UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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 Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, NJ 07052-2989
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
----------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO __
As of November 10, 2000, there were issued and outstanding 8,027,813 shares
of the Registrant's Common Stock.
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
September 30, June 30,
2000 2000
--------------------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents.............................................. $ 14,960 $ 13,866
Investment securities held to maturity, at amortized cost,
market value of $282,014 and $278,643 at September 30,
2000 and June 30, 2000...... ...................................... 303,008 303,026
Mortgage-backed securities held to maturity, at amortized
cost, market value of $77,836 and $86,861 at September
30, 2000 and June 30, 2000..... ................................... 77,714 87,561
Loans held for sale.................................................... 18,350 ---
Loans receivable, net of allowance for loan losses of $4,076
and $3,983 at September 30, 2000 and June 30, 2000................. 1,230,790 1,259,248
Premises and equipment, net............................................ 20,279 20,076
Real estate owned, net................................................. 633 334
Federal Home Loan Bank of New York stock, at cost...................... 22,488 22,295
Accrued interest receivable, net....................................... 12,143 10,227
Goodwill and other intangible assets................................... 8,486 8,996
Other assets........................................................... 1,616 3,590
------------ ------------
$1,710,467 $1,729,219
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits........................................................... $1,117,807 $1,080,350
Federal Home Loan Bank of New York advances........................ 374,465 364,465
Other borrowings................................................... 47,465 112,175
Mortgage escrow funds.............................................. 11,834 11,888
Due to banks....................................................... 7,227 7,908
Accounts payable and other liabilities............................. 5,453 5,647
------------ ------------
Total liabilities.................................................. 1,564,251 1,582,433
------------ ------------
Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures................................. 34,500 34,500
Unamortized issuance expenses...................................... (1,679) (1,695)
------------ -----------
Net Trust Preferred securities..................................... 32,821 32,805
------------ -----------
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 shares issued and 8,117,313 and 8,396,019
shares outstanding at September 30, 2000 and June 30, 2000
(excluding shares held in treasury of 3,782,687 and
3,503,981 at September 30, 2000 and June 30, 2000)............. 60 60
Additional paid-in capital......................................... 60,792 60,523
Employee Stock Ownership Plan Trust debt........................... (2,191) (2,320)
Retained earnings, partially restricted............................ 94,610 91,840
Treasury stock, at cost, 3,782,687 and 3,503,981 shares at
September 30, 2000 and June 30, 2000........................... (39,876) (36,122)
------------ -----------
Total stockholders' equity......................................... 113,395 113,981
------------ -----------
$1,710,467 $1,729,219
============ ============
See notes to consolidated financial statements.
2
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended September 30,
2000 1999
----------- -----------
(Dollars in thousands, except
per share amounts)
Interest and Dividend Income:
Interest and fees on loans......................................... $23,327 $19,037
Interest on federal funds sold..................................... 16 ---
Interest and dividends on investment securities.................... 5,665 5,583
Interest on mortgage-backed securities............................. 1,428 2,015
--------- ---------
30,436 26,635
--------- ---------
Interest Expense:
Deposits........................................................... 13,202 11,409
Borrowed funds..................................................... 7,379 5,285
Trust Preferred securities......................................... 783 783
--------- ---------
21,364 17,477
--------- ---------
Net Interest and Dividend Income Before Provision
for Loan Losses.................................................... 9,072 9,158
Provision for Loan Losses.............................................. 200 210
--------- ---------
Net Interest and Dividend Income After Provision
for Loan Losses.................................................... 8,872 8,948
--------- ---------
Non-Interest Income:
Service charges.................................................... 577 556
Net gain from real estate operations............................... --- 30
Net gain on sales of loans......................................... 314 33
Other.............................................................. 168 189
--------- ----------
1,059 808
--------- ----------
Non-Interest Expenses:
Compensation and employee benefits................................. 2,666 2,511
Net occupancy expense.............................................. 395 383
Equipment.......................................................... 448 440
Advertising........................................................ 118 82
Amortization of intangibles........................................ 510 562
Federal deposit insurance premium.................................. 55 159
Other.............................................................. 829 832
--------- ---------
5,021 4,969
--------- ---------
Income Before Income Taxes............................................. 4,910 4,787
Income Tax Expense..................................................... 1,734 1,705
--------- ---------
