UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _____________________
Commission file number 0-24040
PennFed Financial Services, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-3297339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, NJ 07052-2989
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
--------------
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [ ]
As of February 9, 2000, there were issued and outstanding 8,563,727 shares
of the Registrant's Common Stock.
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, June 30,
1999 1999
---------- ----------
(Dollars in thousands)
ASSETS
Cash and cash equivalents............................................................. $ 11,190 $ 9,900
Investment securities held to maturity, at amortized cost, market value of
$278,381 and $281,880 at December 31, 1999 and June 30, 1999..................... 303,073 293,282
Mortgage-backed securities held to maturity, at amortized cost, market value
of $105,501 and $128,617 at December 31, 1999 and June 30, 1999.................. 105,855 127,983
Loans held for sale................................................................... --- 5,180
Loans receivable, net of allowance for loan losses of $3,604 and $3,209
at December 31, 1999 and June 30, 1999........................................... 1,153,490 1,061,431
Premises and equipment, net........................................................... 19,444 19,240
Real estate owned, net................................................................ 142 936
Federal Home Loan Bank of New York stock, at cost..................................... 19,613 16,623
Accrued interest receivable, net...................................................... 9,641 9,680
Goodwill and other intangible assets.................................................. 10,031 11,118
Other assets.......................................................................... 3,618 3,390
---------- ----------
$1,636,097 $1,558,763
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits......................................................................... $1,039,873 $1,063,600
Federal Home Loan Bank of New York advances...................................... 344,465 244,465
Other borrowings................................................................. 87,075 88,738
Mortgage escrow funds............................................................ 9,967 10,102
Due to banks..................................................................... 6,609 7,385
Accounts payable and other liabilities........................................... 5,282 4,230
---------- ----------
Total liabilities................................................................ 1,493,271 1,418,520
---------- ----------
Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures............................................... 34,500 34,500
Unamortized issuance expenses.................................................... (1,726) (1,757)
---------- ----------
Net Trust Preferred securities................................................... 32,774 32,743
---------- ----------
Stockholders' Equity:
Serial preferred stock, $.01 par value, 7,000,000 shares
authorized, no shares issued................................................. --- ---
Common stock, $.01 par value, 15,000,000 shares authorized, 11,900,000
and 11,897,858 shares issued and 8,568,727 and 8,813,416 shares
outstanding at December 31, 1999 and June 30, 1999 (excluding shares
held in treasury of 3,331,273 and 3,084,442 at
December 31, 1999 and June 30, 1999)......................................... 60 59
Additional paid-in capital....................................................... 60,074 59,488
Employee Stock Ownership Plan Trust debt......................................... (2,562) (2,804)
Retained earnings, partially restricted.......................................... 86,251 80,673
Treasury stock, at cost, 3,331,273 and 3,084,442 shares at
December 31, 1999 and June 30, 1999.......................................... (33,771) (29,916)
---------- ----------
Total stockholders' equity....................................................... 110,052 107,500
---------- ----------
$1,636,097 $1,558,763
========== ==========
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans...................................... $20,073 $19,773 $39,110 $39,972
Interest on federal funds sold.................................. 14 23 14 26
Interest and dividends on investment securities................. 5,702 3,884 11,284 7,672
Interest on mortgage-backed securities.......................... 1,853 2,872 3,869 6,120
-------- -------- -------- --------
27,642 26,552 54,277 53,790
-------- -------- -------- --------
Interest Expense:
Deposits........................................................ 11,479 12,506 22,889 25,154
Borrowed funds.................................................. 5,852 5,072 11,136 10,585
Trust Preferred securities...................................... 783 783 1,566 1,566
-------- -------- -------- --------
18,114 18,361 35,591 37,305
-------- -------- -------- --------
Net Interest and Dividend Income Before Provision
for Loan Losses................................................. 9,528 8,191 18,686 16,485
Provision for Loan Losses............................................ 210 185 420 360
-------- -------- -------- --------
Net Interest and Dividend Income After Provision
for Loan Losses................................................. 9,318 8,006 18,266 16,125
-------- -------- -------- --------
Non-Interest Income:
Service charges................................................. 564 487 1,120 1,028
Net gain (loss) from real estate operations..................... 51 (9) 81 (46)
Net gain on sales of loans...................................... --- 345 33 762
Other........................................................... 152 89 341 183
-------- -------- -------- --------
767 912 1,575 1,927
-------- -------- -------- --------
Non-Interest Expenses:
Compensation and employee benefits.............................. 2,387 2,117 4,898 4,352
Net occupancy expense........................................... 427 319 810 646
Equipment....................................................... 453 414 893 839
Advertising..................................................... 80 62 162 138
Amortization of intangibles..................................... 525 593 1,087 1,191
Federal deposit insurance premium............................... 159 152 318 311
Other........................................................... 898 887 1,730 1,739
-------- -------- -------- --------
4,929 4,544 9,898 9,216
-------- -------- -------- --------
