UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2005
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)
Maryland 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
filing 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|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |X| NO |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |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 December 31, 2004, was $188,416,000. (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 2, 2005, there were issued and outstanding 13,256,056
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for 2005 Annual
Meeting of Stockholders.
PennFed Financial Services, Inc. and Subsidiaries
2005 Annual Report on Form 10-K
Table of Contents
Page
Number
------
PART I
ITEM 1. Business ....................................................... 1
ITEM 2. Properties ..................................................... 21
ITEM 3. Legal Proceedings .............................................. 21
ITEM 4. Submission of Matters to a Vote of Security Holders ............ 22
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ......................................... 23
ITEM 6. Selected Financial Data ........................................ 24
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 26
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 44
ITEM 8. Financial Statements and Supplementary Data .................... 45
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .................................... 78
ITEM 9A. Controls and Procedures ........................................ 78
ITEM 9B. Other Information .............................................. 78
PART III
ITEM 10. Directors and Executive Officers of the Registrant ............. 79
ITEM 11. Executive Compensation ......................................... 79
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters .................. 79
ITEM 13. Certain Relationships and Related Transactions ................. 80
ITEM 14. Principal Accountants Fees and Services ........................ 80
PART IV
ITEM 15. Exhibits and Financial Statement Schedules ..................... 81
PART I
Item 1. Business
General
PennFed Financial Services, Inc. ("PennFed" and with its subsidiaries, the
"Company"), a Maryland 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 common stock of the
Bank. 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 of the 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. Penn Federal's
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 these 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 many types of deposit accounts having a wide range of
interest rates and terms, which generally include savings, money market, and
many types of checking accounts, as well as certificate accounts. The Company
generally solicits deposits in its primary market areas.
At June 30, 2005, the Company had total assets of approximately $2.1 billion,
deposits of $1.3 billion, borrowings of $565 million and stockholders' equity of
$124 million.
Penn Federal, through its wholly-owned subsidiary, Penn Savings Insurance
Agency, Inc., offers insurance and uninsured non-deposit investment products to
its customers. Through the Bank's wholly-owned subsidiary, PennFed Title Service
Corporation, the Bank has a 49% ownership interest in a title insurance agency
known as Eagle Rock Title Agency, LLC. See "Subsidiary Activities."
In October 1997, Penn Federal formed Ferry Development Holding Company, a
Delaware operating subsidiary. In November 2002, Penn Federal formed Eagle Rock
Investment Corp., a New Jersey investment company. Both companies hold and
manage investment portfolios for the Bank.
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.
The Company's reports, proxy statements and other information the Company files
with the Securities and Exchange Commission (the "SEC"), as well as the
Company's news releases, are available free of charge through our Internet site
at http://www.pennfsb.com. The SEC filings can be found under "Investor
Relations" on the "Documents" page of the Company's Internet site. The Company's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act are available as soon as reasonably practicable after
they have been filed with the SEC. Reference to the Company's Internet address
is not intended to incorporate any of the information contained on our Internet
site into this document.
1
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with 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 laws and
regulations and in policies of regulatory agencies, fluctuations in interest
rates and demand for loans in the Company's market area, the credit risks of
lending activities, including changes in the level and direction of loan
delinquencies and write-offs and changes in estimates of the adequacy of the
allowance for loan losses, the Company's ability to attract and retain
depositors and to obtain cost-effective funding, the relationship of short-term
interest rates to long-term interest rates and the Company's ability to manage
its interest rate risk, 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.
Market Area
The Company's primary market areas are comprised of the Ironbound section of the
City of Newark and surrounding communities, the suburban Essex County area and
selected areas of central/southern New Jersey, which are serviced through 25
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. The Company entered Union
County in fiscal 2004 with the opening of a branch in the township of Union.
Deposits at Bank branches in the Ironbound section of the City of Newark and
surrounding communities comprised 28% of total Bank deposits at June 30, 2005.
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 43% of total Bank
deposits at June 30, 2005. 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 29% of total Bank deposits
at June 30, 2005, serve retirement populations and expanding townhouse,
multi-family and single family home developments. The Bank also originates loans
secured by properties throughout New Jersey and areas in eastern Pennsylvania
and, from time to time, purchases one-to four-family loans secured by properties
primarily located in selected Northeastern states. See "Originations, Purchases,
Sales and Servicing of Loans."
Lending Activities
General. The Company primarily originates fixed and adjustable rate, one- to
four-family first mortgage loans. The Company's general policy is to originate
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 Company has purchased loans from time to time generally under
the same guidelines under which it originates loans. 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. These loans generally reprice more
frequently, have shorter maturities and/or have higher yields than fixed rate,
one- to four-family mortgage loans. In addition, as part of its commercial
lending activities, the Company originates loans under an accounts receivable
financing program for small and mid-sized businesses and business lines of
credit secured by non-real estate assets.
2
Residential and consumer loan applications may be approved by various officers
up to $1.5 million. Commercial and multi-family real estate loan applications
are initially considered and approved by the Senior Vice President of the
Commercial/Business Banking Group. Any commercial and multi-family real estate
loan or relationship of $750,000 and over must be approved by the Executive Loan
Committee which consists of the CEO, COO, CFO, the EVP of the Residential
Lending Group and the SVP of the Commercial/Business Banking Group. The approval
of the Company's Board of Directors is required for all loans or relationships
above $1.5 million.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have lent to any one borrower is
generally 15% of unimpaired capital and surplus. See "Regulation-Federal
Regulation of Savings Associations by the OTS." At June 30, 2005, the maximum
amount which the Bank could have lent to any one borrower and the borrower's
related entities was approximately $26.4 million. The Company's current policy
is to limit such loans to a maximum of 50% of the general regulatory limit or
$10.0 million, whichever is less. Any exception to this policy requires approval
of the Board of Directors. At June 30, 2005, the Company's largest group of
loans to one borrower (and any related entities) totaled $10.6 million and
consisted of two commercial real estate loans of $6.1 million and $4.5 million.
At June 30, 2005, there were a total of 21 loans or lender relationships in
excess of $1.5 million, for a total amount of $64.0 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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2005 2004 2003 2002 2001
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in thousands)
First mortgage loans:
One- to four-
family(1) .......... $1,148,489 78.52% $ 996,659 77.46% $ 946,560 77.01% $1,172,145 81.53% $1,065,819 82.61%
Commercial and
multi-family(2) .... 169,765 11.61 172,244 13.39 165,905 13.50 144,585 10.06 108,625 8.42
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Total first
mortgage
loans ........ 1,318,254 90.13 1,168,903 90.85 1,112,465 90.51 1,316,730 91.59 1,174,444 91.03
--------------------------------------------------------------------------------------------------------
Other loans:
Consumer loans:
Second mortgages ... 91,147 6.23 67,538 5.25 67,290 5.47 58,671 4.08 48,133 3.73
Home equity lines of
credit .......... 49,901 3.41 46,288 3.60 44,308 3.61 55,247 3.85 60,412 4.68
Other .............. 3,375 0.23 3,862 0.30 5,060 0.41 6,948 0.48 7,140 0.56
--------------------------------------------------------------------------------------------------------
Total consumer
loans ........ 144,423 9.87 117,688 9.15 116,658 9.49 120,866 8.41 115,685 8.97
--------------------------------------------------------------------------------------------------------
Total loans ..... 1,462,677 100.00% 1,286,591 100.00% 1,229,123 100.00% 1,437,596 100.00% 1,290,129 100.00%
======= ====== ====== ====== ======
Add/(less):
Unamortized premiums,
deferred loan costs,
and other, net ..... 8,853 7,131 6,079 9,485 9,611
Allowance for loan
losses ............. (6,050) (6,249) (6,284) (5,821) (4,248)
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Total loans
receivable and
loans held for
sale, net .... $1,465,480 $1,287,473 $1,228,918 $1,441,260 $1,295,492
========================================================================================================
- ----------
(1) One-to four-family loans include loans held for sale of $4.8 million, $11.5
million, $1.6 million and $83,000 at June 30, 2005, 2003, 2002 and 2001,
respectively. There were no loans held for sale at June 30, 2004.
(2) Commercial and multi-family loans include loans under an accounts receivable
financing program for small and mid-sized businesses and business lines of
credit secured by non-real estate business assets totaling $8.6 million, $12.6
million, $12.6 million, $9.1 million and $3.1 million at June 30, 2005, 2004,
2003, 2002 and 2001, respectively.
Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 2005. 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, do not include the allowance for
loan losses or adjustments for premiums or deferred loan costs. 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.
3
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 ............ $ 596 $ 3,117 $ 5,592 $ 54,884 $ 376,270 $ 708,030 $ 1,148,489
Commercial and multi-family .... 7,035 2,789 7,498 35,051 115,634 1,758 169,765
-----------------------------------------------------------------------------------------------
Total first mortgage loans .. 7,631 5,906 13,090 89,935 491,904 709,788 1,318,254
Other loans:
Consumer loans ................. 2,467 4,798 8,920 27,298 56,904 44,036 144,423
-----------------------------------------------------------------------------------------------
Total loans, gross .......... $ 10,098 $ 10,704 $ 22,010 $ 117,233 $ 548,808 $ 753,824 $ 1,462,677
===============================================================================================
Loans due after June 30, 2006, which have fixed interest rates amount to $1.1
billion, while those with adjustable rates amount to $361.8 million, detailed as
follows:
Due After June 30, 2006
-------------------------------------
Fixed Adjustable Total
-------------------------------------
(In thousands)
First mortgage loans:
One- to four-family ................................................................... $ 954,210 $ 193,683 $1,147,893
Commercial and multi-family ........................................................... 43,641 119,089 162,730
-------------------------------------
Total first mortgage loans ......................................................... 997,851 312,772 1,310,623
Other loans:
Consumer loans ........................................................................ 92,940 49,016 141,956
-------------------------------------
Total loans, gross ................................................................. $1,090,791 $ 361,788 $1,452,579
=====================================
One- to Four-Family Residential Mortgage Lending. At June 30, 2005, the
Company's one- to four-family residential mortgage loans totaled $1.1 billion,
or approximately 78.5% of the Company's gross loan portfolio. Residential loan
originations are generated by the Company's in-house originations staff through
marketing efforts, present customers, walk-in customers and referrals from
attorneys, accounting firms, 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, 2005, the Company originated $350.3
million of real estate loans secured by first mortgages on one- to four-family
residential real estate. All of the Company's one- to four-family residential
mortgage originations are secured by properties located in the State of New
Jersey and areas in eastern Pennsylvania.
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 a licensed in-house appraiser and
independent appraisers, all of whom are 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 up to a maximum available of $500,000, if
necessary) in the amount of 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.
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, 2005, the Company had $169.8 million of commercial and multi-family
real estate loans which represented 11.6% of the Company's gross loan portfolio.
This amount includes $3.2 million of lines of credit secured by non-real estate
business assets and $5.4 million of loans under an accounts receivable financing
program for small and mid-sized businesses. At June 30, 2005, the average per
loan balance of the Company's commercial and multi-family real estate loans
outstanding was $400,000. As of June 30, 2005 approximately 73% of the loans in
the commercial and multi-family real estate loan portfolio were adjustable rate
loans.
4
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 if a
major tenant is unable to fulfill its lease obligations), the borrower's ability
to repay the loan may be impaired.
Under the accounts receivable financing program, credit is extended to the
customer based upon the amount of receivables purchased by the Company. The
Company has actual ownership of the receivables. Remittances from the account
debtors of the customer are made directly to the Company's lockbox account. Risk
under this type of lending is further limited by the establishment of a cash
collateral reserve account used to offset any receivables that do not pay
timely. Furthermore, accounts receivable default and fraud insurance is obtained
as additional protection. The facility can be terminated at the Company's option
upon 60 days notice to the customer. Accounts receivable financing is done with
full recourse to the customer and is generally guaranteed by the principals of
the customer. In addition to the accounts receivable as collateral, the Company
typically obtains additional collateral in the form of a lien on the customer's
business assets and/or real estate.
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, 2005, the Company's total
consumer loan portfolio was $144.4 million, or 9.9% of its gross loan portfolio,
of which approximately 64% were fixed rate loans and 36% were adjustable rate
loans. The Company originates nearly all of its consumer loans throughout the
State of New Jersey and areas in eastern Pennsylvania.
The Company originates adjustable rate home equity lines of credit and fixed
rate second mortgage loans. Home equity lines of credit and second mortgage
loans, together with loans secured by all prior liens, are generally limited to
80% 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. As of June 30, 2005, second mortgage loans and home equity lines of
credit amounted to $141.0 million or 97.7% of the Company's consumer loan
portfolio.
Consumer loan terms vary according to the type and value of collateral and
length of contract. The underwriting standards employed by the Company for
consumer loans include an application, a determination of the applicant's
payment history on other debts and an assessment of the applicant's ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential first mortgage
loans, particularly in the case of consumer loans which are secured by rapidly
depreciable assets, such as automobiles and boats. In such cases, any
repossessed collateral from a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected 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.
5
Originations, Purchases, Sales and Servicing of Loans
For the year ended June 30, 2005, the Company originated $479.7 million of
loans, compared to $528.0 million and $667.7 million in fiscal 2004 and 2003,
respectively. Mortgage loan originations are handled by employees of the
Company.
There were no loans purchased during the year ended June 30, 2005. During the
years ended June 30, 2004 and 2003, the Company purchased $53.0 million and
$676,000 of one- to four-family first mortgage loans, respectively. For the year
ended June 30, 2004, the purchased loans represented large bulk loan purchases
of adjustable rate and fixed rate first mortgages secured by properties
primarily located in selected northeastern and mid-Atlantic states (i.e.,
Connecticut, Delaware, Maryland, Massachusetts, Pennsylvania and Virginia). The
fiscal 2004 loan purchases were viewed as a means of investing excess cash from
the high levels of loan prepayments.
From time to time, the Company has engaged in loan sale strategies -- selling
loans to Freddie Mac and other secondary market purchasers. During the year
ended June 30, 2005, approximately $11.0 million and $24.6 million of
predominately conforming, fixed rate one- to four-family residential mortgage
loans were sold into the secondary market and to other financial institutions,
respectively, as part of the Company's efforts to manage interest rate risk.
During the year ended June 30, 2004, approximately $48.4 million and $39.0
million of predominately conforming, fixed rate one-to four-family residential
mortgage loans were sold into the secondary market and to other financial
institutions, respectively. During the year ended June 30, 2004, a $3.0 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. During
the latter part of fiscal 2004, loan sales were reduced and loan production was
retained in portfolio until the excess cash from prepayments was utilized.
The level of loan sale activity is continuously evaluated with primary
consideration given to interest rate risk management, long-term profitability
and liquidity objectives.
When loans are sold, the Company may retain the responsibility for servicing the
loans or may sub-service the loans for a short term period. The Company receives
a fee for performing these services. The Company serviced for others primarily
one- to four-family mortgage loans with an aggregate outstanding principal
balance of $69.1 million, $66.3 million and $87.0 million at June 30, 2005, 2004
and 2003, respectively. The decrease in fiscal 2004, as compared to the prior
year, included the effects of accelerated prepayments. At June 30, 2005 and
2004, the carrying value of the Company's mortgage servicing rights was
immaterial in relation to total assets and is included in Other assets on the
Company's Consolidated Statements of Financial Condition.
6
The following table sets forth the activity in the Company's loan portfolio for
the years indicated.
Year ended June 30,
------------------------------------
2005 2004 2003
------------------------------------
(In thousands)
Net loans receivable and loans held for sale at
beginning of year ............................ $1,287,473 $1,228,918 $1,441,260
Plus:
Loans originated:
One- to four-family ...................... 350,274 409,799 528,869
Commercial and multi-family real estate .. 38,612 43,222 49,049
Consumer ................................. 90,808 75,002 89,775
------------------------------------
Total loans originated ................ 479,694 528,023 667,693
------------------------------------
One- to four-family loans purchased ......... -- 53,034 676
------------------------------------
Total loans originated and purchased .. 479,694 581,057 668,369
------------------------------------
Less:
Loans sold .................................. 35,643 90,395 165,180
Loan principal payments and other, net ...... 265,572 432,107 715,531
Loans transferred to real estate owned ...... 472 -- --
------------------------------------
Net loans receivable and loans held for sale at
end of year ................................ $1,465,480 $1,287,473 $1,228,918
====================================
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, collection procedures are initiated with the
mailing of a late charge notice and the customer is contacted by telephone. At
the end of the first month, a delinquency notice is issued. In many cases,
delinquencies are cured promptly; however, if a loan secured by real estate or
other collateral has been delinquent for more than 65 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 95 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.
7
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 the settlement of
loans (generally through foreclosure or a deed in lieu) and is shown net of
valuation allowances.
At June 30,
-----------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ................. $1,713 $2,158 $1,451 $2,905 $1,219
Commercial and multi-family ......... 904 -- -- -- 49
Consumer ............................ 2 24 231 370 369
-----------------------------------------------
Total non-accruing loans ......... 2,619 2,182 1,682 3,275 1,637
Real estate owned, net .............. -- -- 28 28 500
-----------------------------------------------
Total non-performing assets ...... 2,619 2,182 1,710 3,303 2,137
Restructured loans .................. -- -- -- -- --
-----------------------------------------------
Total risk elements .............. $2,619 $2,182 $1,710 $3,303 $2,137
===============================================
Non-accruing loans as a percentage
of total loans .................... 0.18% 0.17% 0.14% 0.23% 0.13%
===============================================
Non-performing assets as a percentage
of total assets ................... 0.13% 0.11% 0.09% 0.17% 0.12%
===============================================
Total risk elements as a percentage
of total assets ................... 0.13% 0.11% 0.09% 0.17% 0.12%
===============================================
For the year ended June 30, 2005, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $79,000.
Non-Performing Assets. Non-accruing loans at June 30, 2005 were comprised of 13
one- to four-family loans aggregating $1,713,000, three commercial loans
aggregating $904,000 and six consumer loans aggregating $2,000.
Other Loans of Concern. As of June 30, 2005, there were $726,000 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. These loans of concern
have been considered by management in conjunction with the analysis of the
adequacy of the allowance for loan losses.
Classified Assets. Federal regulations provide for the classification of loans
and other assets such as debt and equity securities considered by the OTS to be
of lesser quality as "substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that the establishment of a specific loss reserve is
warranted.
When a savings institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities. When a savings institution classifies problem assets as "loss," it
is required to either establish a specific reserve equal to 100% of that portion
of the asset so classified or to charge-off such amount.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the assets in its portfolio to determine whether any assets require
classification in accordance
8
with applicable regulations. On the basis of management's review of its assets
at June 30, 2005, the Bank's classified assets totaled $3.4 million, of which
$3.3 million were classified as substandard. At June 30, 2005, total classified
assets represented 2.74% of the Company's stockholders' equity and 0.17% of the
Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established through
charges to income based on management's evaluation of the probable credit losses
presently inherent in the Company's 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 discussed above,
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 such properties. If the
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 income.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and 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. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations " - Critical Accounting Policies."
9
The following table sets forth an analysis of the Company's allowance for loan
losses at the dates and for the periods indicated.
Year ended June 30,
--------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year ........... $ 6,249 $ 6,284 $ 5,821 $ 4,248 $ 3,983
Charge-offs:
One- to four-family ................. (165) -- (20) (20) (164)
Commercial and multi-family ......... (2) -- -- -- (35)
Consumer ............................ (32) (35) (42) (32) (161)
--------------------------------------------------------
(199) (35) (62) (52) (360)
--------------------------------------------------------
Recoveries:
One- to four-family ................. -- -- -- -- --
Commercial and multi-family ......... -- -- -- -- --
Consumer ............................ -- -- -- -- --
--------------------------------------------------------
-- -- -- -- --
--------------------------------------------------------
Net charge-offs ........................ (199) (35) (62) (52) (360)
Additions charged to operations ........ -- -- 525 1,625 625
--------------------------------------------------------
Balance at end of year ................. $ 6,050 $ 6,249 $ 6,284 $ 5,821 $ 4,248
========================================================
Ratio of net charge-offs during the
year to average loans outstanding
during the year ..................... 0.01% 0.00% 0.00% 0.00% 0.03%
========================================================
Ratio of allowance for loan losses
to total loans at end of year ....... 0.41% 0.48% 0.51% 0.40% 0.33%
========================================================
Ratio of allowance for loan losses to
non-accruing loans at end of year ... 231.00% 286.39% 373.60% 177.74% 259.50%
========================================================
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized in the following table.
June 30,
--------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
One- to four-family ........... $3,006 78.52% $2,896 77.46% $2,869 77.01% $2,928 81.53% $2,223 82.61%
Commercial and
multi-family real estate .... 2,396 11.61 2,768 13.39 2,767 13.50 2,040 10.06 1,280 8.42
Consumer ...................... 648 9.87 585 9.15 648 9.49 853 8.41 745 8.97
-------------------------------------------------------------------------------------------------
Total .................... $6,050 100.00% $6,249 100.00% $6,284 100.00% $5,821 100.00% $4,248 100.00%
=================================================================================================
10
Investment Activities
General. The Bank maintains appropriate 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 the requirements of normal daily activities, repayment of
maturing debt and potential deposit outflows.
At June 30, 2005, the Company had a securities portfolio consisting principally
of U.S. government agency securities and mortgage-backed securities issued by
Ginnie Mae, Freddie Mac and Fannie Mae. These investments carry a low risk
weighting for OTS risk-based capital purposes and are generally considered
liquid assets. See "Regulation-Regulatory Capital Requirements." The majority of
investment securities and all mortgage-backed securities were classified as held
to maturity at June 30, 2005, as the Company has a positive intent and ability
to hold these securities to maturity. All investment securities not classified
as held to maturity are classified as available for sale.
The following table sets forth the composition of the Company's investment and
mortgage-backed securities portfolios at the dates indicated.
June 30,
------------------------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------------------
Estimated Percent Estimated Percent Estimated Percent
Fair of Total Fair of Total Fair of Total
Carrying Market Carrying Carrying Market Carrying Carrying Market Carrying
Value Value Value Value Value Value Value Value Value
-----------------------------------------------------------------------------------
(Dollars in thousands)
Investment securities:
Available for sale:
Equity securities ....................... $ 5,011 $ 5,011 1.16% $ 4,720 $ 4,720 1.05% $ 4,741 $ 4,741 1.28%
-----------------------------------------------------------------------------------
Held to maturity:
U.S. government agency obligations ...... 371,487 371,270 85.81 386,134 377,610 86.05 305,662 308,425 82.73
Corporate bonds ......................... 1,022 1,236 0.24 1,026 1,276 0.23 1,030 1,222 0.28
Trust preferred securities .............. 32,989 34,220 7.62 33,100 34,329 7.37 32,806 35,821 8.88
-----------------------------------------------------------------------------------
Total held to maturity .............. 405,498 406,726 93.67 420,260 413,215 93.65 339,498 345,468 91.89
-----------------------------------------------------------------------------------
Total investment securities ......... 410,509 411,737 94.83 424,980 417,935 94.70 344,239 350,209 93.17
FHLB of New York stock ..................... 22,391 22,391 5.17 23,773 23,773 5.30 25,223 25,223 6.83
-----------------------------------------------------------------------------------
Total investment securities and FHLB
of New York stock ................ $432,900 $ 434,128 100.00% $448,753 $ 441,708 100.00% $369,462 $ 375,432 100.00%
===================================================================================
Mortgage-backed securities:
Ginnie Mae .............................. $ 151 $ 163 0.19% $ 249 $ 271 0.25% $ 415 $ 455 0.44%
Freddie Mac ............................. 35,221 35,581 45.04 45,526 45,718 45.49 37,968 39,635 40.55
Fannie Mae .............................. 42,529 43,204 54.38 53,860 54,430 53.82 54,430 56,896 58.13
Collateralized Mortgage Obligations/
REMICs/IOs ........................... 161 161 0.21 225 225 0.22 149 152 0.16
-----------------------------------------------------------------------------------
78,062 79,109 99.82 99,860 100,644 99.78 92,962 97,138 99.28
Unamortized premiums, net ............... 139 -- 0.18 219 -- 0.22 670 -- 0.72
-----------------------------------------------------------------------------------
Total mortgage-backed securities .... $ 78,201 $ 79,109 100.00% $100,079 $ 100,644 100.00% $ 93,632 $ 97,138 100.00%
===================================================================================
Investment Securities. At June 30, 2005, the Company's investment securities
(including $5.0 million of investment securities available for sale, $405.5
million of investment securities held to maturity and a $22.4 million investment
in FHLB of New York stock) totaled $432.9 million, or 21.1% of its total assets.
