UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- --------------------
Commission file number 0-24040
PennFed Financial Services, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3297339
- ----------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, NJ 07052-2989
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES [X] NO [_]
As of February 10, 2003, there were issued and outstanding 7,161,572
shares of the Registrant's Common Stock.
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, June 30,
2002 2002
-------------- ---------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents............................................................. $ 60,470 $ 37,189
Investment securities available for sale, at market value, amortized cost of
$4,372 and $4,266 at December 31, 2002 and June 30, 2002......................... 4,579 4,295
Investment securities held to maturity, at amortized cost, market value of
$202,022 and $178,676 at December 31, 2002 and June 30, 2002..................... 199,700 179,490
Mortgage-backed securities held to maturity, at amortized cost, market value
of $135,598 and $174,036 at December 31, 2002 and June 30, 2002.................. 130,140 169,689
Loans held for sale................................................................... 9,660 1,592
Loans receivable, net of allowance for loan losses of $6,226 and $5,821
at December 31, 2002 and June 30, 2002........................................... 1,371,484 1,439,668
Premises and equipment, net........................................................... 20,571 19,598
Real estate owned, net................................................................ 28 28
Federal Home Loan Bank of New York stock, at cost..................................... 25,223 25,656
Accrued interest receivable, net...................................................... 8,931 9,564
Goodwill and other intangible assets.................................................. 4,100 5,043
Other assets.......................................................................... 3,011 615
-------------- ---------------
$1,837,897 $1,892,427
============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits......................................................................... $1,126,432 $1,174,507
Federal Home Loan Bank of New York advances...................................... 504,465 504,465
Other borrowings................................................................. 24,651 23,314
Mortgage escrow funds............................................................ 10,112 12,772
Accounts payable and other liabilities........................................... 7,661 14,071
-------------- ---------------
Total liabilities................................................................ 1,673,321 1,729,129
-------------- ---------------
Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures............................................... 46,500 46,500
Unamortized issuance expenses.................................................... (1,926) (1,963)
-------------- ---------------
Net Trust Preferred securities................................................... 44,574 44,537
-------------- ---------------
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 7,138,572 and 7,347,552 shares outstanding at
December 31, 2002 and June 30, 2002 (excluding shares held in
treasury of 4,761,428 and 4,552,448 at December 31, 2002 and
June 30, 2002)............................................................. 60 60
Additional paid-in capital....................................................... 64,872 63,820
Employee Stock Ownership Plan Trust debt......................................... (944) (1,244)
Retained earnings, partially restricted.......................................... 120,399 114,444
Accumulated other comprehensive income, net of taxes............................. 62 18
Treasury stock, at cost, 4,761,428 and 4,552,448 shares at
December 31, 2002 and June 30, 2002.......................................... (64,447) (58,337)
-------------- ---------------
Total stockholders' equity....................................................... 120,002 118,761
-------------- ---------------
$1,837,897 $1,892,427
============== ===============
See notes to consolidated financial statements.
2
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
2002 2001 2002 2001
---------- --------- ---------- ---------
(Dollars in thousands, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans...................................... $21,696 $23,666 $44,882 $47,521
Interest on federal funds sold.................................. 13 --- 13 1
Interest and dividends on investment securities................. 3,608 4,105 6,889 10,029
Interest on mortgage-backed securities.......................... 2,044 2,559 4,578 4,713
---------- --------- ---------- ----------
27,361 30,330 56,362 62,264
---------- --------- ---------- ----------
Interest Expense:
Deposits........................................................ 8,853 10,976 18,507 22,538
Borrowed funds.................................................. 7,557 7,624 15,114 15,841
---------- --------- ---------- ----------
16,410 18,600 33,621 38,379
---------- --------- ---------- ----------
Net Interest and Dividend Income Before Provision
for Loan Losses................................................. 10,951 11,730 22,741 23,885
Provision for Loan Losses............................................ 200 375 425 925
---------- --------- ---------- ----------
Net Interest and Dividend Income After Provision
for Loan Losses................................................. 10,751 11,355 22,316 22,960
---------- --------- ---------- ----------
Non-Interest Income:
Service charges................................................. 1,230 762 2,353 1,409
Net gain (loss) from real estate operations..................... --- (7) 2 (46)
Net gain on sales of loans...................................... 563 45 794 87
Other........................................................... 266 209 492 404
---------- --------- ---------- ----------
2,059 1,009 3,641 1,854
---------- --------- ---------- ----------
Non-Interest Expenses:
Compensation and employee benefits.............................. 3,313 3,180 6,794 6,415
Net occupancy expense........................................... 407 388 810 794
Equipment....................................................... 510 531 1,027 1,032
Advertising..................................................... 31 120 118 240
Amortization of intangibles..................................... 468 487 942 979
Federal deposit insurance premium............................... 50 50 98 102
Preferred securities expense.................................... 1,092 1,092 2,184 2,184
Other........................................................... 941 996 1,956 2,028
---------- --------- ---------- ----------
6,812 6,844 13,929 13,774
---------- --------- ---------- ----------
Income Before Income Taxes........................................... 5,998 5,520 12,028 11,040
Income Tax Expense................................................... 2,174 1,949 4,380 3,916
---------- --------- ---------- ----------
Net Income........................................................... $ 3,824 $ 3,571 $ 7,648 $ 7,124
========== ========= ========== ==========
Weighted average number of common shares outstanding:
Basic........................................................... 6,997,197 7,284,562 7,056,226 7,295,748
========== ========= ========== ==========
Diluted......................................................... 7,526,698 7,779,361 7,589,741 7,828,602
========== ========= ========== ==========
Net income per common share:
Basic........................................................... $0.55 $0.49 $1.08 $0.98
========== ========= ========== ==========
Diluted......................................................... $0.51 $0.46 $1.01 $0.91
========== ========= ========== ==========
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended Six months ended
December 31, December 31,
------------------------- ------------------------
2002 2001 2002 2001
---------- --------- --------- ----------
(In thousands)
Net income............................................................ $3,824 $3,571 $7,648 $7,124
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities available
for sale:
Unrealized holding gains (losses) arising during period........ (81) 3 44 ---
---------- --------- --------- ----------
Comprehensive income.................................................. $3,743 $3,574 $7,692 $7,124
========== ========= ========= ==========
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended December 31, 2002 and 2001
---------------------------------------------------
Employee
Stock Accumulated
