UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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
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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 Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
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(Address of principal executive offices) (Zip Code)
(973) 669-7366
----------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X|. NO |_|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the 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|.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES |_|. NO |_|.
As of November 3, 2005, there were issued and outstanding 13,130,956
shares of the Registrant's Common Stock.
1
PennFed Financial Services, Inc. and Subsidiaries
Form 10-Q
Contents of Report
Page
Number
------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. - Financial Statements
Consolidated Statements of Financial Condition - September 30, 2005 (unaudited) and June 30, 2005 3
Consolidated Statements of Income (unaudited) - For the three months ended September 30, 2005
and 2004 4
Consolidated Statements of Comprehensive Income (unaudited) - For the three months ended
September 30, 2005 and 2004 5
Consolidated Statements of Changes in Stockholders' Equity (unaudited) - For the three months ended
September 30, 2005 and 2004 6
Consolidated Statements of Cash Flows (unaudited) - For the three months ended September 30, 2005
and 2004 7
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. - Controls and Procedures 22
PART II - OTHER INFORMATION
- ---------------------------
Item 1. - Legal Proceedings 24
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. - Defaults Upon Senior Securities 24
Item 4. - Submission of Matters to a Vote of Security Holders 24
Item 5. - Other Information 24
Item 6. - Exhibits 24
SIGNATURES 25
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EXHIBITS
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Exhibit Index 26
Exhibit 31.1 - Certification Required by Securities Exchange Act of 1934 Rule 13a - 14 (a)
(Chief Executive Officer) 28
Exhibit 31.2 - Certification Required by Securities Exchange Act of 1934 Rule 13a - 14 (a)
(Chief Financial Officer) 29
Exhibit 32 - Certifications Required by Section 1350 of Title 18 of the United States Code 30
2
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
September 30, June 30,
2005 2005
------------- -----------
(unaudited) (audited)
(Dollars in thousands)
ASSETS
Cash and cash equivalents ........................................................... $ 17,838 $ 15,220
Investment securities available for sale, at market value, amortized cost of
$4,897 and $4,849 at September 30, 2005 and June 30, 2005 ........................ 4,965 5,011
Investment securities held to maturity, at amortized cost, market value of
$417,141 and $406,726 at September 30, 2005 and June 30, 2005 .................... 420,447 405,498
Mortgage-backed securities held to maturity, at amortized cost, market value
of $73,249 and $79,109 at September 30, 2005 and June 30, 2005 ................... 73,270 78,201
Loans held for sale ................................................................. 937 4,826
Loans receivable, net of allowance for loan losses of $5,916 and $6,050
at September 30, 2005 and June 30, 2005 .......................................... 1,522,194 1,460,654
Premises and equipment, net ......................................................... 20,350 20,903
Federal Home Loan Bank of New York stock, at cost ................................... 24,586 22,391
Accrued interest receivable, net .................................................... 10,753 9,808
Bank owned life insurance ("BOLI") .................................................. 23,418 23,202
Other assets ........................................................................ 4,929 4,837
------------- -----------
$ 2,123,687 $ 2,050,551
============= ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits ......................................................................... $ 1,364,002 $ 1,339,491
Federal Home Loan Bank of New York advances ...................................... 425,465 415,465
Other borrowings ................................................................. 148,134 107,952
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $1,207 and $1,218 at September 30, 2005 and
June 30, 2005 ................................................................. 42,093 42,082
Mortgage escrow funds ............................................................ 10,424 10,398
Accounts payable and other liabilities ........................................... 7,699 11,109
------------- -----------
Total liabilities ................................................................ 1,997,817 1,926,497
------------- -----------
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, 13,211,256
and 13,280,038 shares issued and outstanding at September 30, 2005
and June 30, 2005 ............................................................. 132 133
Additional paid-in capital ....................................................... 38,921 39,092
Retained earnings ................................................................ 86,776 84,734
