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, 2001
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.
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(Exact name of registrant as specified in its charter)
Delaware 22-3297339
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
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(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 7, 2001, was $133,757,000. (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 7, 2001, there were issued and outstanding 7,661,428
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for 2001 Annual
Meeting of Stockholders.
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, 2001, the Company had total assets in excess of $1.8 billion,
deposits of $1.1 billion, borrowings of $582.1 million and stockholders' equity
of $112.5 million.
At June 30, 2001, the Company's gross loan portfolio totaled $1.3 billion,
including $1.1 billion of one- to four-family residential first mortgage loans,
$108.6 million of commercial and multi-family real estate loans and $115.7
million of consumer loans. In addition, on that date the Company had $135.6
million of mortgage-backed securities and $360.2 million of other investment
securities and FHLB of New York stock.
At June 30, 2001, 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.
2
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 will not undertake -- and specifically declines any obligation -- to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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 32% 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 41% of total Bank deposits at June 30, 2001.
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 27% 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. A conforming
mortgage loan is defined as a mortgage loan that meets all requirements (size,
type and age) to be eligible for purchase or securitization by federal agencies,
such as Freddie Mac and Fannie Mae. The conforming loan limit is based upon
national housing median sales prices. See "Loan Portfolio Composition" and "One-
to Four-Family Residential Mortgage Lending."
The Company also originates commercial and multi-family (five units or more)
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. 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.
3
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 by the
OTS." At June 30, 2001, the maximum amount which the Company could have lent to
any one borrower and the borrower's related entities was approximately $22.4
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,
2001, the Company's largest group of loans to one borrower (and any related
entities) consisted of six commercial real estate loans aggregating $3.7
million. Four of these loans, aggregating $3.1 million, are secured by
multi-family properties in Essex County. The other two loans, for $550,000,
represent the Company's participation in loans for senior assisted-living
complexes in Morris and Hudson Counties. At June 30, 2001, there was a total of
28 loans or lender relationships in excess of $1.0 million, for a total amount
of $50.0 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,
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2001 2000 1999 1998
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Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in thousands)
First mortgage loans:
One- to four-family(1) $ 1,065,819 82.61% $ 1,070,048 85.34% $ 915,244 86.15% $ 971,668 89.01%
Commercial and multi-family 108,625 8.42 86,257 6.88 74,613 7.02 65,833 6.03
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Total first mortgage loans 1,174,444 91.03 1,156,305 92.22 989,857 93.17 1,037,501 95.04
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Other loans:
Consumer loans:
Second mortgages 48,133 3.73 45,659 3.64 37,243 3.50 27,232 2.49
Home equity lines of credit 60,412 4.68 46,394 3.70 31,754 2.99 23,538 2.16
Other 7,140 0.56 5,534 0.44 3,575 0.34 3,331 0.31
Total consumer loans 115,685 8.97 97,587 7.78 72,572 6.83 54,101 4.96
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Total loans 1,290,129 100.00% 1,253,892 100.00% 1,062,429 100.00% 1,091,602 100.00%
====== ====== ====== ======
Add/(less):
Unamortized premiums,
deferred loan fees, and
other, net 9,611 9,339 7,391 7,026
Allowance for loan losses (4,248) (3,983) (3,209) (2,776)
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Total loans receivable, net $ 1,295,492 $ 1,259,248 $ 1,066,611 $ 1,095,852
==========================================================================================
June 30,
----------------------
1997
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Amount Percent
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(Dollars in thousands)
First mortgage loans:
One- to four-family(1) $ 831,843 89.55%
Commercial and multi-family 56,811 6.12
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Total first mortgage loans 888,654 95.67
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Other loans:
Consumer loans:
Second mortgages 23,665 2.55
Home equity lines of credit 14,040 1.51
Other 2,512 0.27
Total consumer loans 40,217 4.33
----------------------
Total loans 928,871 100.00%
======
Add/(less):
Unamortized premiums,
deferred loan fees, and
other, net 5,202
Allowance for loan losses (2,622)
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Total loans receivable, net $ 931,451
=============
-------------------
(1) One-to four-family loans include loans held for sale of $83,000, $5,180,000
and $565,000 at June 30, 2001, 1999 and 1998, 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, 2001. 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.
4
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
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(In thousands)
First mortgage loans:
One- to four-family .......... $ 528 $ 3,028 $ 2,751 $ 82,627 $ 191,024 $ 785,861 $1,065,819
Commercial and multi-family .. 3,420 1,559 4,588 25,060 71,673 2,325 108,625
----------------------------------------------------------------------------------------------
Total first mortgage loans 3,948 4,587 7,339 107,687 262,697 788,186 1,174,444
Other loans:
Consumer loans ............... 3,475 2,976 7,710 17,422 68,127 15,975 115,685
----------------------------------------------------------------------------------------------
Total loans, gross ........... $ 7,423 $ 7,563 $ 15,049 $ 125,109 $ 330,824 $ 804,161 $1,290,129
==============================================================================================
Loans due after June 30, 2002, which have fixed interest rates amount to $750.9
million, while those with adjustable rates amount to $531.8 million, detailed as
follows:
Due After June 30, 2002
------------------------------------------
Fixed Adjustable Total
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(In thousands)
First mortgage loans:
One- to four-family ......... $ 686,877 $ 378,414 $1,065,291
Commercial and multi-family . 12,196 93,009 105,205
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Total first mortgage loans 699,073 471,423 1,170,496
Other loans:
Consumer loans .............. 51,808 60,402 112,210
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Total loans, gross ...... $ 750,881 $ 531,825 $1,282,706
==========================================
One- to Four-Family Residential Mortgage Lending. At June 30, 2001, the
Company's one- to four-family residential mortgage loans totaled $1.1 billion,
or approximately 82.6% 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, 2001, the Company originated $269.6 million of real estate loans
secured by one- to four-family residential real estate. Substantially all of the
Company's one- to four-family residential mortgage originations are secured by
properties located in the State of New Jersey.
During fiscal 2001, the Company had one correspondent relationship with another
institution through which it purchased $25.5 million of newly originated
adjustable rate and $10.8 million of newly originated fixed rate one- to
four-family residential first mortgages. Purchased loans are secured by
properties primarily located in New Jersey. 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
in the amount of the loan. In addition, the Company requires borrowers to obtain
fire and property insurance (including flood insurance, if necessary) in the
amount of the loan or the replacement cost. 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.
5
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, 2001, the Company had $108.6 million of commercial and multi-family
real estate loans which represented 8.4% of the Company's gross loan portfolio.
This amount includes $1.9 million of lines of credit secured by non-real estate
business assets. At June 30, 2001, the Company had $1.2 million of loans under
an Accounts Receivable Financing Program for small and mid-sized businesses. At
June 30, 2001, the average per loan balance of the Company's commercial and
multi-family real estate loans outstanding was $296,000. As of June 30, 2001
approximately 86% 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 first mortgage liens on 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 the Wall 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, 2001, the Company's total
consumer loan portfolio was $115.7 million, or 9.0% of its gross loan portfolio,
of which approximately 46% were fixed rate loans and 54% were adjustable rate
loans. The Company currently originates all of its consumer loans throughout the
State of New Jersey.
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 draw periods up to 10 years with repayment terms up to 15 years
beyond the draw period. These loans are underwritten utilizing criteria similar
to the Company's first mortgage loans. As of June 30, 2001, second mortgage
loans and home equity lines of credit amounted to $108.5 million or 93.8% 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
6
loan collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit or eliminate the amount which can be
recovered on such loans.
Originations, Purchases, Sales and Servicing of Loans
For the fiscal year ended June 30, 2001, the Company originated $380.3 million
of loans, compared to $267.9 million and $371.0 million in fiscal 2000 and 1999,
respectively. The lower amount in fiscal 2000 was due principally to reduced
refinancing activity. Mortgage loan originations are handled by employees of the
Company.
During the fiscal years ended June 30, 2001, 2000 and 1999, the Company
purchased $36.3 million, $106.0 million and $31.2 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. During the majority
of fiscal 2001, the Company's strategy included the sale of conforming, fixed
rate one- to four-family residential loan production. Loans sold under this
strategy totaled approximately $29 million for the current fiscal year. In
addition, the Company sold approximately $65 million of longer duration, one- to
four-family residential mortgage loans in an effort to improve liquidity,
interest rate risk and net interest margin. In March 2001, the Company issued
$12 million of Trust Preferred securities. See - "Sources of Funds - Trust
Preferred Securities." Effective with the issuance of the $12 million of Trust
Preferred securities, a determination was made whereby conforming, fixed rate
one- to four-family mortgage loan production would not be sold for a period of
time to leverage the proceeds of such issuance. 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 adverse 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.
At June 30, 2001, the Company has made no determination as to the sale of loans
presently committed to be originated. 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.
During the year ended June 30, 2001, the Company securitized approximately $48
million of one- to four-family mortgage loans as Fannie Mae mortgage-backed
securities. These securities are held in the Company's securities portfolio for
collateral purposes.
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
$141.5 million, $108.5 million and $116.2 million at June 30, 2001, 2000, and
1999, respectively.
7
The following table sets forth the activity in the Company's
loan portfolio for the years indicated.
Year ended June 30,
------------------------------------------
2001 2000 1999
------------------------------------------
(In thousands)
Net loans receivable at beginning of year ..... $1,259,248 $1,066,611 $1,095,852
Plus:
Loans originated:
One- to four-family ..................... 269,607 172,201 295,522
Commercial and multi-family real estate . 40,020 30,364 22,938
Consumer ................................ 70,626 65,325 52,560
------------------------------------------
Total loans originated ............. 380,253 267,890 371,020
------------------------------------------
One- to four-family loans purchased ......... 36,319 106,049 31,220
------------------------------------------
Total loans originated and purchased 416,572 373,939 402,240
------------------------------------------
Less:
One- to four-family loans sold .............. 94,099 5,532 150,474
Loans securitized ........................... 47,661 -- --
Loan principal payments and other, net ...... 237,876 175,388 280,575
Loans transferred to real estate owned ....... 692 382 432
------------------------------------------
Net loans receivable at end of year ........... $1,295,492 $1,259,248 $1,066,611
==========================================
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, 2001, the Company's loans delinquent 60 to 89 days totaled $281,000
of which $278,000 were one- to four-family mortgage loans and $3,000 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.
8
At June 30,
----------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ................. $1,219 $2,152 $2,937 $2,575 $3,567
Commercial and multi-family ......... 49 95 46 414 1,053
Consumer ............................ 369 468 687 753 865
----------------------------------------------------------
Total non-accruing loans ..... 1,637 2,715 3,670 3,742 5,485
Real estate owned, net ............... 500 334 936 1,643 884
----------------------------------------------------------
Total non-performing assets ....... 2,137 3,049 4,606 5,385 6,369
Restructured loans ................... -- -- -- 1,415 1,451
----------------------------------------------------------
Total risk elements ............... $2,137 $3,049 $4,606 $6,800 $7,820
==========================================================
Non-accruing loans as a percentage
of total loans ....... 0.13% 0.21% 0.34% 0.34% 0.59%
==========================================================
Non-performing assets as a percentage
of total assets ...... 0.12% 0.18% 0.30% 0.35% 0.48%
==========================================================
Total risk elements as a percentage
of total assets ...... 0.12% 0.18% 0.30% 0.44% 0.59%
==========================================================
For the year ended June 30, 2001, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $60,000, none of which was included in interest
income during this period.
Non-Performing Assets. Non-accruing loans at June 30, 2001 were comprised of 19
one- to four-Family loans aggregating $1.2 million, 17 consumer loans
aggregating $369,000 and one commercial and multi-family real estate loan for
$49,000.
Real estate owned at June 30, 2001 totaled $500,000 and included four one- to
four-family properties, the largest of which had a net book value of $192,000.
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 five fiscal years. Any loan that has been restructured continues to
perform in accordance with the restructured terms.
Other Loans of Concern. As of June 30, 2001, there were $863,000 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, 2001 are four loans to one
borrower and one loan to a related party totaling $835,000 acquired in the 1989
acquisition of First Federal Savings and Loan Association of Montclair. The four
loans consist of one commercial real estate loan of $416,000, two one- to
four-family loans totaling $103,000 and a $66,000 line of credit. The loan to a
related party consists of a commercial real estate loan of $250,000. 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
9
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, 2001, the Bank's classified
assets, including real estate owned, totaled $3.0 million, which is classified
as substandard. At June 30, 2001 total classified assets represented 2.69% of
the Company's stockholders' equity and 0.16% 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 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.
10
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,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year ............ $ 3,983 $ 3,209 $ 2,776 $ 2,622 $ 2,630
Charge-offs:
One- to four-family ................... (164) (105) (60) (306) (392)
Commercial and multi-family ........... (35) -- (165) (44) (147)
Consumer .............................. (161) (18) (171) (96) (146)
----------------------------------------------------------------------
(360) (123) (396) (446) (685)
----------------------------------------------------------------------
Recoveries:
One- to four-family ................... -- 37 -- -- --
Commercial and multi-family ........... -- -- 49 -- --
Consumer .............................. -- -- -- 42 --
----------------------------------------------------------------------
-- 37 49 -- 42
----------------------------------------------------------------------
Net charge-offs ......................... (360) (86) (347) (446) (643)
Additions charged to operations ......... 625 860 780 600 635
----------------------------------------------------------------------
Balance at end of year .................. $ 4,248 $ 3,983 $ 3,209 $ 2,776 $ 2,622
======================================================================
Ratio of net charge-offs during the
year to average loans outstanding
during the year ................. 0.03% 0.01% 0.03% 0.04% 0.08%
======================================================================
Ratio of allowance for loan losses
to total loans at end of year ... 0.33% 0.32% 0.30% 0.25% 0.28%
======================================================================
Ratio of allowance for loan losses to
non-accruing loans at end of year 259.50% 146.70% 87.44% 74.18% 47.80%
======================================================================
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized in the following table.