Serial Additional Ownership Other
Preferred Common Paid-In Plan Trust Retained Comprehensive Treasury
Stock Stock Capital Debt Earnings Income Stock
----------- ---------- ------------ ------------- -------- ------------------ --------
(Dollars in thousands)
Balance at June 30, 2001........... $--- $60 $61,504 $(1,801) $102,694 $ --- $(49,927)
Allocation of Employee Stock
Ownership Plan (ESOP) stock...... 278
ESOP adjustment.................... 1,539
Purchase of 340,000 shares of
treasury stock................... (7,121)
Issuance of 205,961 shares of
treasury stock for options
exercised and Dividend
Reinvestment Plan (DRP).......... (1,038) 2,441
Cash dividends of $0.11 per
common share..................... (815)
Net income for the six months
ended December 31, 2001.......... 7,124
----------- ---------- ----------- ------- --------- --------- --------
Balance at December 31, 2001....... $--- $60 $63,043 $(1,523) $107,965 $ --- $(54,607)
=========== ========== =========== ======= ========= ========= ========
Balance at June 30, 2002........... $--- $60 $63,820 $(1,244) $114,444 $ 18 $(58,337)
Allocation of ESOP stock........... 300
ESOP adjustment.................... 1,052
Purchase of 255,000 shares of
treasury stock................... (6,704)
Issuance of 46,020 shares of
treasury stock for options
exercised and DRP................ (286) 594
Cash dividends of $0.20 per
common share..................... (1,407)
Unrealized gain on investment
securities available for sale,
net of income taxes.............. 44
Net income for the six months
ended December 31, 2002.......... 7,648
----------- ---------- ----------- ------- --------- --------- --------
Balance at December 31, 2002....... $--- $60 $64,872 $ (944) $120,399 $ 62 $(64,447)
=========== ========== =========== ======= ========= ========= ========
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended December 31,
-----------------------------
2002 2001
--------- ---------------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income....................................................................... $ 7,648 $ 7,124
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans....................................................... (794) (87)
Proceeds from sales of loans held for sale....................................... 59,184 8,706
Net gain on sales of real estate owned........................................... --- (13)
Amortization of investment and mortgage-backed securities
premium, net................................................................... 401 170
Depreciation and amortization.................................................... 854 797
Provision for losses on loans and real estate owned.............................. 425 951
Amortization of cost of stock plans.............................................. 1,352 1,818
Amortization of intangibles...................................................... 943 979
Amortization of premiums on loans and loan fees.................................. 3,683 1,536
Amortization of Trust Preferred securities issuance costs........................ 37 38
Increase in accrued interest receivable, net of accrued
interest payable............................................................... (945) (349)
(Increase) decrease in other assets.............................................. (2,396) 694
Decrease in accounts payable and other liabilities............................... (6,544) (3,420)
Decrease in mortgage escrow funds................................................ (2,660) (1,219)
Other, net....................................................................... --- (3)
--------- ---------
Net cash provided by operating activities........................................ 61,188 17,722
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities................................ 104,222 254,575
Purchases of investment securities held to maturity.............................. (124,480) (110,148)
Purchases of investment securities available for sale............................ (107) (15)
Net outflow from loan originations net of principal repayments of loans.......... (5,876) (98,851)
Proceeds from loans sold......................................................... 4,170 ---
Purchases of loans............................................................... (676) (17,141)
Proceeds from principal repayments of mortgage-backed securities................. 39,197 21,590
Purchases of mortgage-backed securities.......................................... --- (20,364)
Proceeds from sale of premises and equipment..................................... --- 14
Purchases of premises and equipment.............................................. (1,827) (613)
Net inflow from real estate owned activity....................................... --- 246
Redemptions (purchases) of Federal Home Loan Bank of New York stock.............. 433 (860)
--------- ---------
Net cash provided by investing activities........................................ 15,056 28,433
--------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits.............................................. (46,497) 34,104
Increase (decrease) in advances from the Federal Home Loan Bank
of New York and other borrowings............................................... 1,337 (71,840)
Cash dividends paid.............................................................. (1,407) (815)
Purchases of treasury stock, net of reissuance................................... (6,396) (5,718)
--------- ---------
Net cash used in financing activities............................................ (52,963) (44,269)
--------- ---------
Net Increase in Cash and Cash Equivalents............................................. 23,281 1,886
Cash and Cash Equivalents, Beginning of Period........................................ 37,189 15,771
--------- ---------
Cash and Cash Equivalents, End of Period.............................................. $ 60,470 $ 17,657
========= =========
6
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Six months ended December 31,
-----------------------------
2002 2001
--------- ---------------
(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest......................................................................... $35,292 $ 40,811
========= ========
Income taxes..................................................................... $ 5,291 $ 3,188
========= ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at market................... $66,641 $ 9,401
========= ========
Securitization of loans receivable and transfer to mortgage-backed
securities................................................................... $ --- $65,923
========= ========
See notes to consolidated financial statements.
7
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries (Penn Federal Savings Bank (the
"Bank"), PennFed Capital Trust I and PennFed Capital Trust II). These interim
consolidated financial statements included herein should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended June 30, 2002.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. There were no adjustments of a non-recurring nature recorded
during the six months ended December 31, 2002 and 2001. The interim results of
operations presented are not necessarily indicative of the results for the full
year.
2. Commitments to Originate Loans
The Company enters into commitments to originate loans whereby the interest rate
on the loan is determined prior to funding (rate lock commitments). Rate lock
commitments on mortgage loans that are intended to be sold are considered to be
derivatives and are recorded within other assets at fair value with changes in
fair value recorded in the net gain on sales of loans. Fair value is based upon
current prices in the secondary market for mortgage loans with similar
characteristics as the rate lock commitments.
3. Adoption of Recently Issued Accounting Standards
Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143") and Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144").
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 Statement of
Financial Position No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
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 144 supersedes SFAS 121 but retains the requirements of SFAS 121 for
recognizing and measuring the impairment loss of long-lived assets to be held
and used. For long-lived assets to be disposed of by sale, SFAS 144 requires a
single accounting model be used for all long-lived assets, whether previously
held and used or newly acquired. Long-lived assets to be disposed of other than
by sale would be considered held and used until disposition. SFAS 144 also
broadens the presentation of discontinued operations in the income statement to
include more disposal transactions.
