UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-24040
PENNFED FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3297339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Common Stock Purchase Rights
(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
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 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 voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market as of September 8, 2000, was $96,446,000. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of September 8, 2000, there were issued and outstanding 8,122,313
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for 2000 Annual Meeting
of Stockholders.
5
PART I
Item 1. Business
General
PennFed Financial Services, Inc. ("PennFed" and with its subsidiaries, the
"Company"), a Delaware corporation, was organized in March 1994 for the purpose
of becoming the savings and loan holding company for Penn Federal Savings Bank
("Penn Federal" or the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion"). PennFed owns all of the outstanding stock of the Bank.
All references to the Company, unless otherwise indicated, prior to July 14,
1994 refer to the Bank and its subsidiaries on a consolidated basis. The
Company's common stock is traded on the Nasdaq National Market Tier of the
Nasdaq Stock Market under the symbol "PFSB."
PennFed and the Bank are subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision, Department of the Treasury
("OTS") and by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
member of the Federal Home Loan Bank ("FHLB") System and its deposits are
insured up to applicable limits by the FDIC.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with borrowings and other funds, to
originate and purchase one- to four-family residential mortgage loans, and, to a
lesser extent, to originate commercial and multi-family real estate and consumer
loans. See "Originations, Purchases, Sales and Servicing of Loans." The Company
also invests in mortgage-backed securities secured by one- to four-family
residential mortgages, U.S. government agency obligations and other permissible
investments.
The Company offers a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings, money market, and a variety of
checking accounts, as well as certificate accounts. The Company generally
solicits deposits in its primary market areas.
At June 30, 2000, the Company had total assets of $1.7 billion, deposits of $1.1
billion, borrowings of $476.6 million and stockholders' equity of $114.0
million.
At June 30, 2000, the Company's gross loan portfolio totaled $1.3 billion,
including $1.1 billion of one- to four-family residential first mortgage loans,
$86.3 million of commercial and multi-family real estate loans and $97.6 million
of consumer loans. In addition, on that date the Company had $87.6 million of
mortgage-backed securities and $325.3 million of other investment securities and
FHLB of New York stock.
At June 30, 2000, the vast majority of the Company's first and second mortgage
loans (excluding mortgage-backed securities) were secured by properties located
in New Jersey. Of the loans secured by properties outside New Jersey, the
majority are one- to four-family loans. See "Originations, Purchases, Sales and
Servicing of Loans." The Company's revenues are derived primarily from interest
on loans, mortgage-backed securities and investments, and income from service
charges.
Penn Federal, through its wholly-owned subsidiary, Penn Savings Insurance
Agency, Inc., offers insurance and uninsured non-deposit investment products to
its customers. See "Subsidiary Activities."
In October 1997, Penn Federal formed Ferry Development Holding Company, a
Delaware operating subsidiary, to hold and manage its investment portfolio.
The administrative offices of the Company are located at 622 Eagle Rock Avenue,
West Orange, New Jersey 07052-2989, and the telephone number at that address is
(973) 669-7366.
6
Forward-Looking Statements
When used in this Form 10-K 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 and 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
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise 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 does 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.
Market Area
The Company's primary market areas are comprised of the Ironbound section of the
City of Newark and surrounding urban communities, the suburban Essex County area
and selected areas of central/southern New Jersey, which are serviced through 21
full service offices. Penn Federal was organized in the Ironbound section of
Newark in 1941 and the home office of the Bank remains there. The Ironbound
section of the City of Newark and immediately adjacent communities of East
Newark and Harrison are primarily urban blue collar areas with two or more
family dwellings and some manufacturing and industry. Deposits at Bank branches
in these areas comprise 35% of total Bank deposits. The suburban Essex County
area consists of communities with predominantly single family homes and a white
collar commuter population. Suburban Essex County is the Bank's largest market
area, accounting for approximately 39% of total Bank deposits at June 30, 2000.
Penn Federal's central/southern New Jersey branches are located in selected
areas of Middlesex, Monmouth and northern Ocean counties. The central/southern
region branches, with 26% of total Bank deposits, serve retirement populations
and expanding townhouse, multi-family and single family home developments. The
Bank also purchases one- to four-family residential loans secured by properties
located primarily in New Jersey. See "Originations, Purchases, Sales and
Servicing of Loans."
Lending Activities
General. The Company primarily originates and purchases fixed and adjustable
rate, one- to four-family first mortgage loans. The Company's general policy is
to originate and purchase such loans with maturities between 10 and 30 years.
The Company underwrites mortgage loans generally using Freddie Mac and Fannie
Mae guidelines, although loan amounts may exceed agency limits. See "Loan
Portfolio Composition" and "One- to Four-Family Residential Mortgage Lending."
The Company also originates commercial and multi-family real estate loans and
consumer loans. Such loans generally reprice more frequently, have shorter
maturities, and/or have higher yields than fixed rate, one- to four-family
mortgage loans.
Residential and consumer loan applications may be approved by various officers
up to $1.25 million and $1.0 million, respectively. Commercial and multi-family
real estate loan applications are initially considered and approved at various
levels of authority, depending on the amount of the loan. All commercial and
multi-family real estate loans and relationships $750,000 and over must be
approved by the Executive Loan Committee which consists of the President and
certain executive and senior officers. The approval of the Company's Board of
Directors is required for all loans and relationships above $1.25 million.
7
The aggregate amount of loans that the Company is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Company could have invested in any one real
estate project is generally the greater of 15% of unimpaired capital and surplus
or $500,000. See "Regulation-Federal Regulation of Savings Associations." At
June 30, 2000, the maximum amount which the Company could have lent to any one
borrower and the borrower's related entities was approximately $20.6 million.
The Company's current policy is to limit such loans to a maximum of 50% of the
general regulatory limit or $5.0 million, whichever is less. At June 30, 2000,
the Company's largest group of loans to one borrower (and any related entities)
consisted of five commercial real estate loans aggregating $4.3 million. Four of
these loans, aggregating $3.2 million, are secured by multi-family properties in
Essex County. The fifth loan, for $1.1 million, represents the Company's
participation in a loan for a senior assisted-living complex in Morris County.
At June 30, 2000, there was a total of 22 loans or lender relationships in
excess of $1.0 million, for a total amount of $38.8 million. At that date, all
of these loans were performing in accordance with their respective repayment
terms.
Loan Portfolio Composition. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
June 30,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
First mortgage loans:
One- to four-family(1) $1,070,048 85.34% $ 915,244 86.15% $ 971,668 89.01% $831,843 89.55% $565,924 86.68%
Commercial and multi-family 86,257 6.88 74,613 7.02 65,833 6.03 56,811 6.12 52,014 7.97
--------------------------------------------------------------------------------------------------------
Total first mortgage
loans 1,156,305 92.22 989,857 93.17 1,037,501 95.04 888,654 95.67 617,938 94.65
--------------------------------------------------------------------------------------------------------
Other loans:
Consumer loans:
Second mortgages 45,659 3.64 37,243 3.50 27,232 2.49 23,665 2.55 23,912 3.66
Home equity lines of credit 46,394 3.70 31,754 2.99 23,538 2.16 14,040 1.51 8,955 1.37
Other 5,534 0.44 3,575 0.34 3,331 0.31 2,512 0.27 2,117 0.32
--------------------------------------------------------------------------------------------------------
Total consumer loans 97,587 7.78 72,572 6.83 54,101 4.96 40,217 4.33 34,984 5.35
--------------------------------------------------------------------------------------------------------
Total loans 1,253,892 100.00% 1,062,429 100.00% 1,091,602 100.00% 928,871 100.00% 652,922 100.00%
====== ====== ====== ====== ======
Add/(less):
Unamortized premiums,
deferred loan fees,
and other, net 9,339 7,391 7,026 5,202 2,279
--------------------------------------------------------------------------------------------------------
Allowance for loan losses (3,983) (3,209) (2,776) (2,622) (2,630)
========================================================================================================
Total loans receivable,
net $1,259,248 $1,066,611 $1,095,852 $931,451 $652,571
- --------------
(1) One-to four-family loans include loans held for sale of $5,180,000, $565,000
and $88,000 at June 30, 1999, 1998 and 1996, respectively. There were no loans
held for sale at June 30, 2000 and 1997.
Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 2000. Loans that have adjustable rates
are shown as amortizing to final maturity rather than when the interest rates
are next subject to change. Loans with balloon payments are also shown as
amortizing to final maturity (i.e., when the balloon payment is due). All
balances are shown on a gross basis and, thus, include no premium or discount
adjustments. Savings account loans and overdraft checking balances, included in
consumer loans, which have no stated final maturity, are reported as due within
one year. The table does not reflect the effects of possible prepayments or
scheduled principal amortization.
8
After One After Three After Five After Ten
One Year Through Through Through Through After
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Total
-------------------------------------------------------------------------------------
(In thousands)
First mortgage loans:
One- to four-family $1,345 $1,803 $ 5,147 $ 73,012 $218,430 $770,311 $1,070,048
Commercial and multi-family 2,916 3,264 2,094 23,684 52,515 1,784 86,257
------------------------------------------------------------------------------------
Total first mortgage loans 4,261 5,067 7,241 96,696 270,945 772,095 1,156,305
Consumer loans 3,374 1,764 8,172 14,890 69,387 -- 97,587
------------------------------------------------------------------------------------
Total loans, gross $7,635 $6,831 $15,413 $111,586 $340,332 $772,095 $1,253,892
====================================================================================
Loans due after June 30, 2001, which have fixed interest rates amount to $703.1
million, while those with adjustable rates amount to $543.1 million, detailed as
follows:
Due After June 30, 2001
--------------------------------------------
Fixed Adjustable Total
--------------------------------------------
(In thousands)
First mortgage loans:
One- to four-family $644,098 $424,605 $1,068,703
Commercial and multi-family 11,216 72,125 83,341
--------------------------------------------
Total first mortgage loans 655,314 496,730 1,152,044
Consumer loans 47,819 46,394 94,213
--------------------------------------------
Total loans, gross $703,133 $543,124 $1,246,257
============================================
One- to Four-Family Residential Mortgage Lending. At June 30, 2000, the
Company's one- to four-family residential mortgage loans totaled $1.1 billion,
or approximately 85.3% of the Company's gross loan portfolio. Residential loan
originations are generated by the Company's in-house originations staff,
marketing efforts, present customers, walk-in customers and referrals from real
estate agents, mortgage brokers and builders. The Company focuses its lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied, one- to four-family residences. During the fiscal year ended
June 30, 2000, the Company originated $172.2 million of real estate loans
secured by one- to four-family residential real estate of which $96.1 million
were adjustable rate loans. Substantially all of the Company's one- to
four-family residential mortgage originations are secured by properties located
in the State of New Jersey.
For the majority of fiscal 2000, the Company had two correspondent relationships
with other institutions through which it purchased $98.2 million of newly
originated adjustable rate and $7.8 million of newly originated fixed rate one-
to four-family residential first mortgages. In late fiscal 2000, the Company
entered into a third correspondent relationship to purchase loans from another
New Jersey institution. Purchased loans are secured by properties primarily
located in New Jersey, with a limited amount secured by properties in
Pennsylvania, Massachusetts and Connecticut. Loans are underwritten by the
correspondent institutions using the Company's guidelines and a portion of those
loans are re-underwritten by the Bank on a test basis. All loans purchased are
supported by customary representations and warranties provided by the
correspondent institutions. See "Originations, Purchases, Sales and Servicing of
Loans."
The Company currently originates one- to four-family residential mortgage loans
with terms of up to 30 years in amounts up to 95% of the appraised value of the
property. The Company generally requires that private mortgage insurance be
obtained in an amount sufficient to reduce the Company's exposure to 80% or less
of the loan-to-value level. Interest rates charged on loans are competitively
priced according to market conditions.
In underwriting one- to four-family residential real estate loans, the Company
evaluates the borrower's ability to make monthly payments, past credit history
and the value of the property securing the loan. Properties securing real estate
loans made by the Company are appraised by independent appraisers approved by
the Board of Directors. The Company requires borrowers to obtain title insurance
and fire and property insurance (including flood insurance, if necessary) in the
amount of the loan or the replacement cost, whichever is less. Real estate loans
originated and purchased by the Company contain a "due on sale" clause allowing
the Company to declare the unpaid principal balance due and payable upon the
sale of the property.
9
Commercial and Multi-Family Real Estate Lending. The Company engages in
commercial and multi-family real estate lending primarily in its market areas.
At June 30, 2000, the Company had $86.3 million of commercial and multi-family
real estate loans which represented 6.9% of the Company's gross loan portfolio.
This amount includes $694,000 of lines of credit secured by non-real estate
business assets. During fiscal 2000, the Company introduced an Accounts
Receivable Financing Program for small and mid-sized businesses. At June 30,
2000, the commercial and multi-family real estate loan portfolio included
$120,000 of these loans. At June 30, 2000, the average per loan balance of the
Company's commercial and multi-family real estate loans outstanding was
$287,000. As of June 30, 2000 approximately 83% of the loans in the commercial
and multi-family real estate loan portfolio were adjustable rate loans.
The Company's commercial and multi-family real estate loan portfolio is secured
primarily by apartment buildings, mixed-use buildings, small office buildings,
restaurants, warehouses and strip shopping centers. Commercial and multi-family
real estate loans typically have terms that do not exceed 15 years and have a
variety of rate adjustment features and other terms. Generally, the loans are
made in amounts up to 75% of the appraised value of the property. Adjustable
rate commercial and multi-family real estate loans normally provide for a margin
over various U.S. Treasury securities adjusted to a constant maturity, with
periodic adjustments, or are tied to the Prime Rate as reported in theWall
Street Journal. In underwriting these loans, the Company analyzes the current
financial condition of the borrower, the borrower's credit history, the value of
the property securing the loan, and the reliability and predictability of the
cash flow generated by the property securing the loan. The Company usually
requires personal guarantees of individuals who are principals of the borrowers.
Appraisals on properties securing commercial real estate loans originated by the
Company are performed by independent appraisers approved by the Board of
Directors.
Commercial and multi-family real estate loans generally present a higher level
of risk than loans secured by one- to four-family residences. This greater risk
is due to several factors, including the concentration in a limited number of
loans and borrowers, the effect of general economic conditions on
income-producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial and multi-family real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (e.g., if leases are not obtained or renewed, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be
impaired.
Consumer Lending. The Company offers a variety of secured consumer loans,
including home equity lines of credit, second mortgages, automobile loans, boat
loans and loans secured by savings deposits. In addition, the Company offers
unsecured overdraft checking protection. At June 30, 2000, the Company's total
consumer loan portfolio was $97.6 million, or 7.8% of its gross loan portfolio,
of which approximately 51% were fixed rate loans and 49% were adjustable rate
loans. The Company currently originates substantially all of its consumer loans
in its primary market areas.
The Company originates adjustable rate home equity lines of credit and fixed
rate second mortgage loans generally up to $250,000. Home equity lines of credit
and second mortgage loans together with loans secured by all prior liens, are
generally limited to 75% of the appraised value of the property securing the
loan. The Company also offers 100% equity financing up to $100,000, with these
loans re-underwritten and insured through a mortgage insurance company. Second
mortgage loans have a maximum term of up to 20 years. Home equity lines of
credit may have varying terms up to 20 years. These loans are underwritten
utilizing criteria similar to the Company's first mortgage loans. As of June 30,
2000, second mortgage loans and home equity lines of credit amounted to $92.1
million or 94.3% of the Company's consumer loan portfolio.
Consumer loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. The underwriting standards
employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential first mortgage
loans, particularly in the case of consumer loans which are secured by rapidly
depreciable assets, such as automobiles and boats. In such cases, any
repossessed collateral from a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected
10
by adverse personal circumstances. Furthermore, the application of various
federal and state laws, including bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans.
Originations, Purchases, Sales and Servicing of Loans
For the fiscal year ended June 30, 2000, the Company originated $267.9 million
of loans, compared to $371.0 million and $340.2 million in fiscal 1999 and 1998,
respectively, due principally to reduced refinancing activity in fiscal 2000.
Mortgage loan originations are handled by employees of the Company.
During the fiscal years ended June 30, 2000, 1999 and 1998, the Company
purchased $106.0 million, $31.2 million and $89.9 million of one- to four-family
first mortgage loans, respectively, through correspondent relationships with
other institutions. The purchased loans primarily represent adjustable rate and,
to a lesser extent, fixed rate first mortgages secured by properties primarily
located throughout New Jersey. A limited amount of loans secured by properties
located in Pennsylvania, Massachusetts and Connecticut have been purchased.
From time to time, the Company has engaged in loan sale strategies -- selling
loans to Freddie Mac and other secondary market purchasers. Due to the majority
of one- to four-family residential mortgage loan production being adjustable
rate and due to the higher interest rate environment during the year ended June
30, 2000, loan sale activity was reduced significantly from the fiscal 1999
levels, as the majority of production was retained in portfolio. For the year
ended June 30, 2000, the Company sold loans totaling $5.5 million. During fiscal
1999, PennFed actively employed a strategy of selling one - to four-family
mortgage loans. This strategy served to mitigate the effects of low interest
rates and a flat yield curve. For the year ended June 30, 1999, the Company sold
$150.5 million of low-coupon, longer duration one - to four-family first
mortgage loans to Freddie Mac and other secondary market purchasers. The Company
sold loans in aggregate amounts of $76.2 million during the year ended June 30,
1998.
The level of loan sale activity will continue to be evaluated with primary
consideration given to interest rate risk, long-term profitability and liquidity
objectives.
When loans are sold, the Company may retain the responsibility for servicing the
loans or may sub-service the loans for a short term period. The Company receives
a fee for performing these services. The Company serviced for others one- to
four-family mortgage loans with an aggregate outstanding principal balance of
$108.5 million, $116.2 million and $110.9 million at June 30, 2000, 1999, and
1998, respectively.
The following table sets forth the activity in the Company's loan portfolio for
the years indicated.
Year ended June 30,
-----------------------------------------------------
2000 1999 1998
-----------------------------------------------------
(In thousands)
Net loans receivable at beginning of year $1,066,611 $1,095,852 $ 931,451
Plus:
Loans originated:
One- to four-family 172,201 295,522 283,666
Commercial and multi-family real estate 30,364 22,938 18,901
Consumer 65,325 52,560 37,595
-----------------------------------------------------
Total loans originated 267,890 371,020 340,162
-----------------------------------------------------
One- to four-family loans purchased 106,049 31,220 89,910
-----------------------------------------------------
Total loans originated and purchased 373,939 402,240 430,072
Less:
One- to four-family loans sold 5,532 150,474 76,196
Loan principal payments and other, net 175,388 280,575 187,360
Loans transferred to real estate owned 382 432 2,115
-----------------------------------------------------
Net loans receivable at end of year $1,259,248 $1,066,611 $1,095,852
=====================================================
11
Non-Performing and Classified Assets
Generally, when a borrower fails to make a required payment on a real estate
secured loan or other secured loan the Company institutes collection procedures
by mailing a delinquency notice. The customer is contacted again, by telephone,
if the delinquency is not promptly cured. In many cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent for more than 60 days, a letter of notice of intention to foreclose
is sent and the customer is requested to make arrangements to bring the loan
current. At 90 days past due, unless satisfactory arrangements have been made,
immediate repossession commences or foreclosure procedures are instituted. For
unsecured loans, the collection procedures are similar; however, at 90 days past
due, a specific reserve or charge-off is recommended and, subsequently, a
lawsuit is filed, if necessary, to obtain a judgement.
At June 30, 2000, the Company's loans delinquent 60 to 89 days totaled $406,000
of which $391,000 were one- to four-family mortgage loans and $15,000 were
consumer loans.
The table below sets forth the Company's amounts and categories of
non-performing assets and restructured loans. 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. Restructured loans are all performing
in accordance with modified terms and are, therefore, considered performing.
At June 30,
-------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family . . . . . . . . . . . $2,152 $2,937 $2,575 $3,567 $4,009
Commercial and multi-family . . . . . . 95 46 414 1,053 913
Consumer . . . . . . . . . . . . . . . . 468 687 753 865 1,264
-------------------------------------------------
Total non-accruing loans . . . . . . . . . 2,715 3,670 3,742 5,485 6,186
Real estate owned, net . . . . . . . . . 334 936 1,643 884 1,083
-------------------------------------------------
Total non-performing assets . . . . . . . 3,049 4,606 5,385 6,369 7,269
Restructured loans . . . . . . . . . . . -- -- 1,415 1,451 2,340
-------------------------------------------------
Total risk elements . . . . . . . . . . . $3,049 $4,606 $6,800 $7,820 $9,609
=================================================
Non-accruing loans as a percentage
of total loans . . . . . . . . . . . . . 0.21% 0.34% 0.34% 0.59% 0.95%
===============================================
Non-performing assets as a percentage
of total assets . . . . . . . . . . . . . 0.18% 0.30% 0.35% 0.48% 0.67%
===============================================
Total risk elements as a percentage
of total assets . . . . . . . . . . . . . 0.18% 0.30% 0.44% 0.59% 0.88%
===============================================
For the year ended June 30, 2000, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $97,000, none of which was included in interest
income during this period.
Non-Performing Assets. Non-accruing loans at June 30, 2000 were comprised of 29
one- to four-family loans aggregating $2.2 million, 17 consumer loans
aggregating $468,000 and two commercial and multi-family real estate loans
totaling $95,000.
Real estate owned at June 30, 2000 included five one - to four-family properties
totaling $334,000, the largest of which had a net book value of $141,000.
Restructured Loans. In the normal course of business the Company has
restructured the terms of certain loans. No loans have been restructured within
the last four fiscal years. Any loan that has been restructured continues to
perform in accordance with the restructured terms.
12
Other Loans of Concern. As of June 30, 2000, there were $1.0 million of other
loans not included in the table or discussed above where known information about
the possible credit problems of borrowers caused management to have doubts as to
the ability of the borrower to comply with present loan repayment terms and
which may result in disclosure of such loans in the future.
Included in other loans of concern at June 30, 2000 are five loans to one
borrower and one loan to a related party totaling $862,000 acquired in the 1989
acquisition of First Federal Savings and Loan Association of Montclair. The five
loans consist of one commercial real estate loan of $426,000, three one- to
four-family loans totaling $110,000 and a $70,000 line of credit. The loan to a
related party consists of a commercial real estate loan of $256,000. All of
these loans are secured by properties located in New Jersey. All of the loans
were performing in accordance with their respective repayment terms. The Company
continues to monitor these loans due to their periodic delinquencies.
All of the other loans of concern have been considered by management in
conjunction with the analysis of the adequacy of the allowance for loan losses.