June 30,
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent 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 $2,223 82.61% $2,244 85.34% $1,797 86.15% $1,502 89.01% $1,463 89.55%
Commercial and
multi-family real estate 1,280 8.42 1,051 6.88 855 7.02 740 6.03 654 6.12
Consumer 745 8.97 688 7.78 557 6.83 534 4.96 505 4.33
--------------------------------------------------------------------------------------------
Total $4,248 100.00% $3,983 100.00% $3,209 100.00% $2,776 100.00% $2,622 100.00%
============================================================================================
11
Investment Activities
The Bank maintains minimum levels of investments for liquidity purposes.
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 at a level believed
adequate to meet requirements of normal daily activities, repayment of maturing
debt and potential deposit outflows. As of June 30, 2001, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable deposit accounts and
current borrowings) was 21.50%.
At June 30, 2001, 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, 2001, 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, are generally considered
liquid-assets and are generally of relatively short duration. See
"Regulation-Regulatory Capital Requirements."
Investment Securities. At June 30, 2001, the Company's investment securities
(including a $26.2 million investment in FHLB of New York stock) totaled $360.2
million, or 19.5% 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, 2001, PennFed held $11.0 million of such
non-investment grade securities. In addition, investment securities at June 30,
2001 included $17.4 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 by the OTS"
for a discussion of additional restrictions on the Company's investment
activities.
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, 2001
---------------------------------------------------------------------
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 ... $-- $ 19,994 $284,544 $304,538 $299,056
Obligations of states and
political subdivisions 10 -- -- 10 11
Corporate bonds ........... -- 1,038 -- 1,038 1,062
Trust preferred
securities ........... -- -- 28,383 28,383 27,116
---------------------------------------------------------------------
Total investment
securities ........... $ 10 $ 21,032 $312,927 $333,969 $327,245
=====================================================================
Weighted average yield at
year end ............. 10.38% 6.81% 6.97% 6.96%
=====================================================================
The majority of the securities in the investment portfolio have call features.
At June 30, 2001, the assumed weighted average life of the investment portfolio
was 4.1 years.
The Company's investment securities portfolio at June 30, 2001 did not contain
tax-exempt securities or securities of any single issuer 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.
12
Mortgage-Backed Securities. At June 30, 2001, mortgage-backed securities totaled
$135.6 million, or 7.3% of the Company's total assets, of which approximately
10% 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, 2001
------------------------------------------------------------------------------------
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 .................. $ -- $ 132 $ 393 $ 510 $ 1,035 $ 1,107
Freddie Mac ................. 1,369 1,228 21,539 18,825 42,961 43,942
Fannie Mae .................. 15 204 12,995 77,448 90,662 91,485
Collateralized Mortgage
Obligations/REMICs ....... -- -- -- 59 59 58
------------------------------------------------------------------------------------
Total mortgage-backed
securities .. $ 1,384 $ 1,564 $ 34,927 $ 96,842 $134,717 $136,592
====================================================================================
Weighted average yield at
year end 8.01% 7.02% 6.94% 7.07% 7.05%
====================================================================================
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 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,
------------------------------------
2001 2000 1999
------------------------------------
(In thousands)
Mortgage-backed securities, net:
At beginning of year ................ $ 87,561 $127,983 $204,452
Plus:
Securities purchased ............. 32,383 220 34
Securitization of loans receivable 47,661 -- --
Less:
Principal repayments ............. 31,908 40,522 76,206
Amortization of premiums ......... 91 120 297
------------------------------------
At end of year ...................... $135,606 $ 87,561 $127,983
====================================
13
The following table sets forth the composition of the Company's investment and
mortgage-backed securities portfolios at the dates indicated.
June 30,
--------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------
Percent Percent
of Total of Total
Book Market Book Book Market Book Book Market
Value Value Value Value Value Value Value Value
--------------------------------------------------------------------------------------
(Dollars in thousands)
Investment securities:
U.S. government
agency obligations .......... $304,538 $299,056 84.55% $274,532 $254,066 84.39% $264,538 $254,243
Obligations of states and
political subdivisions ...... 10 11 0.00 30 32 0.01 40 45
Corporate bonds ..................... 1,038 1,062 0.29 -- -- -- -- --
Trust preferred securities .......... 28,383 27,116 7.88 28,464 24,545 8.75 28,704 27,592
--------------------------------------------------------------------------------------
Total investment securities . 333,969 327,245 92.72 303,026 278,643 93.15 293,282 281,880
FHLB of New York stock .............. 26,218 26,218 7.28 22,295 22,295 6.85 16,623 16,623
--------------------------------------------------------------------------------------
Total investment securities
and FHLB of New York stock $360,187 $353,463 100.00% $325,321 $300,938 100.00% $309,905 $298,503
======================================================================================
Weighted average life of
investment securities excluding
FHLB of New York stock 4.1 years 4.2 years 3.4 years
Mortgage-backed securities:
Ginnie Mae ........................ $ 1,035 $ 1,107 0.76% $ 1,358 $ 1,392 1.55% $ 2,071 $ 2,162
Freddie Mac ....................... 42,961 43,942 31.68 48,759 48,507 55.69 74,622 75,119
Fannie Mae ........................ 90,662 91,485 66.86 37,197 36,886 42.48 50,899 51,233
Collateralized Mortgage
Obligations/REMICs ................ 59 58 0.04 79 76 0.09 103 103
--------------------------------------------------------------------------------------
134,717 136,592 99.34 87,393 86,861 99.81 127,695 128,617
Unamortized premiums, net ......... 889 -- 0.66 168 -- 0.19 288 --
--------------------------------------------------------------------------------------
Total mortgage-backed securities $135,606 $136,592 100.00% $ 87,561 $ 86,861 100.00% $127,983 $128,617
======================================================================================
June 30,
----------
1999
----------
Percent
of Total
Book
Value
----------
Investment securities:
U.S. government
agency obligations .......... 85.36%
Obligations of states and
political subdivisions ...... 0.01
Corporate bonds ..................... --
Trust preferred securities .......... 9.27
----------
Total investment securities . 94.64
FHLB of New York stock .............. 5.36
----------
Total investment securities
and FHLB of New York stock 100.00%
==========
Weighted average life of
investment securities excluding
FHLB of New York stock 3.4 years
Mortgage-backed securities:
Ginnie Mae ........................ 1.62%
Freddie Mac ....................... 58.31
Fannie Mae ........................ 39.77
Collateralized Mortgage
Obligations/REMICs ................ 0.08
----------
99.78
Unamortized premiums, net ......... 0.22
----------
Total mortgage-backed securities 100.00%
==========
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, 2001, certificates of deposit
from municipalities totaled $21.2 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,
14
changes in interest rates and competition. There were no brokered deposits at
June 30, 2001 and 2000. See Item 8 - Financial Statements - Note H - 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,
---------------------------------------------
2001 2000 1999
---------------------------------------------
(Dollars in thousands)
Opening balance .......... $ 1,080,350 $ 1,063,600 $ 1,028,100
Net deposits (withdrawals) (40,991) (24,630) (5,555)
Interest credited ........ 45,976 41,380 41,055
---------------------------------------------
Ending balance ........... $ 1,085,335 $ 1,080,350 $ 1,063,600%
=============================================
Net increase ............. $ 4,985 $ 16,750 $ 35,500
=============================================
Percent increase ......... 0.46% 1.57% 3.45%
=============================================
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 2001.
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 $197,215 $101,931 $103,412 $240,211 $642,769
Certificates of deposit of $100,000 or more 49,753 20,356 17,452 35,241 122,802
----------------------------------------------------
Total certificates of deposit ............. $246,968 $122,287 $120,864 $275,452 $765,571
====================================================
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.
15
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,
----------------------------------
2001 2000 1999
----------------------------------
(In thousands)
Maximum balance for the year ended:
FHLB of New York advances ........................................ $454,465 $364,465 $289,465
==================================
Other borrowings:
Overnight repricing lines of credit ........................... $ 84,400 $ 80,200 $ 54,700
FHLB of New York one-month overnight repricing
line of credit ............................................. -- 30,000 10,000
Reverse repurchase agreements callable or maturing
within one year ............................................. 48,840 9,563 39,925
Reverse repurchase agreements maturing after one year ......... 19,350 49,275 49,275
Unsecured revolving line of credit ............................ 4,705 -- --
----------------------------------
Total other borrowings ..................................... $157,295 $169,038 $153,900
==================================
Average balance for the year ended:
FHLB of New York advances ........................................ $397,614 $322,754 $266,906
==================================
Other borrowings:
Overnight repricing lines of credit ........................... $ 27,438 $ 30,393 $ 21,254
FHLB of New York one-month overnight repricing
line of credit ............................................. -- 5,706 1,221
Reverse repurchase agreements callable or maturing
within one year ............................................. 30,638 5,353 10,824
Reverse repurchase agreements maturing after one year ......... 2,050 39,601 40,215
Unsecured revolving line of credit ............................ 2,038 -- --
----------------------------------
Total other borrowings ...................................... $ 62,164 $ 81,053 $ 73,514
==================================
Balance at June 30:
FHLB of New York advances ........................................ $454,465 $364,465 $244,465
==================================
Other borrowings:
Overnight repricing lines of credit ........................... $ 59,450 $ 72,900 $ 29,900
FHLB of New York one-month overnight repricing
line of credit ............................................. -- -- --
Reverse repurchase agreements callable or maturing
within one year ............................................. 48,840 19,875 19,563
Reverse repurchase agreements maturing after one year ......... 19,350 19,400 39,275
Unsecured revolving line of credit ............................ -- -- --
----------------------------------
Total other borrowings ...................................... $127,640 $112,175 $ 88,738
==================================
Weighted average cost of funds for the year ended:
FHLB of New York advances ........................................ 6.18% 6.07% 6.01%
Other borrowings:
Overnight repricing lines of credit ........................... 6.02% 6.00% 5.20%
FHLB of New York one-month overnight repricing
line of credit ............................................. -- 5.96% 5.42%
Reverse repurchase agreements callable or maturing
within one year ......................................... 5.92% 5.69% 5.58%
Reverse repurchase agreements maturing after one year ......... 5.07% 6.02% 5.74%
Unsecured revolving line of credit ............................ 7.81% -- --
Weighted average cost of funds at June 30:
FHLB of New York advances ........................................ 6.00% 6.13% 5.93%
Other borrowings:
Overnight repricing lines of credit ........................... 4.23% 7.23% 5.98%
FHLB of New York one-month overnight repricing
line of credit ............................................. -- -- --
Reverse repurchase agreements callable or maturing
within one year ............................................ 4.69% 5.77% 5.01%
Reverse repurchase agreements maturing after one year ......... 4.92% 6.10% 5.93%
Unsecured revolving line of credit ............................ -- -- --
16
Trust Preferred Securities. During fiscal 1998, the Company formed a
wholly-owned trust subsidiary, PennFed Capital Trust I (the "Trust I").
Effective October 21, 1997, Trust I 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").
Trust I 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.
In March 2001, the Company formed a wholly-owned trust subsidiary, PennFed
Capital Trust II (the "Trust II"). Effective March 28, 2001, Trust II sold $12
million of 10.18% cumulative trust preferred securities in a private transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Act"). Therefore, these securities have not been registered under the Act.
Trust II used the proceeds from the sale of the Trust Preferred securities to
purchase 10.18% junior subordinated deferrable interest debentures issued by
PennFed. The Company used the proceeds from the junior subordinated debentures
for general corporate purposes.
Subsidiary Activities
As a federally chartered savings association, Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $37.0 million at June 30, 2001,
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
$17,000. 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, 2001, the Bank's investment in its operating
subsidiary was $426.9 million. Its Delaware operating subsidiary, Ferry
Development Holding Company, holds and manages an investment portfolio for the
benefit of the Bank.
Penn Federal currently has one 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 as Investment 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 uninsured 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.
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.
17
REGULATION
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 2000.
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, 2001 was $279,000.
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 FDIC
may 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, 2001, Penn
Federal had $7.0 million of intangible assets other than qualifying mortgage
servicing rights.
18
At June 30, 2001, Penn Federal had tangible capital of $144.8
million, or 7.87% of adjusted total assets, which was approximately $117.2
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, 2001, 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, 2001, Penn Federal had core capital of $144.8 million, or 7.87% of
adjusted total assets, which was approximately $71.2 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, 2001, the Bank had no capital instruments that qualify
as supplementary capital. The Bank had $4.2 million of allowances for loan and
lease losses at June 30, 2001, 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.
On June 30, 2001, Penn Federal had total risk-based capital of $149.0 million
(including $144.8 million in core capital and $4.2 million in allowable
supplementary capital) and risk-weighted assets of $950.0 million (including
$42.9 million in converted off-balance sheet assets) resulting in a risk-based
capital ratio of 15.69% of risk-weighted assets. This amount was $73.1 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 undercapitalized" (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.
19
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."
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 twelve 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, 2001, 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.
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 establishment 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," "satisfactory," "needs improvement" and "substantial
noncompliance." The Bank was examined for CRA compliance in February 2001 and
received a rating of "satisfactory."
20
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.