The Company's general policy is 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, 2005,
PennFed held $10.9 million of such non-investment grade securities. In addition,
investment securities at June 30, 2005 included $22.1 million of investment
grade trust preferred securities.
11
OTS regulations limit 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 held to maturity portion of
the investment securities portfolio based on the final maturities of each
investment. Securities in the investment portfolio in the amount of $404.5
million have call features and, thus, depending on future interest rates, may
have a much shorter life than final maturity.
June 30, 2005
-----------------------------------------------------------------------------------
After After
One Year Five Years After Total Investment
One Year Through Through Ten Securities Held
or Less Five Years Ten Years Years to Maturity
-----------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Book Average Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-----------------------------------------------------------------------------------
(Dollars in thousands)
U.S. government agency
obligations ...................... $ -- --% $ -- --% $76,844 5.07% $294,643 5.44% $371,487 5.36%
Corporate bonds .................... -- -- -- -- 1,022 9.25 -- -- 1,022 9.25
Trust preferred securities ......... -- -- -- -- -- -- 32,989 8.00 32,989 8.00
-----------------------------------------------------------------------------------
Total investment securities held to
maturity ......................... $ -- --% $ -- --% $77,866 5.12% $327,632 5.70% $405,498 5.59%
====================================================================================
The Company's investment securities portfolio at June 30, 2005 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.
Mortgage-Backed Securities. At June 30, 2005, mortgage-backed securities totaled
$78.2 million, or 3.8% of the Company's total assets, of which approximately
5.0% consisted of adjustable rate securities. The Company has invested primarily
in securities of Freddie Mac and Fannie Mae.
The following table indicates the composition of the mortgage-backed securities
portfolio based on the final maturities of each security.
June 30, 2005
------------------------------------------------------------------------------------
After After
One Year Five Years After Total Mortgage-Backed
One Year Through Through Ten Securities Held
or Less Five Years Ten Years Years to Maturity
------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Book Average Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------------------------------------------------------------------------------------
(Dollars in thousands)
Ginnie Mae ....................... $ -- --% $ 61 8.05% $ -- --% $ 90 9.16% $ 151 8.72%
Freddie Mac ...................... 6 6.50 1,397 4.10 1,471 6.86 32,358 4.93 35,232 4.98
Fannie Mae ....................... -- -- 938 7.04 1,681 6.81 40,038 5.24 42,657 5.34
Collateralized Mortgage
Obligations/REMICs/IOs ........ -- -- -- -- -- -- 161 6.50 161 6.50
------------------------------------------------------------------------------------
Total mortgage-backed
securities .................. $ 6 6.50% $2,396 5.35% $ 3,152 6.83% $ 72,647 5.10% $ 78,201 5.18%
====================================================================================
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. In accordance with Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"), with
certain loan sales, the Company may record an interest-only strip ("IO"). These
IO's represent the contractual right to receive some or all of the interest due
on the mortgage loans sold.
12
The following table sets forth the activity in the Company's mortgage-backed
securities portfolio for the years indicated.
Year ended June 30,
-------------------------------
2005 2004 2003
-------------------------------
(In thousands)
Mortgage-backed securities, net:
At beginning of year .................. $ 100,079 $ 93,632 $ 169,689
Plus:
Securities purchased ................ -- 54,823 10,190
Less:
Principal repayments ................ 21,739 47,976 85,489
Amortization of premiums, net ....... 139 400 758
-------------------------------
At end of year ........................ $ 78,201 $ 100,079 $ 93,632
===============================
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 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, 2005, certificates of deposit from
municipalities totaled $1.4 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 deposits. Based on its experience,
the Company believes that its savings, money market and demand deposit accounts
are relatively stable sources of deposits. However, the ability of the Company
to attract and maintain certificates of deposit and the rates paid on these
deposits has been and will continue to be significantly affected by market
conditions, including general economic conditions, changes in interest rates and
competition. When appropriate, the Company has from time to time utilized
brokered deposits as an alternate source of funds. At June 30, 2005, the Company
had $66.1 million of brokered deposits. There were $46.1 million of brokered
deposits at June 30, 2004. 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,
-------------------------------------------
2005 2004 2003
-------------------------------------------
(Dollars in thousands)
Opening balance .................. $ 1,188,100 $ 1,094,666 $ 1,174,507
Net deposits (withdrawals) ....... 123,307 69,326 (109,429)
Interest credited ................ 28,084 24,108 29,588
-------------------------------------------
Ending balance ................... $ 1,339,491 $ 1,188,100 $ 1,094,666
===========================================
Net increase (decrease) .......... $ 151,391 $ 93,434 $ (79,841)
===========================================
Percent increase (decrease) ...... 12.74% 8.54% (6.80)%
===========================================
13
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 2005.
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 ......... $ 70,634 $ 96,267 $ 170,654 $ 174,025 $ 511,580
Certificates of deposit of $100,000 or more ........ 14,958 22,304 63,670 113,445 214,377
---------------------------------------------------------
Total certificates of deposit ...................... $ 85,592 $ 118,571 $ 234,324 $ 287,470 $ 725,957
=========================================================
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 as a means of managing exposure
to interest rate risk.
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.
Junior Subordinated Deferrable Interest Debentures. In 2001, PennFed formed
PennFed Capital Trust II (the "Trust II"), which on March 28, 2001 sold $12.0
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"). Trust II used the proceeds from the sale of its trust preferred
securities and from the sale of $0.4 million of its common securities to PennFed
to purchase $12.4 million of 10.18% junior subordinated deferrable interest
debentures issued by PennFed, which are the sole assets of Trust II. These
junior subordinated deferrable interest debentures mature in 2031 and are
redeemable at any time after ten years. The obligations of PennFed related to
Trust II constitute a full and unconditional guarantee by PennFed of Trust II
obligations under its trust preferred securities. PennFed used the proceeds from
the junior subordinated deferrable interest debentures for general corporate
purposes, including a $4.2 million capital contribution to the Bank to support
growth.
In 2003, PennFed formed PennFed Capital Trust III (the "Trust III"), which on
June 2, 2003 sold $30.0 million of variable rate cumulative trust preferred
securities in a private transaction exempt from registration under the Act.
Trust III used the proceeds from the sale of its trust preferred securities and
from the sale of $0.9 million of its common securities to PennFed to purchase
$30.9 million of variable rate junior subordinated deferrable interest
debentures issued by PennFed, which are the sole assets of Trust III. These
junior subordinated deferrable interest debentures mature in 2033 and are
redeemable at any time after five years. The interest rate on the $30.0 million
of trust preferred securities and the $30.9 million junior subordinated
deferrable interest debentures resets quarterly and was 6.66% and 4.77% at June
30, 2005 and 2004, respectively. The obligations of PennFed related to Trust III
constitute a full and unconditional guarantee by PennFed of Trust III
obligations under its trust preferred securities. PennFed used the proceeds from
the junior subordinated deferrable interest debentures together with available
cash to redeem $34.5 million of 8.90% cumulative trust preferred securities
issued by PennFed Capital Trust I in October 1997.
In accordance with the full adoption in fiscal 2003 of Financial Accounting
Standards Board Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"), as of June 30, 2005, the Company's trust subsidiaries are
not consolidated. Although, in accordance with FIN 46, Trust III was never
consolidated, Trust II was consolidated in prior years. The primary effect of
de-consolidating Trust II was a change in the balance sheet classification of
the liabilities from Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Deferrable Interest Debentures to long-term borrowings.
14
The following table sets forth the maximum month-end balance, average balance,
year-end balance and weighted average cost of FHLB of New York advances, other
borrowings and junior subordinated deferrable interest debentures for the
periods indicated.
Year ended June 30,
------------------------------------
2005 2004 2003
------------------------------------
(Dollars in thousands)
Maximum month-end balance for the year ended:
FHLB of New York advances ................................. $ 435,465 $ 504,465 $ 504,465
====================================
Other borrowings:
Overnight repricing lines of credit ..................... $ 68,400 $ 15,200 $ --
Reverse repurchase agreements callable or maturing
within one year ....................................... 17,567 34,260 19,350
Reverse repurchase agreements callable or maturing
after one year ........................................ 54,461 24,986 --
Unsecured revolving line of credit ...................... 9,586 9,892 7,294
------------------------------------
Total other borrowings ................................ $ 150,014 $ 84,338 $ 26,644
====================================
Junior subordinated debentures, net ....................... $ 42,082 $ 42,037 $ 30,005
====================================
Average balance for the year ended:
FHLB of New York advances ................................. $ 425,319 $ 489,699 $ 504,465
====================================
Other borrowings:
Overnight repricing lines of credit ..................... $ 48,820 $ 3,452 $ 1
Reverse repurchase agreements callable or maturing
within one year ....................................... 12,437 20,590 19,350
Reverse repurchase agreements callable or maturing
after one year ........................................ 49,461 1,898 --
Unsecured revolving line of credit ...................... 7,567 5,368 3,765
------------------------------------
Total other borrowings ................................ $ 118,285 $ 31,308 $ 23,116
====================================
Junior subordinated debentures, net ....................... $ 42,059 $ 42,015 $ 2,376
====================================
Balance at June 30:
FHLB of New York advances ................................. $ 415,465 $ 475,465 $ 504,465
====================================
Other borrowings:
Overnight repricing lines of credit ..................... $ 45,150 $ 7,000 $ --
Reverse repurchase agreements callable or maturing
within one year ....................................... 15,000 17,468 19,350
Reverse repurchase agreements callable or maturing
after one year ........................................ 39,461 24,986 --
Unsecured revolving line of credit ...................... 8,341 9,892 7,294
------------------------------------
Total other borrowings ................................ $ 107,952 $ 59,346 $ 26,644
====================================
Junior subordinated debentures, net ....................... $ 42,082 $ 42,037 $ 30,005
====================================
Weighted average cost of funds for the year ended:
FHLB of New York advances ................................. 5.80% 5.76% 5.73%
Other borrowings:
Overnight repricing lines of credit ..................... 2.30% 1.13% 2.17%
Reverse repurchase agreements callable or maturing
within one year ....................................... 2.13% 4.38% 4.99%
Reverse repurchase agreements callable or maturing
after one year ........................................ 3.31% 2.95% --
Unsecured revolving line of credit ...................... 3.82% 2.66% 3.09%
Junior subordinated debentures, net ....................... 7.24% 6.42% 4.71%
Weighted average cost of funds at June 30:
FHLB of New York advances ................................. 5.75% 5.70% 5.66%
Other borrowings:
Overnight repricing lines of credit ..................... 3.49% 1.56% --
Reverse repurchase agreements callable or maturing
within one year ....................................... 2.88% 1.21% 4.92%
Reverse repurchase agreements callable or maturing
after one year ........................................ 3.42% 3.23% --
Unsecured revolving line of credit ...................... 4.64% 2.63% 2.82%
Junior subordinated debentures, net ....................... 7.67% 6.32% 4.71%
15
Trust Preferred Securities. In 1997, PennFed formed a wholly-owned trust
subsidiary, PennFed Capital Trust I (the "Trust I"). On October 21, 1997, Trust
I sold $34.5 million of 8.90% cumulative trust preferred securities to the
public which were reflected on the Consolidated Statements of Financial
Condition as Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Deferrable Interest Debentures. Trust I used the proceeds from the
sale of its trust preferred securities to purchase 8.90% junior subordinated
deferrable interest debentures issued by PennFed. On June 3, 2003, the Company
redeemed the $34.5 million of 8.90% junior subordinated deferrable interest
debentures, which resulted in the trustee redeeming the related trust preferred
securities issued by Trust I.
Distributions payable on these trust preferred securities have historically been
included as a component of non-interest expense on the Consolidated Statements
of Income.
Subsidiary Activities
As a federally chartered savings association, Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $41.0 million at June 30, 2005,
in the stock of, or loans to, service corporation subsidiaries. Penn Federal
currently has two service corporations, Penn Savings Insurance Agency, Inc.
("PSIA") and PennFed Title Service Corporation ("PTSC"). At June 30, 2005, the
net book values of Penn Federal's investments in PSIA and PTSC were $205,000 and
$53,000, respectively.
PSIA offers insurance products and the Bank offers 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. Previously, the
sale of securities, such as mutual funds and variable rate annuities, and
securities brokerage services were provided through IFMG Securities, Inc.
("IFMGSI"), a non-affiliated registered broker dealer. Fixed annuity and
insurance products were offered through IFS Agencies, Inc. ("IFSA"), a
non-affiliated licensed insurance agency. Effective April 18, 2005, the Bank's
agreement with IFMGSI was terminated and replaced by a similar agreement with
INVEST Financial Corporation ("INVEST"), a non-affiliated registered broker
dealer, member NASD and SIPC. Also effective April 18, 2005, PSIA's agreement
with IFSA was terminated and replaced by a similar agreement with INVEST
Financial Corporation Insurance Agency, Inc. of Maryland ("INVEST Insurance"), a
non-affiliated licensed insurance agency and a subsidiary of INVEST. The Bank's
relationship with INVEST and PSIA's relationship with INVEST Insurance enhance
the Investment Services at Penn Federal program by giving customers a greater
array of insurance and uninsured non-deposit investment products than previously
offered, while continuing to offer convenient access to financial consulting and
advisory services and securities brokerage services. To a much lesser extent,
PSIA also offers homeowners insurance to Bank customers.
PTSC was formed to participate in the ownership of a title insurance agency
known as Eagle Rock Title Agency, LLC. PTSC is a joint venture partner, owning
49%, with a third party title agency owning the remainder. PTSC has no active
role in the management of the company.
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,
2005, the Bank's investment in its operating subsidiaries, Ferry Development
Holding Company ("FDHC") and Eagle Rock Investment Corp. ("ERIC"), was $330.6
million and $159.3 million, respectively. FDHC and ERIC hold and manage
investment portfolios for the Bank.
Competition
The Company faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks, other savings associations, mortgage
banking companies and credit unions making loans secured by real estate located
in New Jersey. Competition in originating non-real estate loans comes mainly
from commercial banks and other savings associations. 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.
16
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 June 2004.
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 may impose 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. 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, and accumulated unrealized gains
and losses on certain available for sale securities must be deducted from assets
and capital for calculating compliance with the requirements. At June 30, 2005,
Penn Federal had no intangible assets other than qualifying mortgage servicing
rights.
At June 30, 2005, Penn Federal had tangible capital of $169.8 million, or 8.28%
of adjusted total assets, which was approximately $139.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
17
The capital standards also require core capital equal to at least 3% of adjusted
total assets and 4% of risk-weighted assets (as described below). 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 as to allow it to maintain a 3% ratio. Core capital generally
consists of tangible capital plus certain intangible assets up to 25% of
adjusted total assets. At June 30, 2005, Penn Federal did not have any
intangibles which were subject to these tests.
At June 30, 2005, Penn Federal had core capital of $169.8 million, or 8.28% of
adjusted total assets, which was approximately $87.8 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, allowances for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets and up to 45% of pretax
unrealized gains, net of unrealized losses, on available for sale equity
securities. Supplementary capital may be used to satisfy the risk-based
requirement only to the extent of core capital. At June 30, 2005, the Bank had
no capital instruments that qualify as supplementary capital. The Bank had $6.0
million of allowances for loan and lease losses at June 30, 2005, 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% as assigned by OTS capital regulations based on the risk inherent in the
type of assets.
On June 30, 2005, Penn Federal had total risk-based capital of $175.9 million
(consisting of $169.8 million in core capital and $6.1 million in allowable
supplementary capital) and risk-weighted assets of $1.1 billion (including $44.4
million in converted off-balance sheet items primarily represented by unused
lines of credit) resulting in a risk-based capital ratio of 15.84% of
risk-weighted assets. This amount was $87.1 million above the 8% requirement in
effect on that date.
Penn Federal met all the requirements to be considered a "well capitalized"
institution as of June 30, 2005. 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.
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 without OTS approval
during any calendar year equal to 100% of calendar year-to-date net income plus
retained net income for the two previous calendar years. The Bank is required to
give the OTS 30 days notice prior to declaring any dividend to PennFed 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)(C) 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, 2005, the Bank
met the QTL test and has always met the test since its effective date.
18
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it re-qualifies as a QTL and thereafter remains a
QTL. If an association does not re-qualify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. Until such an association has re-qualified 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, such an 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 the association has not re-qualified 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 communities
and to take this record into account in its evaluation of certain applications,
such as a merger, by Penn Federal. A less than "satisfactory" rating may be used
by the OTS as the basis for the denial of an application.
Due to the heightened attention being given to the CRA in recent years, the Bank
has devoted 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 last examined for CRA compliance in February 2004 and was notified in July
2004 that it received a rating of "satisfactory."
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. Furthermore, 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 the 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.
19
As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York. At June 30, 2005, the Bank had $22.4 million in FHLB of New York
stock, which was in compliance with this requirement. Over the past five fiscal
years, the yields earned on its FHLB of New York stock have averaged 4.36% per
annum.
Federal and State Taxation
Federal Taxation. PennFed files consolidated federal income tax returns with the
Bank and its subsidiaries. In addition to the regular income tax, corporations,
including savings associations such as the Bank, are generally subject to a
minimum tax. An alternative minimum tax is imposed at a 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. This excess amount may then be
used as a credit in a future year to offset the income tax liability calculated
under the regular income tax method. Beginning with tax years ending in 2003,
net operating losses can offset no more than 90% of alternative minimum taxable
income.
The Bank and its consolidated subsidiaries have been audited by the Internal
Revenue Service ("IRS") with respect to its 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 PennFed) would not result in a deficiency which would have a
material adverse effect on the financial condition of the Company and its
consolidated subsidiaries.
New Jersey Taxation. Prior to fiscal 2003, the Bank was taxed under the New
Jersey Savings Institution Tax Act. The tax was an annual privilege tax imposed
at a rate of 3% on the net income of the Bank as reported for federal income tax
purposes, with certain modifications. On July 2, 2002, the State of New Jersey
enacted a new law revising the state's corporate income tax law. For the
Company, the new law was effective beginning July 1, 2002. Effective with the
new tax structure, the New Jersey Savings Institution Tax was eliminated.
Beginning in fiscal 2003, earnings for savings institutions are taxed at the 9%
corporate tax rate. The new tax law changes increased the overall effective tax
rate of the Company. In addition, for taxable years beginning after December 31,
2001, New Jersey imposes an alternative minimum assessment. The Bank is now
required to pay the greater of the regular corporate tax or the alternative
minimum assessment. The amount of alternative minimum assessment can be used in
a future year as a credit to offset the income tax liability calculated under
the regular corporate business tax. The alternative minimum assessment is based
on either 0.4% of gross receipts or 0.8% of gross profits. PennFed and ERIC are
taxed under the New Jersey Corporation Business Tax Act (the "Tax Act"), and if
they meet certain tests, will be taxed as investment companies at an effective
annual rate of 3.6% of New Jersey taxable income (as defined in the Tax Act). If
they fail to meet these tests, they will be taxed at an annual rate of 9% of New
Jersey taxable income. It is anticipated that PennFed and ERIC will be taxed as
investment companies. PSIA and PTSC are taxed under the Tax Act at a rate of 9%
on their New Jersey taxable income.
Delaware Taxation. FDHC, a Delaware investment company, is exempt from Delaware
corporate income tax, but is required to file an annual report with and pay
annual fees to the State of Delaware. FDHC is also subject to an annual
franchise tax imposed by the State of Delaware. As Delaware business trusts,
treated as grantor trusts for income tax purposes, PennFed Capital Trust II and
PennFed Capital Trust III are not required to pay income or franchise taxes to
the State of Delaware.
Maryland Taxation. PennFed, a Maryland corporation, currently does not pay
Maryland income taxes because it does not conduct any business in that state.
Unlike the State of Delaware, the State of Maryland does not impose a franchise
tax on corporations incorporated under its laws.
20
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 principal executive
officers of PennFed are as follows: Joseph L. LaMonica, President and Chief
Executive Officer; Jeffrey J. Carfora, Senior Executive Vice President and Chief
Operating Officer; Patrick D. McTernan, Senior Executive Vice President, General
Counsel and Secretary; and Claire M. Chadwick, Executive Vice President and
Chief Financial Officer. Executive officers of PennFed do not receive any
remuneration in their capacity as PennFed executive officers.
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
Name Age Positions Held with the Bank
- --------------------------------------------------------------------------------------------------------
Jeffrey J. Carfora ......... 47 Senior Executive Vice President and Chief Operating Officer
Claire M. Chadwick ......... 45 Executive Vice President and Chief Financial Officer
Maria F. Magurno ........... 53 Executive Vice President and Residential 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.
Jeffrey J. Carfora - Mr. Carfora is responsible for the daily operations of the
Bank. Mr. Carfora also assists President LaMonica in the development of
corporate policies and goals. Mr. Carfora joined Penn Federal in 1993 as Senior
Vice President and Chief Financial Officer and was appointed Executive Vice
President in 1999. He was named Senior Executive Vice President and Chief
Operating Officer in 2001. Mr. Carfora is a Certified Public Accountant.
Claire M. Chadwick - Ms. Chadwick is responsible for the financial affairs of
the Bank, which include financial and tax accounting and reporting, budgeting
and investor relations. Ms. Chadwick joined Penn Federal in 1994 and served as
the Bank's Senior Vice President and Controller since 1999. In 2002, she was
named Executive Vice President and Chief Financial Officer. Ms. Chadwick is a
Certified Public Accountant.
Maria F. Magurno - Ms. Magurno joined the Bank in October 1997 as Vice President
of Residential Lending. Ms. Magurno is responsible for the Bank's residential
lending operations as well as overseeing the outsourced residential collections
and servicing activities. She was named Senior Vice President in 1999 and
Executive Vice President in 2001.
Employees
At June 30, 2005, the Company and its subsidiaries had a total of 283 employees,
including 57 part-time employees. The Company's employees are not represented by
any collective bargaining group.
Item 2. Properties
The Company conducts its business at its headquarters, operations center and the
Bank's branch offices located in its primary market areas. The total net book
value of the Company's premises and equipment (including land, building and
leasehold improvements and furniture and equipment) at June 30, 2005 was $20.9
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.
21
Penn Federal Savings Bank and ExxonMobil have been ordered by the New Jersey
Department of Environmental Protection to investigate and remediate soil and
ground water pollution that may have been generated at a branch location that
was formerly a gasoline service station. Penn Federal Savings Bank and
ExxonMobil have entered into a cost sharing arrangement under which ExxonMobil
will supervise the investigation and remediation and the cost will be shared
equally. Based on information then available, the Company recorded a $298,000
(pretax) charge during the fourth quarter of fiscal 2004 to accrue its share of
the estimated cost. At June 30, 2005, an environmental liability of $328,000 was
included in Accounts payable and other liabilities on the Company's Consolidated
Statements of Financial Condition. Management believes the total current
liability of $328,000 represents the probable 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, 2005.
22
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "PFSB." At September 2, 2005, there were
approximately 500 stockholders of record of the Company's common stock (not
including the number of persons or entities holding stock in nominee or street
name through various brokerage firms).
The following table sets forth the high and low closing sales prices per common
share for the periods indicated.
Fiscal 2005 Closing Price Fiscal 2004 Closing Price
------------------------- -------------------------
High Low High Low
------------------------- -------------------------
Quarter Ended:
September 30, 2004 and 2003 ............... $16.50 $14.84 $15.25 $13.78
December 31, 2004 and 2003 ................ 17.34 15.18 17.09 14.75
March 31, 2005 and 2004 ................... 16.68 14.75 18.35 16.68
June 30, 2005 and 2004 .................... 17.12 13.20 18.17 13.99
The closing price of a common share was $16.88 at June 30, 2005 compared to
$16.61 at June 30, 2004.