Classified Assets. Federal regulations provide for the classification of loans
and other assets such as debt and equity securities considered by the OTS to be
of lesser quality as "substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that the establishment of a specific loss reserve is
warranted.
When a savings institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities. When a savings institution classifies problem assets as "loss," it
is required to either establish a specific reserve equal to 100% of that portion
of the asset so classified or to charge-off such amount.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the assets in its portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets at June 30, 2000, the Bank's classified
assets, including real estate owned, totaled $4.1 million, with $3.9 million
classified as substandard and $182,000 classified as loss. At June 30, 2000
total classified assets represented 3.57% of the Company's stockholders' equity
and 0.24% of the Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on 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, the
loan classifications discussed above, 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
13
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 examination.
The following table sets forth an analysis of the Company's allowance for loan
losses at, and for, the dates indicated.
Year ended June 30,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year . . . . $3,209 $2,776 $2,622 $2,630 $2,860
Charge-offs:
One- to four-family . . . . . . . . . . (105) (60) (306) (392) (195)
Commercial and multi-family . . . . . -- (165) (44) (147) (508)
Consumer . . . . . . . . . . . . . . . . (18) (171) (96) (146) (238)
--------------------------------------------------------
(123) (396) (446) (685) (941)
--------------------------------------------------------
Recoveries:
One- to four-family . . . . . . . . . . 37 -- -- -- --
Commercial and multi-family . . . . . -- 49 -- -- 101
Consumer . . . . . . . . . . . . . . . . -- -- -- 42 --
--------------------------------------------------------
37 49 -- 42 101
--------------------------------------------------------
Net charge-offs . . . . . . . . . . . . (86) (347) (446) (643) (840)
Additions charged to operations . . . . . 860 780 600 635 610
--------------------------------------------------------
Balance at end of year . . . . . . . . . $3,983 $3,209 $2,776 $2,622 $2,630
========================================================
Ratio of net charge-offs during the
year to average loans outstanding
during the year . . . . . . . . . . . . 0.01% 0.03% 0.04% 0.08% 0.16%
========================================================
Ratio of allowance for loan losses
to total loans at end of year . . . . . 0.32% 0.30% 0.25% 0.28% 0.40%
========================================================
Ratio of allowance for loan losses to
non-accruing loans at end of year . . 146.70% 87.44% 74.18% 47.80% 42.52%
========================================================
14
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized in the following table.
June 30,
-------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent of
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------------------------
(Dollars in thousands)
One- to four-family. . . $2,244 85.34% $1,797 86.15% $1,502 89.01% $1,463 89.55% $1,290 86.68%
Commercial and
multi-family real estate 1,051 6.88 855 7.02 740 6.03 654 6.12 782 7.97
Consumer . . . . . . . 688 7.78 557 6.83 534 4.96 505 4.33 558 5.35
------------------------------------------------------------------------------------------
Total . . . . . . . $3,983 100.00% $3,209 100.00% $2,776 100.00% $2,622 100.00% $2,630 100.00%
===========================================================================================
Investment Activities
The Bank must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Historically, the Bank has maintained its liquid assets
above the minimum requirements imposed by the OTS regulations and at a level
believed adequate to meet requirements of normal daily activities, repayment of
maturing debt and potential deposit outflows. As of June 30, 2000, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable deposit
accounts and current borrowings) was 8.71%. See "Regulation-Liquidity."
At June 30, 2000, the Company had a securities portfolio consisting principally
of U.S. government agency securities, including mortgage-backed securities. All
investment securitities and mortgage-backed securities were classified as held
to maturity at June 30, 2000, as the Company has a positive intent and ability
to hold these securities to maturity. These investments carry a low risk
weighting for OTS risk-based capital purposes, generally satisfy OTS
liquid-asset requirements and are generally of relatively short duration. See
"Regulation-Regulatory Capital Requirements" and "Regulation-Liquidity."
Investment Securities. At June 30, 2000, the Company's investment securities
(including a $22.3 million investment in FHLB of New York stock) totaled $325.3
million, or 18.8% of its total assets. It is the Company's general policy to
purchase U.S. government securities and federal agency obligations and other
investment grade securities in accordance with its strategic objectives,
including, but not limited to, liquidity, growth, yield and interest rate risk
management and to provide collateral for borrowings. In prior years, PennFed
invested in certain non-investment grade trust preferred securities of other
financial institutions. At June 30, 2000, PennFed held $11.0 million of such
non-investment grade securities. In addition, investment securities at June 30,
2000 included $17.5 million of investment grade trust preferred securities.
OTS regulations restrict investments in corporate debt and equity securities by
the Bank. See "Regulation-Federal Regulation of Savings Associations" for a
discussion of additional restrictions on the Company's investment activities.
15
The following table indicates the composition of the investment securities
portfolio, excluding FHLB of New York stock, based on the final maturities of
each investment.
June 30, 2000
----------------------------------------------------------------------
After After
One Year Five Years After Total
Through Through Ten Investment
Five Years Ten Years Years Securities
---------------------------------------- ---------------------------
Book Value Book Value Book Value Book Value Market Value
----------------------------------------------------------------------
(Dollars in thousands)
U.S. government
agency obligations . . . . . . . . . . . $-- $10,000 $264,532 $274,532 $254,066
Obligations of states and
political subdivisions . . . . . . . . . 30 -- -- 30 32
Trust preferred
securities . . . . . . . . . . . . .. -- -- 28,464 28,464 24,545
----------------------------------------------------------------------
Total investment
securities . . . . . . . . . . . . .. $30 $10,000 $292,996 $303,026 $278,643
======================================================================
Weighted average yield at
year end . . . . . . . . . . . . .. 10.38% 6.77% 7.07% 7.06% --
======================================================================
The majority of the securities in the investment portfolio have call features.
At June 30, 2000, the assumed weighted average life of the investment portfolio
was 4.2 years.
The Company's investment securities portfolio at June 30, 2000 did not contain
securities of any issuer or tax-exempt securities with an aggregate book value
in excess of 10% of the Company's retained earnings, excluding those issued by
the U.S. government or its agencies.
Mortgage-Backed Securities. At June 30, 2000, mortgage-backed securities totaled
$87.6 million, or 5.1% of the Company's total assets, of which approximately 23%
consisted of adjustable rate securities. The Company has invested primarily in
government agency securities, principally those of Ginnie Mae, Freddie Mac and
Fannie Mae.
The following table indicates the composition of the mortgage-backed securities
portfolio, excluding unamortized premiums, based on the final maturities of each
security.
June 30, 2000
------------------------------------------------------------------------------------
After After
One One Year Five Years After Total
Year or Through Through Ten Mortgage-backed
Less Five Years Ten Years Years Securities
---------------------------------------------------- -----------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------------------------------------------------- -----------------------------
(Dollars in thousands)
Ginnie Mae ...................... $ -- $ 116 $ 580 $ 662 $ 1,358 $ 1,392
Freddie Mac ..................... 7,121 3,540 14,158 23,940 48,759 48,507
Fannie Mae ...................... 3,193 652 10,802 22,550 37,197 36,886
Collateralized Mortgage
Obligations/REMICs ........... -- -- -- 79 79 76
------------------------------------------------------------------------------------
Total mortgage-backed
securities ................... $10,314 $ 4,308 $25,540 $47,231 $87,393 $86,861
====================================================================================
Weighted average yield at
year end ..................... 6.40% 7.59% 7.11% 7.20% 7.10%
====================================================================================
The Ginnie Mae, Freddie Mac and Fannie Mae certificates are modified
pass-through mortgage-backed securities that represent undivided interests in
underlying pools of fixed rate, or certain types of adjustable rate,
single-family
16
residential mortgages issued by these government-sponsored entities. Ginnie
Mae's guarantee to the certificate holder of timely payments of principal and
interest is backed by the full faith and credit of the U.S. government. Freddie
Mac and Fannie Mae provide the certificate holder a guarantee of timely payments
of interest and scheduled principal payments, whether or not they have been
collected.
The following table sets forth the Company's mortgage-backed securities purchase
and repayment activities for the years indicated.
Year ended June 30,
----------------------------------
2000 1999 1998
----------------------------------
(In thousands)
Mortgage-backed securities, net:
At beginning of year .......................... $127,983 $204,452 $288,539
Securities purchased .......................... 220 34 --
Less:
Principal repayments ........................ 40,522 76,206 83,775
Amortization of premiums .................... 120 297 312
----------------------------------
At end of year ................................... $ 87,561 $127,983 $204,452
==================================
The following table sets forth the composition of the Company's investment and
mortgage-backed securities portfolios at the dates indicated.
June 30,
----------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------
Percent Percent Percent
of Total of Total of Total
Book Market Book Book Market Book Book Market Book
Value Value Value Value Value Value Value Value Value
----------------------------------------------------------------------------------------
(Dollars in thousands )
Investment securities:
U.S. government
agency obligations . . . . $274,532 $254,066 84.39% $264,538 $254,243 85.36% $166,969 $166,985 86.35%
Obligations of states and
political subdivisions . . 30 32 0.01 40 45 0.01 140 147 0.07
Trust preferred securities . . 28,464 24,545 8.75 28,704 27,592 9.27 11,201 11,611 5.79
----------------------------------------------------------------------------------------
Total investment
securities . . . . . . . . 303,026 278,643 93.15 293,282 281,880 94.64 178,310 178,743 92.21
FHLB of New York stock . . . . 22,295 22,295 6.85 16,623 16,623 5.36 15,065 15,065 7.79
----------------------------------------------------------------------------------------
Total investment securities
and FHLB of New York stock $325,321 $300,938 100.00% $309,905 $298,503 100.00% $193,375 $193,808 100.00%
========================================================================================
Weighted average life of
investment securities excluding
FHLB of NewYork stock . . . . 4.2 years 3.4 years 0.9 years
Mortgage-backed securities:
Ginnie Mae . . . . . . . . . . $ 1,358 $ 1,392 1.55% $ 2,071 $ 2,162 1.62% $ 3,005 $ 3,195 1.47%
Freddie Mac . . . . . . . . . 48,759 48,507 55.69 74,622 75,119 58.31 123,444 125,931 60.38
Fannie Mae . . . . . . . . . . 37,197 36,886 42.48 50,899 51,233 39.77 77,019 78,601 37.67
Collateralized Mortgage
Obligations/REMICs . . . . . . 79 76 0.09 103 103 0.08 400 401 0.19
----------------------------------------------------------------------------------------
87,393 86,861 99.81 127,695 128,617 99.78 203,868 208,128 99.71%
Unamortized premiums, net . . 168 -- 0.19 288 -- 0.22 584 -- 0.29
----------------------------------------------------------------------------------------
Total mortgage-backed
securities $ 87,561 $86,861 100.00% $127,983 $128,617 100.00% $204,452 $208,128 100.00%
========================================================================================
17
Sources of Funds
General. The Company's sources of funds are deposits, borrowings, payment of
principal and interest on loans and mortgage-backed securities, interest
received on and maturities or calls of other investment securities and funds
provided from operations.
Deposits. The Company offers a variety of deposit accounts having a wide range
of interest rates and terms. The Company's deposits consist of savings, money
market and demand deposit accounts, as well as certificate accounts currently
ranging in terms up to 60 months. The Company solicits deposits primarily from
its market areas and relies primarily on product mix, competitive pricing
policies, advertising, customer service and customer relationships to attract
and retain deposits. The Company also solicits short term deposits from
municipalities in its market areas. As of June 30, 2000, certificates of deposit
from municipalities totaled $53.2 million.
The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management, liquidity and profitability
objectives. In this regard, the Company has from time-to-time paid slightly
higher rates than its competitors to attract certificates of deposit. Based on
its experience, the Company believes that its savings, money market and demand
deposit accounts are relatively stable sources of deposits. However, the ability
of the Company to attract and maintain certificates of deposit and the rates
paid on these deposits has been and will continue to be significantly affected
by market conditions, including general economic conditions, changes in interest
rates and competition. There were no brokered deposits at June 30, 2000. At June
30, 1999, the Company had $1.0 million of brokered deposits. See Item 8 -
Financial Statements - Note I -Deposits - of the Notes to Consolidated Financial
Statements.
The following table sets forth the deposit flows of the Company during the
periods indicated.
Year ended June 30,
---------------------------------------------
2000 1999 1998
---------------------------------------------
(Dollars in thousands)
Opening balance . . . . . . . . .$ 1,063,600 $ 1,028,100 $ 918,160
Net deposits (withdrawals) ...... (24,630) (5,555) 68,152
Interest credited ............... 41,380 41,055 41,788
---------------------------------------------
Ending balance ..................$ 1,080,350 $ 1,063,600 $ 1,028,100%
=============================================
Net increase ....................$ 16,750 $ 35,500 $ 109,940
=============================================
Percent increase ................ 1.57% 3.45% 11.97%
=============================================
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 2000.
Maturity
----------------------------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
----------------------------------------------------------
(In thousands)
Certificates of deposit less
than $100,000 . . . . . . . . . . . . . $190,403 $128,099 $130,728 $202,792 $652,022
Certificates of deposit of $100,000 or more . 83,200 18,768 16,536 29,651 148,155
-----------------------------------------------------------
Total certificates of deposit. . . . . . . . $273,603 $146,867 $147,264 $232,443 $800,177
===========================================================
Borrowings. Although deposits are the Company's primary source of funds, the
Company's policy has been to utilize borrowings when they are a less costly
source of funds, when the Company desires additional capacity to fund loan
demand or to extend the life of its liabilities.
The Company's borrowings historically have consisted of advances from the FHLB
of New York, and to a lesser extent, reverse repurchase agreements. FHLB of New
York advances can be obtained pursuant to several different credit programs,
each of which has its own interest rate and range of maturities.
18
The following table sets forth the maximum month-end balance, average balance
and weighted average cost of FHLB of New York advances and other borrowings for
the periods indicated.
Year ended June 30,
------------------------------------
2000 1999 1998
------------------------------------
(In thousands)
Maximum balance for the year ended:
FHLB of New York advances ..................................... $364,465 $289,465 $240,465
====================================
Other borrowings:
Overnight repricing lines of credit ......................... $ 80,200 $ 54,700 $ 50,000
FHLB of New York one-month overnight repricing
line of credit ............................................ 30,000 10,000 35,000
Reverse repurchase agreements callable or maturing
within one year ........................................... 9,563 39,925 49,925
Reverse repurchase agreements maturing after one year ....... 49,275 49,275 29,875
------------------------------------
Total other borrowings ......................................... $169,038 $153,900 $164,800
====================================
Average balance for the year ended:
FHLB of New York advances ..................................... $322,754 $266,906 $218,568
====================================
Other borrowings:
Overnight repricing lines of credit ......................... $ 30,393 $ 21,254 $ 24,620
FHLB of New York one-month overnight repricing
line of credit ............................................. 5,706 1,221 4,401
Reverse repurchase agreements callable or maturing
within one year ........................................... 5,353 10,824 23,091
Reverse repurchase agreements maturing after one year ....... 39,601 40,215 21,487
------------------------------------
Total other borrowings .................................... $ 81,053 $ 73,514 $ 73,599
====================================
Balance at June 30:
FHLB of New York advances ..................................... $364,465 $244,465 $230,465
====================================
Other borrowings:
Overnight repricing lines of credit ......................... $ 72,900 $ 29,900 $ 41,700
FHLB of New York one-month overnight repricing
line of credit ............................................. -- -- 10,000
Reverse repurchase agreements callable or maturing
within one year ............................................ 19,875 19,563 49,925
Reverse repurchase agreements maturing after one year ....... 19,400 39,275 29,875
------------------------------------
Total other borrowings ..................................... $112,175 $ 88,738 $131,500
====================================
Weighted average cost of funds for the year ended:
FHLB of New York advances ..................................... 6.07% 6.01% 6.13%
Other borrowings:
Overnight repricing lines of credit ......................... 6.00% 5.20% 5.75%
FHLB of New York one-month overnight repricing
line of credit ............................................. 5.96% 5.42% 5.85%
Reverse repurchase agreements callable or maturing
within one year ............................................ 5.69% 5.58% 5.59%
Reverse repurchase agreements maturing after one year ....... 6.02% 5.74% 6.06%
Weighted average cost of funds at June 30:
FHLB of New York advances ..................................... 6.13% 5.93% 6.06%
Other borrowings:
Overnight repricing lines of credit ......................... 7.23% 5.98% 6.25%
FHLB of New York one-month overnight repricing
line of credit ............................................. -- -- 6.13%
Reverse repurchase agreements callable or maturing
within one year ............................................ 5.77% 5.01% 5.35%
Reverse repurchase agreements maturing after one year ....... 6.10% 5.93% 5.93%
19
Trust Preferred Securities.During fiscal 1998, the Company formed a wholly-owned
trust subsidiary, PennFed Capital Trust I (the "Trust"). Effective October 21,
1997, the Trust sold $34.5 million of 8.90% cumulative trust preferred
securities to the public which are reflected on the Consolidated Statement of
Financial Condition as Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures (the "Trust Preferred securities"). The Trust
used the proceeds from the sale of the Trust Preferred securities to purchase
8.90% junior subordinated deferrable interest debentures issued by PennFed. The
Company used the proceeds from the junior subordinated debentures for general
corporate purposes, including a $20 million capital contribution to the Bank to
support growth.
Subsidiary Activities
As a federally chartered savings association, Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $34.6 million at June 30,2000,
in the stock of, or loans to, service corporation subsidiaries. As of such date,
the net book value of Penn Federal's investment in its service corporation was
$3,000. In addition to investments in service corporations, federal associations
are permitted to invest an unlimited amount in operating subsidiaries engaged
solely in activities which a federal association may engage in directly. As of
June 30, 2000, the Bank's investment in its operating subsidiary was $441.5
million.
Penn Federal currently has a single service corporation, which is known as Penn
Savings Insurance Agency, Inc. ("PSIA"). PSIA offers insurance and uninsured
non-deposit investment products to the Company's customers and members of the
general public through a program known asInvestment Services at Penn
Federal.Securities are offered through Liberty Securities Corp. ("LSC"), a
registered broker dealer, member NASD and SIPC. Annuities and insurance are
offered through IFS Agencies, Inc., a licensed insurance agency. Neither LSC nor
IFS Agencies, Inc. is affiliated with the Bank. The Bank's relationship with LSC
and IFS Agencies, Inc. gives customers convenient access to financial consulting
/ advisory services and related non-deposit investment products, such as fixed
and variable annuities and mutual funds. In addition, securities brokerage
services are available through Liberty Securities Corp. Life, health and
disability insurance are also available through IFS Agencies, Inc. To a much
lesser extent, PSIA also offers homeowners insurance to Bank customers.
Penn Federal also has a Delaware operating subsidiary, Ferry Development Holding
Company, that holds and manages an investment portfolio for the benefit of the
Bank.
Competition
The Company faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks, other savings associations, mortgage
banking companies and credit unions making loans secured by real estate located
in New Jersey. Commercial banks, credit unions and finance companies provide
vigorous competition in consumer lending. The Company competes for real estate
and other loans principally on the basis of the quality of services it provides
to borrowers, interest rates and loan fees it charges, and the types of products
offered.
The Company attracts substantially all of its deposits through its branches,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from commercial banks, savings
associations, credit unions and brokerage houses. The Company competes for these
deposits by offering a variety of deposit accounts at competitive rates, quality
customer service, convenient business hours and branch locations with
interbranch deposit and withdrawal privileges.
20
R E G U L A T I O N
General
Penn Federal is a federally chartered savings bank, and accordingly, the Bank is
subject to comprehensive federal regulation and oversight by the OTS extending
to all its operations. Penn Federal is a member of the FHLB of New York and
certain of its activities are subject to regulation by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of Penn Federal, PennFed is also subject to federal regulation
and oversight by the OTS. The Bank is a member of the Savings Association
Insurance Fund ("SAIF") and the deposits of Penn Federal are insured by the FDIC
up to applicable limits. As a result, the FDIC has regulatory and examination
authority over the Bank. For purposes of the "Regulation" discussion, the terms
"savings bank," "savings association" and "savings institution" apply to the
Bank.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Associations by the OTS
The OTS has extensive authority over the operations of savings associations. As
part of this authority, Penn Federal is required to file periodic reports with
the OTS and is subject to periodic examinations by the OTS. The last regular OTS
examination of the Bank was as of December 1999.
All savings associations are subject to a semi-annual OTS assessment, based upon
the savings association's total assets and supervisory evaluation. The Bank's
OTS assessment for the fiscal year ended June 30,2000 was $260,000.
The OTS, as well as the other federal banking agencies, has developed guidelines
establishing safety and soundness standards on matters such as loan underwriting
and documentation, internal controls and audit systems, asset quality, earning
standards, interest rate risk exposure and compensation and other employee
benefits.
Insurance of Accounts and Regulation by the FDIC
Penn Federal's deposits are insured by the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. The last
FDIC examination of the Bank was as of May 1992. The FDIC may also prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the deposit insurance funds. The
FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the savings association's deposit insurance if it determines that the
savings association has engaged or is engaging in unsafe or unsound practices,
or is in an unsafe or unsound condition.
Regulatory Capital Requirements
Federally insured savings associations, such as Penn Federal, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained earnings, and certain noncumulative
perpetual preferred stock. In addition, all intangible assets, other than
certain amounts of mortgage servicing rights, must be deducted from assets and
capital for calculating compliance with the requirements. At June 30,2000, Penn
Federal had $9.0 million of intangible assets other than qualifying mortgage
servicing rights.
At June 30, 2000, Penn Federal had tangible capital of $133.4 million, or 7.76%
of adjusted total assets, which was approx-
21
imately $107.6 million above the minimum requirement of 1.5% of adjusted total
assets in effect on that date.
The capital standards also require core capital equal to at least 3% of adjusted
total assets and 4% of risk-weighted assets (as defined below). Core capital
generally consists of tangible capital plus certain intangible assets up to 25%
of adjusted total assets. At June 30, 2000, Penn Federal did not have any
intangibles which were subject to these tests. As a result of the prompt
corrective action provisions discussed below, however, a savings association
must maintain a ratio of core capital to adjusted total assets of at least 4% to
be considered adequately capitalized unless its supervisory condition is such to
allow it to maintain a 3% ratio.
At June 30, 2000, Penn Federal had core capital of $133.4 million, or 7.76% of
adjusted total assets, which was approximately $64.6 million above the 4% ratio
required to be considered adequately capitalized.
The OTS risk-based capital requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of selected items, such as certain permanent and maturing capital
instruments that do not qualify as core capital and allowances for loan and
lease losses up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent of
core capital. At June 30,2000, the Bank had no capital instruments that qualify
as supplementary capital. The Bank had $3.8 million of allowances for loan and
lease losses at June 30, 2000, all of which was included as supplementary
capital since it was less than 1.25% of risk-weighted assets.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, are multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of assets. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by Freddie Mac and Fannie Mae.