Net Income............................................................. $ 3,176 $ 3,082
========= =========
Weighted average number of common shares outstanding:
Basic.............................................................. 7,807,413 8,296,598
========= =========
Diluted............................................................ 8,242,969 8,909,660
========= =========
Net income per common share:
Basic.............................................................. $0.41 $0.37
===== =====
Diluted............................................................ $0.39 $0.35
===== =====
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended September 30,
2000 1999
---------- -----------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income......................................................... $ 3,176 $ 3,082
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans......................................... (314) (33)
Proceeds from sales of loans held for sale......................... 54,124 5,324
Net gain on sales of real estate owned............................. --- (36)
Amortization of investment and mortgage-backed securities
premium, net..................................................... 39 60
Depreciation and amortization...................................... 336 352
Provision for losses on loans and real estate owned................ 200 210
Amortization of cost of stock plans................................ 399 446
Amortization of intangibles........................................ 510 562
Amortization of premiums on loans and loan fees.................... 394 405
Amortization of Trust Preferred securities issuance costs.......... 16 16
Increase in accrued interest receivable net of accrued
interest payable................................................. (972) (1,105)
Decrease in other assets........................................... 1,974 1,204
Decrease in accounts payable and other liabilities................. (194) (420)
Increase (decrease) in mortgage escrow funds....................... (54) 379
Decrease in due to banks........................................... (681) (2,152)
Other, net......................................................... --- (48)
-------- ----------
Net cash provided by operating activities.............................. 58,953 8,246
-------- ----------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities.................. --- 165
Purchases of investment securities held to maturity................ --- (19,991)
Net outflow from loan originations net of principal
repayments of loans ............................................. (25,274) (13,661)
Purchases of loans................................................. (19,293) (21,208)
Proceeds from principal repayments of mortgage-backed securities... 9,826 13,813
Purchases of mortgage-backed securities............................ --- (65)
Proceeds from sale of premises and equipment....................... --- 250
Purchases of premises and equipment................................ (539) (816)
Net inflow (outflow) from real estate owned activity............... (28) 440
Purchases of Federal Home Loan Bank of New York stock.............. (193) (563)
-------- --------
Net cash used in investing activities.............................. (35,501) (41,636)
-------- --------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits................................ 36,513 (359)
Increase (decrease) in advances from the Federal Home Loan Bank
of New York and other borrowings................................. (54,710) 33,537
Cash dividends paid................................................ (316) (343)
Purchases of treasury stock, net of reissuance..................... (3,845) 152
--------- --------
Net cash provided by (used in) financing activities................ (22,358) 32,987
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents................... 1,094 (403)
Cash and Cash Equivalents, Beginning of Period......................... 13,866 9,900
--------- --------
Cash and Cash Equivalents, End of Period............................... $ 14,960 $ 9,497
========= ========
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Three months ended September 30,
2000 1999
-------- --------
(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest........................................................... $ 20,515 $ 17,120
======== ========
Income taxes....................................................... $ 1 $ 209
======== ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net............. $ 271 $ 114
======== ========
Transfer of loans receivable to loans held for sale, at market..... $ 72,160 $ 111
======== ========
See notes to consolidated financial statements.
5
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries, Penn Federal Savings Bank (the
"Bank") and PennFed Capital Trust I. These interim consolidated financial
statements included herein should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended June 30, 2000. The interim
consolidated financial statements reflect all normal and recurring adjustments
which are, in the opinion of management, considered necessary for a fair
presentation of the financial condition and results of operations for the
periods presented. There were no adjustments of a non-recurring nature recorded
during the three months ended September 30, 2000 and 1999. The interim results
of operations presented are not necessarily indicative of the results for the
full year.
When necessary, reclassifications have been made to conform to current period
presentation.
2. Adoption of Recently Issued Accounting Standards
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" ("SFAS 137") and SFAS No. 138, "Accounting for Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 138"). 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. 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 of September 30, 2000, the Company
did not have any derivatives as defined under SFAS 133. Therefore, the adoption
of the new accounting standards did not have an effect on the Company's
financial condition, results of operations or cash flows.