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, 2001, the Bank had $26.2 million in FHLB of New York
stock, which was in compliance with this requirement. Over the past five fiscal
years dividends on its FHLB of New York stock have averaged 6.84%.
For the year ended June 30, 2001, the Company recorded $1.5 million in dividends
from the FHLB of New York resulting in a 6.79% yield.
Federal and State Taxation
Federal 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 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.
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,
21
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, 2001 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 Delaware
business trusts, PennFed Capital Trust I and PennFed Capital Trust II are not
required to pay income or franchise taxes to the State of Delaware.
22
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 as of June 30, 2001 were 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. Ms. Tinker has announced her retirement effective
September 28, 2001. In conjunction with Ms. Tinker's retirement, Mr. Carfora
will assume the additional responsibilities of Chief Operating Officer effective
September 28, 2001. 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, 2001 regarding
the executive officers of the Bank who are not also directors.
Name Age Positions Held with the Bank
----------------------------------------------------------------------------------------------
Lucy T. Tinker 61 Senior Executive Vice President and Chief Operating Officer
Jeffrey J. Carfora 43 Executive Vice President and Chief Financial Officer
Barbara A. Flannery 45 Executive Vice President and Retail Banking Group Executive
James M. O'Brien 49 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. Ms. Tinker
has announced her retirement effective September 28, 2001.
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. In conjunction with
Ms. Tinker's retirement, Mr. Carfora will also assume the additional
responsibilities of Chief Operating Officer effective September 28, 2001.
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, 2001, the Company and its subsidiaries had a total of 289 employees,
including 47 part-time employees. The Company's employees are not represented by
any collective bargaining group.
23
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, 2001 was $20.4
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.
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 (now
ExxonMobil) 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. The Bank has
continued to vigorously deny liability but has recently engaged in discussions
with ExxonMobil. The Bank may be willing to enter into a cost sharing
arrangement with ExxonMobil if ExxonMobil will agree to develop and implement
the remedial action work plan required by the NJDEP. A written proposal is
expected to be submitted to the Bank by ExxonMobil. Currently, no written
agreement has been signed and neither party is bound to any verbal
conversations.
Based upon an environmental engineering report, a remedial investigation would
cost approximately $30,000. The environmental engineering company has also
indicated that, based upon their experience with similar type projects, the
majority of cases are addressed by natural remediation. Natural remediation
costs, if needed, range from $60,000 to $150,000. At June 30, 2001, the Bank has
established a contingent environmental liability of $45,000, which is included
in Accounts payable and other liabilities on the Company's Consolidated
Statement of Financial Condition. The $45,000 represents one-half of the
remedial investigation (one-half of $30,000, or $15,000) plus one-half of the
lower end of the range for natural remediation (one-half of $60,000, or
$30,000). Based upon the most current information available, management believes
the $45,000 represents the most likely liability at this time.
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, 2001.
24
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 7, 2001, there were
approximately 485 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 2001 Closing Price Fiscal 2000 Closing Price
------------------------- -------------------------
High Low High Low
------------------------- -------------------------
Quarter Ended:
September 30, 2000 and 1999 $15.375 $13.000 $17.625 $14.000
December 31, 2000 and 1999 17.063 13.625 16.000 12.844
March 31, 2001 and 2000 21.000 16.875 14.125 10.625
June 30, 2001 and 2000 23.100 19.200 14.125 11.500
The closing price of a common share was $23.10 at June 30, 2001 compared to
$14.13 at June 30, 2000.
In the fourth quarter of fiscal 2001, the Company increased the quarterly cash
dividend on its common stock to $0.05 per share. Prior quarterly cash dividends
were $0.04 per share since the second quarter of fiscal 1999. Quarterly cash
dividend payments of $0.035 per share were initiated in the second quarter of
fiscal 1997.
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,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------------
(In thousands, except per share amounts)
Selected Financial Condition
Data:
Total assets .................. $1,849,377 $1,729,219 $1,558,763 $1,551,938 $1,321,751
Loans receivable, net ......... 1,295,492 1,259,248 1,066,611 1,095,852 931,451
Investment securities ......... 333,969 303,026 293,282 178,310 35,290
Mortgage-backed securities .... 135,606 87,561 127,983 204,452 288,539
Deposits ...................... 1,085,335 1,080,350 1,063,600 1,028,100 918,160
Total borrowings .............. 582,105 476,640 333,203 361,965 288,215
Trust Preferred securities, net 44,461 32,805 32,743 32,681 --
Stockholders' equity .......... 112,530 113,981 107,500 103,703 97,270
Book value per common share(1) 15.50 14.37 13.03 11.87 10.92
Tangible book value per common share(1) 14.54 13.24 11.68 10.33 9.13
--------------------
(1) In accordance with Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," the calculation of book value per share
only includes ESOP shares to the that they are released or committed to be
released during the fiscal year.
25
Year ended June 30,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997(1)
-----------------------------------------------------------------------
(In thousands, except per share amounts)
Selected Operating Data:
Total interest and dividend income .............. $ 120,358 $ 111,763 $ 105,557 $ 100,805 $ 85,401
Total interest expense .......................... 79,584 71,201 68,786 65,869 53,073
----------------------------------------------------------------------
Net interest and dividend income ................ 40,774 40,562 36,771 34,936 32,328
Provision for loan losses ....................... 625 860 780 600 635
----------------------------------------------------------------------
Net interest income after provision for
loan losses ............................. 40,149 39,702 35,991 34,336 31,693
----------------------------------------------------------------------
Service charges ................................. 2,495 2,172 2,113 1,974 1,666
Net gain (loss) from real estate operations ..... 65 114 31 (156) (181)
Net gain on sales of loans ...................... 666 36 860 528 --
Other non-interest income ....................... 588 625 542 321 298
----------------------------------------------------------------------
Total non-interest income ....................... 3,814 2,947 3,546 2,667 1,783
----------------------------------------------------------------------
Total non-interest expenses ..................... 24,642 22,728 21,776 19,563 22,385(1)
----------------------------------------------------------------------
Income before taxes ............................. 19,321 19,921 17,761 17,440 11,091
Income tax expense .............................. 6,808 7,051 6,304 6,242 4,205
----------------------------------------------------------------------
Net income ...................................... $ 12,513 $ 12,870 $ 11,457 $ 11,198 $ 6,886(1)
======================================================================
Net income per common share:
Basic ........................................... $ 1.64 $ 1.58 $ 1.36 $ 1.25 $ 0.77(1)
======================================================================
Diluted ......................................... $ 1.55 $ 1.50 $ 1.29 $ 1.16 $ 0.73(1)
======================================================================
(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.
26
At and for the year ended June 30,
------------------------------------------------------------------
Selected Financial Ratios and Other Data: 2001 2000 1999 1998 1997(1)
------------------------------------------------------------------
Performance Ratios:
Return on average assets (ratio of net income to
average total assets) .............................. 0.72% 0.79% 0.74% 0.78% 0.58%(1)
Return on average stockholders' equity (ratio of
net income to average stockholders' equity) ........ 10.95 11.61 11.03 10.96 7.42(1)
Net interest rate spread during the year ................... 2.06 2.22 2.11 2.20 2.58
Net interest margin (net interest and dividend
income to average interest-earning assets) ......... 2.43 2.57 2.45 2.54 2.83
Ratio of average interest-earning assets to average
deposits and borrowings ............................ 107.67 107.64 107.27 107.07 105.30
Ratio of earnings to fixed charges(2):
Excluding interest on deposits ..................... 1.68x 1.81x 1.88x 1.99x 1.86x
Including interest on deposits ..................... 1.24x 1.28x 1.26x 1.26x 1.21x
Ratio of non-interest expense to average total assets ...... 1.42% 1.39% 1.40% 1.37% 1.87%(1)
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) ......... 51.59 47.53 49.24 46.00 57.95(1)
Dividend payout ratio ...................................... 10.37 10.13 11.40 11.20 13.64
Asset Quality Ratios:
Non-accruing loans to total loans at end of year ........... 0.13 0.21 0.34 0.34 0.59
Allowance for loan losses to non-accruing loans
at end of year ..................................... 259.50 146.70 87.44 74.18 47.80
Allowance for loan losses to total loans at end of year .... 0.33 0.32 0.30 0.25 0.28
Non-performing assets to total assets at end of year ....... 0.12 0.18 0.30 0.35 0.48
Ratio of net charge-offs during the year to average
loans outstanding during the year .................. 0.03 0.01 0.03 0.04 0.08
Capital Ratios:
Stockholders' equity to total assets at end of year ........ 6.08 6.59 6.90 6.68 7.36
Average stockholders' equity to average total assets ....... 6.58 6.78 6.67 7.14 7.76
Tangible capital to tangible assets at end of year(3) ...... 7.87 7.76 7.88 7.09 5.61
Core capital to adjusted tangible assets at end of year(3) . 7.87 7.76 7.88 7.11 5.64
Risk-based capital to risk-weighted assets at end of year(3) 15.69 15.50 16.29 15.16 12.22
Other Data:
Number of branch offices at end of year .................... 21 20 20 18 17
Number of deposit accounts at end of year .................. 88,500 88,300 88,200 87,500 85,400
Cash dividends declared per common share ................... $ 0.170 $ 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.
27
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 Trusts.
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 $305.9 million,
$278.3 million and $326.7 million in one- to four-family mortgage loans in
fiscal 2001, 2000 and 1999, 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 82.6% of the Company's gross loan portfolio
at June 30, 2001. During the first nine months of fiscal 2001, the Company's
strategy included the sale of conforming, fixed rate one- to four-family
residential loan production. Loans sold under this strategy totaled
approximately $29 million for the current fiscal year. In addition, the Company
sold approximately $65 million of longer duration, one- to four-family
residential mortgage loans in an effort to improve liquidity, interest rate risk
and net interest margin. Effective with the issuance of the $12 million Trust
Preferred securities in March 2001, a determination was made whereby conforming,
fixed rate one- to four-family mortgage loan production would not be sold for a
period of time. This change was made as part of a leverage strategy associated
with the Trust Preferred securities offering. The year ended June 30, 2000
represented a higher interest rate environment and the majority of one- to
four-family residential mortgage loan production was for adjustable rate
products. Therefore, loan sale activity was reduced as the majority of
production was retained in portfolio. For the year ended June 30, 2000, the
Company sold loans totaling $5.5 million. At June 30, 2001, the Company has made
no determination as to the sale of loans presently committed to be originated.
The level of loan sale activity continues to be evaluated with primary
consideration given to interest rate risk, long-term profitability and liquidity
objectives.
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 $110.6 million, $95.7
million and $75.5 million of commercial and multi-family and consumer loans in
fiscal 2001, 2000 and 1999, respectively. As of June 30, 2001, 2000 and 1999
commercial and multi-family and consumer loans represented 17.4%, 14.7% and
13.9%, 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,
28
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 were 0.12% at June 30, 2001.
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 consisting of checking, money market and savings accounts. These core
deposits increased $39.3 million, or 14.1%, in fiscal 2001.
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 core deposits 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 $286,000, or 10.2%, increase for fiscal 2001
compared to fiscal 2000, due to growth in core deposits and earnings from the
Bank's Investment Services at Penn Federal program. This 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 1.42% for the year ended June 30, 2001.
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 interest sensitive
financial instruments. 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
29
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.
Residential fixed and adjustable rate loans are assumed to prepay at an
annualized rate between 12% and 35%. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 10% and 42% while
consumer loans are assumed to prepay at a 38% rate. Fixed and adjustable rate
mortgage-backed securities have annual payment assumptions ranging from 24% to
44%. 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, 2001, $120.9 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.
