to recapitalize the SAIF. Under the proposal,
which was part of the budget bill, all SAIF-member
institutions will pay a special assessment to the SAIF of
approximately 80 basis points (80 cents per $100 of
deposits), the amount that would enable the SAIF to
attain its designated reserve ratio of 1.25%. The special
assessment would be based on the assessable deposits held
as of March 31, 1995. If an 80 basis point assessment
were levied on the assessable deposits of the Bank held
at March 31, 1995, the special assessment of Palmetto
Federal would total $3.9 million. The Company cannot
predict either the final details of any legislation or
the effective dates thereof.
Historically, PALFED's customer base has been
concentrated in and around Aiken and Barnwell Counties,
South Carolina, the home of the U.S. Department of
Energy's ("DOE") Savannah River Site ("SRS"). The SRS
employs approximately 17,000 people, down from
approximately 22,000 in 1993. Funding levels for SRS are
uncertain based upon the current status of the Federal
budget. Future federal funding reductions could result in
additional job losses at the SRS. Significant layoffs and
other reductions at SRS could have a significant adverse
effect on the local economy and the Company.
NOTE 12: The Company has granted options to purchase its common
STOCK OPTIONS AND stock to certain officers and key employees under the
STOCK GRANTS 1985 Incentive Stock Option Plan, the 1993 Stock Option
Plan and the 1995 Stock Option Plan. All outstanding
options were issued at the market value of PALFED common
stock on the date of grant. The outstanding options
become vested over a period of either one, three, or five
years from the date of issuance. During the year ended
December 31, 1995, options issued under the 1993 Plan to
purchase 667 shares at $6.375 per share were exercised.
During the year ended December 31, 1994, no options were
exercised. During the year ended December 31, 1993,
options issued under the 1985 Plan to purchase 1,000
shares at $5.75 per share were exercised.
The Company's Amended and Restated Directors Stock Plan
provides for the grant of stock options and shares of
Company stock to directors, consulting directors and
advisory directors who are not employees subject to
certain restrictions. On April 26, 1995, 13,000 shares
and 39,000 options were granted under the provisions of
the plan at the market value of PALFED common stock on
that date, $9.88 per share.
At December 31, 1995, the Company had the following
options outstanding:
<TABLE>
<CAPTION>
Outstanding Exercisable Option
Grant Date Options Shares Price Expiration Date
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
February 24, 1987 23,127 23,127 $12.80 February 24, 1997
April 26, 1988 8,125 8,125 11.80 April 26, 1998
February 26, 1991 29,000 29,000 5.75 February 26, 2001
February 20, 1992 40,500 24,300 6.50 February 20, 1997
November 16, 1993 65,233 48,989 6.38 November 16, 2003
November 15, 1994 49,500 16,500 7.75 November 15, 2004
April 26, 1995 39,000 0 9.88 April 26, 1998
November 14, 1995 75,000 0 12.78 November 14, 2005
-------------------------------------------------------------------------------------------
</TABLE>
The Company's 1993 Restricted Stock Incentive Award Plan
("the Plan") provides for the grant of shares of the
Company's common stock to officers and other key
employees subject to certain restrictions. During the
years ended December 31, 1995, 1994 and 1993, 10,464,
4,606 and 10,000 shares were granted under the provisions
of the Plan, respectively. On the dates of grants, the
market value of PALFED common stock was $7.375 per share
in 1995, $6.625 per share in 1994 and $9.375 per share in
1993.
38
<PAGE>
<TABLE>
<S> <C>
NOTE 13: The estimated fair values of the Company's financial
FINANCIAL instruments at December 31 are as follows:
INSTRUMENTS
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
1995 1994
---------------------- ----------------------
FAIR CARRYING Fair Carrying
VALUE VALUE Value Value
-------------------------------------------------------------------------------------------
(in thousands)
FINANCIAL ASSETS:
Cash and cash equivalents $ 21,325 $ 21,325 $ 18,331 $ 18,331
Investment and mortgage-backed
securities 119,120 117,843 144,691 152,090
Loans receivable 461,269 464,281 443,215 444,791
Accrued interest receivable 4,256 4,256 3,710 3,710
FHLB stock 10,884 10,884 10,884 10,884
-------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits 499,070 495,855 478,967 477,605
Accrued interest payable 891 891 644 644
FHLB advances 91,866 91,500 135,220 135,800
-------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Commitments to originate loans $ (135) $ (137)
Unused lines of credit (483) (474)
Standby letters of credit (3) (6)
-------------------------------------------------------------------------------------------
</TABLE>
A summary of the notional amounts of the Company's financial
instruments with off-balance-sheet risk at December 31 is as
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C>
---------------------------------------------------------------
(in thousands)
Commitments to originate loans $ 13,460 $ 13,690
---------------------------------------------------------------
Unused lines of credit $ 31,639 $ 31,522
---------------------------------------------------------------
Standby letters of credit $ 713 $ 816
---------------------------------------------------------------
</TABLE>
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business
to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest
rates. These financial instruments are for purposes other
than trading and include loan commitments, unused lines
of credit, and standby letters of credit. The instruments
involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in
the financial statements.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for loan commitments and standby letters of
credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does
for on-balance-sheet instruments. The Bank's lending is
concentrated in South Carolina, its primary market area.