3. Computation of EPS
The computation of EPS is presented in the following table.
Three months ended September 30,
2000 1999
------------- ------------
(Dollars in thousands, except
per share amounts)
Net income................................................. $3,176 $3,082
============= ============
Number of shares outstanding:
Weighted average shares issued............................. 11,900,000 11,899,371
Less: Weighted average shares held in treasury............. 3,654,444 3,066,216
Less: Average shares held by the ESOP...................... 952,000 952,000
Plus: ESOP shares released or committed to be released
during the fiscal year............................ 513,857 415,443
------------- ------------
Average basic shares....................................... 7,807,413 8,296,598
Plus: Average common stock equivalents..................... 435,556 613,062
------------- ------------
Average diluted shares..................................... 8,242,969 8,909,660
============= ============
Earnings per common share:
Basic.............................................. $0.41 $0.37
============= ============
Diluted............................................ $0.39 $0.35
============= ============
6
4. Stockholders' Equity and Regulatory Capital
The Bank's capital amounts and ratios are presented in the following table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- -------- -----
(Dollars in thousands)
As of September 30, 2000
Tangible capital, and ratio to
adjusted total assets........... $136,207 8.00% $25,538 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets........... $136,207 8.00% $68,102 4.00% $85,128 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets............ $136,207 15.35% $35,495 4.00% $53,243 6.00%
Risk-based capital, and ratio to
risk-weighted assets............ $140,205 15.80% $70,990 8.00% $88,738 10.00%
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 I (core) capital, and ratio to
adjusted total assets........... $133,365 7.76% $68,761 4.00% $85,952 5.00%
Tier I (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%
7
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.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- -------- -----
(Dollars in thousands)
As of September 30, 2000
Tangible capital, and ratio to
adjusted total assets........... $137,729 8.00% $25,813 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets........... $137,729 8.00% $68,835 4.00% $86,044 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets............ $137,729 15.73% $35,017 4.00% $52,526 6.00%
Risk-based capital, and ratio to
risk-weighted assets............ $141,727 16.19% $70,035 8.00% $87,543 10.00%
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 I (core) capital, and ratio to
adjusted total assets........... $137,789 8.01% $68,814 4.00% $86,018 5.00%
Tier I (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%
5. Subsequent Event
On October 25, 2000, the Company announced a 5% stock repurchase program to be
in effect over the next 18 months.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. 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.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
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.
Financial Condition
Total assets decreased $18.8 million to $1.710 billion at September 30, 2000
from total assets of $1.729 billion at June 30, 2000. The decrease was primarily
due to the sales of one- to four-family residential mortgage loans. The
Company's current asset/liability management strategy includes the sale of
conforming, fixed rate one- to four-family residential loan production. Loans
sold under this strategy during the quarter ended September 30, 2000 totaled
nearly $8 million. In addition, during this quarter the Company sold $46 million
of one- to four-family residential mortgage loans in an effort to improve
funding, liquidity, interest rate risk and net interest margin.
Deposits increased $37.5 million to $1.118 billion at September 30, 2000 from
$1.080 billion at June 30, 2000. Approximately $11 million of the growth was
attributable to a new branch in Roseland, New Jersey that opened on July 22,
2000. Checking account balances increased $3.8 million from June 30, 2000.
Federal Home Loan Bank ("FHLB") of New York advances increased $10.0 million
from $364.5 million at June 30, 2000 while other borrowings decreased $64.7
million from $112.2 million at June 30, 2000 to $47.5 million at September 30,
2000. The decrease in other borrowings primarily reflects the use of proceeds
from loan sales to reduce borrowings.
Non-performing assets at September 30, 2000 remained unchanged from the $3.0
million, or 0.18% of total assets, recorded at June 30, 2000. Non-accruing loans
totaled $2.4 million, with a ratio of non-accruing loans to total loans of
0.19%, at September 30, 2000 as compared to $2.7 million, or 0.21% of total
loans, at June 30, 2000. Real estate owned increased to $633,000 at September
30, 2000 from $334,000 at June 30, 2000.