Income Before Income Taxes........................................... 5,156 4,374 9,943 8,836
Income Tax Expense................................................... 1,833 1,556 3,538 3,167
-------- -------- -------- --------
Net Income........................................................... $ 3,323 $ 2,818 $ 6,405 $ 5,669
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic........................................................... 8,242,098 8,508,098 8,269,348 8,585,774
========= ========= ========= =========
Diluted......................................................... 8,819,266 9,115,202 8,825,561 9,221,548
========= ========= ========= =========
Net income per common share:
Basic........................................................... $0.40 $0.33 $0.77 $0.66
===== ===== ===== =====
Diluted......................................................... $0.38 $0.31 $0.73 $0.62
===== ===== ===== =====
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended December 31,
-------------------------------
1999 1998
-------- ---------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income....................................................................... $ 6,405 $ 5,669
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans....................................................... (33) (762)
Proceeds from sales of loans held for sale....................................... 5,324 74,873
Net gain on sales of real estate owned........................................... (89) (13)
Amortization of investment and mortgage-backed securities
premium, net................................................................... 112 193
Depreciation and amortization.................................................... 709 679
Provision for losses on loans and real estate owned.............................. 420 401
Amortization of cost of stock plans.............................................. 829 1,044
Amortization of intangibles...................................................... 1,087 1,191
Amortization of premiums on loans and loan fees.................................. 738 1,187
Amortization of Trust Preferred securities issuance costs........................ 31 31
Increase in accrued interest receivable, net of accrued
interest payable............................................................... (2,610) (2,241)
(Increase) decrease in other assets.............................................. (228) 86
Increase in accounts payable and other liabilities............................... 1,052 751
Decrease in mortgage escrow funds................................................ (135) (813)
Decrease in due to banks......................................................... (776) (4,258)
Other, net....................................................................... (49) 26
-------- ---------
Net cash provided by operating activities........................................ 12,787 78,044
-------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities................................ 10,165 137,070
Purchases of investment securities held to maturity.............................. (19,991) (163,597)
Net outflow from loan originations net of principal repayments of loans.......... (41,733) (60,447)
Purchases of loans............................................................... (51,710) (20,351)
Proceeds from principal repayments of mortgage-backed securities................. 22,271 43,879
Purchases of mortgage-backed securities.......................................... (220) ---
Proceeds from sale of premises and equipment..................................... 250 ---
Purchases of premises and equipment.............................................. (1,164) (1,217)
Proceeds from sale of real estate owned.......................................... 1,048 671
Purchases of Federal Home Loan Bank of New York stock............................ (2,990) (1,393)
-------- ---------
Net cash used in investing activities............................................ (84,074) (65,385)
-------- ---------
Cash Flows from Financing Activities:
Net decrease in deposits......................................................... (21,078) (6,293)
Increase in advances from the Federal Home Loan Bank
of New York and other borrowings............................................... 98,337 5,775
Cash dividends paid.............................................................. (683) (671)
Purchases of treasury stock, net of reissuance................................... (3,999) (8,603)
-------- ---------
Net cash provided by (used in) financing activities.............................. 72,577 (9,792)
-------- ---------
Net Increase in Cash and Cash Equivalents............................................. 1,290 2,867
Cash and Cash Equivalents, Beginning of Period........................................ 9,900 10,960
-------- ---------
Cash and Cash Equivalents, End of Period.............................................. $ 11,190 $ 13,827
======== =========
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Six months ended December 31,
-------------------------------
1999 1998
-------- --------
(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for:
Interest......................................................................... $ 37,095 $ 38,692
======== ========
Income taxes..................................................................... $ 3,903 $ 3,300
======== ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net........................... $ 114 $ 28
======== ========
Transfer of loans receivable to loans held for sale, at market................... $ 111 $ 81,095
======== ========
Transfer of premises and equipment, net to real estate owned, net................ $ 50 $ ---
======== ========
See notes to consolidated financial statements.
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries, Penn Federal Savings Bank (the
"Bank") and PennFed Capital Trust I. These interim consolidated financial
statements included herein should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended June 30, 1999. The interim
consolidated financial statements reflect all normal and recurring adjustments
which are, in the opinion of management, considered necessary for a fair
presentation of the financial condition and results of operations for the
periods presented. There were no adjustments of a non-recurring nature recorded
during the six months ended December 31, 1999 and 1998. The interim results of
operations presented are not necessarily indicative of the results for the full
year.
When necessary, reclassifications have been made to conform to current period
presentation.
2. Computation of EPS
The computation of EPS is presented in the following table.