Since many of the loan commitments may expire without
being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained is
based on management's credit evaluation of the
counter-party. Collateral held varies but may include
real estate and improvements, marketable securities,
accounts receivable, inventory, equipment and personal
property.
The credit risk associated with issuing letters of credit
is essentially the same as that associated with extending
loan facilities to customers.
39
<PAGE>
<TABLE>
<S> <C>
Palmetto Federal's risk with respect to mortgage
servicing losses results from unrecoverable advances of
delinquent principal, interest and tax payments made on
behalf of mortgagors. The Bank's loan administration
department controls the risk of this portfolio on an
ongoing basis. To date, the Bank has not suffered
significant losses from its mortgage servicing
activities.
NOTE 14. PALFED's statement of financial condition at December 31,
FINANCIAL 1995 and 1994 and related statements of operations and
INFORMATION cash flows for the years ended December 31, 1995, 1994
OF PALFED, INC. and 1993 are as follows:
(PARENT ONLY)
</TABLE>
<TABLE>
<S> <C> <C> <C>
STATEMENTS OF FINANCIAL CONDITION 1995 1996
---------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 1,590 $ 2,739
Investment in and amounts due from
banking subsidiary 49,026 41,441
Investment in and amounts due from other
subsidiary 699 854
Other assets 170 122
---------------------------------------------------------------
TOTAL ASSETS $ 51,485 $ 45,156
---------------------------------------------------------------
Common stock $ 5,142 $ 5,142
Additional paid-in capital 26,904 26,938
Retained earnings 20,626 16,481
Unrealized loss on debt securities, net (884) (2,925)
Treasury stock (303) (480)
---------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 51,485 $ 45,156
---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS 1995 1994 1993
----------------------------------------------------------------------------
(in thousands)
Income (expenses), net of related income
taxes $ 41 $ (130) $ (34)
Equity in earnings (loss) of
subsidiaries 4,104 3,884 (13,052)
----------------------------------------------------------------------------
Net income (loss) $ 4,145 $ 3,754 $ (13,086)
----------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS 1995 1994 1993
----------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,145 $ 3,754 $ (13,086)
Less equity in (earnings) loss of
subsidiaries (4,104) (3,884) 13,052
Other, net (10) (186) (8)
----------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 31 (316) (42)
----------------------------------------------------------------------------
INVESTING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investment in subsidiaries,
net (1,151) (15,074)
Other, net 9
----------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (1,151) 9 (15,074)
----------------------------------------------------------------------------
FINANCING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) liabilities (79)
Issuance of common stock 18,466
Purchase of treasury stock (480)
Other, net (29) 61 (10)
----------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (29) (419) 18,377
----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (1,149) (726) 3,261
----------------------------------------------------------------------------
Cash and cash equivalents, beginning of
year 2,739 3,465 204
----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,590 $ 2,739 $ 3,465
----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
INCOME TAXES $ 1,100 $ 15
Supplemental schedule of noncash
investing and financing activities:
Issuance of treasury stock as
compensation 172
----------------------------------------------------------------------------
</TABLE>
40
<PAGE>
NOTE 15. The operations of the Company can be broken down into
SEGMENT three segments- Banking, Real Estate, and Other. The
INFORMATION following presents information regarding these segments
at December 31, 1995, 1994 and 1993 and for each of the
years in the three-year period ended December 31, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
(in thousands)
IDENTIFIABLE ASSETS:
Banking $ 637,150 $ 651,866 $ 635,059
Real estate 6,451 6,743 8,245
Other 734 1,044 770
Holding company 1,689 2,772 3,532
------------------------------------------------------------------------------
$ 646,024 $ 662,425 $ 647,606
------------------------------------------------------------------------------
OPERATING INCOME (LOSS):
Banking $ 6,255 $ 5,863 $ 998
Real estate (218) (413) (4,912)
Other 300 260 256
Holding company 65 (199) (43)
------------------------------------------------------------------------------
Operating income (loss) before income
taxes $ 6,402 $ 5,511 $ (3,701)
------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
Banking $ 1,068 $ 958 $ 975
Real estate 12 12 111
Other 2 3 12
------------------------------------------------------------------------------
$ 1,082 $ 973 $ 1,098
------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Banking $ 959 $ 1,351 $ 759
Real estate 18 24 16
Other 4 0 0
------------------------------------------------------------------------------
$ 981 $ 1,375 $ 775
------------------------------------------------------------------------------
</TABLE>
NOTE 16. The following tables summarize the consolidated quarterly
CONSOLIDATED results of operations for each of the years ended
CONDENSED QUARTERLY December 31, 1995 and 1994 (in thousands except per share
RESULTS OF data):
OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------
1995 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 12,347 $ 12,725 $ 12,820 $ 12,638
Net interest income 4,936 4,893 5,094 5,077
Provision for estimated losses on loans 238 209 451 424
Net income 965 1,021 1,068 1,091
Earnings per share $ 0.19 $ 0.20 $ 0.21 $ 0.21
Average shares outstanding 5,116 5,160 5,178 5,185
---------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------------
1994 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------------------------
Total interest income $ 11,464 $ 11,575 $ 11,811 $ 12,087
Net interest income 4,890 5,065 5,261 5,207
Provision for estimated losses on loans 781 548 607 393
Net income 921 773 1,103 957
Earnings per share $ 0.18 $ 0.15 $ 0.21 $ 0.19
Average shares outstanding 5,151 5,172 5,189 5,154
---------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
PALFED, Inc.
We have audited the accompanying consolidated statements of
financial condition of PALFED, Inc. and Subsidiaries as of
December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of PALFED, Inc. and Subsidiaries as of
December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its methods of accounting for
impaired loans and mortgage servicing rights in 1995 and its
methods of accounting for certain investments and the
amortization of goodwill in 1993.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 2, 1996
42
<PAGE>
BOARD OF DIRECTORS
- -------------------------------------------------------------------------
ALBERT H. PETERS, JR.
Chairman of the Board
Retired
E.I. DuPont de Nemours, SRP
JOHN C. TROUTMAN
President and Chief
Executive Officer
WILLIAM F. COCHRANE
President
ALCOA South Carolina, Inc.
PATRICK D. CUNNING
Executive Vice President
J. CLEVELAND HOLMES
Partner
J.C. Holmes and Sons Farms
E. LARRY HUTTO
Vice President
Cummings Oil Company
HAROLD D. KINGSMORE
President and CEO
Graniteville Company
R. BRUCE McBRATNEY
Retired
Pershing & Co. (NYSE)
AMBROSE L. SCHWALLIE
President
Westinghouse Savannah River Company
CHARLES E. SIMONS, III
Attorney and Municipal
Judge
NEIL W. TRASK, JR.
Owner
Bay View Farms
LOWCOUNTRY AREA ADVISORY BOARD
- -------------------------------------------------------------------------
GRETA LYNNE
Chairman, LCA Advisory Board
Agent, Coldwell Banker Carteret
J. WILLIAM BIRD
Retired
Bird Oil Company
ELIZABETH P. GRACE
Vice Chairman
Beaufort County Council
ROBERT L. GRAVES
Owner
Graves Commercial Builders
CARY S. GRIFFIN
Partner
Bethea, Jordon, and Griffin
THOMAS F. JARDINE
Retired
American Cyanamid Company
C.I. MEEKS, III
Partner
Dukes, Williams, Infinger & Meeks, P.A.
DR. CHRIS P. PLYLER
Dean
USC Beaufort
LESTER D. ROYALTY
Retired
Colonel, United States Army
R.M. VENABLE
President
Slatehill Company
ADVISORY/CONSULTING DIRECTORS
- -------------------------------------------------------------------------
HENRY W. GIBSON, M.D.