The adoption of SFAS 142, SFAS 143 and SFAS 144 did not have an effect on the
Company's financial condition, results of operations or cash flows as of and for
the six months ended December 31, 2002.
Effective October 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 147, "Acquisitions of Certain Financial Institutions, an amendment
of FASB Statements No. 72 and 144 and FASB Interpretation No. 9" ("SFAS 147").
Among other things, SFAS 147 amends SFAS 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that SFAS 144
requires for other long-lived assets that are held and used. The adoption of
SFAS 147 did not have an effect on the Company's financial position, results of
operations or cash flows as of and for the six months ended December 31, 2002.
8
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. FIN 45 also clarifies the
requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. For recognition and initial measurement, FIN 45 is
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. For disclosure requirements, FIN 45 is effective for
financial statements of interim or annual periods ending after December 15,
2002.
4. Recently Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS 148
is effective for reporting periods beginning after December 15, 2002. As the
Company did not adopt the SFAS 123 fair value based method of accounting
for stock options, the adoption of SFAS 148 should have no impact on its
consolidated financial position or results of operations.
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 is an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and
addresses consolidation by business enterprises of variable interest entities
having certain characteristics. FIN 46 is effective immediately for certain
disclosure requirements and variable interest entities created after January 31,
2003 and in fiscal 2003 for all other variable interest entities. As the Company
does not have variable interest entities, the adoption of FIN 46 will not have
an effect on the Company's financial position, results of operations or cash
flows.
5. Other Contingencies
In 1987, the New Jersey Department of Environmental Protection ("NJDEP")
conducted an environmental 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 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. In order to comply
with the NJDEP, the Bank has entered into a cost sharing arrangement with
ExxonMobil whereby ExxonMobil has agreed to develop and implement the remedial
action work plan required by the NJDEP.
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 December 31, 2002 and June
30, 2002, a contingent environmental liability of $45,000 is included in
Accounts payable and other liabilities on the Company's Consolidated Statements
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.
9
6. Computation of EPS
The computation of EPS is presented in the following table.
Three months ended Six months ended
December 31, December 31,
------------------------------ -------------------------------
2002 2001 2002 2001
--------------- ------------- ------------- ----------------
(Dollars in thousands, except per share amounts)
Net income...................................................... $3,824 $3,571 $7,648 $7,124
============= ============= ============= =============
Number of shares outstanding:
Weighted average shares issued.................................. 11,900,000 11,900,000 11,900,000 11,900,000
Less: Weighted average shares held in treasury.................. 4,714,030 4,310,940 4,640,016 4,285,809
Less: Average shares held by the ESOP........................... 952,000 952,000 952,000 952,000
Plus: ESOP shares released or committed to be
released during the fiscal year...................... 763,227 647,502 748,242 633,557
----------- ----------- ----------- -----------
Average basic shares............................................ 6,997,197 7,284,562 7,056,226 7,295,748
Plus: Average common stock equivalents.......................... 529,501 494,799 533,515 532,854
----------- ----------- ----------- -----------
Average diluted shares.......................................... 7,526,698 7,779,361 7,589,741 7,828,602
========== ========== ========== ==========
Earnings per common share:
Basic.................................................... $0.55 $0.49 $1.08 $0.98
============= ============= ============= =============
Diluted.................................................. $0.51 $0.46 $1.01 $0.91
============= ============= ============= =============
7. Stockholders' Equity and Regulatory Capital
The Bank's regulatory capital amounts and ratios are presented in the following
table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ----------- ----- ---------- -----
(Dollars in thousands)
As of December 31, 2002
Tangible capital, and ratio to
adjusted total assets.................... $162,450 8.86% $27,516 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $162,450 8.86% $73,376 4.00% $ 91,720 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $162,450 16.20% N/A N/A $ 60,151 6.00%
Risk-based capital, and ratio to
risk-weighted assets..................... $168,753 16.83% $80,202 8.00% $100,252 10.00%
As of June 30, 2002
Tangible capital, and ratio to
adjusted total assets.................... $158,034 8.37% $28,323 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $158,034 8.37% $75,529 4.00% $ 94,411 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $158,034 15.36% N/A N/A $ 61,722 6.00%
Risk-based capital, and ratio to
risk-weighted assets..................... $163,828 15.93% $82,296 8.00% $ 102,869 10.00%
10
The previous table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB"). The following table
summarizes the Company's capital amounts and ratios under the FRB's capital
requirements for bank holding companies.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------ ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ----------- ----- ---------- -----
(Dollars in thousands)
As of December 31, 2002
Tangible capital, and ratio to
adjusted total assets.................... $154,451 8.42% $27,525 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $154,451 8.42% $73,399 4.00% $ 91,749 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $154,451 15.57% N/A N/A $ 59,520 6.00%
Risk-based capital, and ratio to
risk-weighted assets..................... $160,754 16.21% $79,360 8.00% $ 99,200 10.00%
As of June 30, 2002
Tangible capital, and ratio to
adjusted total assets.................... $151,600 8.02% $28,349 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $151,600 8.02% $75,597 4.00% $ 94,496 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $151,600 14.87% N/A N/A $ 61,150 6.00%
Risk-based capital, and ratio to
risk-weighted assets..................... $157,386 15.44% $81,534 8.00% $ 101,917 10.00%
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. General economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities, also significantly affect the Company's
results of operations. Future changes in applicable laws, regulations or
government policies may also have a material impact on the Company.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These 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, the relationship of short-term interest rates to long-term interest rates,
competition and terrorist acts 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 forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above, as well as other
factors, 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
these statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
Total assets decreased $54.5 million to $1.838 billion at December 31, 2002 from
$1.892 billion at June 30, 2002. The decrease was primarily due to a $68.2
million decrease in net loans receivable and a $39.5 million decrease in
mortgage-backed securities, offset by a $23.3 million increase in cash and cash
equivalents and a $20.2 million increase in investment securities held to
maturity. Low market interest rates and the resulting effect of loan refinancing
activity has led to an increase in the runoff of the mortgage-backed securities
portfolio. The effects of accelerated prepayments on loans and the sale of
conforming, fixed rate, one- to four-family residential mortgage loans into the
secondary market have more than offset our loan originations. Due to the lower
yielding investment alternatives that have been available in the market and with
increased cash flows from asset repayments and the sale of loans, cash and cash
equivalents have increased since June 30, 2002.