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Net income ...................................... $ 3,323 $ 2,818 $ 6,405 $ 5,669
=========== =========== =========== ===========
Number of shares outstanding:
Weighted average shares issued ................ 11,900,000 11,900,000 11,899,686 11,900,000
Less: Weighted average shares held in treasury 3,145,498 2,786,240 3,105,858 2,697,326
Less: Average shares held by the ESOP ........ 952,000 952,000 952,000 952,000
Plus: ESOP shares released or committed to be
released during the fiscal year ...... 439,596 346,338 427,520 335,100
----------- ----------- ----------- -----------
Average basic shares ................... 8,242,098 8,508,098 8,269,348 8,585,774
Plus: Average common stock equivalents ....... 577,168 607,104 556,213 635,774
----------- ----------- ----------- -----------
Average diluted shares ................. 8,819,266 9,115,202 8,825,561 9,221,548
=========== =========== =========== ===========
Earnings per common share:
Basic .................................. $ 0.40 $ 0.33 $ 0.77 $ 0.66
=========== =========== =========== ===========
Diluted ................................ $ 0.38 $ 0.31 $ 0.73 $ 0.62
=========== =========== =========== ===========
3. Stockholders' Equity and Regulatory Capital
The Bank's capital amounts and ratios are presented in the following table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ----------- ----- ---------- -----
(Dollars in thousands)
As of December 31, 1999
Tangible capital, and ratio to
adjusted total assets.................... $127,709 7.86% $24,383 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $127,709 7.86% $65,021 4.00% $81,277 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $127,709 15.57% $32,802 4.00% $49,202 6.00%
Total risk-based capital, and ratio to
risk-weighted assets..................... $131,184 16.00% $65,603 8.00% $82,004 10.00%
As of June 30, 1999
Tangible capital, and ratio to
adjusted total assets.................... $121,910 7.88% $23,207 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $121,943 7.88% $61,888 4.00% $77,360 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $121,943 15.90% $30,687 4.00% $46,030 6.00%
Total risk-based capital, and ratio to
risk-weighted assets..................... $124,976 16.29% $61,374 8.00% $76,717 10.00%
The above table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB"). The following table
summarizes the Company's capital amounts and ratios under the FRB's capital
requirements for bank holding companies.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
As of December 31, 1999
Tangible capital, and ratio to
adjusted total assets.................... $133,359 8.20% $24,397 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $133,359 8.20% $65,060 4.00% $81,325 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $133,359 16.47% $32,384 4.00% $48,577 6.00%
Total risk-based capital, and ratio to
risk-weighted assets..................... $136,833 16.90% $64,769 8.00% $80,961 10.00%
As of June 30, 1999
Tangible capital, and ratio to
adjusted total assets.................... $128,385 8.29% $23,217 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $128,419 8.30% $61,913 4.00% $77,391 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $128,419 16.98% $30,253 4.00% $45,380 6.00%
Total risk-based capital, and ratio to
risk-weighted assets..................... $131,452 17.38% $60,507 8.00% $75,633 10.00%
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Company's provision for loan losses and operating expenses.
General economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities also
significantly affect the Company's results of operations. Future changes in
applicable law, regulations or government policies may also have a material
impact on the Company.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company advises readers
that the factors listed above could affect the Company's financial performance
and could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
The Company will not undertake -- and specifically declines -- any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
Total assets increased $77.3 million to $1.636 billion at December 31, 1999 from
total assets of $1.559 billion at June 30, 1999. The increase was primarily due
to the originations and purchases of loans, primarily adjustable rate, offset by
principal payments on loans and mortgage-backed securities.
Deposits decreased $23.7 million to $1.040 billion at December 31, 1999 from
$1.064 billion at June 30, 1999. The decrease was principally due to an outflow
of municipal certificates of deposit, due primarily to year-end pricing
pressures, partially offset by growth in demand deposits. Federal Home Loan Bank
("FHLB") of New York advances increased $100.0 million from $244.5 million at
June 30, 1999, reflecting growth in medium-term borrowings.
Non-performing assets at December 31, 1999 totaled $3.4 million, representing
0.21% of total assets, compared to $4.6 million, or 0.30% of total assets, at
June 30, 1999. Non-accruing loans totaled $3.3 million, with a ratio of
non-accruing loans to total loans of 0.28% at December 31, 1999 as compared to
$3.7 million, or 0.34% of total loans, at June 30, 1999. Real estate owned
decreased to $142,000 at December 31, 1999 from $936,000 at June 30, 1999.
Stockholders' equity at December 31, 1999 totaled $110.1 million compared to
$107.5 million at June 30, 1999. The increase primarily reflects the net income
recorded for the six months ended December 31, 1999, partially offset by the
repurchase of 277,500 shares of the Company's outstanding common stock at an
average price of $14.96 per share and the declaration of dividends.
Results of Operations
General. For the three months ended December 31, 1999 net income was $3.3
million, or $0.38 per diluted share, compared to net income of $2.8 million, or
$0.31 per diluted share, for the comparable prior year period. For the six
months ended December 31, 1999 net income was $6.4 million, or $0.73 per diluted
share. These results compare to net income of $5.7 million, or $0.62 per diluted
share, for the six months ended December 31, 1998.