On June 30,2000, Penn Federal had total risk-based capital of $137.2 million
(including $133.4 million in core capital and $3.8 million in allowable
supplementary capital) and risk-weighted assets of $884.9 million (including
$33.2 million in converted off-balance sheet assets) resulting in a risk-based
capital ratio of 15.50% of risk-weighted assets. This amount was $66.4 million
above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against savings associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and, until such plan is approved by the OTS, may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized associations.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more additional mandated specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
divestiture, merger or acquisition of the association. An association that
becomes "critically undercapi-talized" (i.e., a ratio of tangible equity to
total assets of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations.
Any undercapitalized association is also subject to actions by the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver. The OTS is also authorized to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Penn Federal
may have a substantial adverse effect on the Bank's operations and profitability
and on the market value of PennFed's common stock.
22
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the association's minimum
capital requirements or the amount required to be maintained for the liquidation
account established in connection with the Conversion.
Generally, associations may make capital distributions during any calendar year
equal to 100% of net income for the year-to-date plus retained net income for
the two previous years without OTS approval. The Bank is required to give the
OTS 30 days notice prior to declaring any dividend on its stock. The OTS may
object to the distribution during that 30-day period based on safety and
soundness concerns. See "Regulatory Capital Requirements."
Liquidity
All savings associations, including Penn Federal, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At June 30, 2000, the minimum liquid asset
ratio was 4%. Penalties may be imposed upon associations for violations of the
liquid asset ratio requirement. At June 30,2000, Penn Federal was in compliance
with the requirement, with a liquidity ratio of 8.71%.
Qualified Thrift Lender Test
All savings associations, including Penn Federal, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended (the "Code"). Under either test, such assets primarily consist of
residential housing related loans and investments. At June 30,2000, the Bank met
the QTL test and has always met the test since its effective date.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. Until such an association has requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to national
bank branching rights in its home state.
In addition, the association is immediately ineligible to receive any new FHLB
of New York borrowings and is subject to national bank limits for payment of
dividends. If such association has not requalified or converted to a national
bank within three years after the failure, it must divest itself of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB of New York borrowings,
which may result in prepayment penalties. If any association that fails the QTL
test is controlled by a holding company, then within one year after the failure,
the holding company must register as a bank holding company and become subject
to all restrictions on bank holding companies. See "Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has
a continuing and affirmative obligation consistent with safe and sound banking
practices 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 CRA. The
CRA requires the OTS, in connection with the examination of Penn Federal, 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, such
as a merger or the estab-
23
lishment of a branch, by Penn Federal. An unsatisfactory rating may be used as
the basis for the denial of an application by the OTS.
Due to the heightened attention being given to the CRA in recent years, the Bank
may be required to devote additional funds for investment and lending in its
local communities. CRA compliance ratings given by the OTS include
"outstanding," "needs improvement" and "unsatisfactory." The Bank was examined
for CRA compliance in February 1999 and received a rating of "outstanding."
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries and
its affiliates are required to be on terms as favorable to the association as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to affiliates, are restricted to a percentage of the association's
capital. Affiliates of Penn Federal include PennFed and any company which is
under common control with the Bank. In addition, a savings association may not
lend to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. Penn Federal's
subsidiaries are not deemed affiliates; however, the OTS has the discretion to
treat subsidiaries of savings associations as affiliates on a case-by-case
basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as loans made to unaffiliated individuals.
Federal Securities Law
The common stock of PennFed is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). PennFed is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder.
PennFed stock held by persons who are affiliates (generally executive officers,
directors and principal stockholders) of PennFed may not be resold without
registration or unless such stock is sold in accordance with certain resale
restrictions. If PennFed meets specified current public information
requirements, each affiliate of PennFed may sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Home Loan Bank System
Penn Federal is a member of the FHLB of New York, which is one of 12 regional
FHLBs that provides loans and correspondent services to its members. Each FHLB
serves as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors of
the FHLB, which are subject to the oversight of the Federal Housing Finance
Board. All borrowings from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB.
As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York. At June 30,2000, the Bank had $22.3 million in FHLB of New York
stock, which was in compliance with this requirement. In past years, Penn
Federal has received substantial dividends on its FHLB of New York stock. Over
the past five fiscal years such dividends have averaged 6.85%.
For the year ended June 30,2000, the Company recorded $1.3 million in dividends
from the FHLB of New York resulting in a 6.81% yield.
Federal and State Taxation
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds
24
the corporation's regular income tax. Net operating losses can offset no more
than 90% of alternative minimum taxable income.
PennFed files consolidated federal income tax returns with the Bank and its
subsidiaries.
To the extent a savings association makes "non-dividend distributions," such
distributions will be considered to have been made from the association's tax
bad debt reserves (including the base year reserve) and then from the
association's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the association's income. Non-dividend
distributions include distributions in excess of the association's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the association's current or accumulated
earnings and profits will not be so included in the association's income.
The amount of additional taxable income created from a non-dividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate tax rate. The Bank does not intend to pay dividends that would result
in a recapture of any portion of its tax bad debt reserves.
The Bank and its consolidated subsidiary have been audited by the Internal
Revenue Service ("IRS") with respect to consolidated federal income tax returns
through December 31, 1991. There were no material adjustments made to taxable
income as originally reported to the IRS. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, PennFed) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Company and its consolidated subsidiaries.
New Jersey Taxation. The Bank is taxed under the New Jersey Savings Institution
Tax Act. The tax is an annual privilege tax imposed at a rate of 3% on the net
income of the Bank as reported for federal income tax purposes, with certain
modifications. PennFed is taxed under the New Jersey Corporation Business Tax
Act (the "Act"), and if it meets certain tests, will be taxed as an investment
company at an effective annual rate for the taxable year ending June 30, 2000 of
2.25% of New Jersey taxable income (as defined in the Act). If it fails to meet
such tests, it will be taxed at an annual rate of 9% of New Jersey taxable
income. It is anticipated that PennFed will be taxed as an investment company.
Penn Savings Insurance Agency is taxed under the Act at a rate of 9% on its New
Jersey taxable income.
Delaware Taxation. PennFed, as a Delaware holding company, and Ferry Development
Holding Company ("FDHC"), a Delaware investment company, are exempt from
Delaware corporate income tax, but are required to file an annual report with
and pay an annual fee to the State of Delaware. PennFed and FDHC are also
subject to an annual franchise tax imposed by the State of Delaware. As a
Delaware business trust, PennFed Capital Trust I is not required to pay income
or franchise taxes to the State of Delaware.
25
EXECUTIVE OFFICERS
The executive officers of PennFed are elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors. The executive officers of
PennFed are as follows: Joseph L. LaMonica, President and Chief Executive
Officer; Lucy T. Tinker, Senior Executive Vice President and Chief Operating
Officer; Patrick D. McTernan, Senior Executive Vice President, General Counsel
and Secretary; and Jeffrey J. Carfora, Executive Vice President and Chief
Financial Officer. Executive officers of PennFed do not receive any remuneration
in their capacity as PennFed executive officers.
The following table sets forth certain information as of June 30,2000 regarding
the executive officers of the Bank who are not also directors.
Name Age Positions Held with the Bank
- ---------------------------------------------------------------------------------------------------
Lucy T. Tinker . . . . . . . 60 Senior Executive Vice President and Chief Operating Officer
Jeffrey J. Carfora . . . . . 42 Executive Vice President and Chief Financial Officer
Barbara A. Flannery . . . . . 44 Executive Vice President and Retail Banking Group Executive
James M. O'Brien . . . . . . 48 Executive Vice President and Lending Group Executive
Officers are elected annually by the Board of Directors of the Bank. The
business experience of each executive officer who is not also a director is set
forth below.
Lucy T. Tinker - Ms. Tinker is responsible for the daily operations of the Bank.
Ms. Tinker also assists President LaMonica in the development of corporate
policies and goals. Ms. Tinker joined Penn Federal in 1989 as Vice President and
Treasurer. In 1990, she was appointed Senior Vice President and Finance Group
Executive. She was appointed Executive Vice President and Chief Operating
Officer in 1993 and named Senior Executive Vice President in 1999.
Jeffrey J. Carfora - Mr. Carfora is responsible for the financial affairs of the
Bank, which include financial and tax accounting and reporting, strategic
planning, budgeting, treasury operations and asset/liability management. Mr.
Carfora joined Penn Federal in 1993 as Senior Vice President and Chief Financial
Officer and was appointed Executive Vice President in 1999.
Barbara A. Flannery - Ms. Flannery is responsible for the retail branch network.
Ms. Flannery has served Penn Federal in various capacities since joining the
Bank in 1980, including the management of product development, marketing and
various aspects of branch activities. She was named Executive Vice President in
1999.
James M. O'Brien - Mr. O'Brien joined the Bank in November 1998. Mr. O'Brien is
responsible for the Bank's lending operations which include commercial,
residential and consumer lending, collections, servicing and quality control. He
was named Executive Vice President in 1999. Prior to joining Penn Federal, Mr.
O'Brien was with Monarch Bank, Fleet Mortgage and Citizen's First National Bank.
Employees
At June 30, 2000, the Company and its subsidiaries had a total of 266 employees,
including 44 part-time employees. The Company's employees are not represented by
any collective bargaining group.
Item 2. Properties
The Company conducts its business at its headquarters, operations center and the
Bank's branch offices located in its primary market areas. The total net book
value of the Company's premises and equipment (including land, building and
leasehold improvements and furniture and equipment) at June 30,2000 was $20.1
million.
The Company believes that its current facilities are adequate to meet the
present and foreseeable needs of the Company, subject to possible future
expansion.
26
Item 3. Legal Proceedings
The Company is involved from time to time as plaintiff or defendant in various
legal actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management at the present time, after consultation with counsel
representing the Company in the proceedings, that the resolution of these
proceedings should not have a material effect on the Company's consolidated
financial position or results of operations.
In 1987, the New Jersey Department of Environmental Protection ("NJDEP")
conducted an environment contamination investigation of the Orange Road branch
site of First Federal Savings and Loan Association of Montclair ("First
Federal"). Prior to the acquisition by First Federal, the location was used as a
gasoline service station. On August 16, 1989, the NJDEP issued a "no further
action" letter to First Federal with regard to this site. The Bank acquired
First Federal effective September 11, 1989. Notwithstanding the earlier "no
further action" letter, on June 25, 1997, the NJDEP issued a letter demanding
that Penn Federal Savings Bank develop a remedial action work plan for the
Orange Road branch site as a result of an investigation conducted on behalf of
an adjacent property owner. The Bank disputed the NJDEP position that Penn
Federal Savings Bank was a responsible party. On July 1, 1998, the NJDEP issued
a letter determining that Penn Federal Savings Bank, Mobil Oil Corporation and
the former gasoline service station owner were all responsible parties for the
clean up at the subject site. Responsible parties may ultimately have full or
partial obligation for the cost of remediation. As of this date, the
apportionment of the remediation costs to the Bank, if any, is not determinable.
The Bank continues to vigorously contest this determination and to seek
contribution or indemnification from the other named responsible parties.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 2000.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "PFSB." At September 8, 2000, there were
approximately 525 stockholders of record for the Company's common stock (not
including the number of persons or entities holding stock in nominee or street
name through various brokerage firms).
Market Information
The following table sets forth the high and low closing sales prices per common
share for the periods indicated.
Fiscal 2000 Closing Price Fiscal 1999 Closing Price
--------------------------- -----------------------------
High Low High Low
--------------------------- -----------------------------
Quarter Ended:
September 30, 1999 and 1998. . . . . $17.6250 $14.0000 $16.8750 $10.8750
December 31, 1999 and 1998 . . . . . 16.0000 12.8438 14.2500 10.2500
March 31, 2000 and 1999 . . . . . . 14.1250 10.6250 16.0000 12.7500
June 30, 2000 and 1999 . . . . . . 14.1250 11.5000 15.7500 14.0000
The closing price of a common share was $14.13 at June 30, 2000 compared to
$15.75 at June 30, 1999.
For the second quarter of fiscal 1999, the Company increased the quarterly cash
dividend on its common stock to $0.04 per share compared to $0.035 per share for
all prior quarters since divided payments were initiated in the second quarter
of fiscal 1997.
27
Item 6. Selected Financial Data
The following selected consolidated financial data of the Company and its
subsidiaries is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements, including notes thereto, included
elsewhere in this document.
At June 30,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------
(In thousands, except per share amounts)
Selected Financial Condition Data:
Total assets .................................... $1,729,219 $1,558,763 $1,551,938 $1,321,751 $1,086,524
Loans receivable, net ........................... 1,259,248 1,066,611 1,095,852 931,451 652,571
Investment securities ........................... 303,026 293,282 178,310 35,290 21,288
Mortgage-backed securities ...................... 87,561 127,983 204,452 288,539 346,068
Deposits ........................................ 1,080,350 1,063,600 1,028,100 918,160 836,416
Total borrowings ................................ 476,640 333,203 361,965 288,215 146,700
Trust Preferred securities, net ................. 32,805 32,743 32,681 -- --
Stockholders' equity ............................ 113,981 107,500 103,703 97,270 90,564
Book value per common share ..................... 14.37 13.03 11.87 10.92 10.25
Tangible book value per common share ............ 13.24 11.68 10.33 9.13 8.17
At June 30,
---------------------------------------------------------------------
2000 1999 1998 1997 (1) 1996
---------------------------------------------------------------------
(In thousands, except per share amounts)
Selected Operating Data:
Total interest and dividend income .................. $ 111,763 $ 105,557 $ 100,805 $ 85,401 $ 68,123
Total interest expense .............................. 74,333 71,918 68,043 53,073 39,121
--------------------------------------------------------------------
Net interest and dividend income .................... 37,430 33,639 32,762 32,328 29,002
Provision for loan losses ........................... 860 780 600 635 610
--------------------------------------------------------------------
Net interest income after provision for
loan losses ........................................ 36,570 32,859 32,162 31,693 28,392
--------------------------------------------------------------------
Service charges ..................................... 2,172 2,113 1,974 1,666 1,602
Net gain (loss) from real estate operations ......... 114 31 (156) (181) 104
Net gain on sales of loans .......................... 36 860 528 -- --
Net gain on sales of investment securities .......... -- -- -- -- 94
Other non-interest income ........................... 625 542 321 298 402
--------------------------------------------------------------------
Total non-interest income ........................... 2,947 3,546 2,667 1,783 2,202
--------------------------------------------------------------------
Total non-interest expenses ......................... 19,596 18,644 17,389 22,385(1) 17,642
--------------------------------------------------------------------
Income before taxes ................................. 19,921 17,761 17,440 11,091 12,952
Income tax expense .................................. 7,051 6,304 6,242 4,205 5,111
--------------------------------------------------------------------
Net income .......................................... $ 12,870 $ 11,457 $ 11,198 $ 6,886(1) $ 7,841
====================================================================
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . $ 1.58 $ 1.36 $ 1.25 $ 0.77(1) $ 0.80
====================================================================
Diluted . . . . . . . . . . . . . . . . . . . . . . $ 1.50 $ 1.29 $ 1.16 $ 0.73(1) $ 0.77
====================================================================
- -------------------------------
(1) Fiscal 1997 includes the effect of a one-time SAIF recapitalization
assessment of approximately $ 4.8 million, or $3.1 million net of taxes.
Excluding this non-recurring assessment, total non-interest expenses would
have been $17.6 million, net income would have been $9.9 million, basic
earnings per share would have been $1.12 and diluted earnings per share
would have been $1.05.
28
At and for the year ended June 30,
-------------------------------------------------------------------
Selected Financial Ratios and Other Data: 2000 1999 1998 1997(1) 1996
-------------------------------------------------------------------
Performance Ratios:
Return on average assets (ratio of net income to
average total assets) ................................ 0.79% 0.74% 0.78% 0.58%(1) 0.82%
Return on average stockholders' equity (ratio of
net income to average stockholders' equity) .......... 11.61 11.03 10.96 7.42(1) 8.36
Net interest rate spread during the year .............. 2.12 2.01 2.12 2.58 2.96
Net interest margin (net interest and dividend
income to average interest-earning assets) ........... 2.37 2.24 2.38 2.83 3.22
Ratio of average interest-earning assets to average
deposits, borrowings and Trust Preferred securities .. 105.29 104.82 105.20 105.30 105.87
Ratio of earnings to fixed charges(2):
Excluding interest on deposits ....................... 1.72x 1.76x 1.88x 1.86x 3.35x
Including interest on deposits ....................... 1.27x 1.25x 1.26x 1.21x 1.33x
Ratio of non-interest expense to average total assets . 1.20% 1.20% 1.22% 1.87%(1) 1.84%
Efficiency ratio (non-interest expense, excluding
amortization of intangibles, to net interest and
dividend income and non-interest income excluding
gains on sales and real estate operations) ........... 43.44 44.86 42.65 57.95(1) 48.53
Dividend payout ratio ................................. 10.13 11.40 11.20 13.64 --
Asset Quality Ratios:
Non-accruing loans to total loans at end of year ....... 0.21 0.34 0.34 0.59 0.95
Allowance for loan losses to non-accruing loans
at end of year ....................................... 146.70 87.44 74.18 47.80 42.52
Allowance for loan losses to total loans at end of year 0.32 0.30 0.25 0.28 0.40
Non-performing assets to total assets at end of year .. 0.18 0.30 0.35 0.48 0.67
Ratio of net charge-offs during the year to average
loans outstanding during the year .................... 0.01 0.03 0.04 0.08 0.16
Capital Ratios:
Stockholders' equity to total assets at end of year ... 6.59 6.90 6.68 7.36 8.34
Average stockholders' equity to average total assets .. 6.78 6.67 7.14 7.76 9.80
Tangible capital to tangible assets at end of year(3) . 7.76 7.88 7.09 5.61 5.92
Core capital to adjusted tangible assets at end of
year(3) .............................................. 7.76 7.88 7.11 5.64 5.97
Risk-based capital to risk-weighted assets at end of
year(3) .............................................. 15.50 16.29 15.16 12.22 13.47
Other Data:
Number of branch offices at end of year ............... 20 20 18 17 17
Number of deposit accounts at end of year ............. 88,300 88,200 87,500 85,400 81,700
Cash dividends declared per common share ........... $ 0.160 $ 0.155 $ 0.140 $ 0.105 --
(1) Fiscal 1997 results include the effect of a one-time SAIF recapitalization
assessment of approximately $4.8 million, or $3.1 million net of taxes.
Excluding this non- recurring assessment, return on average assets would
have been 0.83%, return on average stockholders' equity would have been
10.70%, the ratio of non-interest expense to average total assets would have
been 1.47% and the efficiency ratio would have been 43.92%.
(2) The ratio of earnings to fixed charges excluding interest on deposits is
calculated by dividing income before taxes and extraordinary items before
interest on borrowings by interest on borrowings on a pretax basis. The
ratio of earnings to fixed charges including interest on deposits is
calculated by dividing income before income taxes and extraordinary items
before interest on deposits and borrowings by interest on deposits plus
interest on borrowings on a pretax basis.
(3) Represents regulatory capital ratios for the Bank.
29
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
In July 1994, PennFed became the savings and loan holding company of the Bank.
Currently, the results of operations of the Company are primarily those of the
Bank and its subsidiaries and the Trust.
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. 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 laws, regulations or
government policies may also have a material impact on the Company.
Management Strategy
Management's primary goal will continue to be improved earnings, while managing
risks, including liquidity and interest rate risks, so as to enhance stockholder
value, while fostering and maintaining customer confidence. The Company's
current strategies focus on: (i) emphasizing lending secured by one- to
four-family residential first mortgages, (ii) increasing the commercial and
multi-family and consumer loan portfolios, (iii) maintaining asset quality, (iv)
increasing core deposit balances, (v) managing the Company's exposure to
interest rate risk, (vi) improving non-interest income and (vii) controlling
non-interest expenses.
Emphasizing Lending Secured by One- to Four-Family Residential First Mortgages.
The Company will continue to emphasize production (through origination and
purchase) of traditional one- to four-family first mortgage loans secured by
properties located primarily in New Jersey. The Company produced $278.3 million,
$326.7 million and $373.6 million in one- to four-family mortgage loans in
fiscal 2000, 1999 and 1998, respectively. The Company's interest income has been
derived primarily from one- to four-family mortgage loans on residential real
estate which totaled $1.1 billion or 85.3% of the Company's gross loan portfolio
at June 30, 2000. During fiscal 1999, in an effort to mitigate the effects of
low interest rates and a flat yield curve, the Company sold approximately $150.5
million of low-coupon, longer duration one- to four-family mortgage loans. Due
to a majority of one- to four-family residential mortgage loan production being
adjustable rate and due to the higher interest rate environment during the year
ended June 30, 2000, loan sale activity was reduced significantly from the
fiscal 1999 levels, as the majority of production was retained in portfolio. For
the year ended June 30, 2000, the Company sold loans totaling $5.5 million. The
level of such activity will continue to be evaluated with primary consideration
given to interest rate risk and long-term profitability and liquidity
objectives. In early fiscal 2001, the Company engaged in loan sales activity in
an effort to provide liquidity, manage interest rate risk and to help mitigate
the effects of the flat yield curve.
Increasing the Commercial and Multi-Family and Consumer Loan Portfolios. In
addition to one- to four-family residential first mortgage lending, the Company
will continue its emphasis on increasing the commercial and multi-family and
consumer loan porfolios as a percentage of total loans. Such loans reprice more
frequently, have shorter maturities, and/or have higher yields than one- to
four-family first mortgage loans. The Company originated $95.7 million, $75.5
million and $56.5 million of commercial and multi-family and consumer loans in
fiscal 2000, 1999 and 1998, respectively. As of June 30, 2000, 1999 and 1998
commercial and multi-family and consumer loans represented 14.7%, 13.9% and
11.0%, respectively, of the total gross loan portfolio.
Maintaining Asset Quality. The Company's loan portfolio consists primarily of
one- to four-family mortgages, which are considered to have less risk than
commercial and multi-family real estate or consumer loans.
The Company's non-performing assets consist of non-accruing loans and real
estate owned. The Company focuses on strong underwriting and collection efforts
and aggressive marketing of real estate owned properties. In addition, the
Company has occasionally restructured loans in order to return the loan to a
performing status. As a result, non-performing assets as a percentage of total
assets was 0.18% at June 30, 2000.
Increasing Core Deposit Balances. The Company's primary source of funds is
deposits. The Company will continue to emphasize growth in lower costing core
deposits, primarily checking deposits. Checking deposits increased $17.4
million, or 18.1%, in fiscal 2000 and $16.9 million, or 21.34%, in fiscal 1999.