Deposits decreased $48.1 million to $1.126 billion at December 31, 2002 from
$1.175 billion at June 30, 2002. A decrease in short- and medium-term
certificates of deposit was partially offset by an increase in core deposit
accounts (checking, money market and savings accounts). At December 31, 2002,
Federal Home Loan Bank ("FHLB") of New York advances and other borrowings
remained relatively unchanged from June 30, 2002.
Non-performing assets at December 31, 2002 totaled $1.7 million, a decrease of
$1.6 million from the $3.3 million recorded at June 30, 2002. The ratio of
non-performing assets to total assets decreased to 0.09% at December 31, 2002
from 0.17% at June 30, 2002. Non-accruing loans at December 31, 2002 totaled
$1.7 million, as compared to $3.3 million at June 30, 2002, while the ratio of
non-accruing loans to total loans decreased to 0.12% at December 31, 2002 from
0.23% at June 30, 2002. Real estate owned at December 31, 2002 remained
unchanged at $28,000.
Stockholders' equity at December 31, 2002 totaled $120.0 million compared to
$118.8 million at June 30, 2002. The increase primarily reflects the net income
recorded for the six months ended December 31, 2002 and the exercise of stock
options, partially offset by the repurchase of 255,000 shares of the Company's
outstanding stock at an average price of $26.29 per share and the declaration of
cash dividends.
12
Results of Operations
General. For the three months ended December 31, 2002, net income was $3.8
million, or $0.51 per diluted share, compared to net income of $3.6 million, or
$0.46 per diluted share, for the comparable prior year period. For the six
months ended December 31, 2002, net income was $7.6 million, or $1.01 per
diluted share. These results compare to net income of $7.1 million, or $0.91 per
diluted share, for the six months ended December 31, 2001.
Interest and Dividend Income. Interest and dividend income for the three and six
months ended December 31, 2002 decreased to $27.4 million and $56.4 million,
respectively, from $30.3 million and $62.3 million for the three and six months
ended December 31, 2001. In general, the decline in interest and dividend income
reflects a lower level of interest-earning assets due to the effects of loan
sales and accelerated prepayments, and a lower yield earned on these assets as a
result of prepayments of higher yielding loans and origination of loans at lower
market interest rates. Average interest-earning assets were $1.792 billion and
$1.807 billion for the three and six months ended December 31, 2002,
respectively, compared to $1.797 billion and $1.815 billion for the comparable
prior year periods. The average yield earned on interest-earning assets
decreased to 6.08% for the three months ended December 31, 2002 from 6.73% for
the three months ended December 31, 2001. For the six months ended December 31,
2002, the average yield earned on interest-earning assets decreased to 6.22%
from 6.84% for the comparable prior year period.
Interest income on residential one- to four-family mortgage loans for the three
and six months ended December 31, 2002 decreased $2.5 million and $3.6 million,
respectively, when compared to the prior year periods. The decrease in interest
income on residential one- to four-family mortgage loans for the three months
ended December 31, 2002 was due to a decrease in the average yield earned on
this loan portfolio to 5.93% from 6.63% for the three months ended December 31,
2001, reflecting the payoff or refinance of higher yielding loans and the
origination of lower yielding loans. In addition, the decrease in interest
income on residential one- to four-family mortgage loans for the three months
ended December 31, 2002 was due to a decrease in the average balance outstanding
to $1.123 billion from $1.154 billion for the prior year period as the result of
accelerated prepayments and loan sales. For the six months ended December 31,
2002, the decrease in interest income on residential one- to four-family
mortgage loans was primarily due to a decrease in the average yield earned on
this loan portfolio, when compared to the prior year period. The average yield
earned on residential one- to four-family mortgage loans for the six months
ended December 31, 2002 decreased to 6.09% from 6.75% for the six months ended
December 31, 2001. The average balance outstanding of residential one- to
four-family mortgage loans increased slightly to $1.145 billion for the six
months ended December 31, 2002 compared to $1.139 billion for the prior year
period.
Interest income on commercial and multi-family real estate loans increased
$749,000 and $1.4 million for the three and six months ended December 31, 2002,
respectively, when compared to the prior year periods. At December 31, 2002,
commercial and multi-family real estate loans represented approximately 11.6% of
the Company's gross loan portfolio, as compared to 10.1% at June 30, 2002. The
increases in interest income on commercial and multi-family real estate loans
were attributable to increases of $42.6 million and $39.8 million in the average
outstanding balance for the three and six months ended December 31, 2002,
respectively, when compared to the prior year periods. The growth in interest
income for this portfolio was partially offset by decreases in the average yield
earned on commercial and multi-family real estate loans. The average yield
decreased to 7.82% and 7.89% for the current three and six month periods,
respectively, compared to 8.14% and 8.22% for the three and six months ended
December 31, 2001. As with other loans, the payoff of higher yielding loans and
the origination of loans at lower market interest rates has resulted in a
decline in the yield of the commercial and multi-family real estate loan
portfolio.
Interest income on consumer loans decreased $244,000 and $450,000 for the three
and six months ended December 31, 2002, respectively, when compared to the prior
year periods. The decreases in interest income for this loan portfolio are
reflective of the lower market interest rates. The average yield earned on
consumer loans decreased to 6.20% and 6.28% for the three and six months ended
December 31, 2002, respectively, from 6.88% and 7.03% for the comparable prior
year periods. In addition, the decreases in interest income on consumer loans
were attributable to decreases of $2.6 million and $155,000 in the average
balance outstanding for the three and six months ended December 31, 2002,
respectively, when compared to the three and six months ended December 31, 2001.
Interest income on investment securities and other interest-earning assets
decreased $497,000 and $3.1 million for the three and six months ended December
31, 2002, respectively, compared to the prior year periods. The decreases in
interest income on these securities is partially attributable to a $4.6 million
and a $65.4 million decrease in the average balance outstanding for the three
and six months ended December 31, 2002, respectively, when compared to the prior
13
year periods. The decrease in the average balance is primarily attributable to
callable investment securities that were redeemed before maturity. In addition,
the decreases in interest income on investment securities and other
interest-earning assets were due to declines in the average yield earned on
these securities. The average yield decreased to 5.92% and 5.93% for the current
three and six month periods, respectively, compared to 6.61% and 6.74% for the
three and six months ended December 31, 2001 as called investment securities
were replaced with lower yielding investments.