30
Maturing or Repricing
----------------------------------------------------------------------
Year ended June 30,
----------------------------------------------------------------------
2002 2003 2004 2005 2006
----------------------------------------------------------------------
(Dollars in thousands)
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family ............................ $ 120,595 $ 82,975 $ 74,714 $ 68,637 $ 63,487
Average interest rate ....................... 7.27% 7.20% 7.19% 7.19%
Adjustable rate mortgage loans including
one- to four-family and commercial
and multi-family ............................ $ 167,431 $ 106,397 $ 79,329 $ 76,098 $ 22,192
Average interest rate ....................... 7.43% 7.15% 7.33% 7.26% 7.96%
Consumer loans including
demand loans ................................ $ 86,537 $ 13,712 $ 8,729 $ 5,658 $ 680
Average interest rate ....................... 7.59% 7.89% 7.89% 7.89% 7.89%
Investment securities and other ..................... $ 26,228 $ 2,000 $ 304,538 $ -- $ --
Average interest rate ....................... 6.50% 8.72% 6.77% 0.00% 0.00%
Mortgage-backed securities .......................... $ 38,101 $ 21,393 $ 17,527 $ 14,085 $ 11,632
Average interest rate ....................... 7.28% 7.02% 7.03% 7.03%
Total interest-earning assets .................... $ 438,892 $ 226,477 $ 484,837 $ 164,478 $ 97,991
======================================================================
Savings deposits .................................... $ 22,056 $ 16,175 $ 11,646 $ 6,696 $ 6,362
Average interest rate ....................... 1.85% 1.85% 1.85% 1.85%
Money market and demand deposits
(transaction accounts) ...................... $16,193 $ -- $ -- $ -- $ --
Average interest rate ....................... 2.85% 0.00% 0.00% 0.00% 0.00%
Certificates of deposit ............................. $ 490,120 $ 188,090 $ 31,125 $ 48,297 $ 7,939
Average interest rate ....................... 4.97% 5.95% 5.32% 6.21% 5.36%
FHLB of New York advances ........................... $ 70,000 $ 10,000 $ 29,000 $ 20,000 $ 20,000
Average interest rate ....................... 6.06% 4.51% 5.09% 5.98% 5.33%
Other borrowings .................................... $ 108,290 $ -- $ 19,350 $ -- $ --
Average interest rate ....................... 4.31% 0.00% 4.92% 0.00% 0.00%
Total deposits and borrowings ............... $ 706,659 $ 214,265 $ 91,121 $ 74,993 $ 34,301
======================================================================
Interest earning assets less deposits and
borrowings (interest-rate sensitivity gap) .. ($ 267,767) $ 12,212 $ 393,716 $ 89,485 $ 63,690
======================================================================
Cumulative interest-rate sensitivity gap ............ ($ 267,767) ($ 255,555) $ 138,161 $ 227,646 $ 291,336
======================================================================
Cumulative interest-rate sensitivity
gap as a percentage of total assets
at June 30, 2001 ............................ (14.48%) (13.82%) 7.47% 12.31% 15.75%
======================================================================
Cumulative interest-rate sensitivity gap
as a percentage of total interest-
earning assets at June 30, 2001 ............. (15.02%) (14.33%) 7.75% 12.77% 16.34%
======================================================================
Cumulative interest-earning assets as a
percentage of cumulative deposits and
borrowings at June 30, 2001 ................. 62.11% 72.25% 113.65% 120.94% 125.98%
======================================================================
Maturing or Repricing
-------------------------------------------------
Year ended June 30,
-------------------------------------------------
Thereafter Total Fair Value
-------------------------------------------------
(Dollars in thousands)
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family ............................ $ 292,685 $ 703,093 $ 706,295
Average interest rate ....................... 7.20% 7.24% 7.23%
Adjustable rate mortgage loans including
one- to four-family and commercial
and multi-family ............................ $ 18,636 $ 470,083 $ 475,089
Average interest rate ....................... 7.78% 7.36%
Consumer loans including
demand loans ................................ $ -- $ 115,316 $ 115,284
Average interest rate ....................... 0.00% 7.66%
Investment securities and other ..................... $ 27,421 $ 360,187 $ 353,463
Average interest rate ....................... 8.19% 6.87%
Mortgage-backed securities .......................... $ 31,979 $ 134,717 $ 136,592
Average interest rate ....................... 6.98% 6.99% 7.08%
Total interest-earning assets .................... $ 370,721 $ 1,783,396 $ 1,786,723
=================================================
Savings deposits .................................... $ 120,871 $ 183,806 $ 183,806
Average interest rate ....................... 1.85% 1.85% 1.85%
Money market and demand deposits
(transaction accounts) ...................... $ 117,432 $ 133,625 $ 133,625
Average interest rate ....................... 0.65% 0.92%
Certificates of deposit ............................. $ -- $ 765,571 $ 777,095
Average interest rate ....................... 0.00% 5.30%
FHLB of New York advances ........................... $ 305,465 $ 454,465 $ 470,466
Average interest rate ....................... 6.17% 6.00%
Other borrowings .................................... $ -- $ 127,640 $ 128,024
Average interest rate ....................... 0.00% 4.40%
Total deposits and borrowings ............... $ 543,768 $ 1,665,107 $ 1,693,016
=================================================
Interest earning assets less deposits and
borrowings (interest-rate sensitivity gap) .. ($ 173,047) $ 118,289
==============================
Cumulative interest-rate sensitivity gap ............ $ 118,289
============
Cumulative interest-rate sensitivity
gap as a percentage of total assets
at June 30, 2001 ............................ 6.39%
============
Cumulative interest-rate sensitivity gap
as a percentage of total interest-
earning assets at June 30, 2001 ............. 6.62%
============
Cumulative interest-earning assets as a
percentage of cumulative deposits and
borrowings at June 30, 2001 ................. 107.09%
============
At June 30, 2001, the Company's total deposits and borrowings maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing within one year by $267.8 million, representing a one year negative
gap of 14.48% of total assets, compared to a one year negative gap of 22.12% of
total assets at June 30, 2000. See "Asset/Liability Strategy." The Company's gap
position improved from June 30, 2000 due to an increase in mortgage related
prepayment rates brought about by a decline in market interest rates as well as
the sale of $94.1 million of one- to four-family residential mortgage loans, the
proceeds of which were used to reduce short-term borrowings. Additionally,
short-term certificates of deposit, including municipal certificates of deposit,
have decreased $100.9 million while medium-term certificates of deposit have
increased $66.3 million. Also contributing to the improve-
31
ment in the negative gap position was an increase in core deposits and
medium-term borrowings. 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. As of June 30, 2001, these interest rate
swaps had matured or had been terminated early.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap 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 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, 2001, the Bank's internally generated initial NPV ratio was
8.51%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 6.81%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was 1.70%. As of June 30, 2001, the Company's internally generated initial NPV
ratio was 8.21%, the Post-Shock ratio was 6.44%, and the Sensitivity Measure was
1.77%. 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, 2001, the Bank's initial NPV ratio, as measured by the
OTS, was 8.68%, the Bank's Post-Shock ratio was 5.26% and the Sensitivity
Measure was 3.42%.
In addition to monitorFing 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 June 30, 2001, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 9.4% 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.
32
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 its average life and duration,
as well as to mitigate prepayment risk and reduce borrowings. The level of such
activity continues to be evaluated with primary consideration given to interest
rate risk, 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 as such funds
are lower cost alternatives, are relatively stable and, thus, have a longer
duration and assist in strengthening customer relationships.
During fiscal 2001, each of the strategies noted above was employed to manage
the Company's sensitivity to changes in interest rates. In the first half of the
fiscal year, higher market rates, coupled with a flat and often inverted yield
curve, led to improved rate sensitivity but a reduction in net interest rate
spread. To ease liquidity pressures, manage interest rate risk and improve net
interest rate spread, the Company engaged in loan sale activities. In the first
half of the fiscal year, $80.3 million of one- to four-family fixed rate
residential mortgages were sold. In addition, $48 million of 30-year bi-weekly
residential mortgages were securitized with Freddie Mac (including loan
servicing) and the resulting mortgage-backed securities were retained with the
Bank. In the second half of fiscal 2001, lower short-term market rates of
interest and a significantly steeper yield curve resulted in an increase in
residential mortgage activity. Loan prepayments rose sharply and fixed rate new
mortgage loan production accelerated. Fixed rate loan volumes increased from 30%
of total new volumes in fiscal 2000 to 75% in fiscal 2001. Due to increased loan
prepayments and the issuance of the $12 million of Trust Preferred securities in
March 2001, a determination was made whereby conforming, fixed rate one- to
four-family mortgage loan production would not be sold for a period of time to
leverage the proceeds of such issuance.
As a result of the above activity, one- to four-family first mortgage loan
balances fell $4.2 million between June 30, 2000 and June 30, 2001; adjustable
rate balances fell $46.9 million, despite attractive pricing of such products,
while fixed rate balances increased $42.7 million. Consumer loan balances
increased $18.1 million, $14.0 million in prime-based home equity lines of
credit and $4.1 million in principally 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 $22.4 million during
the current fiscal year with $21.3 million of the growth in adjustable rate
products.
At June 30, 2001, medium and long-term certificates of deposits with remaining
maturities greater than one year totaled $275.4 million compared to $232.4
million at June 30, 2000. The lengthening of certificate of deposit maturities
was complemented by a $39.3 million increase in core deposit balances. Checking
and money market account balances grew $9.2 million, while savings balances
increased $30.1 million. Furthermore, wholesale borrowings with remaining
maturities greater than one year totaled $403.8 million at June 30, 2001,
reflecting growth of $70.0 million during the current fiscal year. Short-term
retail deposit balances with remaining maturities less than one year, including
municipal deposit balances, fell $68.9 million while short-term wholesale
funding balances grew $35.5 million between June 30, 2000 and June 30, 2001.
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 29% of total deposits at June 30, 2001, tend to be less
susceptible to rapid changes in interest rates than certificates of deposit
balances.
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.
33
Management will continue to monitor and employ such strategies, as necessary, in
conjunction with its overall strategic objectives.
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,
2001, 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.
Year ended June 30,
-----------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------
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 .......................... $1,040,942 $ 73,480 7.06% $ 988,454 $ 69,085 6.99% $ 970,924 $67,785 6.98%
Commercial and multi-family real
estate loans ................... 97,921 8,455 8.63 79,604 6,788 8.53 68,528 5,922 8.64
Consumer loans ..................... 107,695 8,311 7.72 83,187 6,153 7.40 63,627 4,581 7.20
---------- ----- ------ ----- ------ -----
Total loans receivable ......... 1,246,558 90,246 7.24 1,151,245 82,026 7.12 1,103,079 78,288 7.10
Federal funds sold ................. 1,013 61 6.02 307 17 5.54 1,379 68 4.93
Investment securities and other .... 327,208 22,716 6.94 323,190 22,547 6.98 234,576 16,318 6.96
Mortgage-backed securities ......... 105,297 7,335 6.97 105,913 7,173 6.77 161,702 10,883 6.73
---------- ----- ------ ----- ------ -----
Total interest-earning assets 1,680,076 $ 120,358 7.16 1,580,655 $111,763 7.07 1,500,736 $105,557 7.03
========= ======== ========
Non-interest earning assets ........ 55,173 55,857 57,450
---------- ---------- ----------
Total assets ................. $1,735,249 $1,636,512 $1,558,186
========== ========== ==========
Deposits and borrowings:
Money market and demand
deposits ..................... $ 124,926 $ 1,468 1.18% $ 115,827 $ 1,329 1.15% $ 102,425 $ 1,188 1.16%
Savings deposits ............... 163,292 2,830 1.73 161,845 2,645 1.63 163,636 2,879 1.76
Certificates of deposit ........ 812,440 46,987 5.78 786,949 42,784 5.44 792,507 44,581 5.63
--------- ------ ------- ------ ------- ------
Total deposits ............... 1,100,658 51,285 4.66 1,064,621 46,758 4.39 1,058,568 48,648 4.60
FHLB of New York advances ...... 397,614 24,571 6.18 322,754 19,591 6.07 266,906 16,052 6.01
Other borrowings ............... 62,164 3,728 6.00 81,053 4,852 5.99 73,514 4,086 5.56
--------- ------ ------- ------ ------- ------
Total deposits and borrowings 1,560,436 $ 79,584 5.10 1,468,428 $ 71,201 4.85 1,398,988 $ 68,786 4.92
========= ======== ========
Other liabilities .................. 24,734 24,417 22,619
--------- --------- ---------
Total liabilities ............ 1,585,170 1,492,845 1,421,607
Trust Preferred securities ......... 35,849 32,774 32,712
Stockholders' equity ............... 114,230 110,893 103,867
--------- --------- ---------
Total liabilities and
stockholders' equity ........ $1,735,249 $1,636,512 $ 1,558,186
========== ========== ===========
Net interest income and net interest
rate spread .................. $ 40,774 2.06% $ 40,562 2.22% $ 36,771 2.11%
========= ==== ======== ==== ======== ====
Net interest-earning assets and
interest margin .............. $ 119,640 2.43% $112,227 2.57% $101,748 2.45%
======== ==== ======== ==== ======== ====
Ratio of interest-earning assets to
deposits and borrowings ...... 107.67% 107.64% 107.27%
====== ====== ======
34
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,
-------------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
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 $3,668 $ 690 $ 37 $4,395 $1,224 $ 75 $ 1 $1,300
Commercial and multi-family
real estate loans 1,562 85 20 1,667 957 (77) (14) 866
Consumer loans 1,813 266 79 2,158 1,409 124 39 1,572
-------------------------------------------------------------------------
Total loans receivable 7,043 1,041 136 8,220 3,590 122 26 3,738
Federal funds sold 39 2 3 44 (53) 8 (6) (51)
Investment securities and other 280 (110) (1) 169 6,164 47 18 6,229
Mortgage-backed securities (42) 205 (1) 162 (3,755) 68 (23) (3,710)
-------------------------------------------------------------------------
Total interest-earning assets $7,320 $ 1,138 $137 $8,595 $5,946 $ 245 $ 15 $6,206
=========================================================================
Deposits and borrowings:
Money market and demand
deposits $ 104 $ 32 $ 3 $ 139 $ 155 $ (12) $ (2) $ 141
Savings deposits 24 160 1 185 (31) (205) 2 (234)
Certificates of deposit 1,386 2,729 88 4,203 (313) (1,495) 11 (1,797)
-------------------------------------------------------------------------
Total deposits 1,514 2,921 92 4,527 (189) (1,712) 11 (1,890)
FHLB of New York advances 4,544 354 82 4,980 3,359 149 31 3,539
Other borrowings (1,131) 9 (2) (1,124) 419 315 32 766
-------------------------------------------------------------------------
Total deposits and borrowings $4,927 $ 3,284 $172 $8,383 $3,589 $(1,248) $ 74 $2,415
=========================================================================
Net change in net interest income $2,393 $(2,146) $ (35) $ 212 $2,357 $ 1,493 $(59) $3,791
=========================================================================
35
Financial Condition
Comparison of Financial Condition at June 30, 2001 and June 30, 2000
Total assets increased $120.2 million to $1.849 billion at June 30, 2001 from
total assets of $1.729 billion at June 30, 2000. The increase was primarily due
to the originations and purchases of loans offset by sales of one- to
four-family residential loans and principal payments on loans and
mortgage-backed securities. During the first nine months of fiscal 2001, the
Company's strategy included the sale of conforming, fixed rate one- to
four-family residential loan production. Loans sold under this strategy totaled
approximately $29 million for the current fiscal year. In addition, the Company
sold approximately $65 million of longer duration, one- to four-family
residential mortgage loans in an effort to improve liquidity, interest rate risk
and net interest margin. Effective with the issuance of the $12 million of Trust
Preferred securities in March 2001, a determination was made whereby conforming,
fixed rate one- to four-family mortgage loan production would not be sold for a
period of time to leverage the proceeds of such issuance. At June 30, 2001, the
Company has made no determination as to the sale of loans presently committed to
be originated.