30
Managing the Company's Exposure to Interest Rate Risk. The Company has an
asset/liability committee that meets no less than weekly to price loan and
deposit products and monthly to develop, implement and review strategies and
policies to manage interest rate risk. The Company has endeavored to manage its
interest rate risk through the pricing and diversification of its loan and
deposit products, including the focus on the production of first mortgage
products with adjustable rate features and/or with shorter terms to maturity, as
well as the origination of commercial and multi-family real estate and consumer
loans which generally have shorter expected average lives or reprice at shorter
intervals than one- to four-family residential first mortgage products. The
Company has also engaged in one-to four-family mortgage loan sales whereby
longer duration conventional loans have been sold. Furthermore, as part of its
interest rate risk strategy, the Company has emphasized checking products and
utilized intermediate/longer-term borrowings and has at select times emphasized
longer term certificates of deposit. See "Interest Rate Sensitivity Analysis"
and "Asset/Liability Strategy."
Improving Non-Interest Income. The Company has and will continue to seek
additional ways of improving non-interest income. Total service charges and
other non-interest income, excluding the net gain on sales of loans and real
estate operations, reflected a $142,000, or 5.3%, increase for fiscal 2000
compared to fiscal 1999, due to growth in checking accounts and earnings from
the Bank'sInvestment Services at Penn Federal program. The program gives
customers convenient access to financial consulting/advisory services and
related uninsured non-deposit investment and insurance products at local branch
offices through a non-affiliated entity.
Controlling Non-Interest Expenses. Non-interest expenses are carefully
monitored, which includes ongoing reviews of staffing levels, facilities and
operations. The Company's ratio of non-interest expenses to average total assets
was 1.20% for the year ended June 30, 2000.
Interest Rate Sensitivity Analysis
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 improve net interest income. For an institution with a
positive gap, the reverse would be expected.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Company's exposure to interest rate risk. Management
maintains an asset/liability committee consisting of the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer, the Lending
Group Executive, the Retail Banking Group Executive, the Treasurer and the
Customer Support/Operations Group Executive, which meets regularly and reviews
the Company's interest rate risk position and makes recommendations for
adjusting this position. In addition, the Board reviews on a monthly basis the
Company's asset/liability position, including simulations of the effect on the
Company's capital and earnings of various interest rate scenarios and
operational strategies.
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps. Except for the effects
of prepayments and scheduled principal amortization on mortgage related assets,
the table presents principal cash flows and related weighted average interest
rates by the earlier of term to repricing or contractual term to maturity.
Callable government agency securities are assumed to be called within one year
if their stated interest rates are at or above current market rates. If the
stated interest rate is below current market rates, these callable securities
are assumed to be called at an estimated average life of approximately 4.0
years. For interest rate swaps, the table
31
presents notional amounts and weighted average interest rates by call date or
contractual maturity date.
Residential fixed and adjustable rate loans are assumed to prepay at an
annualized rate between 8% and 12%. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 5% and 37% while
consumer loans are assumed to prepay at a 34% rate. Fixed and adjustable rate
mortgage-backed securities have annual payment assumptions ranging from 15% to
60%. Demand loans and loans which have no repayment schedule or stated final
maturity, are assumed to be due within six months. Loan and mortgage-backed
securities balances are net of non-performing loans and are not adjusted for
unearned discounts, premiums, and deferred loan fees.
The Company assumes that savings account balances decay gradually over time.
Based on historical information, 12% of such balances roll-off within one year;
10% roll-off in the second year; 8% roll-off in the third year; and 5% roll-off
each year thereafter. At June 30, 2000, $101.1 million, or 66%, of savings
accounts roll-off after five years. Transaction accounts, excluding money market
accounts, are assumed to roll-off after five years. Money market accounts are
assumed to be variable accounts and are reported as repricing within six months.
No roll-off rate is applied to certificates of deposit. Fixed maturity deposits
reprice at maturity.
32
Maturing or Repricing
---------------------------------------------------------------------------------------------
Year ended June 30,
---------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---------------------------------------------------------------------------------------------
(Dollars in thousands)
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family . . . . . . . . . . $ 78,127 $ 79,005 $ 73,223 $ 67,600 $ 63,090 $297,349 $ 658,394 $ 635,889
Average interest rate . . . . . . . . 7.26% 7.25% 7.24% 7.24% 7.25% 7.30% 7.27%
Adjustable rate mortgage loans
including
one- to four-family and commercial
and multi-family . . . . . . . . . . $139,106 $ 84,584 $ 87,984 $ 68,276 $ 77,280 $ 38,434 $ 495,664 $ 480,092
Average interest rate . . . . . . . . 7.69% 7.41% 7.40% 7.41% 7.47% 8.13% 7.55%
Consumer loans including
demand loans . . . . . . . . . . . . $ 68,202 $ 12,422 $ 8,407 $ 5,775 $ 2,313 $ -- $ 97,119 $ 96,291
Average interest rate . . . . . . . . 8.37% 7.78% 7.78% 7.78% 7.78% 0.00% 8.20%
Investment securities and other . . . $ 22,325 $ 2,000 $ 274,532 $ -- $ -- $ 26,464 $ 325,321 $ 300,938
Average interest rate . . . . . . . . 6.75% 8.72% 6.87% 0.00% 0.00% 8.15% 6.98%
Mortgage-backed securities . . . . . $ 39,872 $ 15,572 $ 11,365 $ 8,902 $ 7,354 $ 4,328 $ 87,393 $86,861
Average interest rate . . . . . . . . 7.22% 6.92% 7.03% 7.00% 7.00% 7.01% 7.09%
Total interest-earning assets . . . . $347,632 $193,583 $ 455,511 $150,553 $150,037 $366,575 $1,663,891 $1,600,071
=============================================================================================
Savings deposits . . . . . . . . . . $ 18,444 $ 13,524 $ 9,736 $ 5,600 $ 5,320 $101,055 $ 153,679 $ 153,679
Average interest rate . . . . . . . . 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
Money market and demand deposits
(transaction accounts) . . . . . . . $ 11,099 $ -- $ -- $ -- $ -- $113,349 $ 124,448 $ 124,448
Average interest rate . . . . . . . . 2.05% 0.00% 0.00% 0.00% 0.00% 0.94% 1.04%
Certificates of deposit . . . . . . . $567,734 $123,271 $ 54,168 $ 4,825 $ 50,097 $ 82 $ 800,177 $ 798,985
Average interest rate . . . . . . . . 5.64% 6.16% 6.20% 5.35% 6.20% 5.42% 5.79%
FHLB of New York advances . . . . . . $ 50,000 $ 70,000 $ 135,000 $ 19,000 $ 90,000 $ 465 $ 364,465 $ 353,736
Average interest rate . . . . . . . . 6.26% 6.06% 6.08% 5.15% 6.36% 7.39% 6.12%
Other borrowings . . . . . . . . . . $ 92,775 $ 19,400 $ -- $ -- $ -- $ -- $ 112,175 $ 111,939
Average interest rate . . . . . . . . 6.45% 6.10% 0.00% 0.00% 0.00% 0.00% 6.39%
Trust Preferred securities . . . . . $ -- $ -- $ -- $ -- $ -- $ 32,805 $ 32,805 $ 29,843
Average interest rate . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00% 8.90% 8.90%
Total deposits, borrowings and
Trust Preferred securities . . . . . $740,052 $226,195 $198,904 $ 29,425 $145,417 $247,756 $1,587,749 $1,489,939
Interest rate swaps
(pay fixed, receive floating) . . . . ($ 10,000) $ 10,000 $ -- $ -- $ -- $ -- $ -- $ 264
Average pay rate . . . . . . . . . . 6.23% 4.99% -- -- -- -- 5.61% --
Average receive rate . . . . . . . . 6.77% -- -- -- -- -- 6.77% --
Total deposits, borrowings and Trust
Preferred securities including the
effects of interest rate swaps . . . $730,052 $236,195 $ 198,904 $ 29,425 $145,417 $247,756 $1,587,749 $1,490,203
=============================================================================================
Interest earning assets less deposits,
borrowings and Trust Preferred
securities (interest-rate sensitivity
gap) . . . . . . . . . . . . . . . . ($382,420) ($42,612) $ 256,607 $121,128 $ 4,620 $118,819 $ 76,142
=============================================================================================
Cumulative interest-rate sensitivity
gap . . . . . . . . . . . . . . . . . ($382,420) ($425,032) ($ 168,425) ($ 47,297) ($42,677) $ 76,142
======================================================================
Cumulative interest-rate sensitivity
gap as a percentage of total assets
at June 30, 2000 . . . . . . . . . . (22.12%) (24.58%) (9.74%) (2.74%) (2.47%) 4.40%
======================================================================
Cumulative interest-rate sensitivity
gap as a percentage of total interest-
earning assets at June 30, 2000 . . . (22.98%) (25.54%) (10.12%) (2.84%) (2.56%) 4.58%
======================================================================
Cumulative interest-earning assets as
a percentage of cumulative deposits,
borrowings and Trust Preferred
securities at June 30, 2000 . . . . . 47.62% 56.01% 85.54% 96.04% 96.82% 104.80%
======================================================================
33
At June 30, 2000, 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 $382.4 million,
representing a one year negative gap of 22.12% of total assets, compared to a
one year negative gap of 13.61% of total assets at June 30, 1999. See
"Asset/Liability Strategy." The Company's negative gap position widened from
June 30, 1999 due in part to a decline in prepayments and a rise in short-term
funding balances. Asset cash flows lengthened as mortgage rates steadily
increased and refinancing activity slowed significantly. To mitigate the
negative impact such activity had on interest rate risk, the Company focused on
increasing balances of adjustable rate one- to four-family loans, as well as
fixed and variable rate consumer loan products, whose repayment and repricing
characteristics are typically faster than their fixed rate one- to four-family
counterparts. Funding challenges surrounding the year 2000 concerns resulted in
a slight increase in short-term deposits, but efforts to increase core deposit
balances and medium-term funding also proved successful throughout the year.
Interest rate swaps, designed to synthetically lengthen the maturities of
short-term deposits, were reduced to $30 million in notional amount at June 30,
2000 from $150 million in notional amount at June 30, 1999 due to $40 million of
maturities and $80 million of early terminations. This decline in the hedge
portfolio resulted in a deterioration of the Company's negative gap position.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of analysis presented in the foregoing table 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 table. 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 also regularly
monitored by management through selected interest rate risk ("IRR") measures,
including an IRR "Exposure Measure" or "Post-Shock" 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 net portfolio value ("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. A 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 June 30, 2000, the Bank's internally generated initial NPV ratio was
10.16%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 7.38%. The change in the NPV ratio, or the Bank's Sensitivity Measure
was 2.78%. Though NPV is "measured" on an unconsolidated basis for regulatory
purposes, it is managed on a consolidated basis. As of June 30, 2000, the
Company's internally generated initial NPV ratio was 10.41%, the Post-Shock
ratio was 7.56%, and the Sensitivity Measure was 2.85%. 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 filed by the Bank with the OTS,
coupled with non-institution specific assumptions which are based on national
averages. As of June 30, 2000, the Bank's initial NPV ratio, as measured by the
OTS, was 6.97%, the Bank's Post-Shock ratio was 3.62% and the Sensitivity
Measure was 3.35%.
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.
34
At June 30, 2000, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 17.6% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
Asset/Liability Strategy
The primary elements of the Company's asset/liability strategy include the
following:
1. The Company has focused on shortening the average life and duration of its
portfolio of one- to four-family mortgage loans by promoting one year adjustable
rate products, with initial fixed rate terms of 3, 5 and 7 years, 15 and 30 year
bi-weekly mortgages and fixed rate products with terms of 10, 15 and 20 years.
2. The Company has emphasized the origination of variable rate home equity lines
of credit and fixed rate second mortgage loans as well as variable and fixed
rate commercial and multi-family real estate loans having maturities or terms to
repricing significantly shorter than one- to four-family residential mortgage
loans.
3. The Company has periodically sold a portion of its one- to four-family whole
mortgage loan portfolio in an effort to shorten the average life and duration,
as well as to mitigate prepayment risk and reduce borrowings. The level of such
activity will continue to be evaluated with primary consideration given to
interest rate risk and long-term profitability and liquidity objectives.
4. The Company has emphasized the lengthening of maturities of its liabilities
through its pricing of longer-term certificates of deposit and by utilizing
intermediate- and longer-term borrowings, subject to market conditions.
5. The Company has focused on developing and strengthening customer
relationships in an effort to improve earnings and funding stability. Several
products offering pricing incentives and/or special features have been developed
to reward customers with multiple accounts (such as bi-weekly mortgages and Penn
Preferred checking).
6. The Company has also emphasized growth in core deposit accounts, particularly
checking accounts, as such funds are lower cost alternatives, are relatively
stable and, thus, have a longer duration and assist in strengthening customer
relationships.
During fiscal 2000, each of the strategies noted above was employed to manage
the Company's sensitivity to changes in interest rates. Higher market rates of
interest, slower prepayment speeds, and a flat Treasury curve resulted in a
$154.8 million increase in one- to four-family first mortgage loans between June
30, 1999 and June 30, 2000. Adjustable rate one- to four-family loans accounted
for $136.5 million or 88% of the increase. Consumer loan balances increased
$25.0 million; $14.6 million in prime-based home equity lines of credit, the
remainder principally in fixed rate second mortgages and other products of
shorter duration than one- to four-family residential mortgages. Commercial and
multi-family real estate loan balances grew $11.6 million during the fiscal year
with $9.7 million of the growth in adjustable rate products. Due to a majority
of one- to four-family residential mortgage loan production being adjustable
rate and due to the higher interest rate environment during the year ended June
30, 2000, loan sale activity was reduced significantly from the fiscal 1999
levels, as the majority of 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 and liquidity objectives. In
early fiscal 2001, the Company engaged in loan sales activity in an effort to
provide liquidity, manage interest rate risk and help to mitigate the effects of
the flat yield curve.
At June 30, 2000, medium and long-term certificates of deposits with remaining
maturities greater than one year totaled $232.4 million compared to $170.6
million at June 30, 1999. The lengthening of certificates of deposit maturities
was complemented by a $17.4 million increase in checking account balances,
offset by $12.5 million decline in savings and money market account balances.
Furthermore, wholesale borrowings with remaining maturities greater than one
year stood at $333.9 million at June 30, 2000, reflecting growth of $70.1
million when compared to June 30, 1999. Short-term retail and wholesale funding
balances with remaining maturities less than one year grew $19.7 million between
June 30, 1999 and June 30, 2000.
Generally, the investment policy of the Company is to invest funds not utilized
in its lending activities or required for other corporate purposes among various
categories of investments and maturities based upon the Company's
asset/liability management policies. Investments generally include U.S.
government agency securities and mortgage-backed securities.
35
The Company's cost of funds responds more rapidly to changes in interest rates
than its yield on earning assets due to the shorter terms of its funding
portfolios. Consequently, the results of operations are influenced by the levels
of short-term interest rates. The Company offers a range of maturities on its
deposit products at competitive rates and monitors the maturities on an ongoing
basis.
Additionally, the Company emphasizes and promotes its savings, money market and
demand deposit accounts, and certificates of deposit with varying maturities
through five years, principally within its primary market areas. The balances of
savings, money market and demand deposit accounts, which represented
approximately 25.7% of total deposits at June 30, 2000, tend to be less
susceptible to rapid changes in interest rates than certificates of deposit
balances.
Management will continue to monitor and employ such strategies, as necessary, in
conjunction with its overall strategic objectives.
36
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 years ended June 30,
2000, 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.
Year ended June 30,
--------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans . . . . . . . . . . . . . . . $ 988,454 $ 69,085 6.99% $ 970,924 $ 67,785 6.98% $ 889,169 $ 64,852 7.29%
Commercial and multi-family real
estate loans . . . . . . . . . . . 79,604 6,788 8.53 68,528 5,922 .64 58,196 5,235 9.00
Consumer loans . . . . . . . . . . 83,187 6,153 7.40 63,627 4,581 7.20 45,794 3,735 8.16
--------- ------ --------- --------- --------- -------
Total loans receivable . . . . . . 1,151,245 82,026 7.12 1,103,079 78,288 7.10 993,159 73,822 7.43
Federal funds sold . . . . . . . . 307 17 5.54 1,379 68 4.93 346 18 5.20
Investment securities and other . . 323,190 22,547 6.98 234,576 16,318 6.96 134,239 9,814 7.31
Mortgage-backed securities . . . . 105,913 7,173 6.77 161,702 10,883 6.73 248,812 17,151 6.89
--------- ------ --------- --------- --------- -------
Total interest-earning assets . . . 1,580,655 $ 111,763 7.07 1,500,736 $105,557 7.03 1,376,556 $100,805 7.32
=========
Non-interest earning assets . . . . 55,857 57,450 54,614
---------- ---------- ----------
Total assets . . . . . . . . . . . $1,636,512 $1,558,186 $1,431,170
========== ========== ==========
Deposits, borrowings and Trust
Preferred securities:
Money market and demand
deposits . . . . . . . . . . . . . $ 115,827 $ 1,329 1.15% $ 102,425 $ 1,188 1.16% $ 84,958 $ 1,049 1.23%
Savings deposits . . . . . . . . . 161,845 2,645 1.63 163,636 2,879 1.76 166,243 3,638 2.19
Certificates of deposit . . . . . . 786,949 42,784 5.44 792,507 44,581 5.63 742,341 43,513 5.86
--------- ------ --------- --------- --------- -------
Total deposits . . . . . . . . . . 1,064,621 46,758 4.39 1,058,568 48,648 4.60 993,542 48,200 4.85
FHLB of New York advances . . . . 322,754 19,591 6.07 266,906 16,052 6.01 218,568 13,403 6.13
Other borrowings . . . . . . . . . 81,053 4,852 5.99 73,514 4,086 5.56 73,599 4,266 5.80
--------- ------ --------- --------- --------- -------
Total deposits and borrowings . 1,468,428 71,201 4.85 1,398,988 68,786 4.92 1,285,709 65,869 5.12
Trust Preferred securities . . . . 32,774 3,132 9.56 32,712 3,132 9.57 22,748 2,174 9.56
--------- ------ --------- --------- --------- -------
Total deposits, borrowings
and Trust Preferred securities . 1,501,202 $ 74,333 4.95 1,431,700 $ 71,918 5.02 1,308,457 $ 68,043 5.20
========= ========= ========
Other liabilities . . . . . . . . . 24,417 22,619 20,576
------ ------ ------
Total liabilities . . . . . . . . . 1,525,619 1,454,319 1,329,033
Stockholders' equity . . . . . . . 110,893 103,867 102,137
------- ------- -------
Total liabilities and
stockholders' equity . . . . . . . $1,636,512 $1,558,186 $1,431,170
========== ========== ==========
Net interest income and net interest
rate spread . . . . . . . . . . . . $ 37,430 2.12% $ 33,639 2.01% $ 32,762 2.12%
======== ==== ======== ==== ======== ====
Net interest-earning assets and
interest margin . . . . . . . . . . $ 79,453 2.37% $ 69,036 2.24% $ 68,099 2.38%
========== ==== ========== ==== ========== ====
Ratio of interest-earning assets to
deposits, borrowings and
Trust Preferred securities . . . . 105.29% 104.82% 105.20%
====== ====== ======
37
Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (1) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (2) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (3) changes attributable to
changes in rate/volume (changes in rate multiplied by changes in volume) and (4)
the net change.
Year ended June 30,
----------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------- -------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
----------------------------------------------------------------------------
(In thousands)
Interest-earning assets:
One- to four-family
mortgage loans . . . . . . . . . . . . $1,224 $ 75 $ 1 $1,300 $5,963 $ (2,775) $(255) $2,933
Commercial and multi-family
real estate loans . . . . . . . . . . . 957 (77) (14) 866 929 (206) (36) 687
Consumer loans . . . . . . . . . . . . . 1,409 124 39 1,572 1,455 (438) (171) 846
----------------------------------------------------------------------------
Total loans receivable . . . . . . . . . 3,590 122 26 3,738 8,347 (3,419) (462) 4,466
Federal funds sold . . . . . . . . . . . (53) 8 (6) (51) 54 (1) (3) 50
Investment securities and other . . . . . 6,164 47 18 6,229 7,336 (476) (356) 6,504
Mortgage-backed securities . . . . . . . (3,755) 68 (23) (3,710) (6,005) (405) 142 (6,268)
----------------------------------------------------------------------------
Total interest-earning assets . . . . . . $5,946 $ 245 $ 15 $6,206 $9,732 $ (4,301) $(679) $4,752
============================================================================
Deposits, borrowings and Trust Preferred
securities:
Money market and demand
deposits . . . . . . . . . . . . . . . . $ 155 $ (12) $ (2) $ 141 $ 216 $ (64) $ (13) $ 139
Savings deposits . . . . . . . . . . . . (31) (205) 2 (234) (57) (713) 11 (759)
Certificates of deposit . . . . . . . . (313) (1,495) 11 (1,797) 2,941 (1,754) (119) 1,068
----------------------------------------------------------------------------
Total deposits . . . . . . . . . . . . . (189) (1,712) 11 (1,890) 3,100 (2,531) (121) 448
FHLB of New York advances . . . . . . . 3,359 149 31 3,539 2,964 (258) (57) 2,649
Other borrowings . . . . . . . . . . . . 419 315 32 766 (5) (175) -- (180)
----------------------------------------------------------------------------
Total deposits and borrowings 3,589 (1,248) 74 2,415 6,059 (2,964) (178) 2,917
Trust Preferred securities . . . . . . . 6 (6) -- -- 952 4 2 958
----------------------------------------------------------------------------
Total deposits, borrowings
and Trust Preferred securities . . . . $3,595 $(1,254) $ 74 $2,415 $7,011 $ (2,960) $(176) $3,875
============================================================================
Net change in net interest income $2,351 $ 1,499 $(59) $3,791 $2,721 $ (1,341) $(503) $ 877
============================================================================
38
Financial Condition
Comparison of Financial Condition at June 30, 2000 and June 30, 1999
Total assets increased $170.5 million to $1.729 billion at June 30, 2000 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 increased $16.8 million to $1.080 billion at June 30, 2000 from $1.064
billion at June 30, 1999. The Company's focus on lower costing deposits resulted
in a $17.4 million, or 18.1%, increase in demand accounts. FHLB of New York
advances and other borrowings increased $143.4 million from $333.2 million at
June 30, 1999, reflecting growth primarily in medium-term borrowings.