Interest income on the mortgage-backed securities portfolio decreased $515,000
and $135,000 for the three and six months ended December 31, 2002, respectively,
compared to the prior year periods, primarily as the result of accelerated
prepayments. The decrease in interest income on mortgage-backed securities for
the three months ended December 31, 2002 was due to a decrease in the average
yield earned on this loan portfolio to 5.68% from 6.46% for the three months
ended December 31, 2001. In addition, the decrease in interest income on
mortgage-backed securities for the three months ended December 31, 2002 was due
to a decrease in the average balance outstanding to $144.0 million from $158.4
million for the prior year period. For the six months ended December 31, 2002,
the decrease in interest income on mortgage-backed securities was due to a
decrease in the average yield earned on these securities partially offset by an
increase in the average balance outstanding, when compared to the prior year
period. The average yield earned on mortgage-backed securities for the six
months ended December 31, 2002 decreased to 5.94% from 6.54% for the six months
ended December 31, 2001. The average balance outstanding of mortgage-backed
securities increased to $154.0 million for the six months ended December 31,
2002 compared to $144.2 million for the prior year period.
Interest Expense. Interest expense decreased $2.2 million and $4.8 million for
the three and six months ended December 31, 2002, respectively, from the
comparable prior year periods. The decreases in the current year periods were
attributable to decreases in the Company's cost of funds from average rates of
3.86% and 3.93% for the three and six months ended December 31, 2002,
respectively, from 4.42% and 4.51% for the comparable prior year periods, as a
result of lower market interest rates. Partially offsetting the decreases in
interest expense were increases of $18.2 million and $6.3 million in total
average deposits and borrowings for the three and six months ended December 31,
2002, respectively, when compared to the prior year periods.
For the three and six months ended December 31, 2002, the average rate paid on
deposits decreased to 3.05% and 3.17%, respectively, from 3.84% and 3.96% for
the three and six months ended December 31, 2001. Average deposit balances
increased $15.9 million and $29.0 million to $1.150 billion and $1.159 billion
for the three and six months ended December 31, 2002, respectively. With a
reduction in the Company's funding needs as a result of loan sales and
accelerated loan prepayments, higher costing certificates of deposit have been
priced to allow runoff. Increases in core deposits may be partially attributable
to the lack of investment alternatives in this lower interest rate
environment.
The average cost of FHLB of New York advances decreased to 5.66% for the three
and six months ended December 31, 2002 from 5.80% and 5.86% while the average
balance of FHLB of New York advances increased $30.6 million and $38.1 million
for the same respective periods, when compared to the prior year periods. For
the three and six months ended December 31, 2002, the average balance of other
borrowings decreased $28.3 million and $60.8 million, respectively, when
compared to the three and six months ended December 31, 2001. For the three
months ended December 31, 2002, the average rate paid on other borrowings
decreased to 4.61% from 4.65% while the average rate increased to 4.64% from
4.44% for the six months ended December 31, 2002.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three and six months ended December 31, 2002
was $11.0 million and $22.7 million, respectively, reflecting a $779,000 and
$1.1 million decrease from the $11.7 million and $23.9 million recorded in the
comparable prior year periods. Average net interest-earning assets decreased
$23.9 million and $14.1 million for the three and six months ended December 31,
2002, respectively, when compared to the prior year periods. The net interest
rate spread and net interest margin for the three months ended December 31, 2002
were 2.22% and 2.47%, respectively, a decrease from 2.31% and 2.64% for the
comparable prior year period. For the six months ended December 31, 2002, the
net interest rate spread and net interest margin were 2.29% and 2.54%,
respectively, a decrease from 2.33% and 2.67% for the six months ended December
31, 2001. Due to accelerated prepayments resulting from lower market interest
rates, the net interest margin was reduced during the current periods when
compared to the prior year periods.
Provision for Loan Losses. The provision for loan losses for the three and six
months ended December 31, 2002 was $200,000 and $425,000, respectively, compared
to $375,000 and $925,000 for the comparable prior year periods. The
14
reduced provision for loan losses for the current year periods is consistent
with a reduction in non-performing loans. The allowance for loan losses at
December 31, 2002 of $6.2 million reflects a $405,000 increase from the $5.8
million at June 30, 2002. The allowance for loan losses as a percentage of
non-accruing loans was 371.04% at December 31, 2002, compared to 177.74% at June
30, 2002. Non-accruing loans were $1.7 million at December 31, 2002 compared to
$3.3 million at June 30, 2002. The allowance for loan losses as a percentage of
total loans at December 31, 2002 was 0.45% compared to 0.40% at June 30, 2002.
Non-Interest Income. For the three and six months ended December 31, 2002,
non-interest income was $2.1 million and $3.6 million, respectively, compared to
$1.0 million and $1.9 million for the prior year periods. The increases in
non-interest income for the current periods were primarily due to increases in
service charges, net gain on sales of loans and other non-interest income, when
compared to the three and six months ended December 31, 2001.
Service charge income for the three and six months ended December 31, 2002 was
$1.2 million and $2.4 million, respectively, reflecting increases of $468,000
and $944,000 over the $762,000 and $1.4 million recorded for the prior year
periods. Service charges increased partially because of fees associated with
various loan prepayments and refinances.
During the three and six months ended December 31, 2002, the net gain on sales
of loans was $563,000 and $794,000, respectively, compared to $45,000 and
$87,000 for the three and six months ended December 31, 2001. Approximately
$46.0 million and $58.5 million of conforming, fixed rate one- to four-family
residential mortgage loans were sold into the secondary market during the three
and six months ended December 31, 2002, respectively. In addition, during the
three months ended December 31, 2002, a $4.0 million commercial real estate loan
participation was sold as a means to reduce the Company's credit exposure on a
single commercial real estate property, realizing a net gain of approximately
$183,000. During the three and six months ended December 31, 2001, loan
production was retained in portfolio as a partial replacement of investment
securities called before maturity. In addition, effective with the issuance of
$12 million of Trust Preferred securities in March 2001, a determination was
made to suspend the sale of conforming, fixed rate one- to four-family
residential mortgage loan production to leverage the proceeds of the issuance.