Interest and Dividend Income. Interest and dividend income for the three and six
months ended December 31, 1999 increased to $27.6 million and $54.3 million,
respectively, from $26.6 million and $53.8 million for the three and six months
ended December 31, 1998. The increases in the current year periods were
primarily due to increases in average interest-earning assets. The increase in
average interest-earning assets for the six months ended December 31, 1999 was
partially offset by a decrease in the average yield earned on interest-earning
assets, when compared to the prior year period. Average interest-earning assets
were $1.565 billion and $1.541 billion for the three and six months ended
December 31, 1999, respectively, compared to $1.508 billion and $1.514 billion
for the comparable prior year periods. The average yield earned on
interest-earning assets increased slightly to 7.05% for the three months ended
December 31, 1999 from 7.04% for the three months ended December 31, 1998. For
the six months ended December 31, 1999 the average yield earned on
interest-earning assets decreased to 7.03% from 7.10% for the comparable prior
year period.
Interest income on residential one- to four-family mortgage loans for the three
and six months ended December 31, 1999 decreased $241,000 and $1.8 million,
respectively, when compared to the prior year periods. The decrease in interest
income on residential one- to four-family mortgage loans was primarily due to
decreases of $16.0 million and $41.1 million in the average balance outstanding
for the three and six months ended December 31, 1999, respectively, when
compared to the prior year periods. The average yield earned on residential one-
to four-family mortgage loans for the three months ended December 31, 1999
increased slightly to 6.98% from 6.97% for the three months ended December 31,
1998. The average yield earned on this portfolio for the six months ended
December 31, 1999 decreased eight basis points to 6.96% from 7.04% for the
comparable prior year period.
Interest income on commercial and multi-family real estate loans increased
$188,000 and $309,000 for the three and six months ended December 31, 1999,
respectively, when compared to the prior year periods. The increases in interest
income on the commercial and multi-family real estate portfolio were
attributable to increases of $10.6 million and $9.4 million in the average
outstanding balance for the three and six months ended December 31, 1999,
respectively, when compared to the prior year periods. The growth in the
portfolio was partially offset by a decline in the average yield earned on
commercial and multi-family real estate loans. The average yield decreased to
8.34% for both the current three and six month periods compared to 8.69% and
8.76% for the three and six months ended December 31, 1998, respectively.
Growth in consumer loans contributed to increases of $353,000 and $648,000 in
the interest income earned on this loan portfolio for the three and six months
ended December 31, 1999, respectively, compared to the prior year periods. The
average yields earned on the consumer loan portfolio only fluctuated slightly,
with yields of 7.27% and 7.21% for the three and six months ended December 31,
1999, respectively, compared to 7.23% and 7.29% for the prior year periods.
Interest income on investment securities and other interest-earning assets
increased $1.8 million and $3.6 million for the three and six months ended
December 31, 1999, respectively, from the comparable prior year periods. The
increase was primarily due to a $103.5 million and a $106.0 million increase in
the average balance outstanding for the three and six months ended December 31,
1999, respectively, over the comparable prior year periods. The average yield
earned on investment securities and other interest-earning assets for the three
months ended December 31, 1999 increased slightly to 6.99% from 6.98% for the
comparable prior year period. For the six months ended December 31, 1999, the
average yield earned on these securities decreased nine basis points to 6.99%
from 7.08% for the six months ended December 31, 1998.
Interest income on the mortgage-backed securities portfolio decreased $1.0
million and $2.3 million for the three and six months ended December 31, 1999,
respectively, compared to the prior year periods. The decrease in interest
income on mortgage-backed securities primarily reflects a $59.2 million and a
$65.1 million decrease in the average balance outstanding for the three and six
months ended December 31, 1999, respectively, compared to the prior year
periods.
Interest Expense. Interest expense decreased $247,000 and $1.7 million for the
three and six months ended December 31, 1999, respectively, from the comparable
December 31, 1998 periods. The decreases in the current year periods were due to
decreases in the Company's cost of deposits, partially offset by increases in
average borrowings. The average rate paid on deposits, borrowings and Trust
Preferred securities decreased 24 basis points and 29 basis points for the three
and six months ended December 31, 1999, respectively, when compared to the prior
year periods. The decline was primarily attributable to the average cost of
deposits, which decreased to 4.28% and 4.30% for the three and six months ended
December 31, 1999, respectively, from 4.67% and 4.73% for the comparable
December 1998 periods. Total average deposits and borrowings increased $44.1
million and $15.7 million for the three and six months ended December 31, 1999,
respectively, compared to the prior year periods. The greatest increase was in
borrowings which averaged $386.8 million and $371.3 million for the three and
six months ended December 31, 1999, respectively, compared to $341.4 million and
$354.2 million for the prior year periods.