Stockholders' equity at September 30, 2000 totaled $113.4 million compared to
$114.0 million at June 30, 2000. The decrease primarily reflects the net income
recorded for the three months ended September 30, 2000 offset by the repurchase
of 295,500 shares of the Company's outstanding stock at an average market price
of $13.29 per share and the declaration of a cash dividend.
Results of Operations
General. For the three months ended September 30, 2000 net income was $3.2
million, or $0.39 per diluted share, as compared to net income of $3.1 million,
or $0.35 per diluted share, for the comparable prior year period.
9
Interest and Dividend Income. Interest and dividend income for the three months
ended September 30, 2000 increased to $30.4 million from $26.6 million for the
three months ended September 30, 1999. This increase was primarily due to an
increase in average interest-earning assets, when compared to the prior year's
first quarter. Average interest-earning assets were $1.690 billion for the three
months ended September 30, 2000 compared to $1.518 billion for the prior year
period. In addition, the average yield earned on interest-earning assets
increased to 7.18% for the three months ended September 30, 2000 from 7.00% for
the three months ended September 30, 1999.
Interest income on residential one- to four-family mortgage loans for the three
months ended September 30, 2000 increased $3.2 million, or 20.1%, when compared
to the prior year period. The increase in interest income on residential one- to
four-family mortgage loans was primarily due to a $161.2 million increase in the
average balance outstanding to $1.091 billion for the three months ended
September 30, 2000 compared to $929.5 million for the prior year period. The
increase in interest income on residential one- to four-family mortgage loans
was also due to an increase of 16 basis points in the average yield earned on
this loan portfolio to 7.10% for the three months ended September 30, 2000 from
6.94% for the comparable prior year period.
For the three months ended September 30, 2000, interest income on commercial and
multi-family real estate loans increased $413,000, or 26.6%, when compared to
the prior year period. The increase in interest income on this loan portfolio
was partially attributable to an increase of $17.5 million in the average
outstanding balance for the three months ended September 30, 2000, when compared
to the three months ended September 30, 1999. The increase in interest income on
commercial and multi-family real estate loans was also reflective of an increase
of 18 basis points in the average yield earned to 8.53% for the three months
ended September 30, 2000, compared to 8.35% for the three months ended September
30, 1999.
Interest income on consumer loans increased $640,000, or 47.8%, for the three
months ended September 30, 2000, compared to the prior year period. The increase
in interest income for this loan portfolio was due to a $26.0 million increase
in the average balance outstanding to $100.4 million for the three months ended
September 30, 2000 compared to $74.4 million for the prior year period. Also
contributing to an increase in interest income on consumer loans was a 68 basis
point increase in the average yield earned on the consumer loan portfolio to
7.82% for the three months ended September 30, 2000, compared to 7.14% for the
prior year period.
Interest income on investment securities and other interest-earning assets
increased $82,000 for the three months ended September 30, 2000 from the
comparable prior year period. The increase was primarily due to a $5.8 million
increase in the average balance outstanding for the current year period over the
prior year period. The effect on interest income from an increase in the average
balance was partially offset by a slight decrease in the average yield earned on
these securities to 6.96% for the three months ended September 30, 2000,
compared to 6.99% for the three months ended September 30, 1999.
Interest income on the mortgage-backed securities portfolio decreased $587,000
for the three months ended September 30, 2000 as compared to the prior year
period. The decrease in interest income on mortgage-backed securities primarily
reflects a $38.9 million decrease in the average balance outstanding to $82.1
million for the three months ended September 30, 2000, compared to $121.0
million for the prior year period. The decrease in the average balance was
partially offset by a 30 basis point increase in the average yield earned on the
mortgage-backed securities portfolio to 6.96% for the three months ended
September 30, 2000, compared to 6.66% for the comparable prior year period.