As a result, only $5.2 million and $8.6 million of these conforming, fixed rate
one- to four-family residential mortgage loans were sold during the three and
six months ended December 31, 2001, respectively. In April 2002, the Company
resumed the sale of these loans for interest rate risk management purposes in
this low interest rate environment.
Other non-interest income increased $57,000 and $88,000 for the three and six
months ended December 31, 2002, respectively, when compared to the prior year
periods. Other non-interest income included $38,000 and $81,000 of increases in
earnings from the Investment Services at Penn Federal program for the three and
six months ended December 31, 2002, respectively, when compared to the prior
year periods. Through this program, customers have convenient access to
financial consulting/advisory services and related uninsured non-deposit
investment and insurance products.
Non-Interest Expenses. Non-interest expenses were $6.8 million for the three
months ended December 31, 2002, relatively unchanged from the prior year period.
For the six months ended December 31, 2002, non-interest expenses were $13.9
million compared to $13.7 million for the six months ended December 31, 2001.
The Company's non-interest expenses as a percent of average assets decreased to
1.46% for the three months ended December 31, 2002 from 1.49% for the prior year
period. Non-interest expenses as a percent of average assets were 1.49% for the
six months ended December 31, 2002 compared to 1.48% for the prior year period.
Income Tax Expense. Income tax expense for the three and six months ended
December 31, 2002 was $2.2 million and $4.4 million, respectively, compared to
$1.9 million and $3.9 million for the three and six months ended December 31,
2001. The effective tax rate for the three and six months ended December 31,
2002 was 36.3% and 36.4%, respectively, compared to 35.3% and 35.5% for the
three and six months ended December 31, 2001. The effective tax rates for the
current year periods reflect a higher State of New Jersey income tax rate.
15
Analysis of Net Interest Income
The following tables set forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income for the three and six months ended December 31, 2002 and 2001 and
reflect the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived from average daily
balances. The average balance of loans receivable includes non-accruing loans.
The yields and costs include fees which are considered adjustments to yields.
Three Months Ended December 31,
-----------------------------------------------------------------------------------
2002 2001
-------------------------------------- ----------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
------------- ---------- -------- ------------- ---------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans................................... $ 1,122,821 $ 16,677 5.93% $ 1,153,700 $ 19,152 6.63%
Commercial and multi-family real
estate loans............................ 160,904 3,203 7.82 118,297 2,454 8.14
Consumer loans............................. 116,217 1,816 6.20 118,815 2,060 6.88
----------- --------- ------------ ----------
Total loans receivable.................. 1,399,942 21,696 6.17 1,390,812 23,666 6.78
Federal funds sold......................... 4,141 13 1.19 --- --- ---
Investment securities and other............ 243,657 3,608 5.92 248,272 4,105 6.61
Mortgage-backed securities................. 144,035 2,044 5.68 158,367 2,559 6.46
----------- --------- ------------ ---------
Total interest-earning assets........... 1,791,775 $27,361 6.08 1,797,451 $30,330 6.73
========= ==========
Non-interest earning assets.................... 69,524 44,031
----------- ------------
Total assets............................ $1,861,299 $1,841,482
========== ==========
Deposits and borrowings:
Money market and demand deposits........... $ 171,153 $ 253 0.59% $ 138,881 $ 272 0.78%
Savings deposits........................... 332,090 2,194 2.62 214,223 1,135 2.10
Certificates of deposit.................... 647,155 6,406 3.93 781,377 9,569 4.86
----------- --------- ------------ ----------
Total deposits.......................... 1,150,398 8,853 3.05 1,134,481 10,976 3.84
FHLB of New York advances.................. 504,465 7,281 5.66 473,888 7,010 5.80
Other borrowings........................... 23,427 276 4.61 51,723 614 4.65
----------- --------- ------------ ----------
Total deposits and borrowings........... 1,678,290 $ 16,410 3.86 1,660,092 $ 18,600 4.42
========= ==========
Other liabilities.............................. 19,310 21,063
------------ ------------
Total liabilities....................... 1,697,600 1,681,155
Trust Preferred securities..................... 44,565 44,490
Stockholders' equity........................... 119,134 115,837
----------- ------------
Total liabilities and stockholders'
equity.............................. $ 1,861,299 $ 1,841,482
============ ============
Net interest income and net
interest rate spread....................... $ 10,951 2.22% $ 11,730 2.31%
========== ==== ========== ====
Net interest-earning assets and
interest margin............................ $ 113,485 2.47% $ 137,359 2.64%
============= ==== ============ ====
Ratio of interest-earning assets to
deposits and borrowings.................... 106.76% 108.27%
====== ======
(1) Annualized.
16
17
Six Months Ended December 31,
------------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
------------- ---------- -------- ------------- ---------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans................................... $1,144,989 $34,904 6.09% $1,138,821 $38,496 6.75%
Commercial and multi-family real
estate loans............................ 155,149 6,235 7.89 115,363 4,832 8.22
Consumer loans............................. 118,185 3,743 6.28 118,340 4,193 7.03
------------- -------- ------------ ----------
Total loans receivable.................. 1,418,323 44,882 6.30 1,372,524 47,521 6.90
Federal funds sold......................... 2,071 13 1.19 67 1 3.33
Investment securities and other............ 232,337 6,889 5.93 297,733 10,029 6.74
Mortgage-backed securities................. 154,048 4,578 5.94 144,227 4,713 6.54
------------ -------- ------------ ----------
Total interest-earning assets........... 1,806,779 $56,362 6.22 1,814,551 $62,264 6.84
======== ==========
Non-interest earning assets.................... 63,698 47,831
------------- ------------
Total assets............................ $1,870,477 $1,862,382
============= ============
Deposits and borrowings:
Money market and demand deposits........... $ 169,054 $ 590 0.69% $ 134,828 $ 580 0.85%
Savings deposits........................... 325,927 4,402 2.68 204,613 2,140 2.07
Certificates of deposit.................... 664,340 13,515 4.04 790,880 19,818 4.97
------------- -------- ------------ ----------
Total deposits.......................... 1,159,321 18,507 3.17 1,130,321 22,538 3.96
FHLB of New York advances.................. 504,465 14,562 5.66 466,327 13,934 5.86
Other borrowings........................... 23,296 552 4.64 84,091 1,907 4.44
------------- -------- ------------ ----------
Total deposits and borrowings........... 1,687,082 $33,621 3.93 1,680,739 $38,379 4.51
======== ==========
Other liabilities.............................. 19,566 22,206
------------- -------------
Total liabilities....................... 1,706,648 1,702,945
Trust Preferred securities..................... 44,556 44,480
Stockholders' equity........................... 119,273 114,957
------------- ------------
Total liabilities and stockholders'
equity.............................. $1,870,477 $1,862,382
============= ============
Net interest income and net
interest rate spread....................... $22,741 2.29% $23,885 2.33%
======= ==== ========== ====
Net interest-earning assets and
interest margin............................ $ 119,697 2.54% $ 133,812 2.67%
============= ==== ============ ====
Ratio of interest-earning assets to
deposits and borrowings.................... 107.09% 107.96%
====== ======
(1) Annualized.