Net Interest and Dividend Income. Net interest and dividend income for the three
and six months ended December 31, 1999 was $9.5 million and $18.7 million,
respectively, reflecting a $1.3 million and $2.2 million increase from $8.2
million and $16.5 million recorded in the comparable prior year periods. The
increase primarily reflects the Company's improvement in net interest rate
spread coupled with growth in the Company's average interest-earning assets. The
net interest rate spread and net interest margin for the three months ended
December 31, 1999 were 2.22% and 2.46%, respectively, an increase from 1.97% and
2.20%, respectively, for the comparable prior year period. The net interest rate
spread and net interest margin for the six months ended December 31, 1999 were
2.20% and 2.45%, respectively, an increase from 1.98% and 2.20%, respectively,
for the six months ended December 31, 1998. The current year increases in the
net interest rate spread and net interest margin were primarily attributable to
the decreases in the average rate paid on deposits and, to a lesser extent,
growth in the commercial and multi-family real estate and consumer loan
portfolios.
Provision for Loan Losses. The provision for loan losses for the three and six
months ended December 31, 1999 was $210,000 and $420,000, respectively, compared
to $185,000 and $360,000 for the comparable prior year periods. The allowance
for loan losses at December 31, 1999 of $3.6 million reflects a $395,000
increase from the June 30, 1999 level. The allowance for loan losses as a
percentage of non-accruing loans was 109.64% at December 31, 1999, compared to
87.44% at June 30, 1999. The allowance for loan losses was 0.31% of total loans
at December 31, 1999, compared to 0.30% at June 30, 1999.
Non-Interest Income. For the three and six months ended December 31, 1999
non-interest income was $767,000 and $1.6 million, respectively, compared to
$912,000 and $1.9 million for the prior year periods. The decrease was primarily
attributable to a $345,000 and $729,000 reduction in the net gain on sales of
loans during the three and six months ended December 31, 1999, respectively, as
compared to the December 1998 periods. There were no secondary market sales of
one- to four-family residential mortgage loans during the three months ended
December 31, 1999. This compares to a $345,000 net gain on sales of
approximately $48 million of one- to four-family residential mortgage loans
during the three months ended December 31, 1998. For the six months ended
December 31, 1999, $5.3 million of one- to four-family residential mortgage
loans were sold in the secondary market for a net gain of $33,000. For the six
months ended December 31, 1998, approximately $74 million of one- to four-family
residential mortgage loans were sold for a net gain of $762,000. Due to the
majority of one- to four-family residential mortgage loan production being
adjustable rate and due to the higher interest rate and steeper yield curve
environment in the current periods, loan sale activity was reduced from the
fiscal 1999 levels, as the majority of new production was retained in portfolio.
The level of such activity will continue to be evaluated with primary
consideration given to interest rate risk and long-term profitability
objectives. The decrease in net gain on sales of loans during the three and six
months ended December 31, 1999 was partially offset by a $77,000 and $92,000
increase in service charge income, a $60,000 and $127,000 increase in the net
gain (loss) from real estate operations and a $63,000 and $158,000 increase in
other non-interest income, respectively, when compared to the prior year
periods. For the three and six months ended December 31, 1999, other
non-interest income included a $43,000 and $94,000 increase in earnings from the
Investment Services at Penn Federal program, respectively, when compared to the
prior year periods. Through this program, customers have convenient access to
financial consulting/advisory services and related non-deposit investment
products. In addition, other non-interest income for the six months ended
December 31, 1999 included a $48,000 gain on the sale of a former branch
location.
Non-Interest Expenses. The Company's non-interest expenses were $4.9 million and
$9.9 million for the three and six months ended December 31, 1999, respectively,
compared to $4.5 million and $9.2 million for the comparable prior year periods.
In February 1999 and June 1999, the Company opened new branches in Toms River
and Livingston, NJ, respectively. Growth in retail branches and in loan
origination and servicing capacity, as well as investment in technology over the
last two years, has resulted in an increase in non-interest expenses in the
current year periods when compared to the prior year periods. The Company's
non-interest expenses as a percent of average assets increased to 1.22% and
1.24% for the three and six months ended December 31, 1999, respectively, from
1.16% and 1.17% for the prior year periods.
Income Tax Expense. Income tax expense for the three and six months ended
December 31, 1999 was $1.8 million and $3.5 million, respectively, compared to
$1.6 million and $3.2 million for the three and six months ended December 31,
1998. The effective tax rate for the three and six months ended December 31,
1999 was 35.6%. The effective tax rate was 35.6% and 35.8% for the three and six
months ended December 31, 1998, respectively.
Analysis of Net Interest Income
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and the consolidated statements
of income for the three and six months ended December 31, 1999 and 1998, and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived from average daily
balances. The average balance of loans receivable includes non-accruing loans.
The yields and costs include fees which are considered adjustments to yields.