The Company initiated quarterly cash dividend payments in the second quarter of
fiscal 1997 and has continuously paid quarterly cash dividends. The quarterly
cash dividend had been $0.025 per share since the fourth quarter of fiscal 2001.
In the second quarter of fiscal 2002, the Company increased the quarterly cash
dividend to $0.03 per share. In the first quarter of fiscal 2003, the quarterly
cash dividend was increased to $0.05 per share. During the fourth quarter of
fiscal 2005, the quarterly cash dividend was increased to $0.07 per share.
The Company's ability to pay cash dividends is substantially dependent on the
dividend payments it receives from the Bank. For a description of the regulatory
restrictions on the ability of the Bank to pay dividends to the Company, see
Item 1. Business -- "Regulation - Limitations on Dividends and Other Capital
Distributions" and Note O -- Stockholders' Equity and Regulatory Capital in the
Notes to Consolidated Financial Statements.
The following table summarizes the Company's stock repurchase activity for each
month during the three months ended June 30, 2005. All shares repurchased during
the three months ended June 30, 2005 were repurchased in the open market.
Total Number Maximum Number
Total Number Average of Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Purchased Per Share Announced Plan Under the Plan
------------ ---------- ------------------- ------------------
Repurchases for the Month
- -------------------------
April 1 - April 30, 2005 .................... 40,800 $ 13.67 40,800 571,700
May 1 - May 31, 2005 ........................ 100,200 14.16 100,200 471,500
June 1 - June 30, 2005 ...................... 80,500 15.18 80,500 391,000
-----------------------------------------------
Total repurchases ........................... 221,500 $ 14.44 221,500
===============================================
At June 30, 2005, the Company had one repurchase plan under which it had not yet
completed all approved repurchases. This repurchase plan was publicly announced
February 23, 2005 and authorized the Company to repurchase up to 5%, or 675,000,
of its outstanding shares over the following 18 months.
23
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,
--------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------
(In thousands, except per share amounts)
Selected Financial Condition Data:
Total assets ............................. $2,050,551 $1,902,286 $1,812,452 $1,892,427 $1,849,377
Loans receivable, net .................... 1,465,480 1,287,473 1,228,918 1,441,260 1,295,492
Investment securities .................... 410,509 424,980 344,239 183,785 333,969
Mortgage-backed securities ............... 78,201 100,079 93,632 169,689 135,606
Deposits ................................. 1,339,491 1,188,100 1,094,666 1,174,507 1,085,335
Total borrowings ......................... 565,499 576,848 561,114 527,779 582,105
Trust preferred securities, net .......... -- -- 11,621 44,537 44,461
Stockholders' equity ..................... 124,054 118,399 116,835 118,761 112,530
Book value per common share(a) ........... 9.34 8.72 8.71 8.36 7.75
Tangible book value per common share(b) .. 9.34 8.62 8.47 8.01 7.27
- ----------
(a) 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 extent that they are released or
committed to be released during the fiscal year.
(b) Amounts have been restated for the effects of a 2 for 1 stock split in the
form of a 100% stock dividend paid on October 29, 2004.
Year ended June 30,
--------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------
(In thousands, except per share amounts)
Selected Operating Data:
Total interest and dividend income ....... $ 104,722 $ 96,276 $ 106,371 $ 121,339 $ 120,358
Total interest expense ................... 61,384 58,674 62,956 72,862 79,584
--------------------------------------------------------------
Net interest and dividend income before
provision for loan losses .............. 43,338 37,602 43,415 48,477 40,774
Provision for loan losses ................ -- -- 525 1,625 625
--------------------------------------------------------------
Net interest income after provision for
loan losses ............................ 43,338 37,602 42,890 46,852 40,149
--------------------------------------------------------------
Service charges .......................... 3,096 4,175 5,232 2,961 2,495
Income on Bank Owned Life Insurance
("BOLI")................................ 690 512 -- -- --
Net gain on sales of loans ............... 394 759 1,863 194 666
Net gain from real estate operations ..... 156 58 3 87 65
Other non-interest income ................ 660 925 973 975 588
--------------------------------------------------------------
Total non-interest income ................ 4,996 6,429 8,071 4,217 3,814
--------------------------------------------------------------
Total non-interest expenses .............. 24,171 25,430(a) 29,120(b) 28,450 24,642
--------------------------------------------------------------
Income before income taxes ............... 24,163 18,601 21,841 22,619 19,321
Income tax expense ....................... 8,669 6,543 8,107 8,036 6,808
--------------------------------------------------------------
Net income ............................... $ 15,494 $ 12,058 $ 13,734 $ 14,583 $ 12,513
==============================================================
Net income per common share(c):
Basic .................................. $ 1.14 $ 0.89 $ 0.99 $ 1.01 $ 0.82
==============================================================
Diluted ................................ $ 1.11 $ 0.83 $ 0.92 $ 0.94 $ 0.77
==============================================================
- ----------
(a) Includes $298 for recognition of a non-recurring expense associated with
an environmental liability.
(b) Includes $1,514 for recognition of a non-recurring expense associated with
the unamortized issuance costs related to the PennFed Capital Trust I
securities that were redeemed.
(c) Amounts have been restated for the effects of a 2 for 1 stock split in the
form of a 100% stock dividend paid on October 29, 2004.
24
At and for the year ended June 30,
----------------------------------------------------------------
Selected Financial Ratios and Other Data: 2005 2004 2003 2002 2001
----------------------------------------------------------------
Performance Ratios:
Return on average assets (ratio of net income to
average total assets) ....................................... 0.78% 0.67% 0.75% 0.79% 0.72%
Return on average stockholders' equity (ratio of
net income to average stockholders' equity) ................. 12.64 10.20 11.53 12.59 10.95
Net interest rate spread during the year ...................... 2.14 2.02 2.19 2.37 2.06
Net interest margin (net interest and dividend
income to average interest-earning assets) .................. 2.26 2.16 2.44 2.68 2.43
Ratio of average interest-earning assets to average
deposits and borrowings ..................................... 103.87 104.21 107.00 107.88 107.67
Ratio of earnings to fixed charges(a):
Excluding interest on deposits .............................. 1.78x 1.58x 1.73x 1.74x 1.68x
Including interest on deposits .............................. 1.39x 1.32x 1.35x 1.31x 1.24x
Ratio of non-interest expenses to average total assets ........ 1.22% 1.41% 1.58% 1.53% 1.42%
Efficiency ratio (non-interest expenses, excluding
amortization of intangibles, to net interest and
dividend income and non-interest income excluding
gains on sales and real estate operations) ................. 47.74 54.64 54.93 50.58 51.59
Dividend payout ratio ......................................... 19.30 22.47 20.30 11.39 10.37
Asset Quality Ratios:
Non-accruing loans to total loans at end of year .............. 0.18 0.17 0.14 0.23 0.13
Allowance for loan losses to non-accruing loans
at end of year .............................................. 231.00 286.39 373.60 177.74 259.50
Allowance for loan losses to total loans at end of year ....... 0.41 0.48 0.51 0.40 0.33
Non-performing assets to total assets at end of year .......... 0.13 0.11 0.09 0.17 0.12
Ratio of net charge-offs during the year to average
loans outstanding during the year ........................... 0.01 0.00 0.00 0.00 0.03
Capital Ratios:
Stockholders' equity to total assets at end of year ........... 6.05 6.22 6.45 6.28 6.08
Average stockholders' equity to average total assets .......... 6.19 6.56 6.47 6.25 6.58
Tangible capital to tangible assets at end of year(b) ......... 8.28 8.61 8.73 8.37 7.87
Core capital to adjusted tangible assets at end of year(b) .... 8.28 8.61 8.73 8.37 7.87
Risk-based capital to risk-weighted assets at end of year(b) .. 15.84 16.86 17.21 15.93 15.69
Other Data:
Number of branch offices at end of year ....................... 25 24 21 21 21
Number of deposit accounts at end of year ..................... 71,600 69,800 74,800 84,200 88,500
Cash dividends declared per common share ...................... $ 0.22 $ 0.20 $ 0.20 $ 0.12 $ 0.09
- ----------
(a) 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.
(b) Represents regulatory capital ratios for the Bank.
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
The consolidated financial statements are prepared in conformity with U.S.
generally accepted accounting principles. The preparation of the financial
statements requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While the
Company bases estimates on historical experience, current information and other
factors deemed to be relevant, actual results could differ from those estimates.
Management believes the following policies are both important to the reported
financial condition and results of operations and require subjective judgements
and are, therefore, considered critical accounting policies.
Allowance for Loan Losses -- The allowance for loan losses is established
through charges to income based on management's evaluation of the probable
credit losses presently inherent in the Company's 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.
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 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 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
actual 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 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, loss rates by loan category are applied. A 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 or 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 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.
Accounting for Income Taxes - In the accounting for income taxes, the Company
records amounts that represent taxes payable for the current year as well as
deferred tax assets and liabilities arising from transactions that have
differing effects for financial statements and tax returns. Judgement is
required in assessing the future tax effects of transactions that have been
recognized in the Company's consolidated financial statements or tax returns.
Fluctuations in the actual tax effects in future years could have an impact on
the Company's consolidated financial condition or results of operations.
26
Overview
You should read the following discussion together with our Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements,
which are included elsewhere in this Form 10-K. This discussion contains
forward-looking statements and you should read the section titled
"Forward-Looking Statements" in Item 1. Business.
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 has 25 full service branch offices
located in New Jersey. The Company attracts deposits from the general public and
uses these 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.
The Company also invests in mortgage-backed securities secured by one- to
four-family residential mortgages and U.S. government agency obligations.
Through a relationship with an unaffiliated third party, the Company offers
insurance and uninsured non-deposit investment products to the Company's
customers and members of the general public. A wholly-owned subsidiary of the
Company participates in the ownership of a title insurance agency.
The Company's loan portfolio growth is dependent primarily on its ability to
provide the products and services that meet the needs of the customers in its
market area. The Company offers fixed rate, adjustable rate and balloon mortgage
loans for residential and commercial purposes, as well as home equity, consumer
loans and non-mortgage business loans, with a variety of terms. Residential
first mortgage loans are the largest part of the portfolio, representing
approximately 78.5% at June 30, 2005. The level of interest rates also has a
significant impact on the ability of the Company to originate loans and on the
amount of prepayment activity experienced by the Company. During the past fiscal
year, the Company's net loans receivable and loans held for sale increased
$178.0 million. This increase was primarily attributable to strong loan
origination levels and a decline in accelerated prepayments. The Company sold
$35.6 million of loans during the fiscal year as a means to assist in the
management of interest rate risk.
The retention and the recruitment of profitable deposit customers are vital to
PennFed's ability to generate liquid funds and to support the growth of
non-interest income. There has been a 2.6% increase in the number of deposit
accounts since June 30, 2004 and average deposit balances per account, excluding
wholesale certificates of deposit, have increased 8.7%. The Company offers a
number of different deposit products and uses this product mix along with a
strong focus on customer service to attract customers and to build depositor
relationships. The level of interest rates also significantly affects the level
of the Company's deposits. During the past fiscal year, deposits increased
$151.4 million primarily due to a $109.3 million increase in retail certificates
of deposit, a $24.1 million increase in core deposits (checking, money market
and savings accounts) and the addition of $19.9 million of brokered certificates
of deposit. The increase in core deposits was accomplished through a combination
of desirable product features, focused marketing campaigns and competitive
interest rates.
The Company's future loan and deposit growth is, to a large extent, directly
tied to the level of interest rates. If long-term interest rates rise,
origination levels may be reduced from the prior periods. Growth in the loan
pipeline will depend on the Company's ability to aggressively seek out customers
in spite of the higher cost of borrowing for the customer. Loan growth driven by
borrower demand also will depend on the strength of the economy in the Company's
market area. With rising interest rates and/or deteriorating economic
conditions, loan origination volumes would likely be lower than recent years and
a reduction in the prepayment of loans currently in portfolio would be expected.
The Company has continued its loan sale strategy with respect to new residential
loan product in order to assist in the management of interest rate risk
associated with keeping longer-term loans on the balance sheet. With respect to
deposits, while an increase in interest rates would increase the Company's cost
of funds, it would also provide the Company with an additional opportunity for
attracting depositors, some of whom may have sought higher returns with mutual
funds and other non-deposit investment products when market rates were lower.
The Company remains confident that by offering competitively priced products and
by striving for superior service, it will be able to maintain profitable levels
of loans and deposits.
Cash and cash equivalent balances were at lower levels during portions of the
fiscal year, compared to the prior year, due to a decline in accelerated
prepayments and strong loan origination levels. The average balance of
investment securities increased during the past fiscal year, compared to the
prior fiscal year, reflecting the replacement of those securities that prepaid
early, while the average balance of mortgage-backed securities decreased, as
available funds were utilized to grow the loan portfolio.
27
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
mortgage-backed 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.
A slowdown in loan prepayments, growth in the loan portfolio and the repricing
of certain deposits and other borrowings contributed to an expansion in the net
interest margin, when compared to the prior fiscal year. The lower level of
prepayments experienced during the fiscal year positively impacted the Company's
interest income and contributed to growth in the average balance of loans
outstanding, when compared to the prior year. The Company's interest income is
primarily driven by interest earned on residential first mortgage loans, which
increased $7.5 million during the fiscal year, when compared to the prior fiscal
year. The strong origination levels and the significant slowdown in the amount
of prepayments, relative to the prior year period, have contributed to the
increase in residential first mortgage loan interest income. Overall, net
interest income increased $5.7 million and the net interest margin increased
from 2.16% to 2.26% during the fiscal year, when compared to the prior fiscal
year. Lower cost of funds on other borrowings due to the interest rate
environment and the maturity of FHLB of New York advances were the primary
factors responsible for a decrease of $1.4 million in interest expense on FHLB
of New York advances and other borrowings for the fiscal year ended June 30,
2005 when compared to the prior fiscal year.
With a slowdown in refinance activity, non-interest income has decreased
compared to the level seen in the prior year. Loan service fees related to
modifications and prepayments were not at the levels seen in the prior year,
when interest rates caused many customers to refinance their loans or modify
them to reduce the interest rate of their loans.
Non-interest expenses were reduced this fiscal year compared to the prior year
primarily due to the end of costs associated with funding the Company's Employee
Stock Ownership Plan ("ESOP"), as shares became fully allocated in the 2004
fiscal year. Fiscal 2005 non-interest expenses included a much less expensive
replacement benefit plan (essentially an increase in the 401(k) match), as well
as costs associated with four branches opened since September 2003. In addition,
costs associated with regulatory burden, especially compliance with
Sarbanes-Oxley Section 404 on internal control reporting, required significant
additional compliance expenditures.
The Company's future earnings are inherently tied to the level of interest rates
prevailing in the economic environment in which the Company operates. If
interest rates increase, the Company's interest expense on deposits and
wholesale borrowings will increase at a faster pace than the effects that will
be seen in the Company's interest income on loans. This effect on interest
expense is due to the short-term repricing characteristics of a portion of the
Company's deposit and borrowing portfolios. As for interest income, loan
commitments, generally locked in at issuance, will result in loans closed at
below-market rates if rates continue to rise. As interest rates rise, a decline
in loan prepayments will reduce cashflows available for reinvestment at higher
rates. By emphasizing the origination of adjustable rate and biweekly loan
products and continuing the sale of long-term fixed rate residential loans,
while also focusing on increasing the balance of core deposits and longer term
certificates of deposit and borrowings, the Company will endeavor to better
position itself to mitigate the effects of rising interest rates. See the
section titled "Management Strategy" for a discussion of those areas management
has emphasized as important to future growth and improved earnings.
28
Management Strategy
Management's primary goal is to enhance stockholder value, while providing our
customers with appropriate quality products and services through a continued
focus on improved earnings while managing risks, including liquidity and
interest rate risk. 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.
As a traditional thrift serving our market area, the Company will continue to
emphasize production of traditional one- to four-family first mortgage loans
secured by properties located primarily in New Jersey. One-to four-family loans
are generally considered to have a lower inherent risk, coupled with a lower
yield. The Company produced $350.3 million, $462.8 million and $529.5 million in
one- to four-family mortgage loans in fiscal 2005, 2004 and 2003, respectively.
Of these amounts, $350.3 million, $409.8 million and $528.9 million,
respectively, represent loan originations, with the balance representing loan
purchases. As a result of rising interest rates, refinance activity had been
significantly reduced throughout fiscal 2005. Based upon the current level of
interest rates, refinance activity has declined and is expected to decline
further if interest rates continue to rise. While the Company's customers
continue to favor fixed rate products, there has been a slight increase in
borrowers' preference for adjustable rate products. While origination levels may
decline, in response to rising rates, the Company would also expect a
significant decline in prepayments on the existing portfolio. The Company's
interest income has been derived primarily from one- to four-family mortgage
loans, which totaled $1.1 billion, or 78.5%, of the Company's gross loan
portfolio at June 30, 2005. Interest income on one- to four-family loans of
$57.4 million represented 75.6% of total interest on loans.
Increasing the Commercial and Multi-Family and Consumer Loan Portfolios. The
Company will continue its emphasis on increasing the commercial and multi-family
and consumer loan porfolios while remaining vigilant in minimizing the risk
inherent in these products through sound underwriting. These loans generally
reprice more frequently, have shorter maturities, and/or have higher yields than
one- to four-family first mortgage loans. The Company originated $129.4 million,
$118.2 million and $138.8 million of commercial and multi-family and consumer
loans in fiscal 2005, 2004 and 2003, respectively. As of June 30, 2005, 2004 and
2003, commercial and multi-family and consumer loans represented 21.5%, 22.5%
and 23.0%, respectively, of the total gross loan portfolio. Interest income on
commercial and multi-family and consumer loans of $18.5 million represented
24.4% of total interest on loans for the year ended June 30, 2005. During fiscal
2005, despite strong origination levels, the commercial and multi-family and
consumer loan portfolios declined as a percentage of the total gross loan
portfolio. In addition to accelerated prepayments on these portfolios, the
decline was attributable to growth in the one- to four-family residential loan
portfolio. While commercial and multi-family and consumer loans generally
represent higher yielding assets, the Company will continue to balance the
increased income with the risk inherent in these types of loans as compared to a
first lien on a one- to four-family home.
Maintaining Asset Quality. The majority of the Company's loan portfolio consists
of one- to four-family mortgages, which are considered to have less risk than
commercial and multi-family real estate or consumer loans. In recognition of the
Company's strong underwriting standards and aggressive collection efforts on all
loan portfolios, the Company's historical loss experience and net chargeoffs
continue to be low.
The Company's non-performing assets consist of non-accruing loans and real
estate owned. Non-performing assets as a percentage of total assets were 0.13%
at June 30, 2005.
Increasing Core Deposit Balances. The Company's primary source of funds is
deposits. Core deposits increased $24.1 million, or 4.1%, in fiscal 2005. The
Company will continue to emphasize growth in core deposits consisting of
checking, money market and savings accounts. These deposits provide a stable,
low cost source of funds as well as service charge income. The Company utilizes
various techniques to generate core deposits including special promotional rates
and offerings. The Company recognizes the importance of building relationship
customers. Therefore, certain higher rates have been offered on certificates of
deposit for customers who also maintain checking accounts. During fiscal 2005,
as in fiscal 2004, advertising was increased and expanded to include radio,
billboard and bus shelter media in addition to traditional newspaper promotion.
Expanding the retail branch network will likely result in growing core deposits.
During fiscal 2005, the Bank expanded its retail franchise by opening one new
branch, after opening three branches in fiscal 2004. In February 2005, the
Bank's 25th branch was opened in Aberdeen, New Jersey.
29
Managing the Company's Exposure to Interest Rate Risk. The Company has an
asset/liability committee that meets no less frequently than monthly to develop,
implement and review strategies and policies to manage interest rate risk. As
part of its interest rate risk strategy, the Company has emphasized core deposit
growth, utilized intermediate/longer-term borrowings and has, at select times,
emphasized growth in longer term certificates of deposit. Furthermore, the
Company has endeavored to manage its interest rate risk through the pricing and
diversification of its loan products, including focus on the production of loans
with adjustable rate features and/or loans with shorter terms to maturity.
In an effort to manage sensitivity to changes in interest rates, the Company
continually evaluates the sale of longer-term, fixed rate, one- to four-family
residential loan production. During the year ended June 30, 2005, approximately
$35.6 million of primarily conforming, fixed rate one- to four-family
residential mortgage loans were sold into the secondary market and to other
institutions as part of the Company's efforts to manage interest rate risk. The
level of loan sale activity continues to be actively evaluated with primary
consideration given to interest rate risk, long-term profitability and liquidity
objectives. See " -Interest Rate Sensitivity" and " -Asset/Liability Strategy."
Improving Non-Interest Income. The Company has sought and will continue to seek
additional ways of improving non-interest income. Total service charges, which
represent the primary source of non-interest income, reflected a $1.1 million,
or 25.8%, decrease for fiscal 2005 compared to fiscal 2004, primarily due to
decreases in loan prepayment and modification fees. As prepayments and refinance
activity are expected to continue to drop during the next fiscal year, related
income would also decline. Increasing core deposits will likely result in an
increase in service charge income to offset this decline to some degree.
Controlling Non-Interest Expenses. Non-interest expenses are carefully
monitored, which includes ongoing reviews of staffing levels, facilities and
operations. Primarily due to the full allocation of shares under the Company's
ESOP at June 30, 2004, non-interest expenses decreased $1.3 million, or 5.0%,
during fiscal 2005. Fiscal 2005 non-interest expenses included a much less
expensive replacement benefit plan for the ESOP (essentially an increase in the
401(k) match). This decrease in non-interest expenses was partially offset by
costs associated with the four branches opened since September 2003 and the
costs associated with regulatory burden, especially compliance with
Sarbanes-Oxley Section 404.
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 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
Residential Lending Group Executive, the Retail Support 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 of Directors
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 table following this discussion 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 repricing or contractual term to maturity.
30
Investment securities available for sale are assumed to reprice within one year
due to the characteristics associated with the underlying assets of the mutual
fund. 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 a time determined by considering the spread between
the stated interest rate and the market rate, as well as the age and structure
of the security. Some of these callable government agency securities will be
assumed to be called early, while others may extend to maturity.
Based on the Company's experience, residential fixed and adjustable rate loans
are assumed to prepay at an annualized rate between 10% and 16%. Commercial and
multi-family real estate loans are assumed to prepay at an annualized rate
between 5% and 40% while consumer loans are assumed to prepay at a 32% rate.
Fixed and adjustable rate mortgage-backed securities have annual payment
assumptions ranging from 18% to 30%. 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
costs.
The Company assumes that variable rate savings account balances roll-off
gradually over time. Based on the Company's historical experience, it is assumed
that 12% of these 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.
During fiscal 2001 and 2002, the Bank promoted "5% Savings for Life" accounts,
which totaled $120.1 million at June 30, 2005. These deposits are assumed to
have an average life of approximately 10 years. In addition, a "5% Through June
2004 Savings" account was also promoted during fiscal 2002. At June 30, 2005,
the balance in these accounts totaled $45.9 million and the rate was 3%. These
deposits are assumed to roll off 25% within the next 12 months and 35% over the
following three years. The remainder is assumed to have an average life of 10
years. At June 30, 2005, $282.7 million, or 73.4%, of savings accounts are
assumed to 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.