During the year ended June 30, 2001, the Company securitized approximately $48
million of one- to four-family mortgage loans as Fannie Mae mortgage-backed
securities. These securities are held in the Company's securities portfolio for
collateral purposes.
Deposits increased $5.0 million to $1.085 billion at June 30, 2001 from $1.080
billion at June 30, 2000. While higher costing certificate of deposit accounts
decreased, the Company's focus on lower costing deposits resulted in a $39.3
million, or 14.1%, increase in core deposits (checking, savings and money market
accounts). FHLB of New York advances and other borrowings increased $105.5
million from $476.6 million at June 30, 2000, reflecting growth primarily in
medium-term borrowings.
Non-performing assets at June 30, 2001 totaled $2.1 million, representing 0.12%
of total assets, compared to $3.0 million, or 0.18% of total assets, at June 30,
2000. Non-accruing loans totaled $1.6 million, with a ratio of non-accruing
loans to total loans of 0.13% at June 30, 2001 as compared to $2.7 million, or
0.21% of total loans, at June 30, 2000. Real estate owned increased to $500,000
at June 30, 2001 from $334,000 at June 30, 2000.
Stockholders' equity at June 30, 2001 totaled $112.5 million compared to $114.0
million at June 30, 2000. The decrease primarily reflects the net income
recorded for the year ended June 30, 2001, offset by the repurchase of 845,000
shares of the Company's outstanding stock at an average market price of $17.21
per share and the declaration of dividends.
Results of Operations
Comparison of Operating Results for the Years Ended June 30, 2001 and June 30,
2000
General. For the year ended June 30, 2001, net income was $12.5 million, or
$1.55 per diluted share, compared to net income of $12.9 million, or $1.50 per
diluted share, for the year ended June 30, 2000.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 2001 increased to $120.4 million from $111.8 million for the year ended
June 30, 2000. The increase in the year ended June 30, 2001 was due to an
increase in average interest-earning assets, coupled with an increase in the
average yield earned on interest-earning assets. Average interest-earning assets
were $1.7 billion for the year ended June 30, 2001 compared to $1.6 billion for
the prior fiscal year. The average yield on interest-earning assets increased to
7.16% for the year ended June 30, 2001 from 7.07% for the year ended June 30,
2000.
Interest income on residential one- to four-family mortgage loans for the
year ended June 30, 2001 increased $4.4 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 $52.5 million in the average balance
outstanding for the year ended June 30, 2001 over the prior fiscal year. The
increase in interest income on residential one- to four-family mortgage loans
was also the result of an increase in the average yield earned on this loan
portfolio to 7.06% for the year ended June 30, 2001 compared to 6.99% for the
prior fiscal year.
36
Interest income on commercial and multi-family real estate loans increased $1.7
million for the year ended June 30, 2001 when compared to the prior year. The
increase in interest income on commercial and multi-family real estate loans
were attributable to an increase of $18.3 million in the average outstanding
balance for the year ended June 30, 2001 compared to the prior year. The growth
in interest income on this portfolio was also due to an increase in the average
yield earned on commercial and multi-family real estate loans. The average yield
increased to 8.63% for the current year compared to 8.53% for the year ended
June 30, 2000.
Interest income on consumer loans increased $2.2 million for the year ended June
30, 2001 compared to the prior year. The increase in interest income for this
loan portfolio was due to an increase of $24.5 million in the average balance
outstanding for the year ended June 30, 2001 when compared to the prior year.
Also contributing to the increase in interest income on consumer loans was an
increase in the average yield earned on these loans. The average yield increased
to 7.72% for the year ended June 30, 2001 compared to 7.40% for the prior year.
Interest Expense. Interest expense increased $8.4 million for the year ended
June 30, 2001 from $71.2 million for fiscal 2000. The increase was attributable
to an increase in total average deposits and borrowings as well as an increase
in the Company's cost of funds. Average deposits and borrowings increased $92.0
million for the year ended June 30, 2001 compared to the 2000 period. The
average rate paid on deposits and borrowings increased to 5.10% for the year
ended June 30, 2001 from 4.85% for the prior fiscal year.
Net Interest and Dividend Income. Net interest and dividend income for the year
ended June 30, 2001 was $40.8 million, reflecting an increase from $40.6 million
recorded in the prior fiscal year. Average net interest-earning assets increased
$7.4 million for the year ended June 30, 2001 when compared to the prior year,
while the net interest margin of 2.43% for the current year reflected a 0.14%
decline from 2.57% for the year ended June 30, 2000. The compression in the net
interest margin when compared to the prior year was attributable to increased
short-term interest rates and the resulting rise in the Company's cost of funds,
as well as continued stock repurchases by the Company. However, the margin for
the fourth quarter of fiscal 2001 of 2.53% improved from a margin of 2.45% for
the June 30, 2000 quarter as short term market interest rates began to decline
substantially during the later half of fiscal 2001.
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 2001 was $625,000 compared to $860,000 for the prior fiscal year. The
allowance for loan losses at June 30, 2001 of $4.2 million reflects a $265,000
increase from the June 30, 2000 level. The allowance for loan losses as a
percentage of non-performing loans was 259.50% at June 30, 2001, compared to
146.70% at June 30, 2000. The increase is principally attributable to a decline
in the Company's non-performing loans. The allowance for loan losses as a
percentage of total loans at June 30, 2001 was 0.33%.
Non-Interest Income. For the year ended June 30, 2001, non-interest income was
$3.8 million compared to $2.9 million for the prior fiscal year. The increase in
non-interest income was primarily due to an increase in the net gain on sales of
loans during the current year when compared to the prior year. During the year
ended June 30, 2001, the net gain on sales of loans was $666,000 as compared to
$36,000 for the year ended June 30, 2000. Under a Company strategy of selling
conforming, fixed rate one- to four-family residential loan production,
approximately $29 million of such loans were sold during the current year,
generating gains of $259,000 for the year ended June 30, 2001. In addition,
during the year ended June 30, 2001, the Company sold approximately $65 million
of longer duration, one- to four-family residential mortgage loans in an effort
to improve liquidity, interest rate risk and net interest margin and recorded
net gain on sales of such loans of $407,000. Effective with the issuance of the
$12 million of Trust Preferred securities in March 2001, a determination was
made whereby conforming, fixed rate one- to four-family mortgage loan production
would not be sold for a period of time to leverage the proceeds of such
issuance. Service charge income increased to $2.5 million for the year ended
June 30, 2001 versus $2.2 million for the comparable prior year. The net gain
from real estate operations was $65,000 for the year ended June 30, 2001
compared to $114,000 for the year ended June 30, 2000. 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. The Company's non-interest expenses were $24.6 million
for the year ended June 30, 2001 compared to $22.7 million for the prior year.
Additional "non-cash" expense related to the Employee Stock Ownership Plan, an
increase in occupancy expense attributable to harsh winter weather, additional
costs for the Bank's new Business Development department and expenses related to
the expansion of network capacity and the Company's development of an internet
presence all contributed to the increased non-interest expenses for the year
ended June 30,
37
2001, when compared to the prior year. However, the Company's non-interest
expenses as a percent of average assets only increased slightly to 1.42% for the
year ended June 30, 2001 from 1.39% for the prior year.
Income Tax Expense. Income tax expense for the year ended June 30, 2001 was $6.8
million compared to $7.1 million for the prior fiscal year. The effective tax
rate was 35.2% for the year ended June 30, 2001 compared to 35.4% for the year
ended June 30, 2000.
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 $1.6 billion for the year ended June 30, 2000
compared to $1.5 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 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 $68.8 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.
38
Net Interest and Dividend Income. Net interest and dividend income for the year
ended June 30, 2000 was $40.6 million, reflecting a $3.8 million increase from
$36.8 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 2.22% and 2.57%, respectively, an
increase from 2.11% and 2.45%, 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 approximately $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. 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 $22.7 million for the year
ended June 30, 2000 compared to $21.8 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 1.39% was relatively unchanged from 1.40% for the prior year.
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.
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.
The Bank maintains appropriate levels of liquid assets. The Company's most
liquid assets are cash and cash
39
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, 2001 and
2000, the Bank's liquidity ratios were 21.50% and 8.71%, 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, 2001, the Company had
outstanding commitments to extend credit which amounted to $149.8 million
(including $85.8 million in available lines of credit) and commitments to
purchase loans of $17.7 million. Management believes that loan repayments and
other sources of funds will be adequate to meet the Company's foreseeable
liquidity needs.
During fiscal 2001, the Company's cash needs were provided by operating
activities, including the sales of loans, by proceeds from the Trust Preferred
securities offering and by maturities of investment securities. The Company's
fiscal 2001 cash needs were also provided by increased deposits, an increase in
advances from the FHLB of New York and other borrowings and principal repayments
of loans and mortgage-backed securities. During fiscal 2001, the cash provided
was used for investing activities, which included the origination and purchase
of loans, and the purchase of investment and mortgage-backed securities.
Additionally, cash provided was used for the purchase of treasury stock. 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.
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, 2001, 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 and increased
to $0.05 per share in the fourth quarter of fiscal 2001. Total dividends paid
for the years ended June 30, 2001, 2000, and 1999 were $0.17 per share, $0.16
per share and $0.155 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.
40
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2001 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
-------------------------
DELOITTE & Touche LLP
Parsippany, New Jersey
July 25, 2001
41
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
June 30,
----------------------------
2001 2000
----------------------------
(Dollars in thousands)
Assets
Cash and cash equivalents ................................................................. $ 15,771 $ 13,866
Investment securities held to maturity, at amortized cost, market value
of $327,245 and $278,643 at June 30, 2001 and 2000 ................................ 333,969 303,026
Mortgage-backed securities held to maturity, at amortized cost, market value
of $136,592 and $86,861 at June 30, 2001 and 2000 ................................. 135,606 87,561
Loans held for sale ....................................................................... 83 --
Loans receivable, net of allowance for loan losses of $4,248 and $3,983
at June 30, 2001 and 2000 ......................................................... 1,295,409 1,259,248
Premises and equipment, net ............................................................... 20,354 20,076
Real estate owned, net .................................................................... 500 334
Federal Home Loan Bank of New York stock, at cost ......................................... 26,218 22,295
Accrued interest receivable, net .......................................................... 11,590 10,227
Goodwill and other intangible assets ...................................................... 6,983 8,996
Other assets .............................................................................. 2,894 3,590
----------------------------
$ 1,849,377 $ 1,729,219
============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits .......................................................................... $ 1,085,335 $ 1,080,350
Federal Home Loan Bank of New York advances ....................................... 454,465 364,465
Other borrowings .................................................................. 127,640 112,175
Mortgage escrow funds ............................................................. 11,979 11,888
Accounts payable and other liabilities ............................................ 12,967 13,555
----------------------------
Total liabilities ................................................................. 1,692,386 1,582,433
----------------------------
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures ........................................ 46,500 34,500
Unamortized issuance expenses ..................................................... (2,039) (1,695)
----------------------------
Net Trust Preferred securities .................................................... 44,461 32,805
----------------------------
Commitments and Contingencies (Note N)
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 7,620,329 and 8,396,019 shares
outstanding at June 30, 2001 and 2000 (excluding shares held in treasury of
4,279,671 and 3,503,981 at June 30, 2001 and 2000) ........................ 60 60
Additional paid-in capital ........................................................ 61,504 60,523
Employee Stock Ownership Plan Trust debt .......................................... (1,801) (2,320)
Retained earnings, partially restricted ........................................... 102,694 91,840
Treasury stock, at cost, 4,279,671 and 3,503,981 shares at June 30, 2001 and 2000 . (49,927) (36,122)
----------------------------
Total stockholders' equity ........................................................ 112,530 113,981
----------------------------
$ 1,849,377 $ 1,729,219
============================
See notes to consolidated financial statements
42
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Consolidated Statements of Income
For the years ended June 30,
--------------------------------------
2001 2000 1999
--------------------------------------
(Dollars in thousands)
Interest and Dividend Income:
Interest and fees on loans ........................ $ 90,246 $ 82,026 $ 78,288
Interest on federal funds sold .................... 61 17 68
Interest and dividends on investment securities ... 22,716 22,547 16,318
Interest on mortgage-backed securities ............ 7,335 7,173 10,883
--------------------------------------
120,358 111,763 105,557
--------------------------------------
Interest Expense:
Deposits .......................................... 51,285 46,758 48,648
Borrowed funds .................................... 28,299 24,443 20,138
--------------------------------------
79,584 71,201 68,786
--------------------------------------
Net Interest and Dividend Income Before
Provision for Loan Losses ......................... 40,774 40,562 36,771
Provision for Loan Losses ........................... 625 860 780
--------------------------------------
Net Interest and Dividend Income After
Provision for Loan Losses ......................... 40,149 39,702 35,991
--------------------------------------
Non-Interest Income:
Service charges ................................... 2,495 2,172 2,113
Net gain from real estate operations .............. 65 114 31
Net gain on sales of loans ........................ 666 36 860
Other ............................................. 588 625 542
--------------------------------------
3,814 2,947 3,546
--------------------------------------
Non-Interest Expenses:
Compensation and employee benefits ................ 11,283 9,843 8,961
Net occupancy expense ............................. 1,659 1,663 1,333
Equipment ......................................... 1,877 1,763 1,642
Advertising ....................................... 475 393 359
Amortization of intangibles ....................... 2,014 2,121 2,363
Federal deposit insurance premium ................. 217 429 627
Preferred securities expense ...................... 3,452 3,132 3,132
Other ............................................. 3,665 3,384 3,359
--------------------------------------
24,642 22,728 21,776
--------------------------------------
Income Before Income Taxes .......................... 19,321 19,921 17,761
Income Tax Expense .................................. 6,808 7,051 6,304
--------------------------------------
Net Income .......................................... $ 12,513 $ 12,870 $ 11,457
======================================
Weighted average number of common shares outstanding:
Basic ............................................. 7,609,221 8,138,104 8,408,175
======================================
Diluted ........................................... 8,098,603 8,582,513 8,878,491
======================================
Net income per common share:
Basic ............................................. $ 1.64 $ 1.58 $ 1.36
======================================
Diluted ........................................... $ 1.55 $ 1.50 $ 1.29
======================================
See notes to consolidated financial statements.