Physician
W. STEPHEN HARLEY
Retired
Vice President, Peoples Drug Store
DON W. ROPP
Retired
Automotive Parts & Equipment Company
<PAGE>
BOARD OF DIRECTORS
- ---------------------------------------------------------------------------
[PHOTO]
L-R: William F. Cochrane, Patrick D. Cunning,
John C. Troutman, Albert H. Peters, Jr.
[PHOTO]
L-R: Harold D. Kingsmore, E. Larry Hutto,
Henry W. Gibson, M.D., J. Cleveland Holmes
[PHOTO]
L-R: Ambrose L. Schwallie, Charles E. Simons III,
R. Bruce McBratney, Neil W. Trask, Jr.
[PHOTO]
L-R: Donald W. Ropp, W. Stephen Harley, Edwin H. Seim
45
<PAGE>
PRINCIPAL OFFICERS
- ---------------------------------------------------------------------------
PALFED, INC.
- -------------------------------------
JOHN C. TROUTMAN
PRESIDENT & CHIEF EXECUTIVE OFFICER
PATRICK D. CUNNING
EVP, ASSET MANAGEMENT AND CREDIT ADMINISTRATION
HOWARD M. HICKEY, JR.
EVP, GENERAL COUNSEL AND SECRETARY
DARRELL R. RAINS
EVP, CHIEF FINANCIAL OFFICER AND TREASURER
MICHAEL B. SMITH
SVP AND CONTROLLER
PALMETTO FEDERAL SAVINGS BANK
- -------------------------------------
EXECUTIVE OFFICERS
JOHN C. TROUTMAN
PRESIDENT & CHIEF EXECUTIVE OFFICER
W. BARRY ADAMS
EVP, COMMUNITY BANKING AND PUBLIC RELATIONS
PATRICK D. CUNNING
EVP, ASSET MANAGEMENT AND CREDIT ADMINISTRATION
JOE W. DeVORE
EVP AND SENIOR LENDING OFFICER
HOWARD M. HICKEY, JR.
EVP, GENERAL COUNSEL AND SECRETARY
DARRELL R. RAINS
EVP, CHIEF FINANCIAL OFFICER AND TREASURER
HOLLY Z. JOHNSON
SVP, DIRECTOR OF HUMAN AFFAIRS AND TRAINING
CORPORATE OFFICERS
LINDA S. LALIBERTE
SVP, BANKING SERVICES
JOHN MULLEN, III
SVP, ASSET MANAGEMENT
LYNN B. SHEPARD
SVP, LOAN ADMINISTRATION
MICHAEL B. SMITH
SVP AND CONTROLLER
KIMBERLEE G. BEELAND
VP, COMPLIANCE AND SECURITY
R. KENYON BLAKENEY
VP, DATA PROCESSING
ROBERT E. FAULKNER
VP, CREDIT ADMINISTRATION
BYRON K. JENNINGS
VP, GENERAL SERVICES AND ATM
PAULA D. LEVINS
VP, HUMAN RESOURCES
SCOTT F. SINGER
VP, INTERNAL AUDIT
LENDING
RICHARD T. HARMON
SVP, SENIOR RESIDENTIAL LENDING MANAGER
DONALD L. TOOLE
SVP, PALMETTO SERVICE CORPORATION
FRANK L. CUNNINGHAM, III
VP, MORTGAGE LENDING
ROSEMARY GEORGETTI
VP, MORTGAGE LENDING
RANDALL C. GRANT
VP, REGIONAL CREDIT OFFICER
MARION H. MCDONALD
VP, MORTGAGE LENDING
FRANCIS A. TOWNSEND, III
VP, REGIONAL CREDIT OFFICER
BRANCH MANAGEMENT
KAY H. STILL
GROUP VP, CSRA BRANCHES
JAMES G. TAYLOR
GROUP VP, LOWCOUNTRY BRANCHES
MICHAEL L. LaBOONE
VP, CITY EXECUTIVE, CHARLESTON
PALFED INVESTMENT SERVICES, INC.