Three Months Ended December 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
------------- ---------- -------- ------------- ---------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans................................... $ 969,884 $16,950 6.98% $ 985,837 $17,191 6.97%
Commercial and multi-family real
estate loans............................ 77,618 1,649 8.34 67,057 1,461 8.69
Consumer loans............................. 80,426 1,474 7.27 61,516 1,121 7.23
---------- ------- ---------- -------
Total loans receivable.................. 1,127,928 20,073 7.09 1,114,410 19,773 7.09
Federal funds sold......................... 1,024 14 5.35 1,802 23 4.99
Investment securities and other............ 326,112 5,702 6.99 222,623 3,884 6.98
Mortgage-backed securities................. 109,622 1,853 6.76 168,829 2,872 6.80
---------- ------- ---------- -------
Total interest-earning assets........... 1,564,686 $27,642 7.05 1,507,664 $26,552 7.04
======= =======
Non-interest earning assets................ 53,921 57,956
---------- ----------
Total assets ........................... $1,618,607 $1,565,620
========== ==========
Deposits, borrowings and Trust
Preferred securities:
Money market and demand deposits........... $ 113,438 $ 308 1.08% $ 100,741 $ 305 1.20%
Savings deposits........................... 164,298 690 1.67 163,960 716 1.73
Certificates of deposit.................... 786,884 10,481 5.29 801,244 11,485 5.71
---------- ------- ---------- -------
Total deposits.......................... 1,064,620 11,479 4.28 1,065,945 12,506 4.67
FHLB of New York advances.................. 334,763 5,080 5.97 281,590 4,245 5.95
Other borrowings........................... 52,068 772 5.80 59,807 827 5.41
---------- ------- ---------- -------
Total deposits and borrowings........... 1,451,451 17,331 4.73 1,407,342 17,578 4.96
Trust Preferred securities................. 32,766 783 9.56 32,704 783 9.58
---------- ------- ---------- -------
Total deposits, borrowings and
Trust Preferred securities.......... 1,484,217 $18,114 4.83 1,440,046 $18,361 5.07
======= =======
Other liabilities.............................. 23,653 21,504
---------- ----------
Total liabilities....................... 1,507,870 1,461,550
Stockholders' equity........................... 110,737 104,070
---------- ----------
Total liabilities and stockholders'
equity.............................. $1,618,607 $1,565,620
========== ==========
Net interest income and net
interest rate spread....................... $ 9,528 2.22% $ 8,191 1.97%
======= ==== ======= ====
Net interest-earning assets and
interest margin............................ $ 80,469 2.46% $ 67,618 2.20%
========== ==== ========== ====
Ratio of interest-earning assets to
deposits, borrowings and Trust
Preferred securities..................... 105.42% 104.70%
====== ======
(1) Annualized.
Six Months Ended December 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
------------- ---------- -------- ------------- ---------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans................................... $ 949,704 $33,092 6.96% $ 990,783 $34,911 7.04%
Commercial and multi-family real
estate loans............................ 75,333 3,204 8.34 65,930 2,895 8.76
Consumer loans............................. 77,438 2,814 7.21 58,984 2,166 7.29
---------- ------- ---------- -------
Total loans receivable.................. 1,102,475 39,110 7.07 1,115,697 39,972 7.15
Federal funds sold......................... 512 14 5.34 1,021 26 5.01
Investment securities and other............ 322,864 11,284 6.99 216,862 7,672 7.08
Mortgage-backed securities................. 115,295 3,869 6.71 180,431 6,120 6.78
---------- ------- ---------- -------
Total interest-earning assets........... 1,541,146 $54,277 7.03 1,514,011 $53,790 7.10
======= =======
Non-interest earning assets.................... 55,029 58,196
---------- ----------
Total assets ........................... $1,596,175 $1,572,207
========== ==========
Deposits, borrowings and Trust
Preferred securities:
Money market and demand deposits........... $ 112,210 $ 597 1.06% $ 98,171 $ 617 1.25%
Savings deposits........................... 164,755 1,383 1.67 164,382 1,547 1.87
Certificates of deposit.................... 780,829 20,909 5.33 796,695 22,990 5.75
---------- ------- ---------- -------
Total deposits.......................... 1,057,794 22,889 4.30 1,059,248 25,154 4.73
FHLB of New York advances.................. 304,334 9,202 5.95 272,002 8,251 5.99
Other borrowings........................... 66,966 1,934 5.65 82,169 2,334 5.56
---------- ------- ---------- -------
Total deposits and borrowings........... 1,429,094 34,025 4.72 1,413,419 35,739 5.02
Trust Preferred securities................. 32,759 1,566 9.56 32,697 1,566 9.58
---------- ------- ---------- -------
Total deposits, borrowings and
Trust Preferred securities.......... 1,461,853 $35,591 4.83 1,446,116 $37,305 5.12
======= =======
Other liabilities.............................. 24,529 22,258
---------- ----------
Total liabilities....................... 1,486,382 1,468,374
Stockholders' equity........................... 109,793 103,833
---------- ----------
Total liabilities and stockholders'
equity.............................. $1,596,175 $1,572,207
========== ==========
Net interest income and net
interest rate spread....................... $18,686 2.20% $16,485 1.98%
======= ==== ======= ====
Net interest-earning assets and
interest margin............................ $ 79,293 2.45% $ 67,895 2.20%
========== ==== ========== ====
Ratio of interest-earning assets to
deposits, borrowings and Trust
Preferred securities..................... 105.42% 104.70%
====== ======
(1) Annualized.