Interest Expense. Interest expense increased $3.9 million for the three months
ended September 30, 2000 from $17.5 million for the comparable 1999 period. The
increase in the current year period was attributable to a $166.2 million
increase in total average deposits, borrowings and Trust Preferred securities
and a 44 basis point increase in the Company's cost of funds. For the three
months ended September 30, 2000, average deposit balances increased $54.1
million to $1.105 billion from $1.051 billion for the three months ended
September 30, 1999. The average rate paid on deposits for the current year
period increased to 4.74% as compared to 4.32% for the three months ended
September 30, 1999. Average FHLB of New York advances increased $93.8 million
for the three months ended September 30, 2000 to $367.7 million while the
average cost of advances increased 21 basis points to 6.14% for the same period,
when compared to the three months ended September 30, 1999. For the three months
ended September 30, 2000, the average balance of other borrowings increased
$18.2 million from $81.9 million for the three months ended September 30, 1999
as the average rate paid increased 84 basis points from 5.55% for the prior year
period.
10
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three months ended September 30, 2000 was $9.1
million, reflecting an $86,000 decrease from $9.2 million recorded in the
comparable prior year period. The net interest rate spread and net interest
margin for the three months ended September 30, 2000 were 1.92% and 2.19%,
respectively, a decrease from 2.18% and 2.43%, respectively, for the comparable
prior year period. The current period decreases in the net interest rate spread
and net interest margin were primarily attributable to the increases in the
average balance and average rate paid on deposits and borrowings partially
offset by growth in the commercial and multi-family real estate and consumer
loan portfolios.
Provision for Loan Losses. The provision for loan losses for the three months
ended September 30, 2000 was $200,000 compared to $210,000 for the prior year
period. The allowance for loan losses at September 30, 2000 of $4.1 million
reflects a $93,000 increase from the June 30, 2000 level. The allowance for loan
losses as a percentage of non-accruing loans was 171.69% at September 30, 2000,
compared to 146.70% at June 30, 2000. The allowance for loan losses was 0.32% of
total loans at September 30, 2000, unchanged from June 30, 2000.
Non-Interest Income. For the three months ended September 30, 2000, non-interest
income was $1.1 million compared to $808,000 for the prior year period. The
increase was primarily due to a net gain on sales of loans in the current period
of $314,000 compared to $33,000 for the three months ended September 30, 1999.
Under the Company's strategy of selling conforming, fixed rate one- to
four-family loan production, nearly $8 million of such loans sold during the
three months ended September 30, 2000 generated gains of $107,000 for that
period. In addition, during the quarter ended September 30, 2000 the Company
sold $46 million of one- to four-family mortgage loans in an effort to improve
funding, liquidity, interest rate risk and net interest margin and recorded a
net gain on sale of loans of $207,000. Service charge income for the three
months ended September 30, 2000 was $577,000, compared to $556,000 for the prior
year period. The net gain from real estate operations for the three months ended
September 30, 2000 was less than $1,000, a decrease from the $30,000 net gain
recorded for the three months ended September 30, 1999. For the three months
ended September 30, 2000, other non-interest income reflected a $21,000 decrease
from the prior year period. Other non-interest income included $84,000 and
$65,000 in earnings from the Investment Services at Penn Federal program for the
three months ended September 30, 2000 and 1999, respectively. Through this
program, customers have convenient access to financial consulting/advisory
services and related uninsured non-deposit investment and insurance products.
Non-Interest Expenses. Non-interest expenses were $5.0 million for the three
months ended September 30, 2000, unchanged from the amount recorded during the
prior year period. However, the Company's non-interest expenses as a percent of
average assets decreased to 1.15% for the three months ended September 30, 2000
from 1.26% for the comparable prior year period due to the increase in average
assets during the three months ended September 30, 2000.
Income Tax Expense. Income tax expense was $1.7 million for the three months
ended September 30, 2000, unchanged from the amount recorded for the three
months ended September 30, 1999. The effective tax rate for the three months
ended September 30, 2000 was 35.3%. The effective tax rate was 35.6% for the
three months ended September 30, 1999.
Analysis of Net Interest Income
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and the consolidated statements
of income for the three months ended September 30, 2000 and 1999, 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.