31
Maturing or Repricing
---------------------------------------------------------------------------------------------
Year ending June 30,
---------------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter Total Fair Value
---------------------------------------------------------------------------------------------
(Dollars in thousands)
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family .................. $ 164,152 $ 132,287 $117,674 $106,148 $ 96,189 $ 381,806 $ 998,256 $ 1,001,459
Average interest rate ............. 5.59% 5.51% 5.51% 5.51% 5.52% 5.63% 5.57%
Adjustable rate mortgage loans
including one- to four-family and
commercial and multi-family ....... $ 91,321 $ 44,989 $ 45,546 $ 40,391 $ 56,485 $ 38,649 $ 317,381 $ 313,010
Average interest rate ............. 5.88% 5.95% 5.82% 5.38% 5.35% 6.00% 5.74%
Consumer loans including demand
loans ............................. $ 86,611 $ 23,628 $ 16,363 $ 11,439 $ 6,380 $ -- $ 144,421 $ 144,822
Average interest rate ............. 5.86% 5.61% 5.61% 5.61% 5.61% --% 5.76%
Investment securities and other ..... $ 94,860 $ 35,000 $ 44,265 $ 75,882 $ 45,000 $ 137,893 $ 432,900 $ 434,128
Average interest rate ............. 5.31% 5.54% 5.45% 5.34% 5.35% 5.86% 5.53%
Mortgage-backed securities excluding
unamortized premium ............... $ 21,292 $ 14,827 $ 11,738 $ 9,560 $ 7,860 $ 12,785 $ 78,062 $ 79,109
Average interest rate ............. 5.16% 5.24% 5.22% 5.22% 5.22% 5.37% 5.23%
Total interest-earning assets ..... $ 458,236 $ 250,731 $235,586 $243,420 $211,914 $ 571,133 $ 1,971,020 $ 1,972,528
=============================================================================================
Savings deposits .................... $ 37,800 $ 28,485 $ 18,489 $ 10,286 $ 7,591 $ 282,709 $ 385,360 $ 385,360
Average interest rate ............. 1.68% 1.71% 1.57% 1.52% 1.10% 2.88% 2.53%
Money market and demand deposits
(transaction accounts) ............ $ 50,252 $ -- $ -- $ -- $ -- $ 176,779 $ 227,031 $ 227,031
Average interest rate ............. 2.40% --% --% --% --% 0.44% 0.88%
Certificates of deposit ............. $ 438,487 $ 157,017 $ 65,201 $ 29,313 $ 35,939 $ -- $ 725,957 $ 725,949
Average interest rate ............. 2.88% 3.51% 4.00% 4.13% 4.16% --% 3.23%
FHLB of New York advances ........... $ 30,000 $ 20,465 $ 55,000 $ -- $140,000 $ 170,000 $ 415,465 $ 443,927
Average interest rate ............. 4.21% 6.11% 5.49% --% 6.45% 5.50% 5.76%
Other borrowings .................... $ 68,491 $ 29,461 $ 10,000 $ -- $ -- $ -- $ 107,952 $ 107,566
Average interest rate ............. 3.51% 3.36% 3.59% --% --% --% 3.48%
Junior subordinated deferrable
interest debentures ............... $ -- $ -- $ -- $ -- $ -- $ 43,300 $ 43,300 $ 46,556
Average interest rate ............. --% --% --% --% --% 7.67% 7.67%
Total deposits and borrowings ..... $ 625,030 $ 235,428 $148,690 $ 39,599 $183,530 $ 672,788 $ 1,905,065 $ 1,936,389
=============================================================================================
Interest earning assets less
deposits and borrowings (interest-
rate sensitivity gap) ............. $(166,794) $ 15,303 $ 86,896 $203,821 $ 28,384 $ (101,655) $ 65,955
=================================================================================
Cumulative interest-rate sensitivity
gap ............................... $(166,794) $(151,491) $(64,595) $139,226 $167,610 $ 65,955
====================================================================
Cumulative interest-rate sensitivity
gap as a percentage of total
assets at June 30, 2005 ........... (8.13)% (7.39)% (3.15)% 6.79% 8.17% 3.22%
====================================================================
Cumulative interest-rate sensitivity
gap as a percentage of total
interest-earning assets at
June 30, 2005 ..................... (8.46)% (7.69)% (3.28)% 7.06% 8.50% 3.35%
====================================================================
Cumulative interest-earning assets
as a percentage of cumulative
deposits and borrowings at June
30, 2005 .......................... 73.31% 82.39% 93.60% 113.28% 113.60% 103.46%
====================================================================
At June 30, 2005, 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 $166.8 million, representing a one year negative
gap of 8.13% of total assets, compared to a one year negative gap of $148.6
million, or 7.81%, of total assets at June 30, 2004. See " -Asset/Liability
Strategy." The Company's gap position has remained relatively unchanged from
June 30, 2004 when compared to June 30, 2005.
32
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. Furthermore, 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 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 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. OTS
guidelines would characterize an institution with a Post Shock ratio of less
than 4% to have "high" interest rate risk if the Sensitivity Measure is greater
than 2%. 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. Assumptions used in calculating interest rate sensitivity
are periodically reviewed and modified as appropriate.
As of June 30, 2005, the Bank's internally generated initial NPV ratio was
10.19%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 8.33%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 1.86%. As of June 30, 2005, the Company's internally generated
initial NPV ratio was 9.97%, the Post-Shock ratio was 8.27%, and the Sensitivity
Measure was negative 1.70%. As of June 30, 2004, the Bank's Post-Shock NPV ratio
and Sensitivity Measure were 7.87% and negative 1.72%, respectively, and the
Company's Post-Shock NPV ratio and Sensitivity Measure were 7.30% and negative
1.91%, respectively. As of June 30, 2005, the effect of a 2% decrease in
interest rates could not be meaningfully simulated. As of June 30, 2004, due to
historically low interest rate levels, the effect of a 2% decrease in interest
rates could not be simulated. While the Post-Shock ratios have improved from the
prior year, sensitivity has remained essentially unchanged. Over the last year,
shorter term market rates have increased while longer term market rates have
declined. The decline in long term market rates increased prepayment activity on
certain one- to four-family loans. In addition, one- to four-family loan growth
throughout fiscal 2005 favored bi-weekly and adjustable rate products with
shorter average durations. As a result, overall asset duration declined but was
principally offset by a similar decline in liability duration that resulted from
an increase in short term retail deposit balances. Variances between the Bank's
and the Company's NPV ratios are attributable to balance sheet items which are
eliminated during consolidation, such as investments, intercompany borrowings
and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions, including discount and decay rates, and
generally result in lower levels of presumed interest rate risk than OTS
measurements indicate.
The OTS measures the Bank's 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
March 31, 2005 (the latest date for which information is available), the Bank's
initial NPV ratio, as measured by the OTS, was 9.40%, the Bank's Post-Shock
ratio was 5.68% and the Sensitivity Measure was negative 3.72%.
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 June 30, 2005, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 6.1% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates. Although interest rates are not
expected to rise 2% immediately, interest rate projections over the next year
assume a rise in short term interest rates and a tightening of the rate spread
between the 3-month U.S. treasury bill and the 10-year U.S. treasury bond. If
short term rates rise more quickly than long term rates, interest rate risk
measures would be expected to improve, but earnings would likely be negatively
affected.
33
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 and 5 years; 15, 20 and 30
year bi-weekly mortgages; and fixed rate products with terms of 10, 15 and 20
years, which have shorter durations than 30 year fixed rate mortgage loans.
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
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 the retention and the recruitment of profitable
deposit customers in an effort to improve funding stability and earnings.
6. The Company has also emphasized growth in core deposit accounts as these
funds are relatively stable, have a longer duration and assist in strengthening
customer relationships.
During the year ended June 30, 2005, each of the strategies noted above was
employed to manage the Company's sensitivity to changes in interest rates.
On June 30, 2004, the Federal Open Market Committee marked the beginning of a
tightening cycle by raising the Federal funds rate from 1.00% to 1.25%. This
rate has continued to increase at a measured pace so that at June 30, 2005, it
stood at 3.25%. During this time, however, longer-term market yields declined
over 0.50%. As the steepness of the Treasury curve declined, loan originations
accelerated and disintermediation between retail deposit products began to
emerge due to strong competitive pricing for short-term retail deposits.
One- to four-family residential mortgage activity and consumer mortgage activity
remained strong in fiscal 2005, reflective of continued low market rates and
competitive pricing. Bi-weekly and adjustable rate production dominated new
volumes and helped to reduce the duration of these loan portfolios. Furthermore,
the majority of the commercial and multi-family loan production added during the
year ended June 30, 2005 was also adjustable rate. Loan sale activities included
primarily lower coupon, fixed rate products with longer terms to maturity and
supported efforts to reduce interest rate risk.
Retail funding supported most of the asset growth experienced during fiscal
2005. Significant focus was placed on generating new and building existing
retail core deposit relationships. Efforts were rewarded with significant growth
in checking and money market balances, but were partially offset by a decline in
savings balances as certain funds previously "parked" in such accounts began to
roll into more competitively priced certificate of deposit products. Most
certificate of deposit growth was found in shorter term maturities, as
depositors were generally unwilling to lock in their deposits for terms longer
than one year. Wholesale funding increased only slightly, as FHLB of New York
advances that matured during the year were replaced with overnight borrowings,
reverse repurchase agreements and brokered certificates of deposit.
By the end of fiscal 2005, the Company's NPV ratios had improved as the overall
value of assets and liabilities increased, but its sensitivity to rising market
rates did not significantly change, due to the offsetting effects of variations
in market rates and portfolio composition.
As a result of the above activity, one- to four-family mortgage loan balances
increased $151.8 million between June 30, 2004 and June 30, 2005. Adjustable
rate one- to four-family mortgage loan balances increased $73.5 million while
fixed rate balances increased $78.3 million. Additionally, approximately 70% of
the fiscal 2005 fixed rate loan originations were for terms less than 30 years
or for bi-weekly products. Consumer loan balances increased $26.7 million. Prime
34
based home equity lines of credit increased $3.6 million while other consumer
products, principally fixed rate second mortgages generally with shorter
durations than one- to four-family residential mortgages, increased $23.1
million. The commercial and multi-family real estate loan portfolio decreased
$2.5 million during the current fiscal year with adjustable rate products
declining $3.1 million and fixed rate loans rising $600,000.
At June 30, 2005, medium and long-term certificate of deposit balances with
remaining maturities greater than one year totaled $287.5 million, including
$66.1 million of wholesale certificates of deposit, compared to $247.0 million
at June 30, 2004. There were $46.1 million of wholesale certificates of deposit
at June 30, 2004. Certificate of deposit balances, excluding brokered deposits,
increased $107.4 million as short-term interest rates increased during the
fiscal year, while core deposit balances increased $24.1 million. Savings
balances fell $33.3 million, while checking and money market account balances
increased $57.4 million. Wholesale borrowings with remaining maturities greater
than one year totaled $424.9 million at June 30, 2005, reflecting a decline of
$15.5 million during the current fiscal year. However, $100.0 million of
convertible advances from the FHLB of New York with one-time call features were
not called and subsequently were extended five to seven years to their final
maturity. Short-term retail certificate of deposit balances with remaining
maturities of one year or less increased $86.8 million while short-term
wholesale funding balances increased $34.1 million between June 30, 2004 and
2005, as a portion of such borrowings shifted to within one year of maturity. In
fiscal 2005, $185.5 million of new, short-term wholesale borrowings were added,
including a net increase of $38.2 million drawn on an overnight repricing line
of credit and a net decrease of $1.6 million on an unsecured revolving line of
credit.
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 45.7% of total
deposits at June 30, 2005, tend to be less susceptible to rapid changes in
interest rates than certificate of deposit balances.
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,
2005, 2004 and 2003 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.
35
Year ended June 30,
---------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------
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 .......................... $ 1,082,952 $ 57,358 5.30% $ 915,316 $ 49,831 5.44% $ 1,087,196 $ 63,940 5.88%
Commercial and multi-family real
estate loans ................... 168,556 11,638 6.90 162,855 12,029 7.39 157,365 12,373 7.86
Consumer loans .................... 127,020 6,834 5.38 115,793 6,353 5.49 115,295 7,096 6.15
----------- --------- ----------- -------- ----------- ---------
Total loans receivable ......... 1,378,528 75,830 5.50 1,193,964 68,213 5.71 1,359,856 83,409 6.13
Federal funds sold ................ -- -- -- 17,918 178 0.99 19,361 233 1.20
Investment securities and other ... 446,903 24,384 5.46 428,104 22,816 5.33 266,364 15,167 5.69
Mortgage-backed securities ........ 88,286 4,508 5.11 98,828 5,069 5.13 131,815 7,562 5.74
----------- --------- ----------- -------- ----------- ---------
Total interest-earning assets .. 1,913,717 $ 104,722 5.47 1,738,814 $ 96,276 5.54 1,777,396 $ 106,371 5.98
========= ======== =========
Non-interest earning assets ......... 67,373 63,978 63,475
----------- ----------- -----------
Total assets ................... $ 1,981,090 $ 1,802,792 $ 1,840,871
=========== =========== ===========
Deposits and borrowings:
Money market and demand
deposits ....................... $ 191,747 $ 1,144 0.60% $ 167,569 $ 315 0.19% $ 168,767 $ 833 0.49%
Savings deposits .................. 420,852 9,901 2.35 388,552 9,931 2.56 336,856 8,782 2.61
Certificates of deposit ........... 644,112 19,311 3.00 549,480 16,388 2.98 625,468 23,255 3.72
----------- --------- ----------- -------- ----------- ---------
Total deposits ................. 1,256,711 30,356 2.42 1,105,601 26,634 2.41 1,131,091 32,870 2.91
FHLB of New York advances ......... 425,319 24,668 5.80 489,699 28,203 5.76 504,465 28,892 5.73
Other borrowings .................. 118,285 3,313 2.80 31,308 1,139 3.64 23,116 1,082 4.68
Junior subordinated debentures .... 42,059 3,047 7.24 42,015 2,698 6.42 2,376 112 4.71
----------- --------- ----------- -------- ----------- ---------
Total deposits and borrowings .. 1,842,374 $ 61,384 3.33 1,668,623 $ 58,674 3.52 1,661,048 $ 62,956 3.79
========= ======== =========
Other liabilities ................... 16,095 15,899 18,755
----------- ----------- -----------
Total liabilities .............. 1,858,469 1,684,522 1,679,803
Trust Preferred securities .......... -- -- 41,954
Stockholders' equity ................ 122,621 118,270 119,114
----------- ----------- -----------
Total liabilities and
stockholders' equity ........ $ 1,981,090 $ 1,802,792 $ 1,840,871
=========== =========== ===========
Net interest income and net interest
rate spread ....................... $ 43,338 2.14% $ 37,602 2.02% $ 43,415 2.19%
========= ====== ======== ====== ========= ======
Net interest-earning assets and net
interest margin ................... $ 71,343 2.26% $ 70,191 2.16% $ 116,348 2.44%
=========== ====== =========== ====== =========== ======
Ratio of interest-earning assets to
deposits and borrowings ........... 103.87% 104.21% 107.00%
====== ====== ======
36
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
deposits and borrowings 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,
--------------------------------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
------------------------------------------- -----------------------------------------
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 .................. $ 9,127 $ (1,352) $ (248) $ 7,527 $ (10,108) $ (4,752) $ 751 $ (14,109)
Commercial and multi-family
real estate loans ............... 421 (785) (27) (391) 432 (750) (26) (344)
Consumer loans ..................... 616 (123) (12) 481 31 (771) (3) (743)
--------------------------------------------------------------------------------------
Total loans receivable .......... 10,164 (2,260) (287) 7,617 (9,645) (6,273) 722 (15,196)
Federal funds sold ................. (178) (178) 178 (178) (17) (41) 3 (55)
Investment securities and other .... 1,002 542 24 1,568 9,210 (971) (590) 7,649
Mortgage-backed securities ......... (540) (23) 2 (561) (1,892) (801) 200 (2,493)
--------------------------------------------------------------------------------------
Total interest-earning assets ... $ 10,448 $ (1,919) $ (83) $ 8,446 $ (2,344) $ (8,086) $ 335 $ (10,095)
======================================================================================
Deposits and borrowings:
Money market and demand
deposits ........................ $ 45 $ 685 $ 99 $ 829 $ (6) $ (516) $ 4 $ (518)
Savings deposits ................... 826 (790) (66) (30) 1,347 (172) (26) 1,149
Certificates of deposit ............ 2,822 86 15 2,923 (2,825) (4,601) 559 (6,867)
--------------------------------------------------------------------------------------
Total deposits .................. 3,693 (19) 48 3,722 (1,484) (5,289) 537 (6,236)
FHLB of New York advances .......... (3,708) 199 (26) (3,535) (845) 161 (5) (689)
Other borrowings ................... 3,164 (262) (728) 2,174 383 (241) (85) 57
Junior subordinated debentures ..... 3 346 -- 349 1,868 41 677 2,586
--------------------------------------------------------------------------------------
Total deposits and borrowings ... $ 3,152 $ 264 $ (706) $ 2,710 $ (78) $ (5,328) $ 1,124 $ (4,282)
======================================================================================
Net change in net interest income .. $ 7,296 $ (2,183) $ 623 $ 5,736 $ (2,266) $ (2,758) $ (789) $ (5,813)
======================================================================================
Financial Condition
Comparison of Financial Condition at June 30, 2005 and June 30, 2004
Assets. Total assets increased $148.3 million to $2.051 billion at June 30, 2005
from total assets of $1.902 billion at June 30, 2004. The increase at June 30,
2005 was primarily due to a $173.2 million increase in net loans receivable and
a $4.8 million increase in loans held for sale partially offset by a $21.9
million decrease in net mortgage-backed securities and a $14.8 million decrease
in investment securities held to maturity. The increase in total assets at June
30, 2005 was also partially due to a $10.7 million increase in the investment in
BOLI.
The increase in net loans receivable was reflective of strong loan origination
levels and a slowdown in loan prepayment activity. Loan sales in fiscal 2005
were $35.6 million, compared to $90.4 million in fiscal 2004, as originations of
long term, fixed rate conforming balance loans were reduced in fiscal 2005 when
compared to fiscal 2004. The interest rate
37
environment in fiscal 2005, when compared to fiscal 2004, allowed the Company to
utilize available funds for the origination of loans at higher rates of return
than would have been achieved by re-investing in mortgage-backed securities and
investment securities, as these securities rolled off during the fiscal year.
Liabilities. Deposits increased $151.4 million to $1.339 billion at June 30,
2005 from $1.188 billion at June 30, 2004. The increase was attributable to an
increase in short- and medium-term retail certificates of deposit of $109.3
million, core deposit accounts (checking, money market and savings accounts) of
$24.1 million and the addition of $19.9 million of wholesale certificates of
deposit. At June 30, 2005, FHLB of New York advances and other borrowings
totaled $523.4 million, reflecting an $11.4 million decrease from the $534.8
million at June 30, 2004.
Stockholders' Equity. Stockholders' equity at June 30, 2005 totaled $124.1
million compared to $118.4 million at June 30, 2004. The increase primarily
reflects the net income recorded for the year ended June 30, 2005 and the
exercise of stock options, including the related tax effect, partially offset by
the repurchase of 731,800 shares of the Company's outstanding stock at an
average price of $15.41 per share and the declaration of cash dividends.
Results of Operations
Comparison of Operating Results for the Years Ended June 30, 2005 and June 30,
2004
General. For the year ended June 30, 2005, net income was $15.5 million, or
$1.11 per diluted share, compared to net income of $12.1 million, or $0.83 per
diluted share, for the year ended June 30, 2004. As a result of additional
Sarbanes-Oxley Section 404 ("SOX 404") compliance costs, the Company recorded
approximately $300,000 (pretax) of costs associated with SOX 404 in fiscal 2005,
including a $208,000 (pretax) charge during the fourth quarter of fiscal 2005.
As a result of an environmental liability, as explained in Item 3. Legal
Proceedings, the Company recorded a $298,000 (pretax) charge during the fourth
quarter of fiscal 2004. Earnings per share amounts reflect the effect of the
100% stock dividend described in Item 8 - Financial Statements - Note O -
Stockholders' Equity and Regulatory Capital - of the Notes to Consolidated
Financial Statements.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 2005 increased to $104.7 million from $96.3 million for the year ended
June 30, 2004. In general, the increase in interest and dividend income reflects
a higher level of interest-earning assets due to strong loan originations and
the slowdown in prepayments in the Company's loan and mortgage-backed securities
portfolios during fiscal 2005. The effect of the increase was slightly offset by
a lower average yield earned on assets which was the result of prepayments of
higher yielding loans and the origination of loans at lower market interest
rates during the last year. Average interest-earning assets were $1.914 billion
for the year ended June 30, 2005 compared to $1.739 billion for the prior year.
The average yield earned on interest-earning assets decreased to 5.47% for the
year ended June 30, 2005 from 5.54% for the year ended June 30, 2004.
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 2005 increased $7.5 million when compared to the prior year. The
increase in interest income on residential one- to four-family mortgage loans
was due to an increase in the average balance of residential one- to four-family
mortgage loans outstanding of $167.6 million for the year ended June 30, 2005,
when compared to the prior year, as a result of strong loan origination levels
and a slowdown in prepayments. Somewhat offsetting the increase in the average
balance of residential one- to four-family mortgage loans was a decrease in the
average yield earned on this loan portfolio to 5.30% for the year ended June 30,
2005 from 5.44% for the prior year period, reflecting the payoff or refinance of
higher yielding loans and the origination of lower yielding loans over the last
twelve months. At June 30, 2005, one- to four- family mortgage loans represented
78.5% of the total loan portfolio and 75.6% of interest income on loans.
Interest income on commercial and multi-family real estate loans decreased
$391,000 for the year ended June 30, 2005, when compared to the year ended June
30, 2004. The decrease in interest income on commercial and multi-family real
estate loans was attributable to a decrease in the average yield earned on these
loans. The average yield on commercial and multi-family real estate loans
decreased to 6.90% for the year ended June 30, 2005 compared to 7.39% for the
year ended June 30, 2004. As with other loans, the payoff of higher yielding
loans and the origination of loans at lower market interest rates resulted in a
decline in the yield on the commercial and multi-family real estate loan
portfolio. The decrease in interest income for this portfolio was partially
offset by an increase in the average outstanding balance of commercial and
multi-family real estate loans of $5.7 million for the year ended June 30, 2005,
when compared to the prior year.
Interest income on consumer loans increased $481,000 for the year ended June 30,
2005, when compared to the year ended June 30, 2004. The increase in interest
income on consumer loans for the year ended June 30, 2005 was due to an increase
38
in the average balance outstanding of this loan portfolio of $11.2 million, when
compared to the year ended June 30, 2004. The increase in interest income from
the larger portfolio of consumer loans for the year ended June 30, 2005 was
partially offset by a decrease in the average yield to 5.38% from 5.49% for the
prior year.
Interest income on investment securities and other interest-earning assets
increased $1.6 million for the year ended June 30, 2005 compared to the prior
year. The increase in interest income on these securities was attributable to an
$18.8 million increase in the average balance outstanding for the year ended
June 30, 2005, when compared to the prior year. The average yield increased to
5.46% for the year ended June 30, 2005 compared to 5.33% for the year ended June
30, 2004.
Interest income on the mortgage-backed securities portfolio decreased $561,000
for the year ended June 30, 2005 compared to the prior year. The decrease in
interest income on mortgage-backed securities for the year ended June 30, 2005
was primarily due to a decrease in the average balance outstanding of $10.5
million for the year ended June 30, 2005, when compared to the prior year. In
addition, the decrease in interest income on mortgage-backed securities was due
to a decrease in the average yield earned on this portfolio to 5.11% from 5.13%
for the year ended June 30, 2004.
Interest Expense. Interest expense increased $2.7 million for the year ended
June 30, 2005 from the year ended June 30, 2004. While the Company's cost of
funds decreased, total average deposits and borrowings increased. The average
rate on deposits and borrowings decreased to 3.33% for the year ended June 30,
2005 from 3.52% for the prior year, as a result of lower market interest rates
on other borrowings and only a slight increase in the cost of deposits. The
decrease in the cost of funds for the year ended June 30, 2005 was offset by an
increase in total average deposits and borrowings of $173.8 million, when
compared to the year ended June 30, 2004.
The average rate paid on deposits increased slightly to 2.42% for the year ended
June 30, 2005 from 2.41% for the year ended June 30, 2004. Average deposit
balances increased $151.1 million to $1.257 billion for the year ended June 30,
2005 from $1.106 billion for the prior year. The growth in deposits is partially
reflective of the addition of the four new branches opened since September 2003
and the addition of wholesale certificates of deposit. In addition, deposit
growth reflects the offering of attractive and competitive deposit products,
which are promoted through various marketing strategies.