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets. Loans are placed on non-accrual status when the
collection of principal or interest becomes delinquent more than 90 days. There
are no loans delinquent more than 90 days which are still accruing. Real estate
owned represents assets acquired in settlement of loans and is shown net of
valuation allowances.
December 31, June 30,
1999 1999
------ ------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ................................. $2,632 $2,937
Commercial and multi-family ......................... 95 46
Consumer ............................................ 560 687
------ ------
Total non-accruing loans ........................ 3,287 3,670
Real estate owned, net ................................... 142 936
------ ------
Total non-performing assets ..................... 3,429 4,606
------ ------
Total risk elements ............................. $3,429 $4,606
====== ======
Non-accruing loans as a percentage of total loans ........ 0.28% 0.34%
====== ======
Non-performing assets as a percentage of total assets .... 0.21% 0.30%
====== ======
Total risk elements as a percentage of total assets ...... 0.21% 0.30%
====== ======
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based upon management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters,
loan classifications, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the lower of
cost or estimated fair value less costs to dispose of such properties. If fair
value at the date of foreclosure is lower than the balance of the related loan,
the difference will be charged-off to the allowance for loan losses at the time
of transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on real estate owned is established by
a charge to operations.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to record additions to the
allowance level based upon their assessment of the information available to them
at the time of their examination. At December 31, 1999, the Company had a total
allowance for loan losses of $3.6 million representing 109.64% of total
non-accruing loans and 0.31% of total loans.
Interest Rate Sensitivity
Interest Rate Gap. The interest rate risk inherent in assets and liabilities may
be determined by analyzing the extent to which such assets and liabilities are
"interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest-earning assets maturing or
repricing within a defined period and the amount of interest-bearing liabilities
maturing or repricing within the same period is defined as the interest rate
sensitivity gap. An institution is considered to have a negative gap if the
amount of interest-bearing liabilities maturing or repricing within a specified
time period exceeds the amount of interest-earning assets maturing or repricing
within the same period. If more interest-earning assets than interest-bearing
liabilities mature or reprice within a specified period, then the institution is
considered to have a positive gap. Accordingly, in a rising interest rate
environment, in an institution with a negative gap, the cost of its rate
sensitive liabilities would theoretically rise at a faster pace than the yield
on its rate sensitive assets, thereby diminishing future net interest income. In
a falling interest rate environment, a negative gap would indicate that the cost
of rate sensitive liabilities would decline at a faster pace than the yield on
rate sensitive assets and may improve net interest income. For an institution
with a positive gap, the reverse would be expected.
At December 31, 1999, the Company's total deposits, borrowings and Trust
Preferred securities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing within one year by $380.2 million,
representing a one year negative gap of 23.24% of total assets. At June 30,
1999, the one year negative gap was 13.61% of total assets. The Company's
negative gap position widened from June 30, 1999 as interest rates increased and
the yield curve steepened. Results included declining prepayments of loans and
securities and lengthening of asset cash flows. Under the current interest rate
environment, it is assumed that certain callable investment securities may not
be called at their call date, thereby extending the life of these securities.
Also contributing to the increase in the negative gap position was the
termination of $70 million notional amount of interest rate swap contracts and
an increase in short-term borrowings related to Year 2000 liquidity and deposit
pricing pressures. Partially offsetting the increase in the negative gap
position was a reduction in short-term municipal certificates of deposit, an
increase in core deposits and medium-term certificates of deposit, as well as
the addition of medium-term borrowings.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates in the short-term and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate significantly from those assumed in
calculating the gap position. Finally, the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through selected interest rate risk ("IRR") measures set
forth by the Office of Thrift Supervision ("OTS"). The IRR measures used by the
OTS include an IRR "Exposure Measure" or "Post-Shock" net portfolio value
("NPV") ratio and a "Sensitivity Measure." A low Post-Shock NPV ratio indicates
greater exposure to IRR. Greater exposure can result from a low initial NPV
ratio or high sensitivity to changes in interest rates. The Sensitivity Measure
is the change in the NPV ratio, in basis points, caused by a 2% increase or
decrease in rates, whichever produces a larger decline. At least quarterly, and
generally monthly, management models the change in NPV over a variety of
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. An NPV ratio, in any
interest rate scenario, is defined as the NPV in that rate scenario divided by
the market value of assets in the same scenario.