18
Non-Performing Assets
The table below sets forth the amounts and categories of the Company's
non-performing assets. Loans are placed on non-accrual status when the
collection of principal or interest becomes delinquent more than 90 days. There
are no loans delinquent more than 90 days which are still accruing. Real estate
owned represents assets acquired in settlement of loans and is shown net of
valuation allowances.
December 31, June 30,
2002 2002
-------------------- ---------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family.............................................................. $1,353 $2,905
Commercial and multi-family...................................................... --- ---
Consumer......................................................................... 325 370
--------- ---------
Total non-accruing loans..................................................... 1,678 3,275
Real estate owned, net................................................................ 28 28
--------- ---------
Total non-performing assets.................................................. 1,706 3,303
--------- ---------
Total risk elements.......................................................... $1,706 $3,303
========= =========
Non-accruing loans as a percentage of total loans..................................... 0.12% 0.23%
========= =========
Non-performing assets as a percentage of total assets................................. 0.09% 0.17%
========= =========
Total risk elements as a percentage of total assets................................... 0.09% 0.17%
========= =========
Critical Accounting Policy
Allowance for Loan Losses - The allowance for loan losses is established through
charges to earnings based on management's evaluation of the probable credit
losses presently inherent in its loan portfolio. This evaluation, which includes
a review of loans for which full collectibility may not be reasonably assured,
considers among other matters, loan classifications, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss experience,
portfolio growth and composition 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 the 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.
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 probable 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.
Where appropriate, reserves are allocated to individual loans that exhibit
observed or probable credit weakness. For example, reserves may be specifically
assigned for loans that are 90 days or more past due, loans where the borrower
has filed for bankruptcy or loans identified by the Company's internal loan
review process. Reserves are based upon
19
management's estimate of the borrower's ability to repay the loan given the
availability of collateral, other sources of cash flow and legal options
available to the Company. For loans not subject to specific reserve allocations,
historical loss rates by loan category are applied. An unallocated reserve is
maintained to recognize the imprecision in estimating and measuring loss when
evaluating reserves for individual loans or pools of loans. Reserves on
individual loans are reviewed no less frequently than quarterly and adjusted as
appropriate.
The Company has not substantively changed any aspect of its overall approach in
its determination of the level of the allowance for loan losses. There have been
no material changes in assumptions of estimation techniques as compared to prior
periods that impacted the determination of the current period allowance.
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 allowance 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. These 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. At December 31, 2002, the Company had a total
allowance for loan losses of $6.2 million representing 371.04% of total
non-accruing loans and 0.45% of total loans. Based on the procedures discussed
above, management is of the opinion the reserve of $6.2 million was adequate,
but not excessive, to absorb probable credit losses associated with the loan
portfolio at December 31, 2002.
Off Balance Sheet - The Company is a party to financial instruments with
off-balance sheet risk in the normal course of business. These financial
instruments are not recorded on the balance sheet when either the exchange of
the underlying asset or liability has not yet occurred. These financial
instruments include certain commitments to extend credit, unused lines of credit
and commitments to purchase loans. 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.
Interest Rate Sensitivity
Interest Rate Sensitivity Gap. The interest rate risk inherent in assets and
liabilities may be determined by analyzing the extent to which these 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 positive gap if the amount of interest-earning assets maturing or
repricing within a specified time period exceeds the amount of interest-bearing
liabilities maturing or repricing within the same period. If more
interest-bearing liabilities than interest-earning assets mature or reprice
within a specified period, then the institution is considered to have a negative
gap. Accordingly, in a rising interest rate environment, in an institution with
a positive gap, the yield on its rate sensitive assets would theoretically rise
at a faster pace than the cost of its rate sensitive liabilities, thereby
improving future net interest income. In a falling interest rate environment, a
positive gap would indicate that the yield on rate sensitive assets would
decline at a faster pace than the cost of rate sensitive liabilities and
diminish net interest income. For an institution with a negative gap, the
reverse would be expected.
At December 31, 2002, the Company's total interest-earning assets maturing or
repricing within one year exceeded its total deposits and borrowings maturing or
repricing within one year by $190.6 million, representing a one year positive
gap of 10.36% of total assets, compared to a one year positive gap of 5.11% of
total assets at June 30, 2002. The Company's gap position changed from June 30,
2002 primarily due to the decline in market interest rates which has increased
prepayment activity on loans and mortgage-backed securities and has raised
expectations that certain investment securities with callable features will be
redeemed before maturity. Also contributing to the change in the gap position
was a decrease in certificates of deposit maturing within one year, partially
offset by an increase in FHLB of New York advances now maturing within one year.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates in the short-term and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate significantly from those assumed in
calculating the gap position. Finally, the ability of many borrowers to service
their debt may
20
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 additional interest rate risk ("IRR") measures,
including an IRR "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity
Measure." A low Post-Shock NPV ratio indicates greater exposure to IRR. Greater
exposure can result from a low initial NPV ratio or high sensitivity to changes
in interest rates. The Sensitivity Measure is the change in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. At least quarterly, and generally monthly, management models the
change in net portfolio value ("NPV") over a variety of interest rate scenarios.
NPV is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. An NPV ratio, in any interest rate scenario, is
defined as the NPV in that rate scenario divided by the market value of assets
in the same scenario.