The average cost of FHLB of New York advances increased to 5.80% for the year
ended June 30, 2005 from 5.76% for the prior year, due to the maturity of lower
costing advances. The average balance of FHLB of New York advances decreased
$64.4 million for the year ended June 30, 2005, when compared to the year ended
June 30, 2004. As a funding source to replace maturing FHLB of New York advances
and because of the slowdown in prepayments on loans, the average balance of
other borrowings for the year ended June 30, 2005 increased $87.0 million, when
compared to the prior year. The average rate paid on other borrowings decreased
to 2.80% for fiscal 2005 from 3.64% for fiscal 2004. During fiscal 2005, the
vast majority of other borrowings were borrowings with maturities within one
year; thus, the cost of these borrowings reflected the lower levels of short
term interest rates experienced during the year, when compared to fiscal 2004.
Interest expense on junior subordinated debentures increased $349,000 for the
year ended June 30, 2005, when compared to the prior year. The increase in
interest expense was due to an increase in the average cost of these borrowings
to 7.24% for the year ended June 30, 2005 from 6.42% for the year ended June 30,
2004. The average balance of junior subordinated debentures increased $44,000
during the fiscal year ended June 30, 2005.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the year ended June 30, 2005 was $43.3 million
compared to $37.6 million recorded in the prior year. Average net
interest-earning assets increased $1.2 million for the year ended June 30, 2005,
when compared to the prior year. The net interest rate spread and net interest
margin for fiscal 2005 were 2.14% and 2.26%, respectively, an increase from
2.02% and 2.16% for the year ended June 30, 2004. The net interest margin
expanded during fiscal 2005 when compared to the prior year principally due to a
slowdown in loan prepayments, growth in the loan portfolio and the repricing of
certain deposits and other borrowings.
Provision for Loan Losses. There was no provision for loan losses recorded for
the years ended June 30, 2005 and 2004, which is consistent with the maintenance
of the Company's historically low levels of non-accruing loans and loan
chargeoffs. Management believes that the current allowance for loan losses is
adequate to absorb probable losses on existing loans that may become
uncollectible. The allowance for loan losses at June 30, 2005 of $6.1 million is
relatively unchanged from the $6.2 million at June 30, 2004. The allowance for
loan losses as a percentage of non-accruing loans was 231.00% at June 30, 2005,
compared to 286.39% at June 30, 2004. Non-accruing loans were $2.6 million at
39
June 30, 2005 compared to $2.2 million at June 30, 2004. The allowance for loan
losses as a percentage of total loans at June 30, 2005 was 0.41% compared to
0.48% at June 30, 2004, primarily due to the increase in the balance of the
overall loan portfolio. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations " -Critical Accounting Policies".
Non-Interest Income. For the year ended June 30, 2005, non-interest income was
$5.0 million compared to $6.4 million for the prior year. The decrease in
non-interest income for fiscal 2005 was primarily due to decreases in service
charges and net gain on sales of loans when compared to the year ended June 30,
2004.
Service charge income for the year ended June 30, 2005 was $3.1 million compared
to $4.2 million recorded for the prior year. The decline in service charge
income for the year ended June 30, 2005 was primarily due to a decline in fees
associated with various loan prepayments and/or modifications.
During the year ended June 30, 2005, the net gain on sales of loans was $394,000
compared to $759,000 for the year ended June 30, 2004. Approximately $11.0
million of conforming, fixed rate one- to four-family residential mortgage loans
were sold into the secondary market during the 2005 fiscal year. In addition,
during the year ended June 30, 2005, the Company sold approximately $24.6
million of fixed rate one- to four-family residential mortgage loans to other
financial institutions. For the year ended June 30, 2004, there were $48.4
million and $39.0 million of such sales into the secondary market and to other
financial institutions, respectively. Furthermore, during the year ended June
30, 2004, a $3.0 million commercial real estate loan participation was sold as a
means to reduce the Company's credit exposure on a large commercial real estate
loan relationship, realizing a net gain of approximately $183,000. The reduction
in loan sales for the year ended June 30, 2005 can be attributed to a reduction
in origination of longer-term fixed rate products, as borrowers have shown
increased interest in adjustable rate and bi-weekly loans, which are retained in
portfolio.
Non-Interest Expenses. Non-interest expenses for the year ended June 30, 2005
were $24.2 million compared to $25.4 million for the prior year. The Company's
non-interest expenses as a percent of average assets decreased to 1.22% for the
year ended June 30, 2005 from 1.41% for the prior year. While fiscal 2005
expense levels reflect the end of costs associated with funding the Company's
ESOP, expenses in fiscal 2005 included a much less expensive replacement benefit
plan for the ESOP, increased advertising expense and costs associated with the
four branches opened since September 2003. In addition, costs associated with
regulatory burden, especially compliance with SOX 404, required significant
additional expenditures and are expected to remain high into fiscal 2006. The
opening of a new branch in February 2005 will also add to future non-interest
expense, particularly in the net occupancy and advertising expense categories.
For the year ended June 30, 2004, the Company recorded a $298,000 (pretax)
non-recurring charge for an additional environmental accrual, as discussed in
Item 3. Legal Proceedings.
Income Tax Expense. Income tax expense for the year ended June 30, 2005 was $8.7
million compared to $6.5 million for the year ended June 30, 2004. The effective
tax rate for the year ended June 30, 2005 was 35.9% compared to 35.2% for the
prior year. The higher effective tax rate in fiscal 2005 was primarily due to an
adjustment in the first quarter of fiscal 2005 in valuation allowances
established against state deferred tax assets.
Comparison of Operating Results for the Years Ended June 30, 2004 and June 30,
2003
General. For the year ended June 30, 2004, net income was $12.1 million, or
$0.83 per diluted share, compared to net income of $13.7 million, or $0.92 per
diluted share, for the year ended June 30, 2003. As a result of an environmental
liability, as explained in Item 3. Legal Proceedings, the Company recorded a
$298,000 (pretax) charge during the fourth quarter of fiscal 2004. For the year
ended June 30, 2003, as a result of the redemption of trust preferred
securities, the Company recognized a $1.5 million charge associated with
unamortized issuance costs related to these securities.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 2004 decreased to $96.3 million from $106.4 million for the year ended
June 30, 2003. 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
cumulative result of prepayments of higher yielding loans and the origination of
loans at lower market interest rates. Average interest-earning assets were
$1.739 billion for the year ended June 30, 2004 compared to $1.777 billion for
the prior year. The average yield earned on interest-earning assets decreased to
5.54% for the year ended June 30, 2004 from 5.98% for the year ended June 30,
2003.
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 2004 decreased $14.1 million when compared to the prior year. The
decrease in interest income on residential one- to four-family mortgage loans
was due to a decrease in the average yield earned on this loan portfolio to
5.44% for the year ended June 30, 2004 from 5.88% for the prior year period,
40
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 was due to a decrease in the
average balance of residential one- to four-family mortgage loans outstanding of
$171.9 million for the year ended June 30, 2004, when compared to the prior
year, as the result of accelerated prepayments and loan sales. At June 30, 2004,
one- to four-family mortgage loans represented 77.5% of the total loan portfolio
and 73.1% of interest income on loans.
Interest income on commercial and multi-family real estate loans decreased
$344,000 for the year ended June 30, 2004, when compared to the year ended June
30, 2003. The decrease in interest income on commercial and multi-family real
estate loans was attributable to a decrease in the average yield earned on these
loans. The average yield on commercial and multi-family real estate loans
decreased to 7.39% for the year ended June 30, 2004 compared to 7.86% for the
year ended June 30, 2003. As with other loans, the payoff of higher yielding
loans and the origination of loans at lower market interest rates resulted in a
decline in the yield of the commercial and multi-family real estate loan
portfolio. The decrease in yield for this portfolio was partially offset by an
increase in the average outstanding balance of commercial and multi-family real
estate loans of $5.5 million for the year ended June 30, 2004, when compared to
the prior year.
Interest income on consumer loans decreased $743,000 for the year ended June 30,
2004, when compared to the year ended June 30, 2003. The decrease in interest
income for this loan portfolio was reflective of the lower market interest
rates. The average yield earned on consumer loans decreased to 5.49% for the
year ended June 30, 2004 from 6.15% for the prior year. The decrease in yield on
consumer loans for the year ended June 30, 2004 was partially offset by a
$498,000 increase in the average balance outstanding of this loan portfolio,
when compared to the year ended June 30, 2003.
Interest income on investment securities and other interest-earning assets
increased $7.6 million for the year ended June 30, 2004 compared to the prior
year. The increase in interest income on these securities was attributable to a
$161.7 million increase in the average balance outstanding for the year ended
June 30, 2004, when compared to the prior year. As a partial offset to the
reduction in the average balance of loans and mortgage-backed securities due to
increased prepayments, additional investment securities were purchased. The
interest income on investment securities and other interest-earning assets for
the year ended June 30, 2004 was negatively impacted by approximately $1.0
million due to declines in the average yield earned on these securities. The
average yield decreased to 5.33% for the year ended June 30, 2004 compared to
5.69% for the year ended June 30, 2003, as called investment securities were
replaced with lower yielding investments.
Interest income on the mortgage-backed securities portfolio decreased $2.5
million for the year ended June 30, 2004 compared to the prior year. The
decrease in interest income on mortgage-backed securities for the year ended
June 30, 2004 was due to a decrease in the average yield earned on this
portfolio to 5.13% from 5.74% for the year ended June 30, 2003. In addition, the
decrease in interest income on mortgage-backed securities was due to a decrease
in the average balance outstanding of $33.0 million for the year ended June 30,
2004, when compared to the prior year, primarily due to accelerated prepayments.
Interest Expense. Interest expense decreased $4.3 million for the year ended
June 30, 2004 from the year ended June 30, 2003. The decrease in the 2004 fiscal
year was attributable to a decrease in the Company's cost of funds to an average
rate of 3.52% from 3.79% for the prior year, as a result of lower market
interest rates. The decrease in the cost of funds for the year ended June 30,
2004 was partially offset by an increase in total average deposits and
borrowings of $7.6 million, when compared to the year ended June 30, 2003.
The average rate paid on deposits decreased to 2.41% for the year ended June 30,
2004 from 2.91% for the year ended June 30, 2003. Average deposit balances
decreased $25.5 million to $1.106 billion for the year ended June 30, 2004 from
$1.131 billion for the prior year. The lower level of interest rates during the
2004 fiscal year, when compared to the prior year, resulted in a decrease in the
balance of certificates of deposit while total core deposit balances increased.
With a reduction in the Company's funding needs as a result of loan sales and
accelerated loan prepayments, maturing, higher costing certificates of deposit
were priced to allow runoff.
The average cost of FHLB of New York advances increased slightly to 5.76% for
the year ended June 30, 2004 from 5.73% for the prior year, due to the
maturities of lower yielding advances. The average balance of FHLB of New York
advances decreased $14.8 million for the year ended June 30, 2004, when compared
to the year ended June 30, 2003. For the year ended June 30, 2004, the average
balance of other borrowings increased $8.2 million, when compared to the prior
year. The
41
average rate paid on other borrowings decreased to 3.64% for fiscal 2004
compared to 4.68% for fiscal 2003. During fiscal 2004, the vast majority of
other borrowings were those with maturities within one year; thus, the cost of
these borrowings reflected the lower levels of interest rates experienced during
the year, when compared to the prior year.
Effective July 1, 2003, the Company fully adopted Financial Accounting Standards
Board Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46") as it relates to PennFed Capital Trust II and PennFed Capital Trust III,
which were formed by the Company for the purpose of issuing trust preferred
securities. Pursuant to FIN 46, these trust preferred subsidiaries are not
consolidated and their junior subordinated deferrable interest debentures are
reflected as long term borrowings. As such, interest expense for the year ended
June 30, 2004 included the costs associated with the junior subordinated
deferrable interest debentures. For the year ended June 30, 2004, the junior
subordinated deferrable interest debentures had an average balance of $42.0
million and an average cost of 6.42%.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the year ended June 30, 2004 was $37.6 million
compared to $43.4 million recorded in the prior year. Average net
interest-earning assets decreased $46.2 million for the year ended June 30,
2004, when compared to the prior year. The net interest rate spread and net
interest margin for fiscal 2004 were 2.02% and 2.16%, respectively, a decrease
from 2.19% and 2.44% for the year ended June 30, 2003. The net interest margin
was reduced during fiscal 2004 when compared to the prior year principally due
to the effect of accelerated prepayments resulting from lower market interest
rates.
Provision for Loan Losses. There was no provision for loan losses recorded for
the year ended June 30, 2004, which is consistent with the continuation of the
Company's historically low levels of non-accruing loans and loan chargeoffs.
Management believes the allowance for loan losses at June 30, 2004 was adequate
to absorb probable losses on existing loans that may become uncollectible. A
loan loss provision of $525,000 was recorded for the year ended June 30, 2003.
The allowance for loan losses at June 30, 2004 of $6.2 million is relatively
unchanged from the $6.3 million at June 30, 2003. The allowance for loan losses
as a percentage of non-accruing loans was 286.39% at June 30, 2004, compared to
373.60% at June 30, 2003. Non-accruing loans were $2.2 million at June 30, 2004
compared to $1.7 million at June 30, 2003. The allowance for loan losses as a
percentage of total loans at June 30, 2004 was 0.48% compared to 0.51% at June
30, 2003, primarily due to the increase in the balance of the overall loan
portfolio. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations " -Critical Accounting Policies".
Non-Interest Income. For the year ended June 30, 2004, non-interest income was
$6.4 million compared to $8.1 million for the prior year. The decrease in
non-interest income for fiscal 2004 was primarily due to decreases in service
charges and net gain on sales of loans partially offset by an increase in other
non-interest income, when compared to the year ended June 30, 2003.
Service charge income for the year ended June 30, 2004 was $4.2 million compared
to $5.2 million recorded for the prior year. Due to increased interest rates
during the last three quarters of the 2004 fiscal year when compared to the same
periods during the prior fiscal year, loan prepayments and modifications
decreased significantly, resulting in a decline in service charge income for the
year ended June 30, 2004.
During the year ended June 30, 2004, the net gain on sales of loans was $759,000
compared to $1.9 million for the year ended June 30, 2003. Approximately $48.4
million of conforming, fixed rate one- to four-family residential mortgage loans
were sold into the secondary market during the 2004 fiscal year. In addition,
during the year ended June 30, 2004, the Company sold approximately $39.0
million of primarily fixed rate one- to four-family residential mortgage loans
to other financial institutions. For the year ended June 30, 2003, there were
$7.7 million of such sales to other financial institutions. Approximately $154.8
million of conforming, fixed rate one- to four-family residential mortgage loans
were sold into the secondary market during the year ended June 30, 2003.
Furthermore, during the years ended June 30, 2004 and 2003, a $3.0 million and a
$4.0 million commercial real estate loan participation was sold, respectively,
as a means to reduce the Company's credit exposure on a large commercial real
estate loan relationship, realizing a net gain each year of approximately
$183,000. During the second and third quarters of the 2004 fiscal year, one- to
four-family residential loan production slowed significantly as applications for
refinances slowed due to a rise in interest rates. Due to this significant
slowdown in mortgage loan applications and as a means to alternatively invest
available cash at higher yields, in late December 2003, the Company discontinued
its loan sale strategy and began to retain originated one- to four-family
residential loans for portfolio.
Other non-interest income increased $464,000 for the year ended June 30, 2004 to
$1.4 million compared to $973,000 for the prior year. The increase in other
non-interest income for the year ended June 30, 2004 was primarily due to
$512,000 of income from the investment in BOLI. Other non-interest income for
the 2004 fiscal year also included the earnings of the unconsolidated
subsidiaries Trust II and Trust III, pursuant to FIN 46.
42
Non-Interest Expenses. Non-interest expenses for the year ended June 30, 2004
were $25.4 million compared to $29.1 million for the prior year, which included
$5.6 million of preferred securities expense. With the adoption of FIN 46, the
cost of the trust preferred securities was included in interest expense.
Excluding the effect of preferred securities expense for the prior year, the
increase in non-interest expenses for the year ended June 30, 2004 was partially
attributable to an increase in compensation expense related to the ESOP. For the
year ended June 30, 2004, the Company recorded compensation expense related to
the ESOP of $4.0 million compared to $3.1 million for the prior year, reflecting
the appreciation of the Company's stock price over the year. The majority of the
ESOP expense represented a non-cash valuation adjustment to reflect the value of
the Company's stock. The Company ceased recognizing compensation expense related
to the ESOP as of July 1, 2004, as all ESOP shares were fully allocated. In
addition, during the year ended June 30, 2004, the Company recorded a $298,000
(pretax) non-recurring charge for an additional environmental accrual, as
discussed in Item 3. Legal Proceedings. The Company's non-interest expenses as a
percent of average assets decreased to 1.41% for the year ended June 30, 2004
from 1.58% for the prior year.
Income Tax Expense. Income tax expense for the year ended June 30, 2004 was $6.5
million compared to $8.1 million for the year ended June 30, 2003. The effective
tax rate for the year ended June 30, 2004 was 35.2% compared to 37.1% for the
prior year. The decrease in the effective tax rate was primarily due to the
purchase of BOLI, for which the increase in the cash surrender value is not
subject to tax.
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.
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 a $50.0 million
overnight repricing line of credit and a $50.0 million variable rate one-month
overnight repricing line of credit from the FHLB of New York, which expire in
July 2005. The Company expects to renew these lines of credit after expiration.
Furthermore, the Company has $90.0 million of overnight variable repricing lines
of credit available from other correspondent banks. 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. At June 30, 2005, the Company had
outstanding commitments to extend credit which amounted to $130.8 million
(including $88.8 million in available lines of credit). The actual extension of
credit would result in a use of liquidity. Management believes that loan
repayments and other sources of funds will be adequate to meet the Company's
foreseeable liquidity needs. Future liquidity requirements are not expected to
be significantly different from historical experience.
The Company's cash inflows for the year ended June 30, 2005 included $36.0
million of proceeds from the sale of loans, $44.7 million of proceeds from
maturities of investment securities, principal repayments of loans and
mortgage-backed securities, a $151.4 million increase in deposits (net of
accrued interest payable) and a $48.6 million increase in other borrowings,
including short term borrowings. During the year ended June 30, 2005, the cash
provided was used to fund investing activities, which included the origination
of loans, the purchase of $30.2 million of investment securities and to fund a
$10.0 million investment in BOLI. In addition, the cash provided was used to
repay $60.0 million of maturing FHLB of New York advances and other borrowings;
to repurchase $9.9 million of outstanding common shares, net of reissuances; and
to pay cash dividends of $2.9 million.
During the year ended June 30, 2004, the Company's cash inflows included $91.4
million of proceeds from the sale of loans, $96.3 million of proceeds from
maturities of investment securities, principal repayments of loans and
mortgage-backed securities and a $93.6 million increase in deposits (net of
accrued interest payable). Additionally, the Company's cash inflows for the year
ended June 30, 2004 included a $52.1 million increase in other borrowings,
including short term
43
borrowings. During fiscal 2004, the cash provided was used to fund investing
activities, which included the origination and purchase of loans and the
purchase of $232.2 million of investment and mortgage-backed securities, as well
as for the repayment of $48.4 million of FHLB of New York advances and other
borrowings. Additionally, during the year ended June 30, 2004, the cash provided
was used to fund a $12.0 million investment in BOLI; to repurchase $11.0 million
of outstanding common shares, net of reissuances; and to pay cash dividends of
$2.7 million.
During fiscal 2003, the Company's cash inflows included $167.0 million of
proceeds from the sale of loans, $286.6 million of proceeds from maturities of
investment securities and principal repayments of loans and mortgage-backed
securities. In addition, fiscal 2003 cash inflows included a $3.3 million
increase in other short term borrowings. During the year ended June 30, 2003,
the cash provided was used to fund investing activities, which included the
origination and purchase of loans and the purchase of $457.1 million of
investment and mortgage-backed securities. Additionally, during the year ended
June 30, 2003, the cash provided was used to fund a $79.5 million decrease in
deposits (net of accrued interest payable); to repurchase $15.5 million of
outstanding common shares, net of reissuances; and to pay cash dividends of $2.8
million.
Total dividends paid for the years ended June 30, 2005, 2004 and 2003 were $0.22
per share, $0.20 per share and $0.20 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.
Off-Balance Sheet Arrangements and Contractual Obligations
In the normal course of operation, the Company engages in a variety of financial
transactions that, in accordance with U.S. generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used for general corporate purposes or for customer needs.
Corporate purpose transactions are used to help manage credit, interest rate and
liquidity risk or to optimize capital. Customer transactions are used to manage
customers' requests for funding. These financial instruments and commitments
include unused consumer lines of credit and commitments to extend credit and are
discussed in Item 8 - Financial Statements - Note N - of the Notes to
Consolidated Financial Statements.
The following table shows the contractual obligations of the Company by expected
payment period as of June 30, 2005 (in thousands). Further discussion of these
commitments is included in Item 8 - Financial Statements - Notes I and N - of
the Notes to Consolidated Financial Statements.
Less than 1 Year 3 Years More than
Total One Year to 3 Years to 5 Years 5 Years
------------------------------------------------------------
Contractual obligations:
Long term debt obligations..... $ 677,390 $ 170,447 $ 171,665 $ 166,574 $ 168,704
Operating lease and other
contractual obligations..... 6,959 1,124 2,261 1,305 2,269
------------------------------------------------------------
$ 684,349 $ 171,571 $ 173,926 $ 167,879 $ 170,973
============================================================
Long-term debt obligations include borrowings from the FHLB of New York, reverse
repurchase agreements and junior subordinated deferrable interest debentures.
The borrowings have defined terms and, under certain circumstances, are callable
at the option of the lender.
Operating leases and other contractual obligations include lease arrangements
entered into by the Company for the use of land and premises and a loan
sub-servicing contract. The Company's leases generally have escalation terms
based upon certain defined indexes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is set forth in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
"-Interest Rate Sensitivity" and "-Asset/Liability Strategy."
44
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries
We have audited the accompanying consolidated statement of financial condition
of PennFed Financial Services, Inc. and Subsidiaries (the "Company") as of June
30, 2005, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides 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, 2005, and the results of their
operations and their cash flows for the year then ended in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of PennFed
Financial Services, Inc. and Subsidiaries' internal control over financial
reporting as of June 30, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated September 12,
2005 expressed an unqualified opinion on management's assessment of, and the
effective operation of, internal control over financial reporting.
/s/ KPMG, LLP
Short Hills, New Jersey
September 12, 2005
45
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries
West Orange, New Jersey
We have audited the accompanying consolidated statement of financial condition
of PennFed Financial Services, Inc. and Subsidiaries (the "Company") as of June
30, 2004, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the two years
in the period ended June 30, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all
material respects, the financial position of PennFed Financial Services, Inc.
and Subsidiaries as of June 30, 2004, and the results of their operations and
their cash flows for each of the two years in the period ended June 30, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note A to the consolidated financial statements, the Company
fully adopted FASB Interpretation No. 46 "Consolidation of Variable Interest
Entities" as of July 1, 2003.
As discussed in Note V to the consolidated financial statements, the
consolidated statements of cash flows for the years ended June 30, 2004 and 2003
have been restated.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 27, 2004
(September 12, 2005 as to Note V)
46
Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
The Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries
We have audited management's assessment, included in the accompanying Report of
Management on Internal Control Over Financial Reporting, that PennFed Financial
Services, Inc. and Subsidiaries (the "Company") maintained effective internal
control over financial reporting as of June 30, 2005, based on criteria
established in Internal Control -Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Management of the Company
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that PennFed Financial Services, Inc.
and Subsidiaries maintained effective internal control over financial reporting
as of June 30, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also, in our
opinion, PennFed Financial Services, Inc. and Subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
June 30, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statement of
financial condition of PennFed Financial Services, Inc. and Subsidiaries as of
June 30, 2005, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity, and cash flows for the year then ended,
and our report dated September 12, 2005 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
Short Hills, New Jersey
September 12, 2005
47
Report of Management on Internal Control Over Financial Reporting
The management of PennFed Financial Services, Inc. and Subsidiaries (the
"Company") is responsible for establishing and maintaining adequate internal
control over financial reporting.
The Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. The Company's internal
control over financial reporting includes policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
the directors of the Company; (iii) and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on the financial
statements.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. All internal control systems, no matter how
well designed, have inherent limitations, including the possibility of human
error and the circumvention of overriding controls. Therefore, even effective
internal control over financial reporting can provide only reasonable assurance
with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of June 30, 2005, based on the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework. Based on our assessment we concluded
that, as of June 30, 2005, the Company's internal control over financial
reporting is effective based on those criteria.
The Company's independent registered public accounting firm that audited the
June 30, 2005 consolidated financial statements has issued a report on our
assessment of, and the effective operation of, the Company's internal control
over financial reporting as of June 30, 2005. This report appears on page 47.
/s/ Joseph L. LaMonica /s/ Claire M. Chadwick
Joseph L. LaMonica Claire M. Chadwick
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
September 12, 2005
48
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
June 30,
--------------------------
2005 2004
--------------------------
(Dollars in thousands)
Assets
Cash and amounts due from depository institutions ....................................... $ 15,220 $ 14,859
Federal funds sold ...................................................................... -- --
--------------------------
Cash and cash equivalents ............................................................ 15,220 14,859
Investment securities available for sale, at market value, amortized cost of
$4,849 and $4,672 at June 30, 2005 and 2004 .......................................... 5,011 4,720
Investment securities held to maturity, at amortized cost, market value of
$406,726 and $413,215 at June 30, 2005 and 2004 ...................................... 405,498 420,260
Mortgage-backed securities held to maturity, at amortized cost, market value of
$79,109 and $100,644 at June 30, 2005 and 2004 ....................................... 78,201 100,079
Loans held for sale ..................................................................... 4,826 --
Loans receivable, net of allowance for loan losses of
$6,050 and $6,249 at June 30, 2005 and 2004 .......................................... 1,460,654 1,287,473
Premises and equipment, net ............................................................. 20,903 21,690
Federal Home Loan Bank of New York stock, at cost ....................................... 22,391 23,773
Accrued interest receivable, net ........................................................ 9,808 10,195
Intangible assets ....................................................................... -- 1,361
Bank owned life insurance ("BOLI") ...................................................... 23,202 12,512
Other assets ............................................................................ 4,837 5,364
--------------------------
$ 2,050,551 $ 1,902,286
==========================
Liabilities and Stockholders' Equity
Liabilities:
Deposits ............................................................................. $ 1,339,491 $ 1,188,100
Federal Home Loan Bank of New York advances .......................................... 415,465 475,465
Other borrowings ..................................................................... 107,952 59,346
Junior Subordinated Deferrable Interest Debentures,
net of unamortized issuance expenses of $1,218 and $1,263 at June 30, 2005
and 2004 .......................................................................... 42,082 42,037
Mortgage escrow funds ................................................................ 10,398 9,739
Accounts payable and other liabilities ............................................... 11,109 9,200
--------------------------
Total liabilities .................................................................... 1,926,497 1,783,887
--------------------------
Commitments and Contingencies
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, 13,280,038 and
13,576,060 shares issued and outstanding at June 30, 2005 and 2004 ................ 133 9
Additional paid-in capital ........................................................... 39,092 36,866
Retained earnings .................................................................... 84,734 81,496
Accumulated other comprehensive income, net of taxes ................................. 95 28
--------------------------
Total stockholders' equity ........................................................... 124,054 118,399
--------------------------
$ 2,050,551 $ 1,902,286
==========================
See notes to consolidated financial statements.
49
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Income
For the years ended June 30,
----------------------------------------------
2005 2004 2003
----------------------------------------------
(Dollars in thousands,except per share amounts)
Interest and Dividend Income:
Interest and fees on loans ....................................... $ 75,830 $ 68,213 $ 83,409
Interest on federal funds sold ................................... -- 178 233
Interest and dividends on investment securities .................. 24,384 22,816 15,167
Interest on mortgage-backed securities ........................... 4,508 5,069 7,562
----------------------------------------------
104,722 96,276 106,371
----------------------------------------------
Interest Expense:
Deposits ......................................................... 30,356 26,634 32,870
Borrowed funds ................................................... 27,981 29,342 29,974
Junior subordinated deferrable interest debentures ............... 3,047 2,698 112
----------------------------------------------
61,384 58,674 62,956
----------------------------------------------
Net Interest and Dividend Income Before
Provision for Loan Losses ........................................ 43,338 37,602 43,415
Provision for Loan Losses ........................................... -- -- 525
----------------------------------------------
Net Interest and Dividend Income After
Provision for Loan Losses ........................................ 43,338 37,602 42,890
----------------------------------------------
Non-Interest Income:
Service charges .................................................. 3,096 4,175 5,232
Income on BOLI ................................................... 690 512 --
Net gain on sales of loans ....................................... 394 759 1,863
Net gain from real estate operations ............................. 156 58 3
Other ............................................................ 660 925 973
----------------------------------------------
4,996 6,429 8,071
----------------------------------------------
Non-Interest Expenses:
Compensation and employee benefits ............................... 12,263 14,593 13,454
Net occupancy expense ............................................ 2,319 1,894 1,692
Equipment ........................................................ 2,140 2,057 2,085
Amortization of intangible assets ................................ 1,361 1,816 1,866
Advertising ...................................................... 719 390 210
Federal deposit insurance premium ................................ 172 168 192
Preferred securities expense ..................................... -- -- 5,638
Other ............................................................ 5,197 4,512 3,983
----------------------------------------------
24,171 25,430 29,120
----------------------------------------------
Income Before Income Taxes .......................................... 24,163 18,601 21,841
Income Tax Expense .................................................. 8,669 6,543 8,107
----------------------------------------------
Net Income .......................................................... $ 15,494 $ 12,058 $ 13,734
==============================================
Weighted average number of common shares outstanding:
Basic ............................................................ 13,612,502 13,548,796 13,922,466
==============================================
Diluted .......................................................... 14,010,684 14,449,170 14,971,562
==============================================
Net income per common share:
Basic ............................................................ $ 1.14 $ 0.89 $ 0.99
==============================================
Diluted .......................................................... $ 1.11 $ 0.83 $ 0.92
==============================================
See notes to consolidated financial statements.
50
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
For the years ended June 30,
-------------------------------
2005 2004 2003
-------------------------------
(In thousands)
Net income ............................................................. $ 15,494 $ 12,058 $ 13,734
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period
on investment securities available for sale, net of tax .......... 67 (149) 159
-------------------------------
Comprehensive income ................................................... $ 15,561 $ 11,909 $ 13,893
===============================
See notes to consolidated financial statements.
51
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of
Changes in Stockholders' Equity
For the Years Ended June 30, 2005, 2004 and 2003
Employee
Serial Additional Stock
Preferred Common Paid-In Ownership
Stock Stock Capital Plan
-------------------------------------------------
(Dollars in thousands,except per share amounts)
Balance at June 30, 2002 $ -- $ 60 $ 61,717 $ (1,244)
Allocation of Employee Stock
Ownership Plan ("ESOP") stock 600
ESOP adjustment 1,869
Purchase of 1,200,000 shares
of treasury stock
Issuance of 180,954 shares
of treasury stock for options
exercised and Dividend
Reinvestment Plan ("DRP") (561)
Cash dividends of $0.20 per
common share
Increase in unrealized gain on
investment securities available
for sale, net of income taxes of $87
Net income for the year ended
June 30, 2003
--------------------------------------------------
Balance at June 30, 2003 -- 60 63,025 (644)
Allocation of ESOP stock 644
ESOP adjustment 2,659
Purchase of 792,200 shares
of treasury stock
Issuance of 692,202 shares
of treasury stock for options
exercised and DRP (3,309)
Cash dividends of $ 0.20 per
common share
Decrease in unrealized gain
on investment securities
available for sale, net of income
taxes of $(77)
Reclassification of treasury shares (51) (25,509)
Net income for the year ended
June 30, 2004
--------------------------------------------------
Balance at June 30, 2004 -- 9 36,866 --
Repurchase of 731,800
outstanding shares (6) (1,823)
Issuance of 435,778 shares of
stock for options exercised
and DRP 2 1,087
Tax benefit from stock option plan 2,962
Cash dividends of $0.22 per
common share
Increase in unrealized gain on
investment securities available
for sale, net of income taxes of $46
Two-for-one split in the
form of a 100% stock dividend 128
Net income for the year ended
June 30, 2005
--------------------------------------------------
Balance at June 30, 2005 $ -- $ 133 $ 39,092 $ --
==================================================
Accumulated
Other
Retained Comprehensive Treasury
Earnings Income Stock Total
-----------------------------------------------------
(Dollars in thousands,except per share amounts)
Balance at June 30, 2002 $ 116,547 $ 18 $ (58,337) $ 118,761
Allocation of Employee Stock
Ownership Plan ("ESOP") stock 600
ESOP adjustment 1,869
Purchase of 1,200,000 shares
of treasury stock (16,106) (16,106)
Issuance of 180,954 shares
of treasury stock for options
exercised and Dividend
Reinvestment Plan ("DRP") (48) 1,199 590
Cash dividends of $0.20 per
common share (2,772) (2,772)
Increase in unrealized gain on
investment securities available
for sale, net of income taxes of $87 159 159
Net income for the year ended
June 30, 2003
13,734 13,734
-----------------------------------------------------
Balance at June 30, 2003 127,461 177 (73,244) 116,835
Allocation of ESOP stock 644
ESOP adjustment 2,659
Purchase of 792,200 shares
of treasury stock (12,908) (12,908)
Issuance of 692,202 shares
of treasury stock for options
exercised and DRP (40) 5,259 1,910
Cash dividends of $ 0.20 per
common share (2,650) (2,650)
Decrease in unrealized gain
on investment securities
available for sale, net of income
taxes of $(77) (149) (149)
Reclassification of treasury shares (55,333) 80,893 --
Net income for the year ended
June 30, 2004 12,058 12,058
-----------------------------------------------------
Balance at June 30, 2004 81,496 28 -- 118,399
Repurchase of 731,800
outstanding shares (9,451) (11,280)
Issuance of 435,778 shares of
stock for options exercised
and DRP 247 1,336
Tax benefit from stock option plan 2,962
Cash dividends of $0.22 per
common share (2,924) (2,924)
Increase in unrealized gain on
investment securities available
for sale, net of income taxes of $46 67 67
Two-for-one split in the
form of a 100% stock dividend (128) --
Net income for the year ended
June 30, 2005 15,494 15,494
-----------------------------------------------------
Balance at June 30, 2005 $ 84,734 $ 95 $ -- $ 124,054
=====================================================
See notes to consolidated financial statements.
52
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
For the years ended June 30,
--------------------------------------
2005 2004 2003
As restated As restated
(Note V) (Note V)
--------------------------------------
(In thousands)
Cash Flows from Operating Activities:
Net income .............................................................................. $ 15,494 $ 12,058 $ 13,734
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sales of loans .............................................................. (394) (759) (1,863)
Proceeds from sales of loans held for sale .............................................. 11,154 48,667 154,811
Originations of loans held for sale ..................................................... (12,051) (42,266) (158,050)
Net gain on sales of real estate owned .................................................. (158) (57) --
Amortization of investment and mortgage-backed securities premium, net .................. 249 503 856
Depreciation and amortization ........................................................... 1,920 1,733 1,717
Provision for loan losses ............................................................... -- -- 525
Amortization of cost of stock plans ..................................................... -- 3,304 2,469
Tax benefit related to stock options .................................................... 2,962 -- --
Amortization of intangible assets ....................................................... 1,361 1,816 1,866
Amortization of premiums on loans and loan fees ......................................... 1,824 2,878 7,068
Amortization of trust preferred securities and junior subordinated debentures
issuance costs ........................................................................ 45 38 1,587
Income on BOLI .......................................................................... (690) (512) --
Increase (decrease) in deferred income tax liability .................................... 1,219 163 (1,539)
(Increase) decrease in accrued interest receivable, net of accrued interest payable ..... 329 (1,627) 552
(Increase) decrease in other assets ..................................................... 527 (590) (3,788)
Increase (decrease) in accounts payable and other liabilities ........................... 644 (8,611) 5,106
Increase (decrease) in mortgage escrow funds ............................................ 659 (752) (2,281)
Other, net .............................................................................. -- 6 --
--------------------------------------
Net cash provided by operating activities ............................................... 25,094 15,992 22,770
--------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities held to maturity ...................... 44,652 96,275 286,571
Purchases of investment securities held to maturity ..................................... (30,000) (177,140) (446,677)
Purchases of investment securities available for sale ................................... (177) (205) (201)
Proceeds from principal repayments of mortgage-backed securities ........................ 21,739 47,976 85,489
Purchases of mortgage-backed securities ................................................. -- (54,823) (10,190)
Net proceeds (outflow) from principal repayments of loans and loan originations ......... (203,896) (56,769) 198,296
Proceeds from loans sold ................................................................ 24,883 42,729 12,232
Purchases of loans ...................................................................... -- (53,034) (676)
Purchases of premises and equipment ..................................................... (1,133) (2,326) (3,222)
Net inflow from real estate owned activity .............................................. 630 84 --
Purchases of BOLI ....................................................................... (10,000) (12,000) --
Redemptions of Federal Home Loan Bank of New York stock ................................. 1,382 1,450 433
--------------------------------------
Net cash provided by (used in) investing activities ..................................... (151,920) (167,783) 122,055
--------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits ..................................................... 151,449 93,550 (79,513)
Proceeds from advances from the Federal Home Loan Bank of New York and other
borrowings ........................................................................... 29,475 24,986 --
Repayment of advances from the Federal Home Loan Bank of New York and other borrowings .. (60,000) (48,350) --
Increase in other short term borrowings ................................................. 19,131 27,066 3,330
Net proceeds from issuance of junior subordinated debentures ............................ -- -- 30,003
Redemption of trust preferred securities ................................................ -- -- (34,500)
Cash dividends paid ..................................................................... (2,924) (2,650) (2,772)
Repurchases of outstanding shares, net of reissuances ................................... (9,944) (10,998) (15,516)
--------------------------------------
Net cash provided by (used in) financing activities ..................................... 127,187 83,604 (98,968)
--------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ...................................... 361 (68,187) 45,857
Cash and Cash Equivalents, Beginning of Year .............................................. 14,859 83,046 37,189
--------------------------------------
Cash and Cash Equivalents, End of Year .................................................... $ 15,220 $ 14,859 $ 83,046
======================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ................................................................................ $ 61,510 $ 59,335 $ 63,453
======================================
Income taxes ............................................................................ $ 3,649 $ 7,105 $ 11,616
======================================
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at lower of cost or market ......... $ 28,417 $ 33,876 $ 13,047
======================================
Transfer of loans receivable to real estate owned, net .................................. $ 472 $ -- $ --
======================================
See notes to consolidated financial statements.
53
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended June 30, 2005, 2004 and 2003
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 (including the Bank). PennFed owns all of the
outstanding stock of the Bank issued on July 14, 1994. All intercompany accounts
and transactions with consolidated subsidiaries have been eliminated in
consolidation.
Use of Estimates -- The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant area in the accompanying financial statements where
estimates have an impact is in the allowance for loan losses.
Cash and Cash Equivalents -- For purposes of reporting cash flows, cash and cash
equivalents include cash, amounts due from depository institutions and Federal
funds sold.
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 accumulated other comprehensive income in
stockholders' equity. Unrealized gains and losses are accounted for on a
specific identification method. Held to maturity and available for sale
securities are periodically reviewed for impairment. The review considers the
length of time the market value has been below cost, the expectation for the
security's performance, the credit worthiness of the issuer and the Company's
ability to hold the security to maturity. A decline that is considered to be
other than temporary is recorded as a loss within other non-interest expenses in
the Consolidated Statements of Income.
In accordance with Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 140"), with certain loan sales, the Company may record an
interest-only strip ("IO"). These IO's represent the contractual right to
receive some or all of the interest due on the mortgage loans sold.
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 -- Loans are stated at unpaid principal balances, net of the
allowance for loan losses, unamortized premiums and deferred loan costs.
Interest income on loans is accrued and credited to income as earned. Loan
origination fees and premiums on purchased loans are deferred and amortized to
interest income over the life of the loan as an adjustment to the loan's yield.
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,
54
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 market
value or at the lower of cost or market 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 for impairment collectively on a portfolio basis are not considered
impaired under SFAS 114. The Company generally evaluates the collectibility of
consumer and one- to four-family mortgage loans on a total portfolio basis.
Allowance for Loan Losses -- The allowance for loan losses is established
through charges to income. 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, historical
loss experience, review of specific problem loans, current economic conditions
that may affect the borrowers' ability to pay and other factors which, in
management's judgement, deserve consideration in estimating probable credit
losses. 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.
Loan Origination Fees/Costs and Discounts and Premiums -- Nonrefundable loan
origination fees and certain direct loan origination costs are deferred. Net
deferred amounts 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 amounts
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 in interest income over the estimated life of the asset
purchased using the level-yield method.
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 anticipated 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 or increases in the estimated costs to dispose.
Unanticipated 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.
55
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Core Deposit Premium -- The premium resulting from the valuation of core
deposits arising from the acquisition discussed in Note B was amortized to
expense over the estimated average remaining life of the existing customer
deposit base acquired (10 years). As of June 30, 2005, the entire amount has
been amortized.
Bank Owned Life Insurance - The Bank has purchased Bank Owned Life Insurance
("BOLI") policies in consideration of future employee benefit costs associated
with the Supplemental Executive Retirement Plan and the Directors' Retirement
Plan as well as current benefit costs for medical insurance coverage. The BOLI
is recorded at its cash surrender value and increases in the cash surrender
value of the insurance are recorded as a component of non-interest income.
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.
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income tax expense in the period that includes the enactment
date.
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 contracts to issue common stock, such as stock
options, were exercised or resulted in the issuance of common stock. The number
of additional shares is computed using the treasury stock method.
Stock Dividend - All share information has been adjusted to reflect a
two-for-one stock split in the form of a 100% stock dividend paid on October 29,
2004. For further information, refer to Note O - Stockholders' Equity and
Regulatory Capital.
Reclassification - Certain reclassifications have been made to prior years'
financial statements to conform with current year's presentation.
Recently Adopted Accounting Standards - Effective July 1, 2003, the Company
fully adopted Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") as it relates to
PennFed Capital Trust II ("Trust II") and PennFed Capital Trust III ("Trust
III"), which were formed by the Company for the purpose of issuing trust
preferred securities in March 2001 and June 2003, respectively. Although the
required adoption date was extended, the Company elected to early adopt FIN 46,
as permitted. 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. As a
result of the adoption of FIN 46, Trust III was not consolidated at June 30,
2003 and Trust II was de-consolidated effective July 1, 2003. The full adoption
of FIN 46 did not have an overall impact on the Company's consolidated financial
condition, results of operations or cash flows. The primary effect of
de-consolidating Trust II was a change in the balance sheet classification of
the liabilities from Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Deferrable Interest Debentures to long-term borrowings. In
December 2003, FIN 46 was revised ("FIN 46R") to clarify some of the provisions
in the original FIN 46 and to exempt certain entities from its requirements. The
revisions to FIN 46 contained in FIN 46R did not have an impact on the Company's
consolidated financial condition, results of operations or cash flows.
B. Branch Acquisitions
In 1995, the Bank acquired the deposit liabilities and certain of the assets and
other liabilities of three branch offices of another financial institution. The
Bank recorded a total deposit premium intangible asset of $18,141,000 in
connection with the acquisition. For the years ended June 30, 2005, 2004 and
2003, amortization of the deposit premium intangible of $1,361,000, $1,814,000
and $1,814,000 was recorded, respectively. The deposit premium intangible was
fully amortized by June 30, 2005. At June 30, 2004, the deposit premium
intangible was $1,361,000.
56
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
C. Investment Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
-------------------------------------------------
(In thousands)
June 30, 2005
Available for Sale:
Equity securities ............................ $ 4,849 $ 162 $ -- $ 5,011
=================================================
Held to Maturity:
U.S. government agency obligations ........... $ 371,487 $ 255 $ (472) $ 371,270
Corporate bonds .............................. 1,022 214 -- 1,236
Trust preferred securities ................... 32,989 1,233 (2) 34,220
-------------------------------------------------
Total held to maturity .................... $ 405,498 $ 1,702 $ (474) $ 406,726
=================================================
June 30, 2004
Available for Sale:
Equity securities ............................ $ 4,672 $ 48 $ -- $ 4,720
=================================================
Held to Maturity:
U.S. government agency obligations ........... $ 386,134 $ 41 $ (8,565) $ 377,610
Corporate bonds .............................. 1,026 250 -- 1,276
Trust preferred securities ................... 33,100 1,370 (141) 34,329
-------------------------------------------------
Total held to maturity .................... $ 420,260 $ 1,661 $ (8,706) $ 413,215
=================================================
The amortized cost and estimated fair market value of investment securities held
to maturity at June 30, 2005, by contractual maturity, are shown below. The
expected maturity may differ from the contractual maturity because issuers may
have the right to call obligations. Available for sale securities have been
excluded from the table as they are equity securities.
June 30, 2005
------------------------
Estimated
Amortized Fair Market
Cost Value
------------------------
(In thousands)
Held to Maturity:
Maturing after five years but within ten years ........................ $ 77,866 $ 78,157
Maturing after ten years .............................................. 327,632 328,569
------------------------
Total held to maturity .............................................. $ 405,498 $ 406,726
========================
At June 30, 2005 and 2004, investment securities with a carrying value of
$189,814,000 and $138,403,000, respectively, were pledged to secure Federal Home
Loan Bank of New York advances and other borrowings.
There were no sales of investment securities for the years ended June 30, 2005,
2004 and 2003.
57
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The following tables provide gross unrealized losses and market value
for investment securities, aggregated by category and the length of time the
individual investments have been in a continuous unrealized loss position.
June 30, 2005
------------------------------------------------------------------------
Less than 12 months 12 months or more Total
------------------------------------------------------------------------
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
------------------------------------------------------------------------
(In thousands)
U.S. Government agency obligations ........... $ -- $ -- $ 101,428 $ (472) $ 101,428 $ (472)
Trust preferred securities ................... -- -- 1,080 (2) 1,080 (2)
------------------------------------------------------------------------
Total ...................................... $ -- $ -- $ 102,508 $ (474) $ 102,508 $ (474)
========================================================================
June 30, 2004
------------------------------------------------------------------------
Less than 12 months 12 months or more Total
------------------------------------------------------------------------
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
------------------------------------------------------------------------
(In thousands)
U.S. Government agency obligations ........... $ 372,614 $ (8,565) $ -- $ -- $ 372,614 $ (8,565)
Trust preferred securities ................... 2,234 (138) 1,083 (3) 3,317 (141)
------------------------------------------------------------------------
Total ...................................... $ 374,848 $ (8,703) $ 1,083 $ (3) $ 375,931 $ (8,706)
========================================================================
At June 30, 2005, the majority of the unrealized losses in the investment
portfolio were comprised of securities issued by U.S. Government agencies and
U.S. Government sponsored agencies. The Company believes the unrealized losses
represent temporary declines in value and that the market value movements in
these securities are reflective of the movement in market interest rates,
particularly given the negligible inherent credit risk for these securities.
D. Mortgage-Backed Securities
June 30,
----------------------
2005 2004
----------------------
(In thousands)
Ginnie Mae ..................................................................................... $ 151 $ 249
Freddie Mac .................................................................................... 35,221 45,526
Fannie Mae ..................................................................................... 42,529 53,860
Collateralized Mortgage Obligations/REMICs/IOs ................................................. 161 225
----------------------
78,062 99,860
Unamortized premiums, net ...................................................................... 139 219
----------------------
$ 78,201 $ 100,079
======================
The amortized cost and estimated fair market value of mortgage-backed securities
held to maturity at June 30, 2005, by contractual maturity, are shown below.
June 30, 2005
----------------------
Estimated
Amortized Fair Market
Cost Value
----------------------
(In thousands)
Maturing within one year ....................................................................... $ 6 $ 6
Maturing after one year but within five years .................................................. 2,396 2,491
Maturing after five years but within ten years ................................................. 3,152 3,295
Maturing after ten years ....................................................................... 72,647 73,317
----------------------
$ 78,201 $ 79,109
======================
58
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
There were no sales of mortgage-backed securities in the years ended June 30,
2005, 2004 and 2003.