43
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Consolidated Statements of
Changes in Stockholders' Equity
For the Years Ended June 30, 2001, 2000 and 1999
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, 1998 $ -- $ 60 $58,278 $ (531) $ (3,253) $ 70,781) $(21,632)
Allocation of Employee Stock Ownership
Plan (ESOP) stock 449
ESOP and Management Recognition
Plan (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 Dividend
Reinvestment Plan (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)
-----------------------------------------------------------------------------------
30, 2000 -- 60 60,523 -- (2,320) 91,840 (36,122)
Allocation of ESOP stock 519
ESOP and MRP adjustment 981
Purchase of 845,000 shares of treasury stock (14,545)
Issuance of 69,310 shares of treasury stock
for options exercised and DRP (343) 740
Cash dividends of $0.17 per common share (1,316)
Net income for the year ended June 30, 2001 12,513)
-----------------------------------------------------------------------------------
Balance at June 30, 2001 $ -- $ 60 $61,504 $ -- $(1,801) $102,694 $(49,927)
===================================================================================
See notes to consolidated financial statements.
44
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
For the years ended June 30,
----------------------------------------
2001 2000 1999
----------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income ............................................................. $ 12,513 $ 12,870 $ 11,457
Adjustments to reconcile net income to net cash provided by operating
activities:
Net gain on sales of loans ............................................. (666) (36) (860)
Proceeds from sales of loans held for sale ............................. 94,765 5,568 151,468
Net gain on sales of real estate owned ................................. (101) (126) (110)
Amortization of investment and mortgage-backed securities premium, net . 171 192 351
Depreciation and amortization .......................................... 1,421 1,385 1,364
Provision for losses on loans and real estate owned .................... 641 860 825
Amortization of cost of stock plans .................................... 1,499 1,520 2,101
Amortization of intangibles ............................................ 2,014 2,121 2,363
Amortization of premiums on loans and loan fees ........................ 2,278 1,437 2,338
Amortization of Trust Preferred securities issuance costs .............. 65 62 62
Increase in accrued interest receivable, net of accrued interest payable (1,076) (1,659) (509)
(Increase) decrease in other assets .................................... 696 (200) 1,970
Increase (decrease) in deferred income tax liability ................... (320) (118) 288
Increase (decrease) in accounts payable and other liabilities .......... (268) 2,058 (3,540)
Increase (decrease) in mortgage escrow funds ........................... 91 1,786 (432)
Other, net ............................................................. -- (34) 30
----------------------------------------
Net cash provided by operating activities .............................. 113,723 27,686 169,166
----------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities ...................... 50,011 10,175 147,070
Purchases of investment securities held to maturity .................... (81,034) (19,991) (262,096)
Net outflow from loan originations net of principal repayments of loans (145,281) (94,799) (93,695)
Purchases of loans ..................................................... (36,319) (106,049) (31,220)
Proceeds from principal repayments of mortgage-backed securities ....... 31,908 40,522 76,206
Purchases of mortgage-backed securities ................................ (32,383) (220) (34)
Proceeds from sale of premises and equipment ........................... -- 250 --
Purchases of premises and equipment .................................... (1,699) (2,487) (2,542)
Net inflow from real eastate owned activity ............................ 612 1,161 1,202
Purchases of Federal Home Loan Bank of New York stock .................. (3,923) (5,672) (1,558)
----------------------------------------
Net cash used in investing activities .................................. (218,108) (177,110) (166,667)
----------------------------------------
Cash Flows From Financing Activities:
Net increase in deposits ............................................... 4,698 17,862 35,052
Increase (decrease) in advances from the Federal Home Loan Bank of New
York and other borrowings ...................................... 105,465 143,437 (28,762)
Net proceeds from issuance of Trust Preferred securities ............... 11,591 -- --
Cash dividends paid .................................................... (1,316) (1,341) (1,353)
Purchases of treasury stock, net of reissuance ......................... (14,148) (6,568) (8,496)
----------------------------------------
Net cash provided by (used in) financing activities .................... 106,290 153,390 (3,559)
----------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ........................... 1,905 3,966 (1,060)
Cash and Cash Equivalents, Beginning of Year ................................... 13,866 9,900 10,960
----------------------------------------
Cash and Cash Equivalents, End of Year ......................................... $ 15,771 $ 13,866 $ 9,900
========================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ............................................................... $ 78,790 $ 71,043 $ 67,552
========================================
Income taxes ........................................................... $ 6,951 $ 7,608 $ 4,700
========================================
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net ................. $ 692 $ 382 $ 432
========================================
Transfer of loans receivable to loans held for sale, at market ......... $ 94,182 $ 352 $ 155,223
========================================
Securitization of loans receivable and transfer to mortgage-backed
securities .......................................................... $ 47,661 $ -- $ --
========================================
Transfer of premises and equipment, net to real estate owned, net ...... $ -- $ 50 $ --
========================================
See notes to consolidated financial statements
45
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended June 30, 2001, 2000 and 1999
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, PennFed Capital Trust I and PennFed
Capital Trust II). PennFed owns all of the outstanding stock of the Bank issued
on July 14, 1994. 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 accounting principles
generally accepted in the United States of America 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.
46
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
The Company generally evaluates the collectibility of consumer and one- to
four-family loans on a total portfolio basis.
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 B 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).
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.
47
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
Interest Rate Swaps -- Prior to July 1, 2000, the Company had utilized interest
rate swaps as a component of managing interest rate risk. Swap agreements were
held for purposes other than trading. The Company's swaps were considered to be
matched swaps, as they were specifically linked with a liability. Periodic net
cash settlements under swap agreements were 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 was 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.
Adoption of Recently Issued Accounting Standards -- Effective July 1, 2000, the
Company adopted Statement of Financial Accounting Standards 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. The Company did not have any derivatives
as defined under SFAS 133 which would have an effect on the Company's financial
condition, results of operations or cash flows as of and for the year ended June
30, 2001.
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140"). SFAS 140 replaces SFAS 125, but carries over most of the
provisions of SFAS 125. SFAS 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral, as well
as requiring certain disclosures. SFAS 140 became effective for the Company
during the year ended June 30, 2001. The adoption of SFAS 140 did not have an
effect on the Company's financial condition, results of operations or cash
flows.
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 O - Stockholders' Equity and Regulatory
Capital.
Reclassifications -- Certain reclassifications have been made to prior years'
financial statements to conform with current year's presentation.
B. Branch Acquisitions
In 1995, the Bank acquired the deposit liabilities and certain of the assets and
other liabilities of three of the Company's branch offices. The Bank recorded a
total deposit premium intangible asset of $18,141,000 in connection with the
acquisition. For the years ended June 30, 2001, 2000 and 1999, amortization of
the deposit premium intangible of $1,814,000 was recorded each year. At June 30,
2001 and 2000, the deposit premium intangible was $6,803,000 and $8,617,000,
respectively.
The Company acquired First Federal Savings and Loan Association of Montclair
effective September 1989. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to assets and liabilities acquired
based on their fair value at their date of acquisition. For each of the years
ended June 30, 2001, 2000 and 1999, the effect of the amortization of goodwill
was to reduce income before income taxes by approximately $200,000, $274,000 and
$347,000, respectively. At June 30, 2001 and 2000, goodwill was $180,000 and
$379,000, respectively.
48
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
C. Investment Securities
June 30, 2001 June 30, 2000
--------------------------------------------
Carrying Market Carrying Market
Value Value Value Value
--------------------------------------------
(In thousands)
U.S. government agencies:
Maturing:
After five years but within ten years . $ 19,994 $ 19,884 $ 10,000 $ 9,494
After ten years ....................... 284,544 279,172 264,532 244,572
--------------------------------------------
304,538 299,056 274,532 254,066
Obligations of states and political subdivisions:
Maturing:
After one year but within five years .. 10 11 30 32
--------------------------------------------
10 11 30 32
Corporate bonds:
Maturing:
After five years but within ten years . 1,038 1,062 -- --
---------------------------------------------
1,038 1,062 -- --
Trust preferred securities:
Maturing:
After ten years ....................... 28,383 27,116 28,464 24,545
--------------------------------------------
$333,969 $327,245 $303,026 $278,643
============================================
At June 30, 2001 and 2000, investment securities with a carrying value of
$174,879,000 and $208,357,000, 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, 2001 and
2000 were as follows:
June 30, 2001 June 30, 2000
----------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
(In thousands)
U.S. government agencies ....................... $-- $5,482 $-- $20,466
Obligations of states and political subdivisions 1 -- 2 --
Corporate bonds ................................ 24 -- -- --
Trust preferred securities ..................... 26 1,293 -- 3,919
----------------------------------------------
$51 $6,775 $ 2 $24,385
==============================================
There were no sales of investment securities for the years ended June 30, 2001,
2000 and 1999.
49
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
D. Mortgage-Backed Securities
June 30,
---------------------
2001 2000
---------------------
(In thousands)
Ginnie Mae ............................... $ 1,035 $ 1,358
Freddie Mac .............................. 42,961 48,759
Fannie Mae ............................... 90,662 37,197
Collateralized Mortgage Obligations/REMICs 59 79
---------------------
134,717 87,393
Unamortized premiums, net ................ 889 168
---------------------
$135,606 $ 87,561
======================
The estimated market values of mortgage-backed securities were $136,592,000 and
$86,861,000 at June 30, 2001 and 2000, respectively. There were no sales of
mortgage-backed securities in the years ended June 30, 2001, 2000 and 1999.
The carrying value of mortgage-backed securities pledged were as follows:
June 30,
---------------------
2001 2000
---------------------
(In thousands)
Pledged to secure:
Federal Home Loan Bank of New York advances $52,530 $47,085
Other borrowings .......................... 40,700 10,795
Public funds on deposit ................... 2,816 2,456
Interest rate swap agreements ............. -- 542
---------------------
$96,046 $60,878
=====================
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, 2001 and 2000 were as follows:
June 30, 2001 June 30, 2000
---------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------------------------------------------------
(In thousands)
Ginnie Mae ............................... $ 71 $-- $ 34 $ 1
Freddie Mac .............................. 823 78 284 661
Fannie Mae ............................... 822 652 173 526
Collateralized Mortgage Obligations/REMICs -- -- -- 3
---------------------------------------------------
$1,716 $ 730 $ 491 $1,191
===================================================
50
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
E. Loans Receivable, Net
June 30,
---------------------------
2001 2000
---------------------------
(In thousands)
First Mortgage Loans:
Conventional .................... $ 1,061,343 $ 1,065,005
FHA insured ..................... 3,865 4,224
VA guaranteed ................... 611 819
---------------------------
Total one- to four-family ....... 1,065,819 1,070,048
Commercial and multi-family ..... 108,625 86,257
---------------------------
Total first mortgage loans ........ 1,174,444 1,156,305
---------------------------
Consumer:
Second mortgages ................ 48,133 45,659
Home equity lines of credit ..... 60,412 46,394
Other ........................... 7,140 5,534
---------------------------
Total consumer loans .............. 115,685 97,587
---------------------------
Total loans ....................... 1,290,129 1,253,892
---------------------------
Add (Less):
Allowance for loan losses ....... (4,248) (3,983)
Unamortized premium ............. 2,764 3,091
Unearned income on consumer loans (1) (20)
Net deferred loan fees .......... 6,848 6,268
---------------------------
5,363 5,356
---------------------------
$ 1,295,492 $ 1,259,248
===========================
At June 30, 2001, there was an $83,000 FHA one- to four-family mortgage loan
included in loans held for sale. At June 30, 2001, there was no commitment to
sell this loan. There were no one- to four-family mortgage loans held for sale
at June 30, 2000.
Non-accruing loans at June 30, 2001 and 2000 were $1,637,000 and $2,715,000,
respectively, which represents 0.13% and 0.21%, respectively, of total loans
outstanding. The total interest income that would have been recorded for the
years ended June 30, 2001 and 2000, 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 $60,000 and $97,000, respectively.
At June 30, 2001 and 2000 impaired loans totaled $49,000 and $97,000,
respectively. The average balance of impaired loans for the years ended June 30,
2001 and 2000 was $61,000 and $97,000, respectively. All impaired loans have a
related allowance for losses, which totaled $12,000 and $60,000 at June 30, 2001
and 2000, respectively. Interest income related to impaired loans is recognized
under the cash-basis method. Interest income recognized on impaired loans for
the year ended June 30, 2001 was $12,000. For the year ended June 30, 2000,
there was no interest income recognized on impaired loans. Total interest income
that would have been recorded for the years ended June 30, 2001 and 2000, had
these loans been current in accordance with their loan terms, was approximately
$7,000 and $9,000, respectively.