11
Three Months Ended September 30,
------------------------------------------------------------------
2000 1999
-------------------------------- -------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
----------------------- -------- -------------------------------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans........................... $1,090,750 $19,380 7.10% $ 929,523 $16,143 6.94%
Commercial and multi-family real
estate loans.................... 90,524 1,967 8.53 73,049 1,554 8.35
Consumer loans..................... 100,406 1,980 7.82 74,449 1,340 7.14
------------ -------- ------------ --------
Total loans receivable.......... 1,281,680 23,327 7.26 1,077,021 19,037 7.05
Federal funds sold................. 984 16 6.37 --- --- ---
Investment securities and other.... 325,404 5,665 6.96 319,616 5,583 6.99
Mortgage-backed securities......... 82,042 1,428 6.96 120,969 2,015 6.66
----------- --------- ------------ --------
Total interest-earning assets... 1,690,110 $30,436 7.18 1,517,606 $26,635 7.00
========= ========
Non-interest earning assets........... 56,433 56,137
----------- ------------
Total assets ................... $1,746,543 $ 1,573,743
=========== ============
Deposits, borrowings and Trust
Preferred securities:
Money market and demand deposits... $ 125,076 $ 441 1.40% $ 110,982 $ 289 1.03%
Savings deposits................... 155,365 621 1.59 165,212 692 1.66
Certificates of deposit............ 824,672 12,140 5.84 774,774 10,428 5.36
----------- --------- ------------ --------
Total deposits.................. 1,105,113 13,202 4.74 1,050,968 11,409 4.32
FHLB of New York advances.......... 367,680 5,745 6.14 273,906 4,123 5.93
Other borrowings................... 100,040 1,634 6.39 81,865 1,162 5.55
----------- --------- ------------ -------
Total deposits and borrowings... 1,572,833 20,581 5.17 1,406,739 16,694 4.71
Trust Preferred securities......... 32,813 783 9.55 32,751 783 9.56
----------- --------- ------------- -------
Total deposits, borrowings and
Trust Preferred securities.. 1,605,646 $21,364 5.26 1,439,490 $17,477 4.82
======= =======
Other liabilities..................... 27,282 25,405
------------ ------------
Total liabilities............... 1,632,928 1,464,895
Stockholders' equity.................. 113,615 108,848
----------- ------------
Total liabilities and
stockholders' equity ....... $ 1,746,543 $ 1,573,743
=========== ============
Net interest income and net
interest rate spread............... $ 9,072 1.92% $ 9,158 2.18%
======== ==== ======== ====
Net interest-earning assets and
interest margin ................... $ 84,464 2.19% $ 78,116 2.43%
=========== ==== ============ ====
Ratio of interest-earning assets to
deposits, borrowings and Trust
Preferred securities............. 105.26% 105.43%
====== ======
(1) Annualized.
12
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets. Loans are placed on non-accrual status when the
collection of principal or interest becomes delinquent more than 90 days. There
are no loans delinquent more than 90 days which are still accruing. Real estate
owned represents assets acquired in settlement of loans and is shown net of
valuation allowances.
September 30, June 30,
2000 2000
------------- ----------
(Dollars in thousands)
Non-accruing loans:
One- to four-family.................................. $1,845 $2,152
Commercial and multi-family.......................... 95 95
Consumer............................................. 434 468
--------- --------
Total non-accruing loans......................... 2,374 2,715
Real estate owned, net................................... 633 334
--------- --------
Total non-performing assets...................... 3,007 3,049
--------- --------
Total risk elements.............................. $3,007 $3,049
========= ========
Non-accruing loans as a percentage of total loans........ 0.19% 0.21%
========= ========
Non-performing assets as a percentage of total assets.... 0.18% 0.18%
========= ========
Total risk elements as a percentage of total assets...... 0.18% 0.18%
========= ========
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,
loan classifications, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the lower of
cost or estimated fair value less costs to dispose of such properties. If fair
value at the date of foreclosure is lower than the balance of the related loan,
the difference will be charged-off to the allowance for loan losses at the time
of transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on real estate owned is established by
a charge to operations.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to record additions to the
allowance level based upon their assessment of the information available to them
at the time of their examination. At September 30, 2000, the Company had a total
allowance for loan losses of $4.1 million representing 171.69% of total
non-accruing loans and 0.32% of total loans.