The carrying value of mortgage-backed securities pledged were as follows:
June 30,
--------------------
2005 2004
--------------------
(In thousands)
Pledged to secure:
Federal Home Loan Bank of New York advances ........... $ 29,561 $ 39,954
Other borrowings ...................................... 15,154 34,555
Public funds on deposit ............................... 361 554
--------------------
$ 45,076 $ 75,063
====================
The following tables provide gross unrealized losses and market value for
mortgage-backed securities, aggregated by issuer and the length of time the
individual mortgage-backed securities have been in a continuous unrealized loss
position.
June 30, 2005
---------------------------------------------------------------
Less than 12 months 12 months or more Total
---------------------------------------------------------------
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
---------------------------------------------------------------
(In thousands)
Ginnie Mae ....................................... $ -- $ -- $ -- $ -- $ -- $ --
Freddie Mac ...................................... -- -- 24,443 (42) 24,443 (42)
Fannie Mae ....................................... -- -- 7,363 (68) 7,363 (68)
Collateralized Mortgage Obligations/REMICs/IOs ... -- -- -- -- -- --
---------------------------------------------------------------
Total .......................................... $ -- $ -- $31,806 $(110) $31,806 $ (110)
===============================================================
June 30, 2004
---------------------------------------------------------------
Less than 12 months 12 months or more Total
---------------------------------------------------------------
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
---------------------------------------------------------------
(In thousands)
Ginnie Mae ....................................... $ -- $ -- $ -- $ -- $ -- $ --
Freddie Mac ...................................... 28,807 (528) -- -- 28,807 (528)
Fannie Mae ....................................... 22,710 (437) -- -- 22,710 (437)
Collateralized Mortgage Obligations/REMICs/IOs ... -- -- -- -- -- --
---------------------------------------------------------------
Total .......................................... $51,517 $ (965) $ -- $ -- $51,517 $ (965)
===============================================================
At June 30, 2005, mortgage-backed securities issued by Freddie Mac and Fannie
Mae had unrealized losses noted in the above table. The Company believes the
unrealized losses represent temporary declines in value and that the market
value movements in these securities are reflective of the movement in market
interest rates, particularly given the negligible inherent credit risk for these
securities.
59
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
E. Loans Receivable and Loans Held For Sale, Net
June 30,
--------------------------
2005 2004
--------------------------
(In thousands)
First Mortgage Loans:
Conventional ................................... $1,147,798 $ 995,335
FHA insured .................................... 605 1,178
VA guaranteed .................................. 86 146
--------------------------
Total one- to four-family ...................... 1,148,489 996,659
Commercial and multi-family .................... 169,765 172,244
--------------------------
Total first mortgage loans ........................ 1,318,254 1,168,903
--------------------------
Consumer:
Second mortgages ............................... 91,147 67,538
Home equity lines of credit .................... 49,901 46,288
Other .......................................... 3,375 3,862
--------------------------
Total consumer loans .............................. 144,423 117,688
--------------------------
Total loans ....................................... 1,462,677 1,286,591
--------------------------
Add (Less):
Allowance for loan losses ...................... (6,050) (6,249)
Unamortized premium ............................ 519 655
Net deferred loan costs ........................ 8,334 6,476
--------------------------
2,803 882
--------------------------
$1,465,480 $1,287,473
==========================
At June 30, 2005, there were $4,826,000 of one- to four-family mortgage loans
included in loans held for sale and there were commitments to sell these loans.
At June 30, 2004, there were no commitments to sell loans.
Non-accruing loans at June 30, 2005 and 2004 were $2,619,000 and $2,182,000,
respectively, which represents 0.18% and 0.17%, respectively, of total loans
outstanding. The total interest income that would have been recorded for the
years ended June 30, 2005 and 2004, 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 $79,000 and $113,000, respectively.
At June 30, 2005 and 2004, there were no impaired loans.
The following is an analysis of the allowance for loan losses:
Year ended June 30,
-----------------------------
2005 2004 2003
-----------------------------
(In thousands)
Balance, beginning of year ................... $6,249 $6,284 $5,821
Provisions for loan losses ................... -- -- 525
Losses charged to allowance .................. (199) (35) (62)
-----------------------------
Balance, end of year ......................... $6,050 $6,249 $6,284
=============================
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, 2005 and 2004, the commercial and multi-family real estate loan
portfolio totaled $169,765,000 and $172,244,000, respectively. These loans are
considered by management to be of somewhat greater risk of collectibility due to
their dependency on income production. Nearly all of the Company's commercial
and multi-family real estate loans are collateralized by real estate located in
New Jersey. Commercial and multi-family real estate loans collateralized by
multi-family or mixed use properties were $47,281,000 and $47,890,000 at June
30, 2005 and 2004, respectively. In addition, at June 30, 2005 and 2004, the
commercial and multi-family real estate loan portfolio included $3,185,000 and
$1,590,000, respectively, of lines of credit secured by non-real estate business
assets. Furthermore, there were $5,439,000 and $11,001,000 of loans outstanding
at June 30, 2005 and 2004, respectively, under the accounts receivable financing
60
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
program for small and mid-sized businesses. The remaining loans in this
portfolio were collateralized by other types of non-residential, commercial real
estate properties.
Loans serviced for others totaled approximately $69,062,000 and $66,329,000 at
June 30, 2005 and 2004, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, collection activities 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 $715,000 and $1,064,000 at June 30,
2005 and 2004, respectively.
F. Premises and Equipment, Net
June 30,
--------------------
2005 2004
--------------------
(In thousands)
Land .................................................... $ 5,577 $ 5,577
Buildings and improvements .............................. 18,326 18,017
Leasehold improvements .................................. 2,316 2,139
Furniture and equipment ................................. 15,758 15,255
--------------------
41,977 40,988
Less: accumulated depreciation and amortization ......... 21,074 19,298
--------------------
$20,903 $21,690
====================
G. Real Estate Owned
June 30,
-------------------
2005 2004
-------------------
(In thousands)
Acquired by foreclosure or deed in lieu of foreclosure .. $ 50 $ 50
Allowance for losses on real estate owned ............... (50) (50)
-------------------
Real estate owned, net .................................. $ -- $ --
===================
Results of real estate operations were as follows:
Year ended June 30,
------------------------
2005 2004 2003
------------------------
(In thousands)
Net gain on sales of real estate owned ............ $158 $ 57 $ --
Holding costs, net ................................ (2) 1 3
Provision for losses on real estate owned ......... -- -- --
------------------------
Net gain from real estate operations .............. $156 $ 58 $ 3
========================
Activity in the allowance for losses on real estate owned was as follows:
Year ended June 30,
------------------------
2005 2004 2003
------------------------
(In thousands)
Balance, beginning of year ........................ $ 50 $ 82 $ 82
Provisions charged to operations .................. -- -- --
Losses charged to allowance ....................... -- (32) --
------------------------
Balance, end of year .............................. $ 50 $ 50 $ 82
========================
61
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
H. Deposits
June 30, 2005 June 30, 2004
----------------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
----------------------------------------------------------
(Dollars in thousands)
Non-interest-bearing demand .............. $ 71,769 $ 66,991
Interest-bearing demand .................. 105,011 0.95% 84,118 0.21%
Money market accounts .................... 50,251 2.59 18,501 0.66
Savings accounts ......................... 385,360 2.53 418,678 2.57
Certificates with remaining maturities of:
One year or less ....................... 438,487 2.88 351,646 2.73
Over one year to three years ........... 222,218 3.66 199,240 3.02
Over three years to five years ......... 65,252 4.15 47,725 4.07
---------- ----------
Total certificates ....................... 725,957 3.23 598,611 2.93
Accrued interest payable ................. 1,143 1,201
---------- ----------
$1,339,491 2.65% $1,188,100 2.41%
========== ==========
The aggregate amount of accounts with a denomination of $100,000 or more was
approximately $464,579,000 and $374,179,000 at June 30, 2005 and 2004,
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, 2005 June 30, 2004
----------------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
----------------------------------------------------------
(Dollars in thousands)
Within one year .......................... $ 130,000 5.24% $ 160,000 5.86%
After one year but within two years ...... 40,465 5.51 130,000 5.24
After two years but within three years ... 55,000 5.49 40,465 5.51
After three years but within four years .. -- -- 55,000 5.49
After four years but within five years ... 140,000 6.46 -- --
After five years ......................... 50,000 5.61 90,000 6.29
---------- ----------
$ 415,465 5.75% $ 475,465 5.70%
========== ==========
The FHLB of New York advances are all fixed rate borrowings collateralized
either under a Listing Only pledge agreement by one- to four-family mortgage
loans or with investment and mortgage-backed securities.
At June 30, 2005, the Company had available from the FHLB of New York an
overnight repricing line of credit and a one-month overnight repricing line of
credit, each in the amount of $50,000,000. Both credit lines renew annually and
currently expire in July 2005. Each line of credit has a variable interest rate.
At June 30, 2005, the Company had $32,350,000 of overnight borrowings from the
FHLB of New York with an interest rate of 3.49%. At June 30, 2004, there were no
overnight borrowings under either credit line. In addition, the Company had
available overnight variable repricing lines of credit with other correspondent
banks totaling $90,000,000 on an unsecured basis. There were $12,800,000 of
borrowings under these lines at June 30, 2005 with an interest rate of 3.50%.
There were $7,000,000 of borrowings under these lines at June 30, 2004 with an
interest rate of 1.56%. The Company also has a $10,000,000 unsecured revolving
line of credit. This line of credit has a variable interest rate tied to 30-day
LIBOR. At June 30, 2005, the Company had $8,341,000 of borrowings under this
line of credit with an interest rate of 4.64%. Borrowings under this line at
June 30, 2004 were $9,892,000 with an interest rate of 2.63%.
62
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 $57,414,000 and $45,240,000 and a
market value of $57,296,000 and $44,191,000 at June 30, 2005 and 2004,
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 maturity date:
June 30, 2005 June 30, 2004
----------------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
----------------------------------------------------------
(Dollars in thousands)
Within one year .......................... $ 15,000 2.88% $ 17,468 1.21%
After one year but within five years ..... 39,461 3.42 24,986 3.23
---------- ----------
$ 54,461 3.27% $ 42,454 2.40%
========== ==========
The average balance of reverse repurchase agreements for the years ended June
30, 2005 and 2004 was $61,898,000 and $22,488,000, respectively.
J. Junior Subordinated Deferrable Interest Debentures
In 2001, PennFed formed PennFed Capital Trust II ("Trust II"), which on March
28, 2001 sold $12.0 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"). Trust II used the proceeds from the sale of its trust
preferred securities and from the sale of $0.4 million of its common securities
to PennFed to purchase $12.4 million of 10.18% junior subordinated deferrable
interest debentures issued by PennFed, which are the sole assets of Trust II.
These junior subordinated deferrable interest debentures mature in 2031 and are
redeemable at any time after ten years. The obligations of PennFed related to
Trust II constitute a full and unconditional guarantee by PennFed of Trust II
obligations under its trust preferred securities. PennFed used the proceeds from
the junior subordinated deferrable interest debentures for general corporate
purposes, including a $4.2 million capital contribution to the Bank to support
growth.
In 2003, PennFed formed PennFed Capital Trust III ("Trust III"), which on June
2, 2003 sold $30.0 million of variable rate cumulative trust preferred
securities in a private transaction exempt from registration under the Act.
Trust III used the proceeds from the sale of its trust preferred securities and
from the sale of $0.9 million of its common securities to PennFed to purchase
$30.9 million of variable rate junior subordinated deferrable interest
debentures issued by PennFed, which are the sole assets of Trust III. These
junior subordinated deferrable interest debentures mature in 2033 and are
redeemable at any time after five years. The interest rate on the $30.0 million
of trust preferred securities and the $30.9 million junior subordinated
deferrable interest debentures resets quarterly and was 6.66% and 4.77% at June
30, 2005 and 2004, respectively. The obligations of PennFed related to Trust III
constitute a full and unconditional guarantee by PennFed of Trust III
obligations under its trust preferred securities. PennFed used the proceeds from
the junior subordinated deferrable interest debentures together with available
cash to redeem $34.5 million of 8.90% cumulative trust preferred securities
issued by PennFed Capital Trust I in October 1997.
63
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
K. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Deferrable Interest Debentures
In 1997, PennFed formed a wholly-owned trust subsidiary, PennFed Capital Trust I
("Trust I"). On 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
Statements of Financial Condition as Guaranteed Preferred Beneficial Interests
in the Company's Junior Subordinated Deferrable Interest Debentures. Trust I
used the proceeds from the sale of its trust preferred securities to purchase
8.90% junior subordinated deferrable interest debentures issued by PennFed. On
June 3, 2003, the Company redeemed the $34.5 million of 8.90% junior
subordinated deferrable interest debentures, which resulted in the trustee
redeeming the related trust preferred securities issued by Trust I.
Distributions payable on these trust preferred securities have historically been
included as a component of non-interest expense on the Consolidated Statements
of Income.
L. Employee Benefit Plans
401(k) 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 21 years old are eligible to participate in the Plan.
For the year ended June 30, 2005, the Plan provided a safe harbor profit sharing
contribution of $641,000. For the years ended June 30, 2004 and 2003, the Plan
provided for a discretionary Company match of employee contributions of $106,000
and $139,000, respectively. At June 30, 2005 and 2004, the Plan assets included
common stock of the Company with a market value of $926,000 and $831,000,
respectively. Effective July 1, 2005, the Company merged the Plan with the
Employee Stock Ownership Plan.
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 1,904,000 shares of
common stock issued in the Conversion. This loan has been repaid from
discretionary contributions by the Bank to the ESOP trust. The Bank made
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt, based on a ten year term and an interest rate
of 7.46%. Annual contributions to the ESOP, which were used to fund principal
and interest payments on the ESOP debt, totaled $692,000. At June 30, 2004, the
loan was paid in full and there were no unallocated shares.
For the years ended June 30, 2004 and 2003, the Bank recorded compensation
expense related to the ESOP of $4,045,000 and $3,105,000, respectively. The
compensation expense related to the ESOP included $3,453,000 and $2,606,000,
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 257,660 and 239,772 shares for the years
ended June 30, 2004 and 2003, respectively, to participants in the plan.
As noted above, effective July 1, 2005, the Company merged the ESOP with the
401(k) Plan.
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 amended to
increase the number of shares of common stock available for awards thereunder
from 2,380,000 to 3,342,492. 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
64
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
the options are established, by the Compensation Committee of the Board of
Directors. Transactions during the years ended June 30, 2005, 2004 and 2003
relating to the Option Plan are as follows:
Weighted
Average
Exercise
Options Price
----------------------
Balance, June 30, 2002 ............................ 2,397,032 $ 5.21
Granted ......................................... -- --
Exercised ....................................... (173,826) 3.40
Expired ......................................... -- --
Forfeited ....................................... -- --
----------------------
Balance, June 30, 2003 ............................ 2,223,206 5.36
Granted ......................................... -- --
Exercised ....................................... (686,962) 2.78
Expired ......................................... -- --
Forfeited ....................................... -- --
----------------------
Balance, June 30, 2004 ............................ 1,536,244 7.05
Granted ......................................... -- --
Exercised ....................................... (431,300) 3.10
Expired ......................................... -- --
Forfeited ....................................... -- --
----------------------
Balance, June 30, 2005 ............................ 1,104,944 $ 7.83
======================
All options previously granted were accounted for in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense has been recognized for the
stock options. Pro forma net income and earnings per share calculated as if the
Company had accounted for employee stock options and other stock based
compensation under the fair value method would equal the amounts presented
within the Consolidated Statements of Income for each of the three years in the
period ended June 30, 2005, as all grants had fully vested prior to June 30,
2002.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"), which requires entities to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). The cost is recognized as an
expense over the period during which the employee is required to provide service
in exchange for the award, which is usually the vesting period. As a result of
SFAS 123R, the Company will recognize the grant-date fair value of options as
compensation expense over the applicable vesting period. This accounting
treatment differs significantly from the previous accounting for fixed stock
options under APB Opinion No. 25, which generally required expense recognition
only when the exercise price of the option was less than the market price of the
underlying stock on the grant date. As required by SFAS 123R, the Company will
estimate the fair value of stock options on each grant date, using an
appropriate valuation approach such as the Black-Scholes option pricing model.
SFAS 123R applies to all awards granted after its effective date and to awards
modified, repurchased, or cancelled after that date. In April 2005, the SEC
deferred the adoption of SFAS 123R until the first fiscal year beginning after
June 15, 2005 (i.e., for the Company, the fiscal year beginning July 1, 2005).
The standard permits different transition methods of recognizing compensation
expense. The Company expects to adopt SFAS 123R by recognizing compensation
expense for (i) any new awards granted after July 1, 2005 and (ii) the portion
of any outstanding awards for which the requisite service has not been rendered
as of July 1, 2005, based on the grant-date fair value of those awards
calculated for purposes of SFAS 123R pro forma disclosures. At June 30, 2005,
the Company had no stock options outstanding for which compensation expense
would be recognized after adoption of SFAS 123R.
At June 30, 2005, 1,104,944 options were exercisable, with exercise prices
ranging from $3.97 to $8.59. At June 30, 2004 and 2003, 1,536,244 options and
2,217,206 options, respectively, were exercisable with exercise prices ranging
from $2.63 to $8.59.
65
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The following table summarizes information about stock options outstanding and
exercisable as of June 30, 2005:
Weighted
Number Average
Exercise Outstanding Remaining
Prices at June 30, 2005 Life
- --------------------------------------------------------------------
$3.97 149,940 1.06 years
$6.94 77,200 2.06
$8.41 118,504 4.08
$8.59 759,300 2.44
---------
$3.97 to $8.59 1,104,944 2.40 years
=========
Supplemental Executive Retirement Plan and Directors' Retirement Plan
The Company currently provides for a Supplemental Executive Retirement Plan
("SERP") and a Directors' Retirement Plan ("DP") for certain key executive
employees and directors. Benefits provided are based primarily on years of
service and compensation or fees. Both plans are unfunded and at June 30, 2005
and 2004, the benefit obligation of $698,000 and $387,000, respectively, is
included in Accounts payable and other liabilities in the Consolidated
Statements of Financial Condition. For both periods, the assumptions used in
calculating the benefit obligation included a 4% compensation increase rate and
a discount rate of 7%. The accounting for these postretirement benefits is in
accordance with Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions." The Company has not made any contributions to these
plans during the fiscal year ending June 30, 2005 and does not expect to make
any contributions to these plans during the next fiscal year.
Net periodic pension cost for the Company's SERP and DP included the following
components:
Year ended June 30,
-------------------------------------
2005 2004
-------------------------------------
SERP DP SERP DP
-------------------------------------
(In thousands)
Service cost .......................... $ 245 $ 43 $ 227 $ 40
Interest cost ......................... 27 5 9 2
Amortization of prior service cost .... (6) (2) (6) (2)
-------------------------------------
Net periodic pension expense .......... $ 266 $ 46 $ 230 $ 40
=====================================
Long-Term Care Insurance Program
In January 2005, Penn Federal Savings Bank (the "Bank") adopted a long-term care
insurance program to be offered on a voluntary basis to all employees, officers
and directors of the Bank. The program provides a nursing home care benefit at
$200 per day, to be adjusted for inflation. Certain officers of the Bank and
certain non-employee directors participate in this program. These participating
officers and directors will be provided with this benefit for their lifetimes at
no cost to them, with the Bank paying the related premiums over a ten-year
period. All other employees who choose to participate must pay the cost of their
participation. With policies becoming effective May 1, 2005, total expense to
the Bank for the year ended June 30, 2005 was $7,000. The other employees may
elect to pay their premiums over ten years, over twenty years or over their
lifetimes and may choose to receive the benefit for three years, for five years
or for their lifetimes.
66
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,
--------------------------------
2005 2004 2003
--------------------------------
(In thousands)
Current provision ......................... $ 7,450 $ 6,380 $ 9,646
Deferred expense (benefit) ................ 1,219 163 (1,539)
--------------------------------
Total income tax provision ................ $ 8,669 $ 6,543 $ 8,107
================================
Income taxes payable is included in Accounts payable and other liabilities in
the Consolidated Statements of Financial Condition at June 30, 2005 and 2004.
The financial statements also include a net deferred tax asset of $99,000 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, 2005 and
2004 is as follows:
June 30,
--------------------
2005 2004
--------------------
(In thousands)
Deferred tax assets:
Allowance for loan losses ............................ $ 2,468 $ 2,544
Environmental reserves ............................... 134 135
Deposit premium intangible ........................... 2,347 2,223
Depreciation ......................................... -- 170
SERP and DP accrual .................................. 285 158
New Jersey Alternative Minimum Assessment credit ..... 641 310
State net operating loss carryforward ................ 1,406 593
--------------------
Total deferred tax assets .............................. 7,281 6,133
Valuation allowance for state deferred tax assets ...... (2,063) (1,130)
--------------------
Deferred tax asset after valuation allowance ........... 5,218 5,003
--------------------
Deferred tax liabilities:
Net deferred loan costs .............................. 4,151 3,333
Depreciation ......................................... 550 --
Purchase accounting .................................. 155 155
Servicing asset ...................................... 197 138
Unrealized gain on investment securities available
for sale ........................................... 66 20
--------------------
Total deferred tax liabilities ......................... 5,119 3,646
--------------------
Net deferred tax asset ................................. $ 99 $ 1,357
====================
A reconciliation of the Federal statutory income tax provision to the effective
income tax provision is as follows:
Year ended June 30,
----------------------------
2005 2004 2003
----------------------------
(In thousands)
Income tax provision at Federal statutory rate .. $ 8,457 $ 6,510 $ 7,644
Amortization of intangible assets................ -- 1 18
State and local income tax provision ............ 417 180 598
Income on BOLI .................................. (241) (179) --
Other, net ...................................... 36 31 (153)
----------------------------
Total income tax provision ...................... $ 8,669 $ 6,543 $ 8,107
============================
Pursuant to SFAS 109, the Company is not required to provide deferred taxes on
the Bank's 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 Bank'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 Bank fails to
qualify as a bank, as provided by the Internal Revenue Code; or (3) there is a
change in federal tax law.
67
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The Company has state net operating loss carryforwards of $15.6 million which
expire in various years through 2011. The Company has provided a valuation
allowance for the state tax benefit of net operating loss carryforwards, tax
credits and other temporary differences. Management has estimated that it is
more likely than not that it will not be able to utilize these deferred state
income tax benefits.
N. Commitments and Contingencies
Lease Commitments -- At June 30, 2005, 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)
- -------------------- --------------
2006 ....................................................... $ 710
2007 ....................................................... 762
2008 ....................................................... 672
2009 ....................................................... 501
2010 ....................................................... 390
2011 and later ............................................. 2,269
------
$5,304
======
Rent expense under long-term operating leases for certain branch offices
amounted to $717,000, $472,000 and $348,000 for the years ended June 30, 2005,
2004 and 2003, respectively. Rental income of $532,000, $534,000 and $532,000
for the years ended June 30, 2005, 2004 and 2003, 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. 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 commitments to extend credit and unused
lines of credit. 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,
-----------------------
2005 2004
-----------------------
(In thousands)
Commitments to extend credit ................... $35,711 $15,997
Unused lines of credit ......................... 88,789 89,153
Commitments to sell loans ...................... 1,447 --
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.
Other Contingencies -- Penn Federal Savings Bank and ExxonMobil have been
ordered by the New Jersey Department of Environmental Protection to investigate
and remediate soil and ground water pollution that may have been generated at a
branch location that was formerly a gasoline service station. Penn Federal
Savings Bank and ExxonMobil have entered into a cost sharing arrangement under
which ExxonMobil will supervise the investigation and remediation and the cost
will be shared equally. Based on information then available, the Company
recorded a $298,000 (pretax) charge during the fourth quarter of fiscal 2004 to
accrue its share of the estimated cost. At June 30, 2005, an environmental
liability of $328,000 was included in Accounts payable and other liabilities on
the Company's Consolidated Statements of Financial Condition. Management
believes the total current liability of $328,000 represents the probable
liability at this time.