Non-performing assets at June 30, 2000 totaled $3.0 million, representing 0.18%
of total assets, compared to $4.6 million, or 0.30% of total assets, at June 30,
1999. Non-accruing loans totaled $2.7 million, with a ratio of non-accruing
loans to total loans of 0.21% at June 30, 2000 as compared to $3.7 million, or
0.34% of total loans, at June 30, 1999. Real estate owned decreased to $334,000
at June 30, 2000 from $936,000 at June 30, 1999.
Stockholders' equity at June 30, 2000 totaled $114.0 million compared to $107.5
million at June 30, 1999. The increase primarily reflects the net income
recorded for the year ended June 30, 2000, partially offset by the repurchase of
492,000 shares of the Company's outstanding stock at an average market price of
$14.09 per share and the declaration of dividends.
Results of Operations
Comparison of Operating Results for the Years Ended June 30, 2000 and June 30,
1999
General. For the year ended June 30, 2000 net income was $12.9 million, or $1.50
per diluted share, as compared to net income of $11.5 million, or $1.29 per
diluted share for the prior year.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 2000 increased to $111.8 million from $105.6 million for the year ended
June 30, 1999. The increase in fiscal 2000 was primarily due to an increase in
average interest-earning assets, when compared to the prior year. Average
interest-earning assets were $1.581 billion for the year ended June 30, 2000
compared to $1.501 billion for the prior year. In addition, the average yield
earned on interest-earning assets increased slightly to 7.07% for the year ended
June 30, 2000 from 7.03% for the year ended June 30, 1999.
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 2000 increased $1.3 million, or 1.9%, when compared to the prior
year. The increase in interest income on residential one- to four-family
mortgage loans was due to a $17.5 million increase in the average balance
outstanding to $988.5 million for the year ended June 30, 2000 compared to
$970.9 million for the prior year. The average yield earned on this loan
portfolio increased one basis point to 6.99% for the year ended June 30, 2000
from 6.98% for the prior year.
For the year ended June 30, 2000, interest income on commercial and multi-family
real estate loans increased $866,000 when compared to the prior year. The
increase in interest income on the commercial and multi-family real estate
portfolio was attributable to an increase of $11.1 million in the average
outstanding balance for fiscal 2000, when compared to the prior year. 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
8.53% for the year ended June 30, 2000, compared to 8.64% for the prior year.
Growth in consumer loans contributed to an increase of $1.6 million in the
interest income earned on this loan portfolio for the year ended June 30, 2000,
compared to the prior year. Also contributing to an increase in interest income
on consumer loans was an increase in the average yield earned on the consumer
loan portfolio to 7.40% in fiscal 2000, compared to 7.20% for the prior year.
Interest income on investment securities and other interest-earning assets
increased $6.2 million for the year ended June 30, 2000, from the prior year.
The increase was primarily due to an $88.6 million increase in the average
balance outstanding for the year ended June 30, 2000, over the prior year. The
average yield earned on investment
39
securities and other interest-earning assets for the year ended June 30, 2000
increased slightly to 6.98% from 6.96% for the prior year.
Interest income on the mortgage-backed securities portfolio decreased $3.7
million for the year ended June 30, 2000 as compared to the prior year. The
decrease in interest income on mortgage-backed securities primarily reflects a
$55.8 million decrease in the average balance outstanding to $105.9 million for
the year ended June 30, 2000 compared to $161.7 million for the prior year.
Interest Expense. Interest expense increased $2.4 million for the year ended
June 30, 2000 from $71.9 million for the year ended June 30, 1999. The increase
in the current year was primarily due to an increase in the Company's
borrowings. Average deposits and borrowings increased $69.4 million for the year
ended June 30, 2000 when compared to the prior year period, with $63.4 million
of the increase in the Company's borrowings. For the year ended June 30, 2000,
there was a decrease in the average rate paid on deposits but an increase in the
cost of borrowings, when compared to the prior year. Overall, the average cost
of deposits and borrowings decreased to 4.85% for the year ended June 30, 2000
from 4.92% for the prior year. Including the Trust Preferred securities, the
average rate paid on deposits, borrowings and Trust Preferred securities
decreased to 4.95% in the current fiscal year from 5.02% paid in the prior year.
Net Interest and Dividend Income. Net interest and dividend income for the year
ended June 30, 2000 was $37.4 million, reflecting a $3.8 million increase from
$33.6 million recorded in the prior year. The increase primarily reflects an
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 year ended June 30, 2000 were 2.12% and 2.37%, respectively, an
increase from 2.01% and 2.24%, respectively, for the comparable prior year. 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 year ended June
30, 2000 was $860,000 compared to $780,000 for the prior year. The allowance for
loan losses at June 30, 2000 of $4.0 million showed an increase from $3.2
million at June 30, 1999. The allowance for loan losses as a percentage of
non-performing loans was 146.70% at June 30, 2000, compared to 87.44% at June
30, 1999 due primarily to the reduction in non-performing loans in fiscal 2000.
The allowance for loan losses was 0.32% of total loans at June 30, 2000,
compared to 0.30% at June 30, 1999.
Non-Interest Income. For the year ended June 30, 2000, non-interest income was
$2.9 million compared to $3.5 million for the prior year. The decrease was
primarily attributable to an $824,000 reduction in the net gain on sales of
loans during the year ended June 30, 2000, as compared to fiscal year 1999. The
$860,000 net gain on sales of loans for the year ended June 30, 1999 relates to
the approximate $150.5 million of one- to four-family residential mortgage loans
which were sold in the secondary market. For the year ended June 30, 2000, $5.5
million of one- to four- family residential mortgage loans were sold in the
secondary market early in the fiscal year for a net gain of $36,000. Due to the
majority of one- to four- family residential mortgage loan production being
adjustable rate and due to the higher interest rate environment in the current
year, loan sale activity was reduced from the fiscal 1999 levels, as the
majority of new production was retained in portfolio. The level of loan sale
activity will continue to be evaluated with primary consideration given to
interest rate risk, long-term profitability and liquidity objectives. Service
charge income for the year ended June 30, 2000 was $2.2 million, compared to
$2.1 million for the prior year. The net gain from real estate operations was
$114,000 for the year ended June 30, 2000. This compares to $31,000 for the year
ended June 30, 1999. For the years ended June 30, 2000, other non-interest
income reflects an $83,000 increase from the year ended June 30, 1999. For the
years ended June 30, 2000 and 1999, other non-interest income included $248,000
and $230,000 in earnings from the Investment Services at Penn Federal program,
respectively. Through this program, customers have convenient access to
financial consulting/advisory services and related uninsured non-deposit
investment and insurance products. In addition, other non-interest income for
the year ended June 30, 2000 included a $48,000 gain on the sale of a former
branch location.
Non-Interest Expenses. Non-interest expenses were $19.6 million for the year
ended June 30, 2000 compared to $18.6 million for the prior year. In February
and June of the prior fiscal year, the Company opened new branches in Toms River
and Livingston, NJ, respectively. The current year included a full year of
expenses associated with these branches resulting in an increase in non-interest
expenses in the current year when compared to the prior year. The Company's
noninterest expenses as a percent of average assets for the year ended June 30,
2000 of 1.20% was unchanged from the prior year.
40
Income Tax Expense. Income tax expense for the year ended June 30, 2000 was $7.1
million compared to $6.3 million for the year ended June 30, 1999. The effective
tax rate for the year ended June 30, 2000 was 35.4%. The effective tax rate was
35.5% for the year ended June 30, 1999.
Comparison of Operating Results for the Years Ended June 30, 1999 and June 30,
1998
General. For the year ended June 30, 1999, net income was $11.5 million, or
$1.29 per diluted share, compared to net income of $11.2 million, or $1.16 per
diluted share, for the year ended June 30, 1998.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 1999 increased to $105.6 million from $100.8 million for the year ended
June 30, 1998. The increase in the year ended June 30, 1999 was due to an
increase in average interest-earning assets, partially offset by a decrease in
the average yield earned on interest-earning assets. Average interest-earning
assets were $1.5 billion for the year ended June 30, 1999 compared to $1.4
billion for the prior fiscal year. The average yield on interest-earning assets
decreased to 7.03% for the year ended June 30, 1999 from 7.32% for the year
ended June 30, 1998.
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 1999 increased $2.9 million when compared to the prior fiscal
year. The increase in interest income on residential one- to four-family
mortgage loans was due to an increase of $81.8 million in the average balance
outstanding for the year ended June 30, 1999 over the prior fiscal year. The
increase in the average balance on residential one- to four-family mortgage
loans was partially offset by a decrease of 0.31% in the average yield earned on
this loan portfolio to 6.98% for the year ended June 30, 1999 from 7.29% for the
prior fiscal year.
Interest income on investment securities increased $6.5 million for the year
ended June 30, 1999 from the prior fiscal year. The increase was primarily due
to a $100.3 million increase in the average balance outstanding for fiscal 1999
compared to fiscal 1998. The increase in the average balance on investment
securities was partially offset by a 0.35% decrease in the average yield earned
on these securities for the year ended June 30, 1999 when compared to the prior
year.
Interest income on the mortgage-backed securities portfolio for the year ended
June 30, 1999 decreased $6.3 million when compared to the prior year. The
decrease in interest income on mortgage-backed securities primarily reflects an
$87.1 million decrease in the average balance outstanding for fiscal 1999
compared to the prior year.
Interest Expense. Interest expense increased $3.9 million for the year ended
June 30, 1999 from $68.0 million for fiscal 1998. The increase was attributable
to an increase in total average deposits, borrowings and Trust Preferred
securities, partially offset by a decrease in the Company's cost of funds.
Average deposits, borrowings and Trust Preferred securities increased $123.2
million for the year ended June 30, 1999 compared to the 1998 period. The
average rate paid on deposits, borrowings and Trust Preferred securities
decreased to 5.02% for the year ended June 30, 1999 from 5.20% for the prior
fiscal year. The average balance and interest expense for the year ended June
30, 1998 only included the Trust Preferred securities since their issuance date
in October 1997. Trust Preferred securities had an average balance of $32.7
million for the year ended June 30, 1999 compared to $22.7 million for the prior
year.
Net Interest and Dividend Income.Net interest and dividend income for the year
ended June 30, 1999 was $33.6 million, reflecting an increase from $32.8 million
recorded in the prior fiscal year. The increase reflects the Company's growth in
average assets, primarily in investment securities and loans receivable. The
increase in net interest and dividend income was partially offset by a decline
in the net interest rate spread. The net interest rate spread and net interest
margin for the year ended June 30, 1999 were 2.01% and 2.24%, respectively, a
decline from 2.12% and 2.38%, respectively, for the year ended June 30, 1998.
For the year ended June 30, 1999, the declines in the net interest rate spread
and net interest margin were partially due to the issuance of the Trust
Preferred securities. The declines in the net interest rate spread and net
interest margin were also attributable to the relatively flat yield curve
environment experienced during fiscal 1999 in which higher yielding assets
pre-paid at accelerated rates and were replaced by lower yielding assets. Since
the Company's liabilities generally reprice more quickly than its assets,
interest margins will likely decrease if interest rates rise.
Provision for Loan Losses.The provision for loan losses for the year ended June
30, 1999 was $780,000 compared to $600,000 for the prior fiscal year. The
allowance for loan losses at June 30, 1999 of $3.2 million reflects a $433,000
increase from the June 30, 1998 level. The allowance for loan losses as a
percentage of non-performing loans was 87.44% at June 30, 1999, compared to
74.18% at June 30, 1998. The increase is principally attributable to a decline
in
41
the Company's non-performing loans. The allowance for loan losses as a
percentage of total loans at June 30, 1999 was 0.30%.
Non-Interest Income. For the year ended June 30, 1999, non-interest income was
$3.5 million compared to $2.7 million for the prior fiscal year. Service charge
income increased to $2.1 million for the year ended June 30, 1999 versus $2.0
million for the comparable prior year. The net gain from real estate operations
was $31,000 for the year ended June 30, 1999. This compares to a net loss of
$156,000 for the year ended June 30, 1998. A net gain on sales of loans of
$860,000 was recorded for the year ended June 30,1999. Low-coupon, longer
duration one- to four-family residential mortgage loans totaling $150.5 million
were sold in the secondary market during the year ended June 30, 1999. Gains of
approximately $494,000 on sales of $70 million of one- to four-family mortgage
loans were reflected in the year ended June 30, 1998. The prior year loan sales
were undertaken to manage prepayment risk as part of the Company's
asset/liability management strategy. Recurring loan sales in fiscal 1999 were
undertaken to mitigate the effects of low interest rates and a flat yield curve.
A $221,000 improvement in other non-interest income reflected increases due to
earnings from theInvestment Services at Penn Federalprogram. Through this
program, customers have convenient access to financial consulting/advisory
services and related uninsured non-deposit investment products at local branch
offices through a non-affiliated entity.
Non-Interest Expenses. The Company's non-interest expenses were $18.6 million
for the year ended June 30, 1999 compared to $17.4 million for the prior year.
Non-interest expenses increased in fiscal 1999 to support the Company's
increased lending volumes and the new Bayville, Toms River and Livingston
branches which opened in October 1997, February 1999 and June 1999,
respectively. Nevertheless, the Company's non-interest expenses as a percent of
average assets declined slightly to 1.20% for the year ended June 30, 1999
compared to 1.22% for the prior year.
Income Tax Expense. Income tax expense for the year ended June 30, 1999 was $6.3
million compared to $6.2 million for the prior fiscal year. The effective tax
rate was 35.5% for the year ended June 30, 1999 compared to 35.8% for the year
ended June 30, 1998.
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 cost for the Year 2000 effort incurred in fiscal 1999 was $45,000. No
additional costs were incurred in fiscal 2000 and no additional expenditures are
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 include cash, accrued
interest receivable, certain time deposits, U.S. Treasury and government
agencies and other
42
securities and obligations generally having remaining maturities of less than
five years. All mortgage-backed securities are includable in liquid assets, as
well. 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 June 30, 2000 and 1999, the Bank's
liquidity ratios were 8.71% and 21.30%, respectively.
In the event that the Company should require funds beyond its ability to
generate them internally, additional sources of funds are available through the
use of FHLB of New York advances and reverse repurchase agreements. In addition,
the Company may access funds, if necessary, through the use of $107.0 million of
overnight repricing lines of credit and a $50.0 million one-month overnight
repricing line of credit from the FHLB of New York. 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
commitments, and to meet operating expenses. At June 30, 2000, the Company had
outstanding commitments to extend credit which amounted to $94.1 million
(including $65.7 million in available lines of credit) and commitments to
purchase loans of $26.8 million. 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 year ended June 30, 2000 were provided by
operating activities, proceeds from maturities of investment securities, an
increase in advances from the FHLB of New York and other borrowings, increased
deposits and principal repayments on loans and mortgage-backed securities.
During fiscal 2000, the cash provided was primarily used to fund investing
activities, which included the origination and purchase of loans and the
purchase of investment securities. During fiscal 1999, the Company's cash needs
were provided by operating activities, primarily from proceeds from the sales of
loans and from maturities of investment securities. During fiscal 1999, the cash
provided was principally used for investing activities, which included the
purchase of investment securities and the origination and purchase of loans. In
addition to cash provided by operating activities, the Company's fiscal 1998
cash needs were provided by increased deposits, an increase in advances from the
FHLB of New York and other borrowings and principal repayments of
mortgage-backed securities. Furthermore, during fiscal 1998, proceeds from the
Trust Preferred securities offering, maturities of investment securities and
sales of loans contributed to meeting the Company's cash needs. During fiscal
1998, 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 ratio of core capital to 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 June 30, 2000, the Bank exceeded all
regulatory capital requirements and qualified as a "well-capitalized"
institution. See "Regulation" and Note P - Stockholders' Equity and Regulatory
Capital, in the Notes to Consolidated Financial Statements.
The Company initiated a quarterly cash dividend on its common stock of $0.035
per share in the second quarter of fiscal 1997. The quarterly cash dividend was
increased to $0.04 per share in the second quarter of fiscal 1999. Total
dividends paid for the years ended June 30, 2000, 1999, and 1998 were $0.16 per
share, $0.155 per share and $0.14 per share, respectively. The declaration and
payment of dividends are subject to, among other things, PennFed's financial
condition and results of operations, regulatory capital requirements, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors.
43
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries West
Orange, New Jersey
We have audited the accompanying consolidated statements of financial condition
of PennFed Financial Services, Inc. and Subsidiaries (the "Company") as of June
30, 2000 and 1999, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2000. These consolidated 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PennFed Financial
Services, Inc. and Subsidiaries as of June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Parsippany, New Jersey
July 26, 2000
44
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30,
------------------------------
2000 1999
------------------------------
(Dollars in thousands)
Assets
Cash and cash equivalents .................................................... $ 13,866 $ 9,900
Investment securities held to maturity, at amortized cost, market value
of $278,643 and $281,880 at June 30, 2000 and 1999 ........................ 303,026 293,282
Mortgage-backed securities held to maturity, at amortized cost, market value
of $86,861 and $128,617 at June 30, 2000 and 1999 ......................... 87,561 127,983
Loans held for sale .......................................................... -- 5,180
Loans receivable, net of allowance for loan losses of $3,983 and $3,209
at June 30, 2000 and 1999 ................................................. 1,259,248 1,061,431
Premises and equipment, net .................................................. 20,076 19,240
Real estate owned, net ....................................................... 334 936
Federal Home Loan Bank of New York stock, at cost ............................ 22,295 16,623
Accrued interest receivable, net ............................................. 10,227 9,680
Goodwill and other intangible assets ......................................... 8,996 11,118
Other assets ................................................................. 3,590 3,390
------------------------------
$ 1,729,219 $ 1,558,763
==============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits ................................................................... $ 1,080,350 $ 1,063,600
Federal Home Loan Bank of New York advances ................................ 364,465 244,465
Other borrowings ........................................................... 112,175 88,738
Mortgage escrow funds ...................................................... 11,888 10,102
Due to banks ............................................................... 7,908 7,385
Accounts payable and other liabilities ..................................... 5,647 4,230
------------------------------
Total liabilities .......................................................... 1,582,433 1,418,520
------------------------------
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures .................................. 34,500 34,500
Unamortized issuance expenses .............................................. (1,695) (1,757)
------------------------------
Net Trust Preferred securities ............................................. 32,805 32,743
------------------------------
Commitments and Contingencies (Note O)
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 8,396,019
and 8,813,416 shares outstanding at June 30, 2000 and 1999
(excluding shares held in treasury of3,503,981 and
3,084,442 at June 30, 2000 and 1999) ...................................... 60 59
Additional paid-in capital .................................................. 60,523 59,488
Employee Stock Ownership Plan Trust debt .................................... (2,320) (2,804)
Retained earnings, partially restricted ..................................... 91,840 80,673
Treasury stock, at cost, 3,503,981 and 3,084,442 shares
at June 30, 2000 and 1999 ................................................. (36,122) (29,916)
------------------------------
Total stockholders' equity .................................................... 113,981 107,500
------------------------------
$1,729,219 $1,558,763
==============================
See notes to consolidated financial statements
45
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended June 30,
-----------------------------------------
2000 1999 1998
-----------------------------------------
(Dollars in thousands)
Interest and Dividend Income:
Interest and fees on loans ........................................... $ 82,026 $ 78,288 $ 73,822
Interest on federal funds sold ....................................... 17 68 18
Interest and dividends on investment securities ...................... 22,547 16,318 9,814
Interest on mortgage-backed securities ............................... 7,173 10,883 17,151
-----------------------------------------
111,763 105,557 100,805
-----------------------------------------
Interest Expense:
Deposits ............................................................. 46,758 48,648 48,200
Borrowed funds ....................................................... 24,443 20,138 17,669
Trust Preferred securities ........................................... 3,132 3,132 2,174
-----------------------------------------
74,333 71,918 68,043
-----------------------------------------
Net Interest and Dividend Income Before
Provision for Loan Losses ............................................ 37,430 33,639 32,762
Provision for Loan Losses ............................................. 860 780 600
-----------------------------------------
Net Interest and Dividend Income After
Provision for Loan Losses ........................................... 36,570 32,859 32,162
-----------------------------------------
Non-Interest Income:
Service charges ...................................................... 2,172 2,113 1,974
Net gain (loss) from real estate operations .......................... 114 31 (156)
Net gain on sales of loans ........................................... 36 860 528
Other ................................................................ 625 542 321
-----------------------------------------
2,947 3,546 2,667
-----------------------------------------
Non-Interest Expenses:
Compensation and employee benefits ................................... 9,843 8,961 8,109
Net occupancy expense ................................................ 1,663 1,333 1,275
Equipment ............................................................ 1,763 1,642 1,542
Advertising .......................................................... 393 359 380
Amortization of intangibles .......................................... 2,121 2,363 2,437
Federal deposit insurance premium .................................... 429 627 591
Other ................................................................ 3,384 3,359 3,055
-----------------------------------------
19,596 18,644 17,389
-----------------------------------------
Income Before Income Taxes ............................................ 19,921 17,761 17,440
Income Tax Expense .................................................... 7,051 6,304 6,242
-----------------------------------------
Net Income ............................................................ $ 12,870 $ 11,457 $ 11,198
=========================================
Weighted average number of common shares outstanding:
Basic ................................................................ 8,138,104 8,408,175 8,949,357
=========================================
Diluted .............................................................. 8,582,513 8,878,491 9,689,655
=========================================
Net income per common share:
Basic ................................................................ $ 1.58 $ 1.36 $ 1.25
=========================================
Diluted .............................................................. $ 1.50 $ 1.29 $ 1.16
=========================================
See notes to consolidated financial statements.