As of December 31, 2002, the Bank's internally generated initial NPV ratio was
4.16%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 6.38%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was positive 2.22%. As of December 31, 2002, the Company's internally generated
initial NPV ratio was 3.69%, the Post-Shock ratio was 5.90%, and the Sensitivity
Measure was positive 2.21%. 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 generally result in lower levels of
presumed interest rate risk (i.e., higher Post-Shock NPV ratio and lower
Sensitivity Measure) than Office of Thrift Supervision ("OTS") measurements
indicate.
The OTS measures the Bank's (unconsolidated) IRR on a quarterly basis using data
from the quarterly Thrift Financial Reports filed by the Bank with the OTS,
coupled with non-institution specific assumptions which are based on national
averages. As of September 30, 2002 (the latest date for which information is
available), the Bank's initial NPV ratio, as measured by the OTS, was 8.10%, the
Bank's Post-Shock ratio was 6.36% and the Sensitivity Measure was negative
1.74%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At December 31, 2002, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
increase 4.5% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates.
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 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.
The Company uses its liquid resources principally to fund maturing certificates
of deposit and deposit withdrawals, to purchase loans and securities, to fund
existing and future loan commitments, and to meet operating expenses. Management
believes that loan repayments and other sources of funds will be adequate to
meet the Company's foreseeable liquidity needs.
The Company's cash needs for the six months ended December 31, 2002 were
provided by operating activities, including the sale of loans, proceeds from
maturities of investment securities and principal repayments of loans and
mortgage-backed securities. During this period, the cash provided was used for
investing activities, which included the
21
origination of loans and the purchase of investment securities, as well as to
fund a decrease in deposits. Additionally, during the six months ended December
31, 2002, cash provided was used for the repurchase of common stock. During the
six months ended December 31, 2001, the cash needs of the Company were provided
by operating activities, proceeds from maturities of investment securities,
increased deposits and principal repayments of loans and mortgage-backed
securities. During this period, the cash provided was used for investing
activities, which included the origination and purchase of loans, the purchase
of investment and mortgage-backed securities, as well as to reduce borrowings.
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 December 31, 2002, the Bank exceeded all
regulatory capital requirements and qualified as a "well-capitalized"
institution (see Note 7. - Stockholders' Equity and Regulatory Capital, in the
Notes to Consolidated Financial Statements).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's most significant form of market risk is interest rate risk, as the
majority of its assets and liabilities are sensitive to changes in interest
rates. See the discussion in this Form 10-Q under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity."
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
------------------------------------------------
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934 (the "Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and several other members of the Company's senior
management within the 90-day period preceding the filing date of this quarterly
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Company's management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended December 31,
-----------------------------
2002, there were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
22
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders (Annual Meeting) was held
on October 23, 2002.
(b) Directors Elected:
Patrick D. McTernan
Marvin D. Schoonover
(c) At the Annual Meeting the stockholders considered:
(i) the election of two directors,
(ii) the ratification of the appointment of Deloitte &
Touche LLP as independent auditors for the Company for
the fiscal year ending June 30, 2003.
The vote on the election of two directors was as follows:
FOR WITHHELD
--------- --------
Patrick D. McTernan 6,253,583 166,631
Marvin D. Schoonover 6,368,061 52,153
There were no broker non-votes with respect to the proposal.
The vote on the ratification of the appointment of Deloitte &
Touche LLP as independent auditors for the Company for the
fiscal year ending June 30, 2003 was as follows:
FOR AGAINST ABSTAIN
--------- ------- -------
6,353,964 47,463 18,787
There were no broker non-votes with respect to the proposal.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
On October 23, 2002, the Company filed a Form 8-K reporting
under Items 5 and 7 the issuance of a press release on October
23, 2002 announcing the Company's first quarter results and
another stock repurchase program. In addition, the script of
the financial presentation from the Company's Annual Meeting
of Stockholders was set forth in this Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: February 14, 2003 By: /s/ Joseph L. LaMonica
-------------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Principal Executive Officer)
Date: February 14, 2003 By: /s/ Claire M. Chadwick
--------------------------------------------
Claire M. Chadwick
Executive Vice President,
Chief Financial Officer and
Controller
(Principal Financial and Accounting Officer)
24
CERTIFICATIONS
I, Joseph L. LaMonica, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PennFed Financial
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Joseph L. LaMonica
- -------------------------------------
Joseph L. LaMonica
President and Chief Executive Officer
25
CERTIFICATIONS
I, Claire M. Chadwick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PennFed Financial
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Claire M. Chadwick
- --------------------------------------
Claire M. Chadwick
Executive Vice President,
Chief Financial Officer and Controller
26
EXHIBIT INDEX
Regulation Reference to
S-K Prior Filing
Exhibit or Exhibit
Number Document Number
- --------------------------------------------------------------------------------------------------------------------------
<c>
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 ***
10 Material contracts:
(a) Employee Stock Ownership Plan *
(b) 1994 Amended and Restated Stock Option and Incentive Plan ****
(c) Management Recognition Plan *
(d) Employment Agreement with Joseph L. LaMonica ****
(e) Employment Agreement with Patrick D. McTernan ****
(f) Employment Agreement with Jeffrey J. Carfora *****
(g) Employment Agreement with Barbara A. Flannery ****
11 Statement re: computation of per share earnings 11
15 Letter re: unaudited interim financial information Not required
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
22 Published report regarding matters submitted to vote of security holders None
23 Consents of independent auditors and counsel None
24 Power of Attorney None
99 Additional Exhibits:
Certification pursuant to Section 906 of Sarbanes-Oxley 99
Act of 2002
- ------------------------------
* 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 an exhibit 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). Such previously filed document
is hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
*** Filed as an exhibit to the Company's Registration Statement on Form 8-A
under the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on March 28, 1996 as amended on Form 8-A/A (the
"Form 8-A/A") filed with the Securities and Exchange Commission on
February 11, 1998, and as further amended on Form 8-A/A-2 (the "Form
8-A/A-2") filed with the Securities and Exchange Commission on October
14, 1998. The First Amendment to the Stockholders Protection Rights
Agreement is filed as an exhibit to the Form 8-A/A and the Second
Amendment to the Stockholders Protection Rights Agreement is filed as an
exhibit to the Form 8-A/A-2. These documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
**** Filed as 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, 2001 (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 Form 10-Q under the Securities
Exchange Act of 1934, filed with the Securities and Exchange Commission
on February 14, 2002 (File No. 0-24040). Such previously filed document
is hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
27