As of December 31, 1999, the Bank's internally generated initial NPV ratio was
9.58%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 6.72%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was 2.86%. NPV is also measured internally on a consolidated basis. As of
December 31, 1999, the Company's initial NPV ratio was 9.90%, the Post-Shock
ratio was 6.97%, and the Sensitivity Measure was 2.93%. Variances between the
Bank's and the Company's NPV ratios are attributable to balance sheet items
which are adjusted during consolidation, such as investments, intercompany
borrowings and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions and, as such, generally result in lower levels
of presumed interest rate risk (i.e., higher Post-Shock NPV ratio and lower
Sensitivity Measure) than OTS measurements indicate.
The OTS measures the Bank's (unconsolidated) IRR on a quarterly basis using data
from the quarterly Thrift Financial Reports, coupled with non-institution
specific assumptions which are based on national averages. As of September 30,
1999 (the latest date for which information is available), the Bank's initial
NPV ratio, as measured by the OTS, was 7.49%, the Bank's Post-Shock ratio was
4.38% and the Sensitivity Measure was 3.11%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At December 31, 1999, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 17% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates.
Year 2000
By following a carefully prescribed Year 2000 Project Plan, all mission-critical
systems, including interfaces to the main systems, were completely renovated and
tested. To date, the Company has not experienced any problems with respect to
the century rollover. The Company will continue to monitor for any Year 2000
problems, as appropriate, through the end of the calendar year. The Board of
Directors will continue to be updated on a monthly basis through the completion
of the March 2000 quarterly period with respect to any problems encountered.
The cost for the Year 2000 effort incurred in fiscal 1999 was $45,000. As of
December 31, 1999, no additional costs have been incurred in fiscal 2000. No
additional expenditures are currently anticipated. The actual expenditures do
not include manpower costs of Company personnel associated with this effort, who
retained their individual operational responsibilities in addition to Year 2000
duties. No assurance can be given that any remaining issues relating to the Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows. The current required percentage is 4% of net
withdrawable deposits payable on demand or in one year or less and borrowings
payable on demand or in one year or less, both as of the end of the preceding
calendar quarter. Liquid assets for purposes of this ratio generally include
cash, accrued interest receivable and U.S. government or federal agency
securities, including mortgage-backed securities. The Company's most liquid
assets are cash and cash equivalents, U.S. government agency securities and
mortgage-backed securities. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period. At December 31, 1999 and June 30, 1999, the Bank's liquidity ratios were
14.43% and 21.30%, respectively.
The Company uses its liquid resources principally to fund maturing certificates
of deposit and deposit withdrawals, to purchase loans and securities, to fund
existing and future loan commitments, and to meet operating expenses. Management
believes that loan repayments and other sources of funds will be adequate to
meet the Company's foreseeable liquidity needs.
The Company's cash needs for the six months ended December 31, 1999 were
provided by operating activities, proceeds from maturities of investment
securities, an increase in advances from the FHLB of New York and principal
repayments on loans and mortgage-backed securities. During this period, the cash
provided was primarily used to offset a net decrease in deposits and to fund
investing activities, which included the origination and purchase of loans and
the purchase of investment securities. During the six months ended December 31,
1998, the cash needs of the Company were principally provided by proceeds from
sales of loans held for sale, proceeds from maturities of investment securities
and principal repayments on mortgage-backed securities. The cash provided was
used for investing activities, which included the origination and purchase of
loans and the purchase of investment securities.
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk-adjusted assets; a
leverage ratio of core capital to total adjusted assets; and a tangible capital
ratio expressed as a percentage of total adjusted assets. As of December 31,
1999, the Bank exceeded all regulatory capital requirements and qualified as a
"well-capitalized" institution (see Note 3. - Stockholders' Equity and
Regulatory Capital, in the Notes to Consolidated Financial Statements).
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders (Annual Meeting) was held
on October 27, 1999.
(b) Directors elected:
Patrick D. McTernan
Marvin D. Schoonover
(c) At the Annual Meeting the stockholders considered:
(i) the election of two directors,
(ii) the ratification of the appointment of Deloitte &
Touche LLP as independent auditors for the Company for
the fiscal year ending June 30, 2000.
The vote on the election of two directors was as follows:
FOR WITHHELD
--------- --------
Patrick D. McTernan 7,554,005 931,230
Marvin D. Schoonover 7,553,608 931,627
There were no broker non-votes with respect to the proposal.
The vote on the ratification of the appointment of Deloitte &
Touche LLP as independent auditors for the Company for the
fiscal year ending June 30, 2000 was as follows:
FOR AGAINST ABSTAIN
--------- ------- -------
8,420,414 56,348 8,473
There were no broker non-votes with respect to the proposal.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Statement Regarding Computation of Per Share
Earnings.
Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K
On October 27, 1999, PennFed Financial Services, Inc. (the
Company) issued a press release announcing its first quarter
results and a stock repurchase program.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: February 11, 2000 By: /s/ Joseph L. LaMonica
-----------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: February 11, 2000 By: /s/ Lucy T. Tinker
-------------------
Lucy T. Tinker
Senior Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: February 11, 2000 By: /s/ Jeffrey J. Carfora
-----------------------
Jeffrey J. Carfora
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)