46
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 2000, 1999 and 1998
Restricted Employee
Stock - Stock
Serial Additional Management Ownership
Preferred Common Paid-In Recognition Plan Trust Retained Treasury
Stock Stock Capital Plan Debt Earnings Stock
--------------------------------------------------------------------------------
(Dollars in thousands)
Balance at June 30, 1997 ........................ $-- $ 60 $ 57,441 $(1,062) $ (3,671) $61,051 (16,549)
Allocation of ESOP stock ........................ 418
Employee Stock Ownership Plan (ESOP) and
Management Recognition Plan (MRP)
adjustment .................................... 837
Purchase of 325,000 shares of treasury stock (5,581)
Issuance of 66,740 shares of treasury stock
for options exercised and Dividend
Reinvestment Plan (DRP) ....................... (166) 498
Amortization of MRP stock ....................... 531
Cash dividends of $0.14 per common share ........ (1,302)
Net income for the year ended June 30, 1998...... 11,198
--------------------------------------------------------------------------------
Balance at June 30, 1998 ........................ -- 60 58,278 (531) (3,253) 70,781 (21,632)
Allocation of ESOP stock ........................ 449
ESOP and MRP adjustment ......................... 1,221
Purchase of 618,000 shares of treasury stock .... (8,729)
Issuance of 47,570 shares of treasury stock
for options exercised and DRP ................. (212) 445
Cancellation of 2,142 MRP shares ................ (1) (11)
Amortization of MRP stock ....................... 531
Cash dividends of $0.155 per common share ....... (1,353)
Net income for the year ended June 30, 1999 ..... 11,457
--------------------------------------------------------------------------------
Balance at June 30, 1999 ........................ -- 59 59,488 -- (2,804) 80,673 (29,916)
Allocation of ESOP stock ........................ 484
ESOP and MRP adjustment ......................... 999
Purchase of 492,000 shares of treasury stock .... (6,931)
Issuance of 72,461 shares of treasury stock
for options exercised and DRP ................. (362) 725
Reissuance of 2,142 shares for MRP .............. 1 36 (36)
Amortization of MRP stock ....................... 36
Cash dividends of $0.16 per common share ........ (1,341)
Net income for the year ended June 30, 2000 ..... 12,870
--------------------------------------------------------------------------------
Balance at June 30, 2000 ...................... $-- $ 60 $ 60,523 $-- $ (2,320) $91,840 $(36,122)
=================================================================================
See notes to consolidated financial statements.
47
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended June 30,
-----------------------------------------
2000 1999 1998
-----------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income ........................................................... $ 12,870 $ 11,457 $ 11,198
Adjustments to reconcile net income to net cash provided by operating
activities:
Net gain on sales of loans ........................................... (36) (860) (528)
Proceeds from sales of loans held for sale ........................... 5,568 151,468 1,616)
Originations of loans held for sale .................................. -- -- (2,181)
Net gain on sales of real estate owned ............................... (126) (110) (95)
Amortization of investment and mortgage-backed securities premium, net 192 351 319
Depreciation and amortization ........................................ 1,385 1,364 1,297
Provision for losses on loans and real estate owned .................. 860 825 751)
Amortization of cost of stock plans .................................. 1,520 2,101 1,786
Amortization of intangibles .......................................... 2,121 2,363 2,437
Amortization of premiums on loans and loan fees ...................... 1,437 2,338 1,565
Amortization of Trust Preferred securities issuance costs ............ 62 62 42
Increase in accrued interest receivable, net of accrued interest payable (1,659) (509) (974)
(Increase) decrease in other assets .................................. (200) 1,970 (2,464)
Increase (decrease) in deferred income tax liability ................. (118) 288 642
Increase in accounts payable and other liabilities ................... 1,535 1,144 230
Increase (decrease) in mortgage escrow funds ......................... 1,786 (432) 1,679
Increase (decrease) in due to banks .................................. 523 (4,684) 4,832
Other, net ........................................................... (34) 30 --
-----------------------------------------
Net cash provided by operating activities ............................ 27,686 169,166 22,152
-----------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities .................... 10,175 147,070 70,141
Purchases of investment securities held to maturity .................. (19,991) (262,096) (213,168)
Net outflow from loan originations net of principal repayments of loans (94,799) (93,695) (152,786)
Purchases of loans ................................................... (106,049) (31,220) (89,910)
Proceeds from principal repayments of mortgage-backed securities ..... 40,522 76,206 83,775
Purchases of mortgage-backed securities .............................. (220) (34) --
Proceeds from sale of loans .......................................... -- -- 75,108
Proceeds from sale of premises and equipment ......................... 250 -- --
Purchases of premises and equipment .................................. (2,487) (2,542) (2,954)
Proceeds from sales of real estate owned ............................. 1,161 1,202 1,300
Purchases of Federal Home Loan Bank of New York stock ................ (5,672) (1,558) (2,652)
-----------------------------------------
Net cash used in investing activities ................................ (177,110) (166,667) (231,146)
-----------------------------------------
Cash Flows From Financing Activities:
Net increase in deposits ............................................. 17,862 35,052 109,387
Increase (decrease) in advances from the Federal Home Loan Bank of New
York and other borrowings ........................................... 143,437 (28,762) 73,750
Net proceeds from issuance of Trust Preferred securities ............ -- -- 32,639
Cash dividends paid ................................................. (1,341) (1,353) (1,302)
Purchases of treasury stock, net of reissuance ....................... (6,568) (8,496) (5,249)
-----------------------------------------
Net cash provided by (used in) financing activities .................. 153,390 (3,559) 209,225
-----------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ................. 3,966 (1,060) 231
Cash and Cash Equivalents, Beginning of Year ......................... 9,900 10,960 10,729
-----------------------------------------
Cash and Cash Equivalents, End of Year ............................... $ 13,866 $ 9,900 $ 10,960
=======================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ............................................................. $ 74,175 $ 70,684 $ 66,821
=========================================
Income taxes ......................................................... $ 7,608 $ 4,700 $ 6,707
=========================================
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net ............... $ 382 $ 432 $ 2,115
=========================================
Transfer of loans receivable to loans held for sale, at market ....... $ 352 $ 155,223 $ --
=========================================
Transfer of premises and equipment, net to real estate owned, net .... $ 50 $ -- $ --
=========================================
See notes to consolidated financial statements.
48
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999 and 1998
A. Summary of Significant Accounting Policies
PennFed Financial Services, Inc. ("PennFed") was organized in March 1994 for the
purpose of becoming the savings and loan holding company for Penn Federal
Savings Bank (the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion").
Principles of Consolidation -- The consolidated financial statements of PennFed
and subsidiaries (with its subsidiaries the "Company") include the accounts of
PennFed and its subsidiaries (the Bank and PennFed Capital Trust I). PennFed
owns all of the outstanding stock of the Bank issued on July 14, 1994 (see Note
B - Stock Conversion). All references to the Company, unless otherwise
indicated, prior to July 14, 1994, refer to the Bank and its subsidiaries on a
consolidated basis. All intercompany accounts and transactions have been
eliminated in consolidation.
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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant area in
the accompanying financial statements where estimates have an impact is in the
allowance for loan losses.
Cash and Cash Equivalents -- For purposes of reporting cash flows, cash and cash
equivalents include cash and amounts due from depository institutions.
Investment Securities and Mortgage-Backed Securities -- In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), debt securities
classified as held to maturity are carried at amortized cost only if the
reporting entity has a positive intent and ability to hold those securities to
maturity.
The Company classifies investment securities and mortgage-backed securities as
either held to maturity or available for sale. Investment securities and
mortgage-backed securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, since the Company has both
the ability and intent to hold the securities to maturity. Investments available
for sale are carried at market value with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity.
Loans Held for Sale -- Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Aggregate net unrealized losses are recorded as a valuation
allowance and recognized as charges to income.
Loans Receivable -- Interest income is not accrued on loans where management has
determined that the borrowers may be unable to meet contractual principal or
interest obligations or where interest and/or principal is 90 days or more past
due. When a loan is placed on nonaccrual status, accrual of interest ceases and,
in general, uncollected past due interest (including interest applicable to
prior years, if any) is reversed and charged against current income. Therefore,
interest income is not recognized unless the financial condition and payment
record of the borrower warrant the recognition of interest income. Interest on
loans that have been restructured is generally accrued according to the
renegotiated terms.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" ("SFAS 118"), the Company
accounts for impaired loans, except those loans that are accounted for at fair
value or at the lower of cost or fair value, at the present value of the
estimated future cash flows of the loan discounted at the loan's effective
interest rate or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable that all principal and interest amounts will not be collected according
to the loan contract. Delinquent, smaller balance, homogeneous loans that are
evaluated collectively on a portfolio basis are not considered impaired under
SFAS 114. The Company generally evaluates the collectibility of consumer and
one- to four-family loans on a total portfolio basis.
49
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Allowance for Loan Losses -- The allowance for loan losses is established
through charges to earnings. Loan losses are charged against the allowance for
loan losses when management believes that the recovery of principal is unlikely.
If, as a result of loans charged off or increases in the size or risk
characteristics of the loan portfolio, the allowance is below the level
considered by management to be adequate to absorb future loan losses on existing
loans, the provision for loan losses is increased to the level considered
necessary to provide an adequate allowance. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the collectibility of the
loans. The evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may affect the
borrowers' ability to pay. Economic conditions may result in the necessity to
change the allowance quickly in order to react to deteriorating financial
conditions of the Company's borrowers. As a result, additional provisions on
existing loans may be required in the future if borrowers' financial conditions
deteriorate or if real estate values decline.
Premises and Equipment -- Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation of
premises and equipment are computed on the straight-line method over three to
ten years for furniture and equipment and twenty-five to forty years for
buildings. Amortization of leasehold improvements is provided using the
straight-line method over the terms of the respective lease or estimated useful
life of the improvement, whichever is shorter.
Real Estate Owned -- Real estate properties acquired by foreclosure are recorded
at the lower of cost or estimated fair value less costs to dispose with any
write down charged against the allowance for loan losses. Subsequent valuations
are periodically performed by management and the carrying value is adjusted by a
charge to expense to reflect any subsequent declines in the estimated fair
value. Further declines in real estate values may result in increased foreclosed
real estate expense in the future. Routine holding costs are charged to expense
as incurred and improvements to real estate owned that increase the fair value
of the real estate are capitalized. Gains on sale of real estate owned are
generally recognized upon disposition of the property. Losses are charged to
operations as incurred.
Goodwill-- The excess of cost over fair value of assets acquired ("goodwill")
arising from the acquisitions discussed in Note C is amortized to expense by an
accelerated method over the estimated remaining lives of long-term,
interest-bearing assets acquired (14 years) in accordance with Statement of
Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions."
Core Deposit Premium -- The premium resulting from the valuation of core
deposits arising from the aforementioned acquisitions is being amortized to
expense over the estimated average remaining life of the existing customer
deposit base acquired (10 years).
Due to Banks -- This item represents a book overdraft relating to outstanding
checks written on the Company's Federal Home Loan Bank of New York operating
account.
Income Taxes -- In accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), the Company uses the asset
and liability method for financial accounting and reporting for income taxes.
Earnings Per Common Share -- Basic earnings per common share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period, less the weighted average
unallocated ESOP shares of common stock. The computation of diluted earnings per
share is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued.
Loan Origination Fees and Discounts and Premiums -- Nonrefundable loan
origination fees net of certain direct loan origination costs are deferred. Net
deferred fees on loans held for investment are amortized into income over the
life of the related loans by use of the level-yield method. Net deferred fees on
loans originated for sale are deferred and recognized as part of the gain or
loss on sale of loans.
Discounts and premiums on investment and mortgage-backed securities and loans
purchased are recognized as income/expense over the estimated life of the asset
purchased using the level-yield method.
Interest Rate Swaps -- The Company has utilized interest rate swaps as a
component of managing interest rate risk.
50
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Swap agreements are held for purposes other than trading. The Company's swaps
are considered to be matched swaps, as they are specifically linked with a
liability. Periodic net cash settlements under swap agreements are accrued as an
adjustment to interest expense over the life of the agreements. In the event of
the termination of an interest rate swap agreement, the gain or loss would be
deferred and amortized as an adjustment to interest expense over the shorter of
the remaining life of the hedged item or the remaining contract period. In the
event of liquidation of the liability to which the interest rate swap is linked,
the interest rate swap would be recorded at its fair market value with any
change in such fair market value recorded in the period it occurs.
Recently Issued Accounting Guidance -- In December 1999 the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 draws on existing
accounting rules with respect to the basic criteria that must be met before
revenue can be recorded. SAB 101 further explains how those rules apply. The
Company has reviewed the guidance in SAB 101 and has concluded that there is no
effect on the Company's financial condition or results of operations.
Stock Split -- All share information has been adjusted to reflect a two-for-one
stock split in the form of a 100% stock dividend paid on February 10, 1998. For
further information refer to Note P- Stockholders' Equity and Regulatory
Capital.
Reclassifications -- Certain reclassifications have been made to prior years'
financial statements to conform with current year's presentation.
B. Stock Conversion
On July 14, 1994, the Bank completed the Conversion and became a wholly owned
subsidiary of PennFed, a newly formed holding company. In connection with an
initial public offering, PennFed issued 11,900,000 shares of common stock at $5
per share ($.01 par value), increasing consolidated equity by $52.1 million,
which was net of conversion expenses of approximately $2.7 million and shares
issued to the ESOP representing 8% of the shares of common stock issued. The
Bank received proceeds of $28.0 million from PennFed in exchange for all of its
common stock.
As part of the Conversion, in order to grant a priority to eligible account
holders in the event of future liquidation in accordance with Office of Thrift
Supervision ("OTS") regulations, the Bank established a liquidation account in
an amount equal to $40.9 million (the retained earnings of the Bank as of March
31, 1994). The total amount of the liquidation account will be decreased as the
balances of eligible account holders are reduced subsequent to the Conversion.
In the event of a complete liquidation of the Bank, and only in such event,
eligible account holders who continue to maintain their deposit accounts shall
be entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
C. Branch Acquisitions
In 1995, the Bank acquired from the Resolution Trust Corporation ("RTC") the
deposit liabilities and certain of the assets and other liabilities of four
branch offices of Carteret Federal Savings Bank, Madison, New Jersey
("Carteret"). The four Carteret branch offices were located in Caldwell, Verona,
Fairfield and Wayne, New Jersey. Immediately following the purchase, under a
pre-arranged "consortium" agreement, Atlantic Stewardship Bank of Midland Park,
New Jersey acquired from the Bank the deposit liabilities and certain of the
assets and other liabilities of the Wayne, New Jersey branch office. In
connection with this transaction, no gain or loss was recorded by the Bank.
The Bank submitted an $18,739,000 deposit premium bid, of which $18,000,000
related to the Caldwell, Verona and Fairfield branches. In addition to the
$18,000,000 deposit premium, the Bank also capitalized $141,000 of expenses
reflecting a total deposit premium intangible asset of $18,141,000. For the
years ended June 30, 2000, 1999 and 1998, amortization of the deposit premium
intangible of $1,814,000 was recorded each year.
The Company acquired Sayreville Savings and Loan Association effective September
1982 and First Federal Savings and Loan Association of Montclair effective
September 1989. The acquisitions have been accounted for as purchases and,
accordingly, the purchase prices have been allocated to assets and liabilities
acquired based on their fair value at their date of acquisition. For each of the
years ended June 30, 2000, 1999 and 1998, the effect of the amortization of
goodwill was to reduce income before income taxes by approximately $274,000,
$347,000 and $421,000, respectively.
51
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
D. Investment Securities
June 30, 2000 June 30, 1999
---------------------------------------------------
Carrying Market Carrying Market
Value Value Value Value
---------------------------------------------------
(In thousands)
U.S. government
agencies:
Maturing:
After five years but within ten years . . . . $ 10,000 $ 9,494 $ 10,000 $ 9,628
After ten years . . . . . . . . . . . . 264,532 244,572 254,538 244,615
-------------------------------------------------
274,532 254,066 264,538 254,243
Obligations of states and political subdivisions:
Maturing:
After one year but within five years . . . . 30 32 40 45
-------------------------------------------------
30 32 40 45
Trust preferred securities:
Maturing:
After ten years. . . . . . . . . . . . . . . . . 28,464 24,545 28,704 27,592
-------------------------------------------------
$303,026 $278,643 $293,282 $281,880
=================================================
At June 30, 2000 and 1999, investment securities with a carrying value of
$208,357,000 and $82,500,000, respectively, were pledged to secure Federal Home
Loan Bank of New York advances and other borrowings.
Gross unrealized gains and losses of investment securities at June 30, 2000 and
1999 were as follows:
June 30, 2000 June 30, 1999
------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
------------------------------------------------
(In thousands)
U.S. government agencies . . . . . . . . . . . . . . . . . . $ -- $20,466 $-- $10,295
Obligations of states and political subdivisions . . . . . . . 2 -- 5 --
Trust preferred securities . . . . . . . . . . . . . . . . . . -- 3,919 41 1,153
-----------------------------------------------
$ 2 $24,385 $46 $11,448
===============================================
There were no sales of investment securities for the years ended June 30, 2000,
1999 and 1998.
52
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
E. Mortgage-Backed Securities
June 30,
------------------------
2000 1999
------------------------
(In thousands)
Ginnie Mae . . . . . . . . . . . . . . . . . . . . $ 1,358 $ 2,071
Freddie Mac . . . . . . . . . . . . . . . . . . . . 48,759 74,622
Fannie Mae . . . . . . . . . . . . . . . . . . . . 37,197 50,899
Collateralized Mortgage Obligations/REMICs . . . . . . 79 103
------------------------
87,393 127,695
Unamortized premiums, net . . . . . . . . . . . . . . 168 288
------------------------
$ 87,561 $127,983
=========================
The estimated market values of mortgage-backed securities were $86,861,000 and
$128,617,000 at June 30, 2000 and 1999, respectively. There were no sales of
mortgage-backed securities in the years ended June 30, 2000, 1999 and 1998.
The carrying value of mortgage-backed securities pledged were as follows:
June 30,
------------------------
2000 1999
------------------------
(In thousands)
Pledged to secure:
Federal Home Loan Bank of New York advances ........ $ 47,085 $ 78,467
Other borrowings ................................... 10,795 19,461
Public funds on deposit ............................ 2,456 3,304
Interest rate swap agreements ...................... 542 4,825
------------------------
$ 60,878 $106,057
=========================
Collateralized mortgage obligations consist primarily of fixed and adjustable
rate sequentially paying securities with short durations.
The gross unrealized gains and losses of mortgage-backed securities held at June
30, 2000 and 1999 were as follows:
June 30, 2000 June 30, 1999
------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
------------------------------------------------
(In thousands)
Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34 $ 1 $ 92 $--
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . 284 661 570 288
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . 173 526 459 198
Collateralized Mortgage Obligations/REMICs . . . . . . . . . . -- 3 -- 1
------------------------------------------------
$491 $1,191 $1,121 $487
================================================
53
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
F. Loans Receivable, Net
June 30,
---------------------------------
2000 1999
---------------------------------
(In thousands)
First Mortgage Loans:
Conventional . . . . . . . . . . . . . . . . $1,065,005 $ 909,576
FHA insured . . . . . . . . . . . . . . . . 4,224 4,585
VA guaranteed . . . . . . . . . . . . . . . 819 1,083
--------------------------------
Total one- to four-family . . . . . . . . . 1,070,048 915,244
Commercial and multi-family . . . . . . . . 86,257 74,613
--------------------------------
Total first mortgage loans . . . . . . . . . 1,156,305 989,857
--------------------------------
Consumer:
Second mortgages . . . . . . . . . . . . . . 45,659 37,243
Home equity lines of credit . . . . . . . . 46,394 31,754
Other . . . . . . . . . . . . . . . . . . . 5,534 3,575
--------------------------------
Total consumer loans . . . . . . . . . . . . 97,587 72,572
--------------------------------
Total loans . . . . . . . . . . . . . . . . 1,253,892 1,062,429
--------------------------------
Add (Less):
Allowance for loan losses . . . . . . . . . (3,983) (3,209)
Unamortized premium . . . . . . . . . . . . 3,091 2,112
Unearned income on consumer loans . . . . . (20) (20)
Net deferred loan fees . . . . . . . . . . . 6,268 5,299
--------------------------------
5,356 4,182
--------------------------------
$1,259,248 $1,066,611
================================
Conventional one- to four-family mortgage loans at June 30, 1999 included
$5,180,000 of mortgages held for sale. At June 30, 1999, there was no commitment
to sell these loans. There were no one- to four-family mortgage loans held for
sale at June 30, 2000.
Non-accruing loans at June 30, 2000 and 1999 were $2,715,000 and $3,670,000,
respectively, which represents 0.21% and 0.34%, respectively, of total loans
outstanding. The total interest income that would have been recorded for the
years ended June 30, 2000 and 1999, had these loans been current in accordance
with their original terms, or since the date of origination if outstanding for
only part of the year, was approximately $97,000 and $137,000, respectively.
At June 30, 2000 and 1999 impaired loans totaled $97,000 and $48,000,
respectively. The average balance of impaired loans for the years ended June 30,
2000 and 1999 was $97,000 and $339,000, respectively. All impaired loans have a
related allowance for losses, which totaled $60,000 and $48,000 at June 30, 2000
and 1999, respectively. Interest income related to impaired loans is recognized
under the cash-basis method. For the year ended June 30, 2000 there was no
interest income recognized on impaired loans. Interest income recognized on
impaired loans for the year ended June 30, 1999 was $10,000. Total interest
income that would have been recorded for the years ended June 30, 2000 and 1999,
had these loans been current in accordance with their loan terms, was
approximately $9,000 and $36,000, respectively.
54
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following is an analysis of the allowance for loan losses:
Year ended June 30,
----------------------------------
2000 1999 1998
----------------------------------
(In thousands)
Balance, beginning of year ........... $ 3,209 $ 2,776 $ 2,622
Provisions for losses on loans ....... 860 780 600
Recoveries ........................... 37 49 --
Losses charged to allowance .......... (123) (396) (446)
---------------------------------
Balance, end of year ................. $ 3,983 $ 3,209 $ 2,776
=================================
The Company's loan portfolio consists primarily of loans secured by residential
and commercial real estate located in its market areas. Therefore, the
collectibility of these loans is dependent to a large degree on the overall
strength of the New Jersey economy, as well as the specific strength of the real
estate sector.
At June 30, 2000 and 1999, commercial and multi-family real estate loans totaled
$86,257,000 and $74,613,000, respectively. These loans are considered by
management to be of somewhat greater risk of collectibility due to their
dependency on income production. The majority of the Company's commercial and
multi-family real estate loans were collateralized by real estate located in New
Jersey. Commercial and multi-family real estate loans collateralized by
multi-family mixed use properties were $33,433,000 and $31,288,000 at June 30,
2000 and 1999, respectively. At June 30, 2000 and 1999 the commercial and
multi-family real estate loan portfolio included $694,000 and $605,000 of lines
of credit secured by non-real estate business assets. Furthermore, under a
program introduced during fiscal 2000, there were $120,000 of loans outstanding
at June 30, 2000 under the Accounts Receivable Financing Program for small and
mid-sized businesses. The remaining commercial real estate loans were
collateralized by commercial properties.
Loans serviced for others totaled approximately $108,518,000 and $116,180,000 at
June 30, 2000 and 1999, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees from
investors and certain charges assessed to borrowers, such as late payment fees.
In connection with these loans serviced for others, the Company held borrowers
escrow balances of $1,235,000 and $1,354,000 at June 30, 2000 and 1999,
respectively.