68
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The Company is a defendant in certain claims and legal actions arising in the
ordinary course of business. At the present time, management does not anticipate
losses on any of these claims or actions which would have a material adverse
effect on the accompanying consolidated financial statements.
O. Stockholders' Equity and Regulatory Capital
On September 29, 2004, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend, payable on October 29, 2004 to
common stockholders of record as of October 15, 2004. All share and share
related amounts reflect the effect of the stock dividend.
During the year ended June 30, 2005, the Company repurchased 731,800 shares of
its outstanding common stock at prices ranging from $13.30 to $17.25 per share,
for a total cost of $11,280,000. During the year ended June 30, 2004, the
Company repurchased 792,200 shares of its outstanding common stock at prices
ranging from $13.84 to $18.03 per share, for a total cost of $12,908,000. During
the year ended June 30, 2003, the Company repurchased 1,200,000 shares of its
outstanding common stock. The prices paid for the repurchased shares ranged from
$12.68 to $14.15 per share, for a total cost of $16,106,000. During fiscal 2004,
the Company changed its state of incorporation from Delaware to Maryland. Under
the laws of the State of Maryland, shares repurchased are not considered
treasury stock. Rather, the shares acquired constitute authorized but unissued
shares. Accordingly, as of June 30, 2004, the Company has reclassified the cost
of treasury stock by reducing common stock, additional paid-in capital and
retained earnings based on the proceeds received for stock in the initial public
offering.
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, 2005, 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.
69
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The Bank's regulatory 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, 2005
Tangible capital, and ratio to
adjusted total assets ...................... $169,765 8.28% $ 30,750 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets ...................... $169,765 8.28% $ 82,001 4.00% $102,501 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets ....................... $169,765 15.29% N/A N/A $ 66,614 6.00%
Risk-based capital, and ratio to
risk-weighted assets ....................... $175,880 15.84% $ 88,819 8.00% $111,024 10.00%
As of June 30, 2004
Tangible capital, and ratio to
adjusted total assets ...................... $163,676 8.61% $ 28,509 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets ...................... $163,676 8.61% $ 76,024 4.00% $ 95,029 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets ....................... $163,676 16.24% N/A N/A $ 60,468 6.00%
Risk-based capital, and ratio to
risk-weighted assets ....................... $169,926 16.86% $ 80,624 8.00% $100,781 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 rates
or a downturn in the economy in areas where the Bank has most of its loans,
could adversely affect future earnings and, consequently, the ability of the
Bank to meet its future minimum capital requirements.
The previous table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB").
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 any calendar year equal to 100% of
calendar year-to-date net income plus retained net income for the two previous
calendar 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, 2005, the Bank
could have paid dividends totaling approximately $1.0 million.
70
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
P. Computation of Earnings Per Share ("EPS")
The computation of EPS is presented in the following table. All share and share
related amounts reflect the effect of a stock dividend described in Note O -
Stockholders' Equity and Regulatory Capital.
For the year ended June 30,
------------------------------------------------
2005 2004 2003
------------------------------------------------
(Dollars in thousands, except per share amounts)
Net income ................................................. $ 15,494 $ 12,058 $ 13,734
===============================================
Number of shares outstanding:
Weighted average shares issued and outstanding ............. 13,612,502 13,645,770 14,270,450
Less: Average shares held by the ESOP ...................... -- 1,904,000 1,904,000
Plus: ESOP shares released or committed to be released ..... -- 1,807,026 1,556,016
-----------------------------------------------
Average basic shares ....................................... 13,612,502 13,548,796 13,922,466
Plus: Average common stock equivalents ..................... 398,182 900,374 1,049,096
-----------------------------------------------
Average diluted shares ..................................... 14,010,684 14,449,170 14,971,562
===============================================
Earnings per common share:
Basic ................................................... $ 1.14 $ 0.89 $ 0.99
===============================================
Diluted ................................................. $ 1.11 $ 0.83 $ 0.92
===============================================
71
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Q. Disclosure About Fair Value of Financial Instruments
The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 2005 and 2004 were as follows:
June 30, 2005 June 30, 2004
-------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------------
(In thousands)
Financial assets:
Cash and cash equivalents .............................. $ 15,220 $ 15,220 $ 14,859 $ 14,859
Investment securities .................................. 410,509 411,737 424,980 417,935
Mortgage-backed securities ............................. 78,201 79,109 100,079 100,644
FHLB of New York stock ................................. 22,391 22,391 23,773 23,773
-------------------------------------------------------
Total cash and investments ............................. 526,321 528,457 563,691 557,211
-------------------------------------------------------
Loans held for sale .................................... 4,826 4,864 -- --
Loans receivable, less allowance for loan losses ....... 1,460,654 1,459,988 1,287,473 1,283,861
-------------------------------------------------------
Total loans ............................................ 1,465,480 1,464,852 1,287,473 1,283,861
Accrued interest receivable, net ....................... 9,808 9,808 10,195 10,195
-------------------------------------------------------
Total financial assets .................................... $2,001,609 $2,003,117 $1,861,359 $1,851,267
=======================================================
Financial liabilities:
Deposits ............................................... $1,339,491 $1,339,483 $1,188,100 $1,189,739
FHLB of New York advances .............................. 415,465 443,927 475,465 509,568
Other borrowings ....................................... 107,952 107,566 59,346 59,283
Junior subordinated deferrable interest debentures ..... 42,082 45,338 42,037 43,358
Mortgage escrow funds .................................. 10,398 10,398 9,739 9,739
-------------------------------------------------------
Total financial liabilities ............................... $1,915,388 $1,946,712 $1,774,687 $1,811,687
=======================================================
June 30, 2005 June 30, 2004
-------------------------------------------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------------
(In thousands)
Off-balance sheet financial instruments:
Commitments to extend credit .............................. $ 35,711 $ -- $ 15,997 $ --
Unused lines of credit .................................... 88,789 -- 89,153 --
Commitments to sell loans ................................. 1,447 -- -- --
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.
FHLB 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 actual committed sales 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.
72
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 - For this asset, the carrying value 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, 2005 and 2004. 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.
FHLB 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.
Junior Subordinated Deferrable Interest Debentures -- For these securities, fair
value is based on quoted market prices for similar securities.
Mortgage Escrow Funds -- For these short-term liabilities, the carrying amount
is a reasonable estimate of fair value.
Commitments to Extend Credit and Unused Lines of Credit -- The fair value of
commitments is estimated to be zero since the fees collected on commitments to
extend credit approximates the amount of costs incurred. No estimated fair value
is presented for unused lines of credit because the rates associated with these
lines are market rates.
Commitments to Sell Loans - The fair value of commitments to sell loans is
estimated based on the change in the interest rate environment between the rate
lock date and the Statement of Financial Condition date. The estimated fair
value is not significant.
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 made on 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,
----------------------
2005 2004
----------------------
(In thousands)
Balance, beginning of year ............................ $ 7,102 $ 8,564
New loans granted ..................................... 2,419 951
Repayments/reductions ................................. (1,517) (2,413)
----------------------
Balance, end of year .................................. $ 8,004 $ 7,102
======================
In addition to the above amount of loans, at June 30, 2005 and 2004, there was
$45,000 and $46,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.
73
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
S. Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary
Assets" ("SFAS 153"), which amends APB Opinion No. 29, "Accounting for
Nonmonetary Transactions." SFAS 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in APB
Opinion No. 29 and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 will be effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS 153 is not expected to have an impact on the Company's
consolidated financial condition, results of operations or cash flows.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections - a replacement of APB Opinion
No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 changes the requirements
for the accounting for and reporting of a voluntary change in accounting
principle. SFAS 154 requires retrospective application to prior periods'
financial statements of such changes, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. When
it is impracticable to determine the period-specific effects of an accounting
change on one or more individual prior periods presented, SFAS 154 requires that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the
opening balance of retained earnings for that period rather than being reported
in an income statement. When it is impracticable to determine the cumulative
effect of applying a change in accounting principle to all prior periods, SFAS
154 requires that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. SFAS 154 will be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of SFAS 154 is not expected to have an
impact on the Company's consolidated financial condition, results of operations
or cash flows.
74
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, 2005 and 2004 and for the years ended June 30, 2005, 2004
and 2003 and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto.
Condensed Statements of Financial Condition
June 30,
---------------------
2005 2004
---------------------
(In thousands)
Assets
Cash ............................................................................ $ 22 $ 27
Intercompany overnight investment ............................ .................. -- 640
---------------------
Total cash and cash equivalents .............................................. 22 667
Investment securities held to maturity, at amortized cost ....................... 10,899 10,924
Investment in subsidiaries ...................................................... 171,530 166,572
Prepaid trust preferred securities expenses ..................................... 1,218 1,263
Accrued interest receivable ..................................................... 282 293
Other assets .................................................................... 2,720 1,409
---------------------
$ 186,671 $ 181,128
=====================
Liabilities and Stockholders' Equity
Junior subordinated deferrable interest debentures .............................. $ 43,300 $ 43,300
Intercompany loan payable ....................................................... 8,400 8,400
Unsecured revolving line of credit .............................................. 8,341 9,892
Accrued interest payable ........................................................ 202 167
Other accrued expenses and other liabilities .................................... 2,374 970
Stockholders' equity ............................................................ 124,054 118,399
---------------------
$ 186,671 $ 181,128
=====================
Condensed Statements of Income
Year ended June 30,
-------------------------------
2005 2004 2003
-------------------------------
(In thousands)
Income
Interest income on intercompany balances ............................... $ -- $ 49 $ 98
Interest income on investment securities ............................... 950 926 979
Other income ........................................................... 1 -- 1
-------------------------------
951 975 1,078
Expenses
Interest expense on junior subordinated deferrable interest
debentures .......................................................... 3,002 2,654 4,291
Interest on intercompany loan .......................................... 498 402 431
Interest on unsecured revolving line of credit ......................... 289 143 116
Other expenses ......................................................... 791 578 2,092
-------------------------------
4,580 3,777 6,930
-------------------------------
Loss before undistributed net income of subsidiaries ................... (3,629) (2,802) (5,852)
Equity in undistributed net income of subsidiaries ..................... 17,884 13,907 17,583
-------------------------------
Income before income taxes ............................................. 14,255 11,105 11,731
Income tax benefit ..................................................... (1,239) (953) (2,003)
-------------------------------
Net income ............................................................. $ 15,494 $ 12,058 $ 13,734
===============================
75
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Condensed Statements of Cash Flows
Year ended June 30,
-------------------------------
2005 2004 2003
-------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income ............................................................. $ 15,494 $ 12,058 $ 13,734
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed net income of subsidiaries ............... (17,884) (13,907) (17,583)
Amortization of investment securities premium .................... 25 23 21
Increase (decrease) in accrued interest payable, net of accrued
interest receivable ........................................... 46 (77) (415)
(Increase) decrease in prepaid trust preferred securities
expense and other assets ...................................... (1,266) (584) 1,076
Increase (decrease) in other accrued expenses and
other liabilities ............................................. 1,404 624 (1,350)
-------------------------------
Net cash used in operating activities ......................... (2,181) (1,863) (4,517)
-------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities ................... -- 1,605 395
Purchases of investment securities held to maturity ................. -- (2,000) --
Investment in Trust I ............................................... -- -- 1,602
Investment in Trust III ............................................. -- -- (928)
Dividends received from subsidiary bank ............................. 15,955 12,478 21,334
Proceeds from principal repayment of ESOP loan ...................... -- 644 600
-------------------------------
Net cash provided by investing activities ..................... 15,955 12,727 23,003
-------------------------------
Cash Flows From Financing Activities:
Increase (decrease) in unsecured revolving line of credit ........... (1,551) 2,598 3,330
Increase in intercompany loan ....................................... -- 300 1,000
Net proceeds from issuance of junior subordinated deferrable
interest debentures .............................................. -- -- 30,928
Redemption of junior subordinated deferrable interest debentures .... -- -- (35,568)
Cash dividends paid ................................................. (2,924) (2,650) (2,772)
Repurchases of outstanding shares, net of reissuances ............... (9,944) (10,998) (15,516)
-------------------------------
Net cash used in financing activities ......................... (14,419) (10,750) (18,598)
-------------------------------
Net increase (decrease) in cash and cash equivalents ................... (645) 114 (112)
Cash and cash equivalents, beginning of year ........................... 667 553 665
-------------------------------
Cash and cash equivalents, end of year ................................. $ 22 $ 667 $ 553
===============================
76
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
U. Quarterly Financial Data (Unaudited)
Quarter ended
--------------------------------------------------
2004 2005
--------------------------------------------------
September 30 December 31 March 31 June 30
--------------------------------------------------
(In thousands, except per share amounts)
Total interest and dividend income ............................... $ 25,805 $ 25,999 $ 26,167 $ 26,751
Total interest expense ........................................... 14,734 15,060 15,300 16,290
--------------------------------------------------
Net interest and dividend income ................................. 11,071 10,939 10,867 10,461
Provision for loan losses ........................................ -- -- -- --
Non-interest income .............................................. 1,100 1,355 1,244 1,297
Non-interest expenses ............................................ 6,119 6,181 6,143 5,728
Income tax expense ............................................... 2,264 2,133 2,114 2,158
--------------------------------------------------
Net income .................................................... $ 3,788 $ 3,980 $ 3,854 $ 3,872
==================================================
Net income per common share:
Basic ......................................................... $ 0.28 $ 0.29 $ 0.28 $ 0.29
==================================================
Diluted ....................................................... $ 0.27 $ 0.28 $ 0.28 $ 0.28
==================================================
Quarter ended
--------------------------------------------------
2003 2004
--------------------------------------------------
September 30 December 31 March 31 June 30
--------------------------------------------------
(In thousands, except per share amounts)
Total interest and dividend income ............................... $ 23,741 $ 23,658 $ 24,326 $ 24,551
Total interest expense ........................................... 14,804 14,620 14,598 14,652
--------------------------------------------------
Net interest and dividend income ................................. 8,937 9,038 9,728 9,899
Provision for loan losses ........................................ -- -- -- --
Non-interest income .............................................. 2,010 1,564 1,374 1,481
Non-interest expenses ............................................ 5,699 6,257 6,637 6,837
Income tax expense ............................................... 1,875 1,464 1,499 1,705
--------------------------------------------------
Net income .................................................... $ 3,373 $ 2,881 $ 2,966 $ 2,838
==================================================
Net income per common share:
Basic ......................................................... $ 0.25 $ 0.21 $ 0.22 $ 0.21
==================================================
Diluted ....................................................... $ 0.23 $ 0.20 $ 0.21 $ 0.20
==================================================
V. Restatement of Prior Years Consolidated Statements of Cash Flow
The Consolidated Statements of Cash Flows for the years ended June 30, 2004 and
2003 have been restated to correct the classification of sales of loans
initially originated by the Company for retention in its portfolio (as opposed
to loans originated for the purpose of resale). Such cash flows had been
accounted for in the Consolidated Statements of Cash Flows as operating
activities and should have been reported as investing activities in accordance
with Statement of Financial Accounting Standards No. 102, "Statement of Cash
Flows, Exemption of Certain Enterprises and Classification of Cash Flows from
Certain Securities Acquired for Resale."
The following table sets forth the data as previously reported in the Company's
fiscal 2004 Form 10-K and the data as adjusted:
For the year ended June 30, 2004 For the year ended June 30, 2003
As Previously As Previously
Reported As Restated Reported As Restated
------------- ----------- ------------- -----------
(In thousands)
Cash Flows from Operating Activities:
Proceeds from sales of loans held for sale $ 88,214 $ 48,667 $ 162,873 $ 154,811
Originations of loans held for sale -- (42,266) -- (158,050)
Net cash provided by operating activities 97,805 15,992 188,882 22,770
Cash Flows from Investing Activities:
Net proceeds (outflow) from loan originations net
of principal repayments of loans (99,034) (56,769) 40,246 198,296
Proceeds from loans sold 3,181 42,729 4,170 12,232
Net cash provided by (used in) investing activities (249,596) (167,783) (44,057) 122,055
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale,
at cost 76,142 33,876 171,097 13,047
77
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
No information is required to be disclosed under this item.
Item 9A. 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-15(e) under the Securities Exchange Act of 1934 (the "Act")) was
carried out as of June 30, 2005 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. The Company's Chief Executive
Officer and Chief Financial Officer concluded that, as of June 30, 2005, the
Company's disclosure controls and procedures were 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:
During the quarter ended June 30, 2005, no change occurred in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
The Company does not expect that its disclosure controls and procedures and
internal control over financial reporting will prevent all error and all fraud.
A control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met. Because of the inherent limitations in all control procedures, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls may be circumvented by the individual acts of some
persons, by collusion of two or more people, or by override of the control. The
design of any control procedure also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be detected.
(c) Management's Annual Report on Internal Control Over Financial Reporting:
The annual report of management on the effectiveness of the Company's internal
control over financial reporting and the attestation report thereon issued by
the Company's independent registered public accounting firm are set forth under
"Report of Management on Internal Control Over Financial Reporting" and "Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting" under Item 8. Financial Statements and Supplementary Data.
Item 9B. Other Information
No information is required to be disclosed under this item.
78
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 28, 2005, except for
information contained under the headings "Audit Committee Reports,"
"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 28, 2005, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Code of Ethics
The Registrant has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer,
and persons performing similar functions, and to all of its other employees and
directors. A copy of the Registrant's code of ethics is available on its
Internet website, at www.pennfsb.com, under "Investor Relations" on the
"Corporate Governance" page of the website.
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 28, 2005, 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 and
Related Stockholder Matters
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 28, 2005, 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.
79
The following table sets forth information as of June 30, 2005 with respect to
compensation plans under which shares of Company common stock were issued.
Equity Compensation Plan Information
Number of Shares
Remaining Available
for Future Issuance
Under Equity
Number of Shares to Compensation Plans
be Issued Upon Weighted Average (Excluding Shares
Exercise of Exercise Price of Reflected in the
Plan Category Outstanding Options Outstanding Options First Column)
- ---------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by stockholders(1) ... 1,104,944 $ 7.83 --
Equity compensation plans not approved by stockholders .. N/A N/A N/A
Total ................................................... 1,104,944 $ 7.83 --
- ----------
(1) The only equity compensation plan approved by stockholders under which
there are outstanding awards is the Company's 1994 Stock Option and
Incentive Plan.
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
28, 2005, 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 14. Principal Accountants Fees and Services
Information concerning principal accountants fees and services is incorporated
herein by reference from the Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on October 28, 2005, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
80
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements:
The following information appearing in Part II, Item 8 of this Form 10-K
is incorporated herein by reference.
Reports of Independent Registered Public Accounting Firms
Consolidated Statements of Financial Condition at June 30, 2005 and
2004
Consolidated Statements of Income for the Years Ended June 30, 2005,
2004 and 2003
Consolidated Statements of Comprehensive Income for the Years Ended
June 30, 2005, 2004 and 2003
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years Ended June 30,
2005, 2004 (restated) and 2003 (restated)
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.
81
(a) (3) Exhibits:
Exhibit Index
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) Articles of Incorporation (a)
3(ii) Bylaws (a)
4 Instruments defining the rights of security holders, including indentures (b)
4(i) Stockholder Protection Rights Agreement (c)
10 Material contracts:
(i) 1994 Amended and Restated Stock Option and Incentive Plan (d)
(ii) Employment Agreement with Joseph L. LaMonica (e)
(iii) Employment Agreement with Patrick D. McTernan (e)
(iv) Employment Agreement with Jeffrey J. Carfora (e)
(v) Employment Agreement with Claire M. Chadwick (e)
(vi) Employment Agreement with Maria F. Magurno (e)
(vii) Supplemental Executive Retirement Plan (f)
(a) First Amendment to the Supplemental Executive Retirement Plan (g)
(b) Second Amendment to the Supplemental Executive Retirement Plan (h)
(viii) Amended and Restated Supplemental Executive Death Benefit Plan (h)
(ix) Outside Directors' Retirement Plan (f)
(x) Form of Consulting Agreement (f)
(xi) Description of Named Executive Officer Salary and Bonus Arrangements 10.1
(xii) Description of Director Fees 10.2
(xiii) Description of Long-Term Care Insurance Program 10.3
11 Statement re: computation of per share earnings (i)
12 Statements re: computation ratios 12
14 Code of Ethics (j)
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to vote of security holders None
23 Consents of independent registered public accounting firm and counsel
(a) Consent of KPMG LLP 23.1
(b) Consent of Deloitte & Touche LLP 23.2
24 Power of Attorney None
31.1 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a) (Chief Executive Officer) 31.1
31.2 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a) (Chief Financial Officer) 31.2
32 Certifications Required by Section 1350 of Title 18 of the United States Code 32
99 Additional Exhibits Not applicable
- ----------
(a) Included as an appendix to the Company's definitive proxy statement under
the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on September 22, 2003 (File No. 0-24040). Such
previously filed document is hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
(b) The Company hereby agrees to furnish the Securities and Exchange
Commission, upon request, the instruments defining the rights of the
holders of each issue of the Company's long-term debt.
(c) 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, 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 and as further
amended on Form 8-A/A-3 (the "Form 8-A/A-3") filed with the Securities and
Exchange Commission on March 1, 2004. The First Amendment to the
Stockholders Protection Rights Agreement is filed as an exhibit to the
Form 8-A/A, the Second Amendment to the Stockholders Protection Rights
Agreement is filed as an exhibit to the
82
Form 8-A/A-2, the Third Amendment to the Stockholder Protection Rights
Agreement is filed as an exhibit to the Current Report on Form 8-K filed
by the Company with the Securities and Exchange Commission on October 29,
2003 and the Fourth Amendment to the Stockholder Protection Rights
Agreement is filed as an exhibit to the Form 8-A/A-3. These documents are
hereby incorporated by reference in accordance with Item 601 of Regulation
S-K.
(d) 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, 2001 (File No. 0-24040). Such previously filed document is
hereby incorporated by reference in accordance with Item 601 of Regulation
S-K.
(e) Filed as an exhibit to the Company's Current Report on Form 8-K under the
Securities Exchange Act of 1934, filed with the Securities and Exchange
Commission on September 15, 2004 (File No. 0-24040). Such previously filed
document is hereby incorporated by reference in accordance with Item 601
of Regulation S-K.
(f) 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 22, 2003 (File No. 0-24040). Such previously filed document is
hereby incorporated by reference in accordance with Item 601 of Regulation
S-K.
(g) 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 17, 2004 (File No. 0-24040). Such previously filed document is
hereby incorporated by reference in accordance with Item 601 of Regulation
S-K.
(h) Filed as exhibits to the Company's Current Report on Form 8-K under the
Securities Exchange Act of 1934, filed with the Securities and Exchange
Commission on February 14, 2005 (File No. 0-24040). Such previously filed
document is hereby incorporated by reference in accordance with Item 601
of Regulation S-K.
(i) Refer to Note P - Computation of Earnings Per Share ("EPS") in the Notes
to Consolidated Financial Statements included in the June 30, 2005 Form
10-K.
(j) Available on the Company's website at www.pennfsb.com.
83
SIGNATURES
Pursuant to the requirements of 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 13, 2005 By: /s/ Joseph L. LaMonica
Joseph L. LaMonica
President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities 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 13, 2005 Date: September 13, 2005
By: /s/ Patrick D. McTernan By: /s/ Amadeu L. Carvalho
---------------------------------------- -----------------------
Patrick D. McTernan Amadeu L. Carvalho
Senior Executive Vice President, General Director
Counsel, Secretary and Director
Date: September 13, 2005 Date: September 13, 2005
By: /s/ Marvin D. Schoonover By: /s/ Mario Teixeira, Jr.
---------------------------------------- -----------------------
Marvin D. Schoonover Mario Teixeira, Jr.
Director Director
Date: September 13, 2005 Date: September 13, 2005
By: /s/ Claire M. Chadwick
----------------------------------------
Claire M. Chadwick
Executive Vice President,
Chief Financial Officer and Controller
(Principal Financial and Accounting Officer)
Date: September 13, 2005
84