The following is an analysis of the allowance for loan losses:
Year ended June 30,
-------------------------------
2001 2000 1999
-------------------------------
(In thousands)
Balance, beginning of year ... $ 3,983 $ 3,209 $ 2,776
Provisions for losses on loans 625 860 780
Recoveries ................... -- 37 49
Losses charged to allowance .. (360) (123) (396)
-------------------------------
Balance, end of year ......... $ 4,248 $ 3,983 $ 3,209
===============================
51
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
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, 2001 and 2000, commercial and multi-family real estate loans totaled
$108,625,000 and $ 86,257,000, 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 or mixed use properties were $35,239,000 and $33,433,000 at June
30, 2001 and 2000, respectively. At June 30, 2001 and 2000, the commercial and
multi-family real estate loan portfolio included $1.9 million and $694,000 of
lines of credit secured by non-real estate business assets. Furthermore, under a
program introduced during fiscal 2000, there were $1.2 million and $120,000 of
loans outstanding at June 30, 2001 and 2000, respectively, 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 $141,488,000 and $108,518,000 at
June 30, 2001 and 2000, 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 $1,588,000 and $1,235,000 at June 30, 2001 and 2000,
respectively.
F. Premises and Equipment, Net
June 30,
-------------------
2001 2000
-------------------
(In thousands)
Land .......................................... $ 4,563 $ 3,934
Buildings and improvements .................... 16,137 15,870
Leasehold improvements ........................ 1,612 1,607
Furniture and equipment ....................... 12,066 11,269
-------------------
34,378 32,680
Less: accumulated depreciation and amortization 14,024 12,604
-------------------
$20,354 $20,076
===================
G. Real Estate Owned
June 30,
----------------
2001 2000
----------------
(In thousands)
Acquired by foreclosure or deed in lieu of foreclosure $ 531 $ 367
Allowance for losses on real estate owned ............ (31) (33)
----------------
$ 500 $ 334
================
Results of real estate operations were as follows:
Year ended June 30,
--------------------------
2001 2000 1999
--------------------------
(In thousands)
Net gain on sales of real estate owned .. $ 101 $ 126 $ 110
Holding costs ........................... (20) (12) (34)
Provision for losses on real estate owned (16) -- (45)
--------------------------
Net gain from real estate operations .... $ 65 $ 114 $ 31
==========================
52
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
Activity in the allowance for losses on real estate owned was as follows:
Year ended June 30,
---------------------------
2001 2000 1999
---------------------------
(In thousands)
Balance, beginning of year ..... $ 33 $ 82 $ 207
Provisions charged to operations 16 -- 45
Losses charged to allowance .... (18) (49) (170)
---------------------------
Balance, end of year ........... $ 31 $ 33 $ 82
===========================
H. Deposits
June 30, 2001 June 30, 2000
-----------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
-----------------------------------------------------
(Dollars in thousands)
Non-interest-bearing demand .............. $ 50,677 $ 42,426
Interest-bearing demand .................. 65,857 1.10% 70,923 2.06%
Money market accounts .................... 17,091 2.80 11,099 2.14
Savings accounts ......................... 183,806 1.88 153,679 1.55
Certificates with remaining maturities of:
One year or less ....................... 490,118 4.97 567,733 5.64
Over one year to three years ........... 219,215 5.86 177,439 6.17
Over three years to five years ......... 56,238 6.09 55,005 6.13
----------- ----------
Total certificates ....................... 765,571 5.30 800,177 5.79
Accrued interest payable ................. 2,333 2,046
----------- ----------
$1,085,335 4.17% $1,080,350 4.67%
=========== ==========
The aggregate amount of accounts with a denomination of $100,000 or more was
approximately $167,393,000 and $175,022,000 at June 30, 2001 and 2000,
respectively.
I. 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, 2001 June 30, 2000
--------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
--------------------------------------------------
(Dollars in thousands)
Within one year ....................... $ 70,000 6.06% $ 50,000 6.25%
After one year but within two years ... 145,000 5.98 70,000 6.06
After two years but within three years 79,000 5.48 135,000 6.09
After three years but within four years 90,000 6.37 19,000 5.15
After four years but within five years 70,000 6.09 90,000 6.37
After five years ...................... 465 7.39 465 7.39
-------- --------
$454,465 6.00% $364,465 6.13%
======== ========
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.
53
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
At June 30, 2001, the Company had available from the FHLB of New York an
overnight repricing line of credit for $100,000,000 which expires on May 9,
2002. The line of credit has a variable interest rate. At June 30, 2001 and
2000, the Company had $59,450,000 and $72,900,000 of overnight borrowings under
this credit line with an interest rate of 4.23% and 7.23%, 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, 2001 or 2000. 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, 2002. This line of credit has a variable
interest rate. There were no borrowings under this line at June 30, 2001 or
2000. The Company also has a $5,000,000 unsecured revolving line of credit. This
line of credit has a variable interest rate tied to 30-day LIBOR. There were no
borrowings under this line at June 30, 2001.
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 $70,700,000 and $43,284,000 and a
market value of $69,929,000 and $40,731,000 at June 30, 2001 and 2000,
respectively. Based on the provisions of these reverse repurchase agreements,
counterparties are not permitted to sell or repledge the collateral pledged by
the Company.
The following table presents reverse repurchase agreements at the earlier of the
callable date or the maturity date:
June 30, 2001 June 30, 2000
--------------------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
--------------------------------------------------------------
(Dollars in thousands)
Within one year ...................... $48,840 4.69% $19,875 5.77%
After one year but within five years.. 19,350 4.92 19,400 6.10
--------- ---------
$68,190 4.76% $39,275 5.93%
========= =========
The average balance of reverse repurchase agreements for the years ended June
30, 2001 and 2000 was $32,688,000 and $44,954,000, respectively.
J. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
In October 1997, the Company formed a wholly-owned trust subsidiary, PennFed
Capital Trust I (the "Trust I"). Effective October 21, 1997, Trust I 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"). Trust I 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 Trust I are $35.6
million of junior subordinated debentures which mature in 2027 and are
redeemable at any time after five years. The obligations of the Company related
to Trust I constitute a full and unconditional guarantee by the Company of Trust
I 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.
In March 2001, the Company formed a wholly-owned trust subsidiary, PennFed
Capital Trust II (the "Trust II"). Effective March 28, 2001, Trust II sold $12
million of 10.18% cumulative trust preferred securities in a private transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Act"). Therefore, these securities have not been registered under the Act. The
trust preferred securities are reflected on the Consolidated Statements of
Financial Condition as Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures. Distributions payable on these Trust
Preferred securities, as well as the distributions payable on the $34.5 million
of Trust Preferred securities issued in October 1997, are included as a
component of non-interest expense on the Consolidated Statements of Income.
Distributions on the securities issued in October 1997 were previously
classified as interest expense. As a result, the net interest margin and the
non-interest expense and efficiency ratios for prior
54
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
periods have been recalculated to conform with this reclassification. Trust II
used the proceeds from the sale of the Trust Preferred securities to purchase
10.18% junior subordinated deferrable interest debentures issued by PennFed. The
sole assets of Trust II are $12.4 million of junior subordinated debentures
which mature in 2031 and are redeemable at any time after ten years. The
obligations of the Company related to Trust II constitute a full and
unconditional guarantee by the Company of Trust II Issuer's obligations under
the Trust Preferred securities. The Company used the proceeds from the junior
subordinated debentures for general corporate purposes.
K. 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, 2001, 2000 and 1999, expense related
to the Plan was $110,000, $111,000 and $107,000, respectively. At June 30, 2001
and 2000, the Plan assets included common stock of the Company with a market
value of $538,000 and $290,000, respectively.
L. 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,
2001 and 2000, the loan had an outstanding balance of $1,801,000 and $2,320,000
and the ESOP had unallocated shares of 360,280 and 464,098, respectively. Based
upon a $23.10 closing price per share of common stock on June 30, 2001, the
unallocated shares had a fair value of $8,322,000. The unamortized balance of
the ESOP debt is reflected as a reduction of stockholders' equity.
For the years ended June 30, 2001, 2000 and 1999, the Bank recorded compensation
expense related to the ESOP of $1,680,000, $1,256,000 and $1,173,000,
respectively. The compensation expense related to the ESOP includes $1,242,000,
$865,000 and $826,000, 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 103,818, 96,612 and
89,904 shares for the years ended June 30, 2001, 2000 and 1999, 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. 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. No MRP expense was recorded for the year ended June 30, 2001. For the
years ended June 30, 2000 and 1999, the Company recorded expense of $36,000 and
$431,000, respectively, related to the MRP.
55
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
Stock Option Plan
In connection with the Conversion, the Company established the 1994 Stock Option
and Incentive Plan ("Option Plan"). The Option Plan was subsequently ammended to
increase the number of shares of common stock available for awards thereunder
from 1,190,000 to 1,671,246. 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, 2001, 2000 and 1999
relating to the Option Plan are as follows:
Weighted
Average
Exercise
Options Price
----------------------------
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
Granted ......... -- --
Exercised ....... (66,650) 5.95
Expired ......... -- --
Forfeited ....... -- --
----------------------------
Balance, June 30, 2001 1,423,367 $ 9.86
============================
At June 30, 2001, 2000 and 1999, 1,414,366 options, 1,474,267 options and
1,343,583 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.
No pro forma disclosures as required under SFAS 123 are presented for the year
ended June 30, 2001 as there were no options granted. 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.
56
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
M. Income Taxes
The income tax provision is comprised of the following components:
Year ended June 30,
-----------------------------------
2001 2000 1999
-----------------------------------
(In thousands)
Current provision ............ $ 7,128 $ 7,169 $ 6,016
Deferred provision (benefit).. (320) (118) 288
-----------------------------------
Total income tax provision ... $ 6,808 $ 7,051 $ 6,304
===================================
Income taxes payable is included in Accounts payable and other liabilities in
the Consolidated Statements of Financial Condition at June 30, 2001 and 2000.
The financial statements also include a net deferred tax liability of $395,000
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, 2001
and 2000 is as follows:
June 30,
---------------------
2001 2000
---------------------
(In thousands)
Deferred tax assets:
Allowance for loan losses .. $ 1,227 $ 986
Litigation reserves ........ 16 4
Deposit premium intangible . 1,323 1,111
Depreciation ............... 480 476
---------------------
Total deferred tax assets .... 3,046 2,577
---------------------
Deferred tax liabilities:
Deferred loan fees ......... 3,049 2,871
Loan sale premiums ......... 8 10
Purchase accounting ........ 137 137
Servicing asset ............ 247 274
---------------------
Total deferred tax liabilities 3,441 3,292
---------------------
Net deferred tax liability ... $ (395) $ (715)
=====================
A reconciliation of the statutory income tax provision to the effective income
tax provision is as follows:
Year ended June 30,
------------------------------------
2001 2000 1999
------------------------------------
(In thousands)
Income tax provision at statutory rate $ 6,762 $ 6,972 $ 6,216
Amortization of intangibles .......... 70 96 121
Other, net ........................... (24) (17) (33)
------------------------------------
Total income tax provision ........... $ 6,808 $ 7,051 $ 6,304
====================================
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.
57
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
N. Commitments and Contingencies
Lease Commitments -- At June 30, 2001, minimum rental commitments under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:
Minimum Rent
Year ending June 30, (In thousands)
-------------------- --------------
2002................................. $ 285
2003................................. 294
2004................................. 205
2005................................. 149
2006................................. 151
2007 and later....................... 334
------
$1,418
======
Rentals under long-term operating leases for certain branch offices amounted to
$328,000, $345,000 and $263,000 for the years ended June 30, 2001, 2000 and
1999, respectively. Rental income of $470,000, $439,000 and $454,000 for the
years ended June 30, 2001, 2000 and 1999, 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 include 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.
The following summarizes the notional amount of off-balance sheet financial
instruments:
June 30,
--------------------
2001 2000
--------------------
(In thousands)
Commitments to extend credit... $63,951 $28,330
Unused lines of credit ........ 85,816 65,746
Commitments to purchase loans.. 17,699 26,826
Interest rate swaps ........... -- 30,000
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. 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 expo-
58
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
sure 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, 2001, the Company's interest rate swaps had all matured or been
terminated early. At June 30, 2000, the Company had $30 million in notional
amount interest rate swap agreements outstanding on which the Company paid a
fixed interest rate and received 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 was $72,877,000.
Included in interest expense for the years ended June 30, 2001, 2000 and 1999
was $(450,000), $67,000, and $1,116,000, respectively, of expense related to
interest rate swap agreements. Mortgage-backed securities with a carrying value
of $542,000 at June 30, 2000 were pledged to secure these agreements. At June
30, 2000, the interest rate swap agreements matured or were 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 (now ExxonMobil) 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. The Bank has continued to vigorously deny liability but has
recently engaged in discussions with ExxonMobil. The Bank may be willing to
enter into a cost sharing arrangement with ExxonMobil if ExxonMobil will agree
to develop and implement the remedial action work plan required by the NJDEP. A
written proposal is expected to be submitted to the Bank by ExxonMobil.
Currently, no written agreement has been signed and neither party is bound to
any verbal conversations.