G. Premises and Equipment, Net
June 30,
-----------------------
2000 1999
-----------------------
(In thousands)
Land .......................................... $ 3,934 $ 4,004
Buildings and improvements .................... 15,870 14,923
Leasehold improvements ........................ 1,607 1,521
Furniture and equipment ....................... 11,269 10,587
-----------------------
32,680 31,035
Less: accumulated depreciation and amortization 12,604 11,795
-----------------------
$20,076 $19,240
=======================
H. Real Estate Owned
June 30,
------------------
2000 1999
------------------
(In thousands)
Acquired by foreclosure or deed in lieu of foreclosure. . . $367 $1,018
Allowance for losses on real estate owned. . . . . . . . . (33) (82)
------------------
$334 $ 936
==================
55
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Results of real estate operations were as follows:
Year ended June 30,
----------------------------
2000 1999 1998
----------------------------
(In thousands)
Net gain on sales of real estate owned .......... $ 126 $ 110 $ 95
Holding costs ................................... (12) (34) (100)
Provision for losses on real estate owned ....... -- (45) (151)
----------------------------
Net gain (loss) from real estate operations ..... $ 114 $ 31 $(156)
============================
Activity in the allowance for losses on real estate owned was as follows:
Year ended June 30,
-----------------------------
2000 1999 1998
-----------------------------
(In thousands)
Balance, beginning of year ................... $ 82 $ 207 $ 102)
Provisions charged to operations ............. -- 45 151
Losses charged to allowance .................. (49) (170) (46)
-----------------------------
Balance, end of year ......................... $ 33 $ 82 $ 207
=============================
I. Deposits
June 30, 2000 June 30, 1999
------------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------------------------------------------------------
(Dollars in thousands)
Non-interest-bearing demand .............. $ 42,426 $ 37,738
Interest-bearing demand .................. 70,923 2.06% 58,255 1.56%
Money market accounts .................... 11,099 2.14 12,406 2.02
Savings accounts ......................... 153,679 1.55 164,893 1.67
Certificates with remaining maturities of:
One year or less ....................... 567,733 5.64 616,600 5.08
Over one year to three years ........... 177,439 6.17 157,922 5.61
Over three years to five years ......... 55,005 6.13 12,628 5.50
---------- ---------
Total certificates ....................... 800,177 5.79 787,150 5.20
Accrued interest payable ................. 2,046 3,158
---------- ---------
$1,080,350 4.67% $1,063,600 4.21%
========== ==========
The aggregate amount of accounts with a denomination of $100,000 or more was
approximately $175,022,000 and $168,613,000 at June 30, 2000 and 1999,
respectively.
56
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
J. Federal Home Loan Bank of New York Advances and Other Borrowings
The following table presents Federal Home Loan Bank of New York ("FHLB of New
York") advances at the earlier of the callable date or maturity date:
June 30, 2000 June 30, 1999
-------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
-------------------------------------------------
(Dollars in thousands)
Within one year ................................ $ 50,000 6.25% $ 90,000 6.17%
After one year but within two years ............ 70,000 6.06 20,000 5.80
After two years but within three years.......... 135,000 6.09 70,000 6.06
After three years but within four years ........ 19,000 5.15 45,000 5.60
After four years but within five years ......... 90,000 6.37 19,000 5.15
After five years ............................... 465 7.39 465 7.39
-------- --------
$364,465 6.13% $244,465 5.93%
======== ========
The FHLB of New York advances are all fixed rate borrowings collateralized
either under a blanket pledge agreement by one- to four-family mortgage loans or
with investment and mortgage-backed securities.
At June 30, 2000, the Company had available from the FHLB of New York an
overnight repricing line of credit for $100,000,000 which expires on May 3,
2001. The line of credit has a variable interest rate. At June 30, 2000 and
1999, the Company had $72,900,000 and $29,900,000 of overnight borrowings under
this credit line with an interest rate of 7.23% and 5.98%, respectively. In
addition, the Company had available overnight variable repricing lines of credit
with other correspondent banks totaling $7,000,000. There were no borrowings
under these lines at June 30, 2000 or 1999. Also, the Company had available from
the FHLB of New York a one-month overnight repricing line of credit for
$50,000,000 which expires on May 3, 2001. This line of credit has a variable
interest rate. There were no borrowings under this line at June 30, 2000 or
1999. On July 11, 2000, the Company entered into a $3.5 million unsecured
revolving line of credit. This line of credit has a variable interest rate tied
to 30-day LIBOR.
From time to time, the Company enters into sales of securities under agreements
to repurchase ("reverse repurchase agreements"). These agreements are accounted
for as financing arrangements and the obligations to repurchase securities sold
are reflected as other borrowings in the accompanying Consolidated Statements of
Financial Condition. The reverse repurchase agreements are collateralized by
investment and mortgage-backed securities which continue to be carried as assets
by the Company, with a carrying value of $43,284,000 and $59,461,000 and a
market value of $40,731,000 and $57,601,000 at June 30, 2000 and 1999,
respectively.
The following table presents reverse repurchase agreements at the earlier of the
callable date or the maturity date:
June 30, 2000 June 30, 1999
-------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
-------------------------------------------------
(Dollars in thousands)
Within one year . . . . . . . . . $19,875 5.77% $19,563 5.01%
After one year but within five years 19,400 6.10 39,275 5.93
-------------------------------------------------
$39,275 5.93% $58,838 5.63%
=================================================
The average balance of reverse repurchase agreements for the years ended June
30, 2000 and 1999 was $44,954,000 and $51,039,000, respectively.
57
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
K. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
The Company formed a wholly-owned trust subsidiary, PennFed Capital Trust I (the
"Trust"). Effective October 21, 1997, the Trust sold $34.5 million of 8.90%
cumulative trust preferred securities to the public which are reflected on the
Consolidated Statement of Financial Condition as Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Debentures (the "Trust Preferred
securities"). The Trust used the proceeds from the sale of the Trust Preferred
securities to purchase 8.90% junior subordinated deferrable interest debentures
issued by PennFed. The sole assets of the Trust are $35.6 million of junior
subordinated debentures which mature on October 31, 2027 and are redeemable at
any time after five years. The obligations of the Company related to the Trust
constitute a full and unconditional guarantee by the Company of the Trust
Issuer's obligations under the Trust Preferred securities. The Company used the
proceeds from the junior subordinated debentures for general corporate purposes,
including a $20 million capital contribution to the Bank to support future
growth.
L. Incentive Savings Plan
The Company's employee benefits include the Penn Federal Savings Bank 401(k)
Plan (the "Plan"). All employees of the Company who work at least 1,000 hours
per year and are at least 201/2 years old are eligible to participate in the
Plan. The Plan provides for a discretionary Company match of employee
contributions. For the years ended June 30, 2000, 1999 and 1998, expense related
to the Plan was $111,000, $107,000 and $101,000, respectively. At June 30, 2000
and 1999, the Plan assets included common stock of the Company with a market
value of $290,000 and $282,000, respectively.
M. Stock Plans
Employee Stock Ownership Plan ("ESOP")
In connection with the Conversion, the Company established an ESOP for eligible
employees. All full-time employees are eligible to participate in the ESOP after
they attain age 21 and complete one year of service during which they work at
least 1,000 hours. Employees were credited for years of service to the Company
prior to the adoption of the ESOP for participation and vesting purposes. The
Bank's contribution is allocated among participants on the basis of
compensation. Each participant's account is credited with cash or shares of the
Company's common stock based upon compensation earned during the year with
respect to which the contribution is made. After completing seven years of
service, a participant will be 100% vested in his/her ESOP account. ESOP
participants are entitled to receive distributions from the ESOP account only
upon termination of service, which includes retirement and death.
The ESOP borrowed $4,760,000 from PennFed and purchased 952,000 shares of common
stock issued in the Conversion. This loan is to be repaid from discretionary
contributions by the Bank to the ESOP trust. The Bank has and intends to
continue to make contributions to the ESOP in amounts at least equal to the
principal and interest requirement of the debt, assuming a ten year term and an
interest rate of 7.46%. Annual contributions to the ESOP, which are used to fund
principal and interest payments on the ESOP debt, total $692,000. At June 30,
2000 and 1999, the loan had an outstanding balance of $2,320,000 and $2,804,000
and the ESOP had unallocated shares of 464,098 and 560,710, respectively. Based
upon a $14.13 closing price per share of common stock on June 30, 2000, the
unallocated shares had a fair value of $6,555,000. The unamortized balance of
the ESOP debt is reflected as a reduction of stockholders' equity.
For the years ended June 30, 2000, 1999 and 1998, the Bank recorded compensation
expense related to the ESOP of $1,256,000, $1,173,000 and $1,273,000,
respectively. The compensation expense related to the ESOP includes $865,000,
$826,000 and $959,000, respectively, for a valuation adjustment to reflect the
increase in the average fair value of allocated shares for the period from the
time of purchase to the allocation date. The ESOP allocated 96,612, 89,904 and
83,662 shares for the years ended June 30, 2000, 1999 and 1998, respectively, to
participants in the plan.
Management Recognition Plan
In connection with the Conversion, the Company established a Management
Recognition Plan ("MRP") as a means of enhancing and encouraging the recruitment
and retention of directors and officers. A maximum amount of an additional 4%,
or 476,000 shares, of the shares outstanding upon Conversion were permitted to
be awarded under the plan.
58
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
All 476,000 shares of restricted stock were awarded under the MRP. The shares
vested in equal installments, generally over a five-year period, with the final
installment vesting on April 28, 1999. Of the total original shares awarded,
2,142 shares did not vest and were cancelled. These 2,142 shares were re-awarded
and vested during the year ended June 30, 2000. For the years ended June 30,
2000, 1999 and 1998, the Company recorded expense of $36,000, $431,000 and
$531,000, respectively, related to the MRP.
Stock Option Plan
In connection with the Conversion, the Company established the 1994 Stock Option
and Incentive Plan ("Option Plan"). The exercise price for the options granted
under the Option Plan cannot be less than the fair market value of the Company's
common stock on the date of the grant. The options are granted, and the terms of
the options are established, by the Compensation Committee of the Board of
Directors. Transactions during the years ended June 30, 2000, 1999 and 1998
relating to the Option Plan are as follows:
Weighted
Average
Exercise
Options Price
-------------------------
Balance, June 30, 1997 . . . . . . . . . . .. . . 1,134,400) $ 5.55
Granted . . . . . . . . . . . . . . . . . . . . 486,700) 16.92
Exercised . . . . . . . . . . . . . . . . . . . (63,800) 5.25
Expired . . . . . . . . . . . . . . . . . . . . -- --
Forfeited . . . . . . . . . . . . . . . . . . . -- --
-------------------------
Balance, June 30, 1998 . . . . . . . . . . .. . . 1,557,300 9.11
Granted . . . . . . . . . . . . . . . . . . . . -- --
Exercised . . . . . . . . . . . . . . . . . . . (44,400) 5.25
Expired . . . . . . . . . . . . . . . . . . . . (7,000) 17.19
Forfeited . . . . . . . . . . . . . . . . . . . (19,950) 13.63
-------------------------
Balance, June 30, 1999 . . . . . . . . . . .. . . 1,485,950 9.13
Granted . . . . . . . . . . . . . . . . . . . . 74,336 16.81
Exercised . . . . . . . . . . . . . . . . . . . (69,270) 5.25
Expired . . . . . . . . . . . . . . . . . . . . (666) 17.19
Forfeited . . . . . . . . . . . . . . . . . . . (333) 17.19
-------------------------
Balance, June 30, 2000 . . . . . . . . . . .. . . 1,490,017 $ 9.69
=========================
At June 30, 2000, 1999 and 1998, 1,474,267 options, 1,343,583 options and
1,023,527 options were exercisable, respectively, with exercise prices ranging
from $5.25 to $17.19.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), if fully adopted, requires companies to measure
employee stock compensation plans based on the fair value method of accounting.
The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly,
the Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its plans. In accordance with APB 25, no
compensation expense has been recognized for its stock-based compensation plans
other than for restricted stock. Pro forma disclosures as if the Company fully
adopted the cost recognition requirements under SFAS 123 are presented below.
The estimated weighted average fair value of each stock option granted during
fiscal 2000 was estimated as $8.83 on the date of grant. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions: stock volatility of 26.14%; risk-free
interest rate of 5.83%; and an expected life of 10 years. Had compensation cost
for the grants been determined based upon the fair value at the grant date
consistent with the methodology prescribed under SFAS 123, the Company's fiscal
2000 pro forma net income and diluted earnings per share would have been
approximately $12.5 million and $1.46, respectively. As the SFAS 123 method of
accounting has not been applied to stock options granted prior to July 1, 1996,
the resulting pro forma effect on net income is not representative of the pro
forma effect on net income in future years.
59
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
N. Income Taxes
The income tax provision is comprised of the following components:
Year ended June 30,
--------------------------------
2000 1999 1998
--------------------------------
(In thousands)
Current provision ...................... $7,169 $6,016 $5,600
Deferred provision (benefit) ........... (118) 288 642
--------------------------------
Total income tax provision ............. $ 7,051 $6,304 $6,242
================================
Income taxes payable is included in accounts payable and other liabilities in
the Consolidated Statements of Financial Condition at June 30, 2000 and 1999.
The financial statements also include a net deferred tax liability of $715,000
that has been recorded for the temporary differences between the tax basis and
the financial statement carrying amounts of assets and liabilities. The source
of these temporary differences and their deferred tax effect at June 30, 2000
and 1999 is as follows:
June 30,
--------------------------
2000 1999
--------------------------
(In thousands)
Deferred tax assets:
Allowance for loan losses ...................... $ 986 $ 657
Litigation reserves ............................ 4 4
Deposit premium intangible ..................... 1,111 950
MRP expense .................................... -- 192
Depreciation ................................... 476 503
--------------------------
Total deferred tax assets ........................ 2,577 2,306
--------------------------
Deferred tax liabilities:
Deferred loan fees ............................. 2,871 2,650
Loan sale premiums ............................. 10 13
Purchase accounting ............................ 137 158
Servicing asset ................................ 274 318
--------------------------
Total deferred tax liabilities ................... 3,292 3,139
--------------------------
Net deferred tax liability ....................... $ (715) $ (833)
============================
A reconciliation of the statutory income tax provision to the effective income
tax provision is as follows:
Year ended June 30,
-----------------------------------
2000 1999 1998
-----------------------------------
(In thousands)
Income tax provision at statutory rate $ 6,972 $ 6,216 $ 6,104
Amortization of intangibles .......... 96 121 147
State and local tax provision ........ -- -- --
Other, net ........................... (17) (33) (9)
-----------------------------------
Total income tax provision ........... $ 7,051 $ 6,304 $ 6,242
===================================
60
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Pursuant to SFAS 109, the Company is not required to provide deferred taxes on
its tax loan loss reserve as of December 31, 1987. The amount of this reserve on
which no deferred taxes have been provided is approximately $16,300,000. This
reserve could be recognized as taxable income and create a current and/or
deferred tax liability using the income tax rates then in effect if one of the
following occur: (1) the Company's retained earnings represented by this reserve
are used for dividends or distributions in liquidation or for any other purpose
other than to absorb losses from bad debts, (2) the Company fails to qualify as
a Bank, as provided by the Internal Revenue Code, or (3) there is a change in
federal tax law.
O. Commitments and Contingencies
Lease Commitments -- At June 30, 2000, minimum rental commitments under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:
Minimum Rent
(In thousands)
--------------
Year ending June 30,
2001 ................................................. $ 277
2002 ................................................. 285
2003 ................................................. 294
2004 ................................................. 205
2005 ................................................. 149
2006 and later ....................................... 484
------
$1,694
======
Rentals under long-term operating leases for certain branch offices amounted to
$345,000, $263,000 and $234,000 for the years ended June 30, 2000, 1999 and
1998, respectively. Rental income of $439,000, $454,000 and $444,000 for the
years ended June 30, 2000, 1999 and 1998, respectively, is netted against
occupancy expense in the Consolidated Statements of Income.
Financial Instruments With Off-Balance Sheet Risk -- 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. These financial
instruments are not recorded on the balance sheet when either the exchange of
the underlying asset or liability has not yet occurred or the notional amounts
are used solely as a means to determine the cash flows to be exchanged. These
financial instruments are commitments to extend credit, unused lines of credit,
commitments to purchase loans and interest rate swaps. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the Consolidated Statements of Financial Condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
61
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following summarizes the notional amount of off-balance sheet financial
instruments:
June 30,
-------------------------
2000 1999
-------------------------
(In thousands)
Commitments to extend credit . . . . . . . $28,330 $ 24,122
Unused lines of credit . . . . . . . . . . . 65,746 46,441
Commitments to purchase loans . . . . . . . 26,826 25,094
Interest rate swaps . . . . . . . . . . . . . 30,000 150,000
Commitments to extend credit and unused lines of credit are legally binding
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments and lines of credit generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained by the Company upon
extension of credit is based on management's credit evaluation of the borrower.
Collateral held varies but may include mortgages on commercial and residential
real estate and other tangible properties.
Commitments to purchase loans represent agreements to purchase loans through
correspondent relationships established by the Company with other institutions.
The Company currently purchases newly originated one- to four-family residential
mortgages secured by properties primarily located in New Jersey. A limited
amount of loans secured by properties located in Pennsylvania, Massachusetts and
Connecticut are also purchased. Prior to purchase, the Company applies the same
underwriting criteria used in its own originations.
The Company has periodically entered into interest rate swap agreements to help
reduce certain interest rate exposure on a portion of the short-term deposits.
Interest rate swaps are contractual agreements between two parties to exchange
interest payments at particular intervals, computed on different terms, on a
specified notional amount. The notional amounts represent the base on which
interest due each counter party is calculated and do not represent the potential
for gains or losses associated with the market risk or credit risk of such
transactions. At June 30, 2000 and 1999, the Company had $30 million and $150
million, respectively, in notional amount interest rate swap agreements
outstanding on which the Company pays a fixed interest rate and receives a
floating interest rate based on three-month LIBOR from the counter parties,
which are nationally recognized investment firms. At June 30, 2000, the fixed
interest rates payable by the Company ranged from 4.99% to 6.23% and three-month
LIBOR was 6.77%. The average balance of notional amount interest rate swap
agreements in fiscal 2000 and 1999 was $72,877,000 and $165,753,000,
respectively. Included in interest expense for the years ended June 30, 2000,
1999 and 1998 was $67,000, $1,116,000 and $507,000, respectively, of expense
related to interest rate swap agreements. Mortgage-backed securities with a
carrying value of $542,000 and $4,824,000 at June 30, 2000 and 1999,
respectively, were pledged to secure these agreements. The interest rate swap
agreements mature or are callable between July 7, 2000 and September 28, 2001.
Other Contingencies -- In 1987, the New Jersey Department of Environmental
Protection ("NJDEP") conducted an environment contamination investigation of the
Orange Road branch site of First Federal Savings and Loan Association of
Montclair ("First Federal"). Prior to the acquisition by First Federal, the
location was used as a gasoline service station. On August 16, 1989, the NJDEP
issued a "no further action" letter to First Federal with regard to this site.
The Bank acquired First Federal effective September 11, 1989. Notwithstanding
the earlier "no further action" letter, on June 25, 1997, the NJDEP issued a
letter demanding that Penn Federal Savings Bank develop a remedial action work
plan for the Orange Road branch site as a result of an investigation conducted
on behalf of an adjacent property owner. The Bank disputed the NJDEP position
that Penn Federal Savings Bank was a responsible party. On July 1, 1998, the
NJDEP issued a letter determining that Penn Federal Savings Bank, Mobil Oil
Corporation and the former gasoline service station owner were all responsible
parties for the clean up at the subject site. Responsible parties may ultimately
have full or partial obligation for the cost of remediation. As of this date,
the apportionment of the remediation costs to the Bank, if any, is not
determinable. The Bank continues to vigorously contest this determination and to
seek contribution or indemnification from the other named responsible parties.
62
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
The Company is a defendant in certain claims and legal actions arising in the
ordinary course of business. At the present time, management does not anticipate
losses on any of these claims or actions which would have a material adverse
effect on the accompanying consolidated financial statements.
P. Stockholders' Equity and Regulatory Capital
On January 13, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend, payable on February 10, 1998
to common stockholders of record as of January 27, 1998.
During the year ended June 30, 2000, the Company repurchased 492,000 shares of
its outstanding common stock. The prices paid for the repurchased shares ranged
from $11.06 to $15.81 per share, for a total cost of $6,931,000. During the year
ended June 30, 1999, the Company repurchased 618,000 shares of its outstanding
common stock at prices ranging from $11.50 to $16.63 per share, for a total cost
of $8,729,000. During the year ended June 30, 1998, the Company repurchased
325,000 shares of its outstanding common stock at prices ranging from $16.63 to
$17.88 per share, for a total cost of $5,581,000.
On March 21, 1996, the Board of Directors of the Company (the "Board") adopted a
Stockholder Protection Rights Plan ("Rights Plan") and declared a dividend of
one common share purchase right ("Right") for each share of common stock of the
Company outstanding on April 1, 1996 and each share issued after that date and
prior to the expiration or redemption of the Rights. Until it is announced that
a person or group has acquired 15% or more of the outstanding common stock of
the Company ("Acquiring Person") or has commenced a tender offer that could
result in such person or group owning 15% or more of such common stock, the
Rights will initially be redeemable for $0.01 each, will be evidenced solely by
the Company's common stock certificates, will automatically trade with the
Company's common stock and will not be exercisable.
Upon announcement that any person or group has become an Acquiring Person and
unless the Board acts to redeem the Rights, then ten business days after such
announcement (the "Flip-in Date"), each Right (other than Rights beneficially
owned by any Acquiring Person or transferee thereof, which Rights become void)
will entitle the holder to purchase, for the $67.50 exercise price, a number of
shares of the Company's common stock having an aggregate market value of
$135.00. In addition, if, after the Acquiring Person gains control of the Board,
the Company is involved in a merger with any person or sells more than 50% of
its assets or earning power to any person (or has entered into an agreement to
do either of the foregoing), and, in the case of a merger, an Acquiring Person
will receive different treatment than other stockholders, each Right will
entitle its holder to purchase, for the $67.50 exercise price, a number of
shares of common stock of such other person having an aggregate market value of
$135.00. If any person or group acquires between 15% and 50% of the Company's
common stock, the Board may, at its option, require the Rights to be exchanged
for common stock of the Company. The Rights generally may be redeemed by the
Board for $0.01 per Right prior to the Flip-in Date.
The Bank is subject to various regulatory capital requirements administered by
the OTS. Failure to meet minimum capital requirements could result in certain
mandatory and possible discretionary actions by the OTS that, if undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific quantitative capital guidelines.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of tangible capital of
not less than 1.5% of tangible assets, core capital of not less than 4% of both
adjusted tangible assets and risk-weighted assets and risk-based capital of not
less than 8% of risk-weighted assets. As of June 30, 2000, the Bank met all
capital adequacy requirements to which it was subject.