- -------------------------------------
JOHN C. TROUTMAN
PRESIDENT
W. BARRY ADAMS
SENIOR VICE PRESIDENT
<PAGE>
OFFICE LOCATIONS
- ---------------------------------------------------------------------------
PALMETTO FEDERAL
[MAP]
SAVINGS BANK
OF SOUTH CAROLINA
19 Banking Offices
7 Mortgage Lending Offices
AIKEN - MAIN OFFICE
107 Chesterfield Street South
MANAGER: MARY D. DUFOUR
(803) 642-1400
AIKEN MORTGAGE CENTER
300 Fabian Drive
MANAGER: CHRISTINA H. HAMRICK
(803) 642-1441
AIKEN - OPERATIONS CENTER
237 Park Avenue
(803) 642-1340
SOUTH AIKEN
1799 Whiskey Road
MANAGER: BENNIE L. NEWMAN, JR.
(803) 642-1300
SOUTH AIKEN - KROGER
441 Silver Bluff Road
MANAGER: MELISSA L. CLARK
(803) 642-1350
AUGUSTA/MARTINEZ, GA. MORTGAGE CENTER
4107 Columbia Road, Suite B
MANAGER: FRANK L. CUNNINGHAM III
(706) 863-3090
BARNWELL
2116 Jackson Street
MANAGER: JACQUELINE P. RAMSEY
(803) 259-5541
BEAUFORT
916 Bay Street
BRANCH SUPERVISOR: MARY ANN WASHINGTON
(803) 525-8400
BURTON
Highway 170 at Salem Road
MANAGER: RUMELL Y. LADSON
(803) 525-8400
BURTON MORTGAGE CENTER
Highway 170 at Salem Road
MANAGER: RUMELL Y. LADSON
(803) 525-8400
COLUMBIA HARBISON WAL-MART
360 Harbison Boulevard
MANAGER: RHONDA J. HUGHEY
(803) 781-6160
CHARLESTON - WEST ASHLEY
1545 Savannah Highway
BRANCH SUPERVISOR: VIRGINIA HOLMES
(803) 852-7020
CHARLESTON - MEETING STREET
170 Meeting Street
BRANCH SUPERVISOR: EVELYN F. PILCHER
(803) 937-4140
CHARLESTON MORTGAGE CENTER
170 Meeting Street
MANAGER: ROSEMARY GEORGETTI
(803) 937-4151
CLEARWATER
1 Midland Valley Plaza
MANAGER: BARBARA P. MONTGOMERY
(803) 593-4421
EDGEFIELD
201 Columbia Road
MANAGER: CHERYL A. IAUKEA
(803) 637-5316
HAMPTON
406 First Street
MANAGER: PHYLLIS H. HARVEY
(803) 943-3021
HILTON HEAD
77 Pope Avenue
MANAGER: JOHN F. DAY
(803) 785-4249
HILTON HEAD MORTGAGE CENTER
The Coastal Building
1036 Highway 278
MANAGER: LISA H. COKER
(803) 785-7989
JOHNSTON
303 Lee Street
MANAGER: JOHN M. DELAUGHTER
(803) 275-3236
LADY'S ISLAND
146 Sea Island Parkway
MANAGER: M. ROBERT STEVENS, JR.
(803) 525-8400
LEXINGTON MORTGAGE CENTER
601 Northwood Road, Suite B
MANAGER: MARION H. MCDONALD
(803) 951-1977
MCCORMICK
407 East Gold Street
MANAGER: DOROTHY J. BANDY
(803) 465-2046
NORTH AUGUSTA
432 West Avenue
MANAGER: KATHY S. GILLILAND
(803) 279-6250
NORTH AUGUSTA - KROGER
400 East Martintown Road at Crossroads Market
MANAGER: HATTIE M. TRACEY
(803) 279-0450
NORTH AUGUSTA MORTGAGE CENTER
106-B East Martintown Road
MANAGER: FRANK L. CUNNINGHAM III
(803) 278-0183
RIDGELAND
312 North Jacob Smart Boulevard
MANAGER: HELEN RIVERS
(803) 726-8186
47
<PAGE>
CORPORATE INFORMATION
- ---------------------------------------------------------------------------
CORPORATE OFFICE
- ---------------
PALFED, Inc.
107 Chesterfield Street South
P.O. Box 1116
Aiken, South Carolina 29802
(803) 642-1400
STOCK LISTING
- ------------
The Company's common stock is traded in the over the counter market and is
quoted on the Nasdaq National Market System under the symbol "PALM" and listed
in THE WALL STREET JOURNAL under the name "PALFED". As of February 20, 1996, the
following firms were market makers in the Company's common stock:
Herzog, Heine, Geduld, Inc.