Based upon an environmental engineering report, a remedial investigation would
cost approximately $30,000. The environmental engineering company has also
indicated that, based upon their experience with similar type projects, the
majority of cases are addressed by natural remediation. Natural remediation
costs, if needed, range from $60,000 to $150,000. At June 30, 2001, the Bank has
established a contingent environmental liability of $45,000, which is included
in Accounts payable and other liabilities on the Company's Consolidated
Statement of Financial Condition. The $45,000 represents one-half of the
remedial investigation (one-half of $30,000, or $15,000) plus one-half of the
lower end of the range for natural remediation (one-half of $60,000, or
$30,000). Based upon the most current information available, management believes
the $45,000 represents the most likely liability at this time.
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.
O. 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, 2001, the Company repurchased 845,000 shares of
its outstanding common stock at prices ranging from $13.13 to $22.65 per share,
for a total cost of $14,545,000. 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.
59
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
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Notes to Consolidated Financial Statements - Continued
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
adjusted tangible assets and risk-based capital of not less than 8% of
risk-weighted assets. As of June 30, 2001, 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.
60
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, 2001
Tangible capital, and ratio to
adjusted total assets $144,825 7.87% $27,617 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets $144,825 7.87% $73,645 4.00% $92,056 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets $144,825 15.25% N/A N/A $56,999 6.00%
Risk-based capital, and ratio to
risk-weighted assets $149,050 15.69% $75,998 8.00% $94,998 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 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% N/A N/A $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%
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 ra
tes 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").
61
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
The following table summarizes the Company's capital amounts and ratios under
the FRB's capital requirements for bank holding companies.
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, 2001
Tangible capital, and ratio to
adjusted total assets $140,729 7.64% $27,638 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets $140,729 7.64% $73,702 4.00% $92,127 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets $140,729 14.97% N/A N/A $56,401 6.00%
Risk-based capital, and ratio to
risk-weighted assets $144,954 15.42% $75,202 8.00% $94,002 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 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% N/A N/A $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%
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, 2001, the Bank could have paid
dividends totaling approximately $16.4 million.
62
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
P. Computation of EPS
The computation of EPS is presented in the following table.
For the year ended June 30,
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
(Dollars in thousands, except per share amounts)
Net income........................................ $ 12,513 $ 12,870 $ 11,457
==================================================
Number of shares outstanding:
Weighted average shares issued.................... 11,900,000 11,899,842 11,899,349
Less: Weighted average shares held in treasury... 3,891,390 3,261,279 2,896,595
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.......... 552,611 451,541 357,421
--------------------------------------------------
Average basic shares.............................. 7,609,221 8,138,104 8,408,175
Plus: Average common stock equivalents.......... 489,382 444,409 470,316
--------------------------------------------------
Average diluted shares............................ 8,098,603 8,582,513 8,878,491
==================================================
Earnings per common share:
Basic..................................... $ 1.64 $ 1.58 $ 1.36
==================================================
Diluted................................... $ 1.55 $ 1.50 $ 1.29
==================================================
Q. Disclosure About Fair Value of Financial Instruments
The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 2001 and 2000 were as follows:
June 30, 2001 June 30, 2000
---------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------
(In thousands)
Financial assets:
Cash and cash equivalents ...................... $ 15,771 $ 15,771 $ 13,866 $ 13,866
Investment securities .......................... 333,969 327,245 303,026 278,643
Mortgage-backed securities ..................... 135,606 136,592 87,561 86,861
FHLB of New York stock ......................... 26,218 26,218 22,295 22,295
---------------------------------------------------------
Total cash and investments ..................... 511,564 505,826 426,748 401,665
Loans held for sale ............................ 83 83 -- --
Loans receivable, less allowance for loan losses 1,295,409 1,303,741 1,259,248 1,220,343
---------------------------------------------------------
Total loans .................................... 1,295,492 1,303,824 1,259,248 1,220,343
Accrued interest receivable, net ............... 11,590 11,590 10,227 10,227
---------------------------------------------------------
Total financial assets ............................. $1,818,646 $1,821,240 $1,696,223 $1,632,235
=========================================================
Financial liabilities:
Deposits ....................................... $1,085,335 $1,096,859 $1,080,350 $1,079,158
FHLB of New York advances ...................... 454,465 470,466 364,465 353,736
Other borrowings ............................... 127,640 128,024 112,175 111,939
Mortgage escrow funds .......................... 11,979 11,979 11,888 11,888
Net Trust Preferred securities ................. 44,461 47,798 32,805 29,843
---------------------------------------------------------
Total financial liabilities ........................ $1,723,880 $1,755,126 $1,601,683 $1,586,564
=========================================================
63
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
June 30, 2001 June 30, 2000
---------------------------------------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------
(In thousands)
Off-balance sheet financial instruments:
Commitments to extend credit ........... $63,951 $ -- $28,330 $ --
Unused lines of credit ................. 85,816 -- 65,746 --
Commitments to purchase loans .......... 17,699 -- 26,826 --
Interest rate swaps .................... -- -- 30,000 264
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, 2001 and 2000. 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 -- 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 or prices for similar securities.
Commitments to Extend Credit and Unused Lines of Credit -- The fair value of
commitments is estimated to be zero
64
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
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.
R. 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,
-----------------------
2001 2000
-----------------------
(In thousands)
Balance, beginning of year.. $ 4,780 $ 3,608
New loans granted .......... 2,146 2,116
Repayments/reductions ...... (2,038) (944)
-----------------------
Balance, end of year ....... $ 4,888 $ 4,780
=======================
In addition to the above amount of loans, at June 30, 2001 and 2000, there was
$48,000 and $45,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.
S. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company has not determined the
impact, if any, that this statement will have on its consolidated financial
position or results of operations.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 requires that upon adoption, amortization of
goodwill will cease and instead, the carrying value of goodwill will be
evaluated for impairment on an annual basis. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS 142 will be effective for
fiscal years beginning after December 15, 2001. The Company has not determined
the impact, if any, that this statement will have on its consolidated financial
position or results of operations.
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred, if a reasonable estimate of fair value can be made. The
associated asset retirement cost would be capitalized as part of the carrying
amount of the long-lived asset. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. The Company has not determined the impact, if
any, that this statement will have on its consolidated financial position or
results of operations.
65
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
T. 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, 2001 and 2000 and for the years ended June 30, 2001, 2000
and 1999 and should be read in conjunction with the Notes to Consolidated
Financial Statements.
Condensed Statements of Financial Condition
June 30,
------------------------
2001 2000
------------------------
(In thousands)
Assets
Cash ....................................... $ 25 $ 25
Intercompany overnight investment .......... 1,582 796
------------------------
Total cash and cash equivalents .......... 1,607 821
Investment securities held to
maturity, at amortized cost .............. 10,987 11,005
Investment in subsidiaries ................. 153,609 143,685
Prepaid Trust Preferred securities expenses 2,039 1,695
Accrued interest receivable ................ 267 267
Other assets ............................... 1,054 558
------------------------
$169,563 $158,031
========================
Liabilities and Stockholders' Equity
Junior subordinated debentures ............. $ 47,940 $ 35,568
Intercompany loan payable .................. 7,100 7,100
Accrued interest payable ................... 608 528
Other accrued expenses and other liabilities 1,385 854
Stockholders' equity ....................... 112,530 113,981
------------------------
$169,563 $158,031
========================
Condensed Statements of Operations
Year ended June 30,
-----------------------------------------
2001 2000 1999
-----------------------------------------
(In thousands)
Income
Interest income on intercompany balances ............ $ 243 $ 301 $ 318
Interest income on investment securities ............ 990 992 1,006
Other income ........................................ 4 4 3
-----------------------------------------
1,237 1,297 1,327
Expenses
Interest expense on Junior subordinated debentures .. 3,491 3,166 3,166
Interest on intercompany loan ....................... 718 666 379
Interest on unsecured revolving line of credit ...... 159 -- --
Other expenses ...................................... 428 412 365
-----------------------------------------
4,796 4,244 3,910
-----------------------------------------
Loss before undistributed net income of subsidiaries. (3,559) (2,947) (2,583)
Equity in undistributed net income of subsidiaries .. 14,863 14,819 13,169
-----------------------------------------
Income before income taxes .......................... 11,304 11,872 10,586
Income tax benefit .................................. (1,209) (998) (871)
-----------------------------------------
Net income .......................................... $ 12,513 $ 12,870 $ 11,457
=========================================
66
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
Condensed Statements of Cash Flows
Year ended June 30,
------------------------------------------
2001 2000 1999
------------------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income ................................................................... $ 12,513 $ 12,870 $ 11,457
Adjustments to reconcile net income to net cash used in operating activities:.
Equity in undistributed net income of subsidiaries ..................... (14,863) (14,819) (13,169)
Amortization of investment securities premium .......................... 18 15 15
Amortization of cost of stock plans .................................... -- 36 520
Increase in accrued interest payable, net of accrued
interest receivable ............................................ 80 4 --
(Increase) decrease in other assets ..................................... (840) 1,064 (1,459)
Increase (decrease) in accrued expenses and other liabilities .......... 531 (282) 615
------------------------------------------
Net cash used in operating activities ............................... (2,561) (1,110) (2,021)
------------------------------------------
Cash Flows From Investing Activities:
Investment in subsidiary bank ................................................ (4,200) -- --
Investment in Trust II ....................................................... (372) -- --
Dividends received from subsidiary bank ...................................... 10,492 6,492 3,246
Proceeds from principal repayment on ESOP loan ............................... 519 484 449
Proceeds from maturities of investment securities ............................ -- 165 --
Net cash provided by investing activities .................... 6,439 7,141 3,695
Cash Flows From Financing Activities:
Proceeds from issuance of junior subordinated debentures ..................... 12,372 -- --
Proceeds from intercompany loan .............................................. -- -- 7,100
Purchases of treasury stock, net of reissuance ............................... (14,148) (6,568) (8,496)
Cash dividends paid .......................................................... (1,316) (1,341) (1,353)
------------------------------------------
Net cash used in financing activities ........................ (3,092) (7,909) (2,749)
------------------------------------------
Net increase (decrease) in cash and cash equivalents ......................... 786 (1,878) (1,075)
Cash and cash equivalents, beginning of year ................................. 821 2,699 3,774
------------------------------------------
Cash and cash equivalents, end of year ....................................... $ 1,607 $ 821 $ 2,699
==========================================
67
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - Continued
U. Quarterly Financial Data (Unaudited)
Quarter ended
--------------------------------------------------
2000 2001
--------------------------------------------------
September 30 December 31 March 31 June 30
--------------------------------------------------
(In thousands, except per share amounts)
Total interest income ...... $30,436 $30,020 $29,657 $30,245
Total interest expense ..... 20,581 20,280 19,364 19,359
--------------------------------------------------
Net interest income ........ 9,855 9,740 10,293 10,886
Provision for loan losses .. 200 125 125 175
Non-interest income ........ 1,059 975 833 947
Non-interest expenses ...... 5,804 5,906 6,313 6,619
Income tax expense ......... 1,734 1,651 1,649 1,774
--------------------------------------------------
Net income ............... $ 3,176 $ 3,033 $ 3,039 $ 3,265
==================================================
Net income per common share:
Basic .................... $ 0.41 $ 0.40 $ 0.40 $ 0.44
==================================================
Diluted .................. $ 0.39 $ 0.38 $ 0.38 $ 0.41
==================================================
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 ...... 16,694 17,331 17,965 19,211
--------------------------------------------------
Net interest income ......... 9,941 10,311 10,240 10,070
Provision for loan losses ... 210 210 210 230
Non-interest income ......... 808 767 681 691
Non-interest expenses ....... 5,752 5,712 5,710 5,554
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
==================================================
68
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 24, 2001, 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 24, 2001.
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 24, 2001, 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 24, 2001, 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
24, 2001, 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.
69
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, 2001
and 2000
Consolidated Statements of Income for the Years Ended
June 30, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended June
30, 2001, 2000 and 1999
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.
70
(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 Amended and Restated Stock Option and Incentive Plan 10(b)
(c) Management Recognition Plan *
(d) Employment Agreement with Joseph L. LaMonica 10(d)
(e) Employment Agreement with Patrick D. McTernan 10(e)
(f) Employment Agreement with Jeffrey J. Carfora 10(f)
(g) Employment Agreement with Barbara A. Flannery 10(g)
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
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.
71
(b) Reports on Form 8-K:
On April 25, 2001, the Company issued a press release announcing its third
quarter results and an increased dividend.
On June 13, 2001, the Company issued a press release announcing its completion
of a stock repurchase program and commencement of a new program.
72
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 24, 2001 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 24, 2001 Date: September 24, 2001
By: /s/ Patrick D. McTernan By: /s/ Amadeu L. Carvalho
------------------------------------ ----------------------------------
Patrick D. McTernan Amadeu L. Carvalho
Senior Executive Vice President, Director
General Counsel, Secretary
and Director
Date: September 24, 2001 Date: September 24, 2001
By: /s/ Marvin D. Schoonover By: /s/ Mario Teixeira, Jr.
------------------------------------ ----------------------------------
Marvin D. Schoonover Mario Teixeira, Jr.
Director Director
Date: September 24, 2001 Date: September 24, 2001
By: /s/ Jeffrey J. Carfora By: /s/ Claire M. Chadwick
------------------------------------ ----------------------------------
Jeffrey J. Carfora Claire M. Chadwick
Executive Vice President and Senior Vice President,
Chief Financial Officer Controller and Assistant Secretary
(Principal Financial Officer) (Principal Accounting Officer)
Date: September 24, 2001 Date: September 24, 2001