As of its last regulatory examination, the Bank was categorized as
"well-capitalized" under the prompt corrective action framework. To be
considered as "well-capitalized", the Bank must maintain a core capital ratio of
not less than 5% and a risk-based capital ratio of not less than 10%. There are
no conditions or events since that notification that management believes have
changed the Bank's category.
63
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
The Bank's capital amounts and ratios are presented in the following table.
To Be Well
Capitalized Under
For Minimum Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
(Dollars in thousands)
As of June 30, 2000
Tangible capital, and ratio to
adjusted total assets . . . . . . . $133,365 7.76% $25,785 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets . . . . . . . . $133,365 7.76% $68,761 4.00% $85,952 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets . . . . . . . $133,365 15.07% $35,395 4.00% $53,093 6.00%
Risk-based capital, and ratio to
risk-weighted assets . . . . . . . $137,197 15.50% $70,791 8.00% $88,488 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 1 (core) capital, and ratio to
adjusted total assets . . . . . . . . . $121,943 7.88% $61,888 4.00% $77,360 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets . . . . . . . $121,943 15.90% $30,687 4.00% $46,030 6.00%
Risk-based capital, and ratio to
risk-weighted assets . . . . . . . $124,976 16.29% $61,374 8.00% $76,717 10.00%
In August 1993, the OTS adopted a regulation requiring that an amount be added
to an institution's risk-based capital requirement equal to 50% of the decline
in market value of portfolio equity ("MVPE") that exceeds 2% of the
institution's assets, under a hypothetical 200 basis points shock in interest
rates. MVPE is defined as the market value of assets, less the market value of
liabilities, plus or minus the market value of off-balance sheet items. At the
present time, the OTS has indefinitely postponed the effective date of the rule.
However, if the regulation had been in effect at June 30, 2000, the Bank would
still have exceeded its risk-based capital requirement.
The Bank's management believes that, with respect to regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
However, events beyond the control of the Bank, such as increased interest rates
or a downturn in the economy in areas where the Bank has most of its loans,
could adversely affect future earnings and, consequently, the ability of the
Bank to meet its future minimum capital requirements.
The previous 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.
64
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
To Be Well
Capitalized Under
For Minimum Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------
(Dollars in thousands)
As of June 30, 2000
Tangible capital, and ratio to
adjusted total assets . . . . . . . $137,789 8.01% $25,805 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets . . . . . . . . .. $137,789 8.01% $68,814 4.00% $86,018 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets . . . . . . . $137,789 15.75% $34,997 4.00% $52,495 6.00%
Risk-based capital, and ratio to
risk-weighted assets . . . . . . . $141,621 16.19% $69,993 8.00% $87,492 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 1 (core) capital, and ratio to
adjusted total assets . . . . . . . . .. $128,419 8.30% $61,913 4.00% $77,391 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets . . . . . . . $128,419 16.98% $30,253 4.00% $45,380 6.00%
Risk-based capital, and ratio to
risk-weighted assets . . . . . . . $131,452 17.38% $60,507 8.00% $75,633 10.00%
Federal regulations impose certain limitations on the payment of dividends and
other capital distributions by the Bank. Under current regulations, savings
institutions, such as the Bank, are generally permitted to make capital
distributions without OTS approval during a calendar year equal to 100% of
year-to-date net income plus retained net income for the two previous years. A
savings institution, such as the Bank, which is a subsidiary of a savings and
loan holding company, must file a notice of the proposed dividend or other
capital distribution with the OTS at least 30 days prior to the declaration of
such dividend or distribution. At June 30, 2000, the Bank could have paid
dividends totaling approximately $24.4 million.
65
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
Q. Computation of EPS
The computation of EPS is presented in the following table.
For the year ended June 30,
-------------------------------------------
2000 1999 1998
-------------------------------------------
(Dollars in thousands, except per share amounts)
Net income ..................................................... $ 12,870 $ 11,457 $ 11,198
===========================================
Number of shares outstanding:
Weighted average shares issued ................................. 11,899,842 11,899,349 11,900,000
Less: Weighted average shares held in treasury ................. 3,261,279 2,896,595 2,268,513
Less: Average shares held by the ESOP .......................... 952,000 952,000 952,000
Plus: ESOP shares released or committed to be
released during the fiscal year ............................. 451,541 357,421 269,870
-------------------------------------------
Average basic shares ........................................... 8,138,104 8,408,175 8,949,357
Plus: Average common stock equivalents ......................... 444,409 470,316 740,298
-------------------------------------------
Average diluted shares ......................................... 8,582,513 8,878,491 9,689,655
===========================================
Earnings per common share:
Basic ........................................................ $ 1.58 $ 1.36 $ 1.25
===========================================
Diluted ...................................................... $ 1.50 $ 1.29 $ 1.16
===========================================
R. Disclosure About Fair Value of Financial Instruments
The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 2000 and 1999 were as follows:
June 30, 2000 June 30, 1999
-------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------------
(In thousands)
Financial assets:
Cash and cash equivalents .......................... $ 13,866 $ 13,866 $ 9,900 $ 9,900
Investment securities .............................. 303,026 278,643 293,282 281,880
Mortgage-backed securities ......................... 87,561 86,861 127,983 128,617
FHLB of New York stock ............................. 22,295 22,295 16,623 16,623
-------------------------------------------------------
Total cash and investments ......................... 426,748 401,665 447,788 437,020
Loans held for sale ................................ -- -- 5,180 5,180
Loans receivable, less allowance for loan losses ... 1,259,248 1,220,343 1,061,431 1,049,735
-------------------------------------------------------
Total loans ........................................ 1,259,248 1,220,343 1,066,611 1,054,915
Accrued interest receivable, net ................... 10,227 10,227 9,680 9,680
-------------------------------------------------------
Total financial assets ............................. $1,696,223 $1,632,235 $1,524,079 $1,501,615
=======================================================
Financial liabilities:
Deposits ........................................... $1,080,350 $1,079,158 $1,063,600 $1,064,543
FHLB of New York advances .......................... 364,465 353,736 244,465 245,103
Other borrowings ................................... 112,175 111,939 88,738 88,810
Mortgage escrow funds .............................. 11,888 11,888 10,102 10,102
Due to banks ....................................... 7,908 7,908 7,385 7,385
Net Trust Preferred securities ..................... 32,805 29,843 32,743 34,414
-------------------------------------------------------
Total financial liabilities ........................ $1,609,591 $1,594,472 $1,447,033 $1,450,357
=======================================================
66
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
June 30, 2000 June 30, 1999
----------------------------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
----------------------------------------
(In thousands)
Off-balance sheet financial instruments:
Commitments to extend credit............. $28,330 $ -- $ 24,122 $ --
Unused lines of credit .................. 65,746 -- 46,441 --
Commitments to purchase loans............ 26,826 -- 25,094 --
Interest rate swaps ..................... 30,000 264 150,000 (256)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate fair
value:
Cash and Cash Equivalents -- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities and Mortgage-Backed Securities -- For these securities,
fair values are based on quoted market prices.
Federal Home Loan Bank of New York Stock --For this security, the carrying
amount, which is par, is a reasonable estimate of fair value. All transactions
in the capital stock of the FHLB of New York are executed at par.
Loans Held for Sale -- Fair value is based on the market price.
Loans Receivable -- Fair values are estimated for portfolios of loans with
similar financial characteristics. The total loan portfolio is first divided
into performing, held for sale and non-performing categories. Performing loans
are then segregated into adjustable and fixed rate interest terms. Fixed rate
loans are segmented by type, such as residential real estate mortgage,
commercial real estate and consumer loans. Adjustable rate loans are segmented
by repricing characteristics. Residential loans are further segmented by
maturity.
For loans, fair value is calculated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the rate at which
the Company would currently make loans which are similar with regard to
collateral, maturity and type of borrower. The discounted value of the cash
flows is reduced by a credit risk adjustment based on internal loan
classifications. Based on the current composition of the Company's loan
portfolio, as well as both past experience and current economic conditions and
trends, future cash flows are adjusted by prepayment assumptions which shorten
the estimated remaining time to maturity and, therefore, impact the fair market
valuation.
Accrued Interest Receivable, Net -- For these short-term assets, the carrying
amount is a reasonable estimate of fair value.
Deposits -- The fair value of deposits with no stated maturity, such as savings,
money market and other demand accounts, is equal to the amount payable on demand
as of June 30, 2000 and 1999. Time deposits are segregated by type and original
term. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is equivalent to the rate currently
offered by the Company for deposits of similar type and maturity.
Federal Home Loan Bank of New York Advances-- The fair value of FHLB of New York
advances is based on the discounted value of contractual cash flows. The
discount rate is equivalent to the rate currently offered by the FHLB of New
York on borrowings of similar type and maturity.
Other Borrowings -- For these short-term borrowings, the fair value is based on
the discounted value of contractual cash flows. The discount rate is equivalent
to the rate currently offered for borrowings of similar type and maturity.
Mortgage Escrow Funds and Due to Banks -- For these short-term liabilities, the
carrying amount is a reasonable estimate of fair value.
Trust Preferred Securities -- For these securities, fair value is based on a
quoted market price.
67
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
Commitments to Extend Credit and Unused Lines of Credit -- The fair value of
commitments is estimated to be zero since the fees collected on commitments to
extend credit approximates the amount of costs incurred. No estimated fair value
is presented for unused lines of credit because the rates associated with these
lines are market rates.
Commitments to Purchase Loans -- No fair value is estimated due to the
short-term nature of these commitments.
Interest Rate Swaps -- For this off-balance sheet financial instrument, fair
value represents the amount the Company would have to pay to terminate the
agreements based upon quoted market prices as provided by financial institutions
which are counter parties to the agreements.
S. Related Party Transactions
In the ordinary course of business, the Company at times has made loans to and
engaged in other financial transactions with its directors, officers and
employees. Such transactions are generally made on substantially the same terms
as those prevailing at the time for comparable transactions with others and do
not involve more than normal risk of collectibility.
The following sets forth an analysis of loans, all of which are current, to
directors, officers and employees:
June 30,
----------------------
2000 1999
----------------------
(In thousands)
Balance, beginning of year ...................... $ 3,608 $ 3,963
New loans granted ............................... 2,116 728
Repayments/reductions ........................... (944) (1,083)
---------------------
Balance, end of year ............................ $ 4,780 $ 3,608
=====================
In addition to the above amount of loans, at June 30, 2000 and 1999, there was
$45,000 and $46,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.
T. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging purposes. SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative. In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays the original effective
date of SFAS 133. In accordance with SFAS 137, SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities -- an amendment of FASB Statement No. 133" ("SFAS
138"). SFAS 138 adds to the accounting guidance for derivative instruments and
hedging activities. SFAS 133 as amended by SFAS 138 is intended to be
comprehensive guidance on accounting for derivatives and hedging activities.
As required, effective July 1, 2000, the Company will adopt these new accounting
standards. As of June 30, 2000, the Company's only derivatives were $30 million
in notional amount of interest rate swaps. Therefore, the adoption of the new
standards is not expected to have a material impact on the Company's financial
condition or results of operations. However, the impact on the Company's
financial condition or results of operations for each reporting period after
adoption is directly related to the size and composition of the Company's
portfolio of derivatives and market conditions.
68
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
U. Condensed Financial Information of PennFed Financial Services, Inc. (Parent
Company Only)
The following are the condensed financial statements for PennFed, parent company
only, as of June 30, 2000 and 1999 and for the years ended June 30, 2000, 1999
and 1998 and should be read in conjunction with the Notes to Consolidated
Financial Statements.
Condensed Statements of Financial Condition
June 30,
----------------------
2000 1999
----------------------
(In thousands)
Assets
Cash ......................................................................... $ 25 $ 25
Intercompany overnight investment ............................................ 796 2,674
----------------------
Total cash and cash equivalents ............................................. 821 2,699
Investment securities held to
maturity, at amortized cost ................................................. 11,005 11,186
Investment in subsidiaries ................................................... 143,685 134,359
Prepaid Trust Preferred securities expenses .................................. 1,695 1,757
Accrued interest receivable .................................................. 267 271
Other assets ................................................................. 558 1,560
----------------------
$158,031 $151,832
======================
Liabilities and Stockholders' Equity
Junior subordinated debentures ............................................... $ 35,568 $ 35,568
Intercompany loan payable .................................................... 7,100 7,100
Accrued interest payable ..................................................... 528 528
Other accrued expenses and other liabilities ................................. 854 1,136
Stockholders' equity ......................................................... 113,981 107,500
---------------------
$158,031 $151,832
=====================
Condensed Statements of Operations
Year ended June 30,
-------------------------------------
2000 1999 1998
-------------------------------------
(In thousands)
Income
Interest income on intercompany balances ........................... $ 301 $ 318 $ 860
Interest income on investment securities ........................... 992 1,006 582
Other income ....................................................... 4 3 4
------------------------------------
1,297 1,327 1,446
Expenses
Interest expense on Junior subordinated debentures ................. 3,166 3,166 2,198
Interest on intercompany loan ...................................... 666 379 --
Other expenses ..................................................... 412 365 328
------------------------------------
4,244 3,910 2,526
------------------------------------
Loss before undistributed net income of subsidiaries ............... (2,947) (2,583) (1,080)
Equity in undistributed net income of subsidiaries ................. 14,819 13,169 11,923
------------------------------------
Income before income taxes ......................................... 11,872 10,586 10,843
Income tax benefit ................................................. (998) (871) (355)
------------------------------------
Net income ......................................................... $ 12,870 $ 11,457 $ 11,198
====================================
69
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
Condensed Statements of Cash Flows
Year ended June 30,
-------------------------------------------
2000 1999 1998
-------------------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income ......................................................... $ 12,870 $ 11,457 $ 11,198
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed net income of subsidiaries ................. (14,819) (13,169) (11,923)
Amortization of investment securities premium ...................... 15 15 8
Amortization of cost of stock plans ................................ 36 520 534
Increase in accrued interest payable, net of accrued
interest receivable ................................................ 4 -- 257
(Increase) decrease in other assets ................................ 1,064 (1,459) (1,819)
Increase (decrease) in other liabilities ........................... (282) 615 (294)
-------------------------------------------
Net cash used in operating activities .............................. (1,110) (2,021) (2,039)
-------------------------------------------
Cash Flows From Investing Activities:
Investments in subsidiary bank ..................................... -- -- (20,000)
Investment in the Trust ............................................ -- -- (1,068)
Purchase of investment securities .................................. -- -- (11,209)
Dividends received from subsidiary bank ............................ 6,492 3,246 --
Proceeds from principal repayment on ESOP loan ..................... 484 449 418)
Proceeds from maturities of investment securities .................. 165 -- --
-------------------------------------------
Net cash provided by (used in) investing activities ................ 7,141 3,695 (31,859)
-------------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of junior subordinated debentures ........... -- -- 35,568)
Proceeds from intercompany loan .................................... -- 7,100 --
Purchases of treasury stock, net of re-issuance .................... (6,568) (8,496) (5,249)
Payment of cash dividends .......................................... (1,341) (1,353) (1,302)
-------------------------------------------
Net cash provided by (used in) financing activities ................ (7,909) (2,749) 29,017
-------------------------------------------
Net decrease in cash and cash equivalents .......................... (1,878) (1,075) (4,881)
Cash and cash equivalents, beginning of year ....................... 2,699 3,774 8,655)
-------------------------------------------
Cash and cash equivalents, end of year ............................. $ 821 $ 2,699 $ 3,774)
===========================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes ....................................................... $-- $-- $ 85
===========================================
70
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
V. Quarterly Financial Data (Unaudited)
Quarter ended
---------------------------------------------------
1999 2000
---------------------------------------------------
September 30 December 31 March 31 June 30
---------------------------------------------------
(In thousands, except per share amounts)
Total interest income ................. $26,635 $27,642 $28,205 $29,281
Total interest expense ................ 17,477 18,114 18,749 19,993
---------------------------------------------------
Net interest income ................... 9,158 9,528 9,456 9,288
Provision for loan losses ............. 210 210 210 230
Non-interest income ................... 808 767 681 691
Non-interest expenses ................. 4,969 4,929 4,926 4,772
Income tax expense .................... 1,705 1,833 1,777 1,736
---------------------------------------------------
Net income ........................... $ 3,082 $ 3,323 $ 3,224 $ 3,241
===================================================
Net income per common share:
Basic ................................ $ 0.37 $ 0.40 $ 0.40 $ 0.41
===================================================
Diluted .............................. $ 0.35 $ 0.38 $ 0.38 $ 0.39
===================================================
Quarter ended
---------------------------------------------------
1998 1999
---------------------------------------------------
September 30 December 31 March 31 June 30
---------------------------------------------------
(In thousands, except per share amounts)
Total interest income ................. $27,238 $26,552 $26,072 $25,695
Total interest expense ................ 18,944 18,361 17,533 17,080
---------------------------------------------------
Net Interest Income ................... 8,294 8,191 8,539 8,615
Provision for loan losses ............. 175 185 210 210
Non-interest income ................... 1,015 912 995 624
Non-interest expenses ................. 4,672 4,544 4,790 4,638
Income tax expense .................... 1,611 1,556 1,626 1,511
---------------------------------------------------
Net income ........................... $ 2,851 $ 2,818 $ 2,908 $ 2,880
===================================================
Net income per common share:
Basic ................................ $ 0.33 $ 0.33 $ 0.35 $ 0.35
===================================================
Diluted .............................. $ 0.31 $ 0.31 $ 0.33 $ 0.33
===================================================
71
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information Concerning Directors and Executive Officers
Information concerning Directors of the Registrant is incorporated herein by
reference from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 25, 2000, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation," a copy of which
will be filed not later than 120 days after the close of the fiscal year. For
information concerning Executive Officers of the Registrant who are not also
Directors, see "Executive Officers" in Part I of this Annual Report on Form
10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Information concerning compliance with the reporting requirements of Section
16(a) of the Securities Exchange Act of 1934 by Directors, Officers and ten
percent beneficial owners of the Registrant is incorporated herein by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on October 25, 2000.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 25, 2000, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation," a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Registrant's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
October 25, 2000, except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation," a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Registrant's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
25, 2000, except for information contained under the headings "Compensation
Committee Report on Executive Compensation" and "Stock Performance
Presentation," a copy of which will be filed not later than 120 days after the
close of the fiscal year.
72
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following information appearing in Part I, Item 8 of this Form 10-K is
incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 2000 and 1999
Consolidated Statements of Income for the Years Ended June 30, 2000, 1999
and 1998
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is not applicable.
73
PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued
(a) (3) Exhibits:
Regulation Reference to
S-K Prior Filing
Exhibit or Exhibit
Number Document Number
- -------------------------------------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3 (i) Certificate of Incorporation *
3 (ii) Bylaws **
4 Instruments defining the rights of security holders, including indentures *
4 (i) Stockholder Protection Rights Agreement ***
9 Voting trust agreement None
10 Material contracts:
(a) Employee Stock Ownership Plan *
(b) 1994 Stock Option and Incentive Plan ****
(c) Management Recognition Plan *
(d) Employment Agreement with Joseph L. LaMonica *****
(e) Employment Agreement with Patrick D. McTernan *****
(f ) Employment Agreement with Lucy T. Tinker *****
(g) Amendment to Employment Agreement with Joseph L. LaMonica **
(h) Amendment to Employment Agreement with Lucy T. Tinker **
(i) Amendment to Employment Agreement with Patrick D. McTernan **
(j ) Employment Agreement with Jeffrey J. Carfora **
(k) Employment Agreement with Barbara A. Flannery **
11 Statement re: computation of per share earnings 11
12 Statements re: computation of ratios 12
13 Annual Report to security holders Not required
16 Letter re: change in certifying accountant Not required
18 Letter re: change in accounting principles None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to vote of security holders None
23 Consents of independent auditors and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits Not applicable
- ---------------------
* Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on March 25, 1994 (Registration No. 33-76854). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Form 10-K under the Securities Exchange
Act of 1934, filed with the Securities and Exchange Commission on
September 24, 1999 (File No. 0-24040). All of such previously filed
documents are hereby incorporated by reference in accordance with Item 601
of Regulation S-K.
*** Filed as an exhibit to the Company's Registration Statement on Form 8-A
under the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on March 28, 1996 as amended on Form 8-A/A (the "Form
8-A/A") filed with the Securities and Exchange Commission on February 11,
1998, and as further amended on Form 8-A/A-2 (the "Form 8-A/A-2") filed with
the Securities and Exchange Commission on October 14, 1998. The First
Amendment to the Stockholders Protection Rights Agreement is filed as an
exhibit to the Form 8-A/A and the Second Amendment to the Stockholders
Protection Rights Agreement is filed as an exhibit to the Form 8-A/A-2. These
documents are hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
**** Filed as an exhibit to the Company's Registration Statement on Form S-8
under the Securities Act of 1933 filed with the Securities and Exchange
Commission on September 26, 1997.
***** Filed as exhibits to the Company's Form 10-K under the Securities Exchange
Act of 1934, filed with the Securities and Exchange Commission on September 27,
1994. All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three month period ended June
30, 2000.
74
SIGNATURES
Pursuant to the requirements of the 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.
PENNFED FINANCIAL SERVICES, INC.
Date: September 25, 2000 By: /s/ Joseph L. LaMonica
----------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Duly Authorized
Representative)
Pursuant to the requirements of the Securities and 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/ Joseph L. LaMonica By: /s/ William C. Anderson
---------------------------------------- ----------------------------
Joseph L. LaMonica William C. Anderson
President, Chief Executive Officer Chairman of the Board
and Director
(Principal Executive Officer)
Date: September 25, 2000 Date: September 25, 2000
By: /s/ Patrick D. McTernan By: /s/ Amadeu L. Carvalho
---------------------------------------- ----------------------------
Patrick D. McTernan Amadeu L. Carvalho
Senior Executive Vice President, General Director
Counsel, Secretary and Director
Date: September 25, 2000 Date: September 25, 2000
By: /s/ Marvin D. Schoonover By: /s/ Mario Teixeira, Jr.
---------------------------------------- ----------------------------
Marvin D. Schoonover Mario Teixeira, Jr.
Director Director
Date: September 25, 2000 Date: September 25, 2000
By: /s/ Lucy T. Tinker By: /s/ Jeffrey J. Carfora
---------------------------------------- ----------------------------
Lucy T. Tinker Jeffrey J. Carfora
Senior Executive Vice President and Executive Vice President and
Chief Operating Officer Chief Financial Officer
(Principal Financial Officer) (Principal Accounting
Officer)
Date: September 25, 2000 Date: September 25, 2000