Friedman, Billings, Ramsey & Co., Inc.
Olde Discount Corporation
Morgan Keegan & Company, Inc.
Sherwood Securities Corp.
Mayer & Schweitzer Inc.
Keefe, Bruyette & Woods, Inc.
Scott & Stringfellow, Inc.
Fox-Pitt, Kelton, Inc.
Wheat First Securities Inc.
Dean Witter Reynolds Inc.
Raymond James & Associates, Inc.
Allen C. Ewing & Co.
Sterne, Agee & Leach, Inc.
Interstate/Johnson Lane Corporation
The Robinson-Humphrey Company, Inc.
PRICE RANGE OF COMMON STOCK
- ---------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C> <C> <C>
High Low High Low
- ----------------------------------------------------------------------------------
January - March 9 5/8 7 7 1/4 6 1/2
April - June 11 1/4 8 5/8 10 3/4 6 1/4
July - September 12 1/4 11 11 1/8 8 3/4
October - December 13 1/4 11 9 3/4 6 7/8
- ----------------------------------------------------------------------------------
</TABLE>
TRANSFER AGENT
- --------------
The Bank of New York
Receive and Deliver Department-11W
P.O. Box 11002
Church Street Station
New York, NY 10286
For Shareholder Inquiries:
The Bank of New York
Shareholder Relations Department - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
ANNUAL REPORT
- --------------
Additional copies of the Company's Annual Report and 1995 SEC Form 10-K Report
(without exhibits) may be obtained without cost upon written request to:
PALFED, Inc.
Darrell R. Rains
P.O. Box 1116
Aiken, South Carolina 29802
INDEPENDENT ACCOUNTANTS
- ----------------------
Coopers & Lybrand L.L.P.
1100 Campanile Building
1155 Peachtree Street
Atlanta, Georgia 30309
SPECIAL COUNSEL
- --------------
Sutherland, Asbill & Brennan
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
48
<PAGE>
PALMETTO
[LOGO] FEDERAL
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PALFED, INC.
Name Jurisdiction of Incorporation
---- -----------------------------
Palmetto Federal Savings Bank Federally-chartered
of South Carolina
PALFED Investment Services, Inc. South Carolina
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements on Form S-8 (File Nos. 333-00615, 33-23667, 33-33097, 33-39700, 33-
48334, 33-65480, 33-65482 and 33-65484) of our report, which includes an
explanatory paragraph concerning changes in methods of accounting for impaired
loans and originated servicing rights in 1995, and changes in methods of
accounting for certain investments and amortization of goodwill in 1993, dated
February 2, 1996, on our audits of the consolidated financial statements of
PALFED, Inc. and subsidiaries as of December 31, 1995 and 1994, and for the
years ended December 31, 1995, 1994 and 1993, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION OF PALFED, INC. AND
SUBSIDIARIES AS OF DECEMBER 31, 1995 AND THE RELATED CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 15,471
<INT-BEARING-DEPOSITS> 5,854
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,550
<INVESTMENTS-CARRYING> 62,293
<INVESTMENTS-MARKET> 63,570
<LOANS> 464,231
<ALLOWANCE> 8,417
<TOTAL-ASSETS> 646,024
<DEPOSITS> 496,746
<SHORT-TERM> 81,500
<LIABILITIES-OTHER> 6,293
<LONG-TERM> 10,000
0
0
<COMMON> 51,485
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 646,024
<INTEREST-LOAN> 40,677
<INTEREST-INVEST> 9,493
<INTEREST-OTHER> 360
<INTEREST-TOTAL> 50,530
<INTEREST-DEPOSIT> 23,680
<INTEREST-EXPENSE> 30,530
<INTEREST-INCOME-NET> 20,000
<LOAN-LOSSES> 1,322
<SECURITIES-GAINS> 569
<EXPENSE-OTHER> 16,454
<INCOME-PRETAX> 6,402
<INCOME-PRE-EXTRAORDINARY> 6,402
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,145
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 3.26
<LOANS-NON> 8,391
<LOANS-PAST> 0
<LOANS-TROUBLED> 12,210
<LOANS-PROBLEM> 9,355
<ALLOWANCE-OPEN> 8,213
<CHARGE-OFFS> 1,770
<RECOVERIES> 652
<ALLOWANCE-CLOSE> 8,417
<ALLOWANCE-DOMESTIC> 8,417
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,225
</TABLE>