Interest Rate Sensitivity
Interest Rate Gap. The interest rate risk inherent in assets and liabilities may
be determined by analyzing the extent to which such assets and liabilities are
"interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest-earning assets maturing or
repricing within a defined period and the amount of interest-bearing liabilities
maturing or repricing within the same period is defined as the interest rate
sensitivity gap. An institution is considered to have a negative gap if the
amount
13
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.
At September 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 $350.9 million,
representing a one year negative gap of 20.52% of total assets, compared to a
one year negative gap of 22.12% of total assets at June 30, 2000. The Company's
improvement in the negative gap position from June 30, 2000 was partially
brought about by a reduction in short-term borrowings as the result of the sale
of $53.8 million of fixed rate one- to four-family residential mortgage loans.
Also contributing to the improvement in the negative gap position was an
increase in core deposits and medium-term certificates of deposit and
borrowings. The Company continued to focus on increasing balances of fixed and
variable rate commercial and multi-family real estate loans and consumer loan
products, whose repayment and repricing characteristics are typically faster
than their fixed rate one- to four-family residential mortgage loan
counterparts. At June 30, 2000, the Company had $30 million in notional amount
of interest rate swaps, designed to synthetically lengthen the maturities of
short-term deposits. During the three months ended September 30, 2000, these
interest rate swaps matured or were terminated early. This elimination of the
hedge portfolio partially offset the improvement in the negative gap position
from June 30, 2000.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates in the short-term and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate significantly from those assumed in
calculating the gap position. Finally, the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is 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. An NPV ratio, in any interest rate scenario, is
defined as the NPV in that rate scenario divided by the market value of assets
in the same scenario.
As of September 30, 2000, the Bank's internally generated initial NPV ratio was
10.75%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 8.03%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was 2.72%. Though NPV is "measured" on an unconsolidated basis for regulatory
purposes, it is managed on a consolidated basis. As of September 30, 2000, the
Company's internally generated initial NPV ratio was 10.88%, the Post-Shock
ratio was 8.16%, and the Sensitivity Measure was 2.72%. 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 Office of Thrift Supervision ("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 latest date for which information is
available), the Bank's initial NPV ratio, as
14
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.
At September 30, 2000, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 13.73% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
Year 2000
By following a carefully prescribed Year 2000 Project Plan, all mission-critical
systems, including interfaces to the main systems, were completely renovated and
tested. To date, the Company has not experienced any problems with respect to
the century rollover. The Company will continue to monitor for any Year 2000
problems, as appropriate, through the end of the calendar year.
The 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 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
September 30, 2000 and June 30, 2000, the Bank's liquidity ratios were 9.90% and
8.71%, respectively.
The Company uses its liquid resources principally to fund maturing certificates
of deposit and deposit withdrawals, to purchase loans and securities, to fund
existing and future loan commitments, and to meet operating expenses. Management
believes that loan repayments and other sources of funds will be adequate to
meet the Company's foreseeable liquidity needs.
The Company's cash needs for the three months ended September 30, 2000 were
provided by operating activities, primarily from proceeds from the sales of
loans, increased deposits and principal repayments on loans and mortgage-backed
securities. During this period, the cash provided was used for investing
activities, which included the origination and purchase of loans, as well as to
reduce borrowings. During the three months ended September 30, 1999, the cash
needs of the Company were provided by operating activities, an increase in
advances from the FHLB of New York and principal repayments on loans and
mortgage-backed securities. The cash provided was used for investing activities,
which included the origination and purchase of loans and the purchase of
investment securities.
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk-adjusted assets; a
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 September 30, 2000, the Bank exceeded all
regulatory capital requirements and qualified as a "well-capitalized"
institution (see Note 4. - Stockholders' Equity and Regulatory Capital, in the
Notes to Consolidated Financial Statements).
15
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Statement Regarding Computation of Per Share Earnings.
Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K
On July 26, 2000, PennFed Financial Services, Inc. (the Company)
issued a press release announcing its fourth quarter results.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: November 14, 2000 By: /s/ Joseph L. LaMonica
-------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: November 14, 2000 By: /s/ Lucy T. Tinker
-------------------------------------
Lucy T. Tinker
Senior Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: November 14, 2000 By: /s/ Jeffrey J. Carfora
-------------------------------------
Jeffrey J. Carfora
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
17