Accumulated other comprehensive income, net of taxes ............................. 41 95
------------- -----------
Total stockholders' equity ....................................................... 125,870 124,054
------------- -----------
$ 2,123,687 $ 2,050,551
============= ===========
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended September 30,
--------------------------------
2005 2004
----------- -----------
(unaudited) (unaudited)
(Dollars in thousands, except
per share amounts)
Interest and Dividend Income:
Interest and fees on loans ................................ $ 20,456 $ 18,477
Interest and dividends on investment securities ........... 6,263 6,099
Interest on mortgage-backed securities .................... 964 1,229
----------- -----------
27,683 25,805
----------- -----------
Interest Expense:
Deposits .................................................. 9,257 7,012
Borrowed funds ............................................ 7,375 7,014
Junior subordinated deferrable interest debentures ........ 859 708
----------- -----------
17,491 14,734
----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses ........................................... 10,192 11,071
Provision for Loan Losses .................................... -- --
----------- -----------
Net Interest and Dividend Income After Provision
for Loan Losses ........................................... 10,192 11,071
----------- -----------
Non-Interest Income:
Fees and service charges .................................. 3,470 726
Income on BOLI ............................................ 216 128
Net gain on sales of loans ................................ 122 24
Net loss from real estate operations ...................... (3) --
Other ..................................................... 181 222
----------- -----------
3,986 1,100
----------- -----------
Non-Interest Expenses:
Compensation and employee benefits ........................ 3,259 3,193
Extinguishment of debt .................................... 1,351 --
Equipment ................................................. 971 535
Net occupancy expense ..................................... 585 539
Advertising ............................................... 134 167
Federal deposit insurance premium ......................... 42 41
Amortization of intangible assets ......................... -- 453
Other ..................................................... 1,411 1,191
----------- -----------
7,753 6,119
----------- -----------
Income Before Income Taxes ................................... 6,425 6,052
Income Tax Expense ........................................... 2,293 2,264
----------- -----------
Net Income ................................................... $ 4,132 $ 3,788
=========== ===========
Weighted average number of common shares outstanding:
Basic ..................................................... 13,263,506 13,735,629
=========== ===========
Diluted ................................................... 13,700,349 14,195,722
=========== ===========
Net income per common share:
Basic ..................................................... $ 0.31 $ 0.28
=========== ===========
Diluted ................................................... $ 0.30 $ 0.27
=========== ===========
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended September 30,
--------------------------------
2005 2004
----------- -----------
(unaudited) (unaudited)
(In thousands)
Net income ....................................................... $ 4,132 $ 3,788
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period on
investment securities available for sale, net of tax ....... (54) 54
----------- -----------
Comprehensive income ............................................. $ 4,078 $ 3,842
=========== ===========
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended September 30, 2005 and 2004
------------------------------------------------------------------------
(unaudited)
Accumulated
Serial Additional Other
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income Total
--------- -------- ---------- -------- ------------- ---------
(Dollars in thousands, except per share amounts)
Balance at June 30, 2004 ............ $ -- $ 9 $ 42,839 $ 75,523 $ 28 $ 118,399
Repurchase of 177,800
outstanding shares ............... (1) (444) (2,272) (2,717)
Issuance of 380,140 shares of
stock for options exercised and
Dividend Reinvestment Plan
("DRP") .......................... 2 949 183 1,134
Tax benefit from stock option plan .. 2,861 2,861
Cash dividends of $0.05 per
common share ..................... (671) (671)
Increase in unrealized gain on
investment securities available
for sale, net of income taxes
of $37 ........................... 54 54
Two-for-one split in the form of
a 100% stock dividend ............ 128 (128) --
Net income for the three months
ended September 30, 2004 ......... 3,788 3,788
--------- -------- ---------- -------- ------------- ---------
Balance at September 30, 2004 ....... $ -- $ 138 $ 46,205 $ 76,423 $ 82 $ 122,848
========= ======== ========== ======== ============= =========
Balance at June 30, 2005 ............ $ -- $ 133 $ 39,092 $ 84,734 $ 95 $ 124,054
Repurchase of 70,600
outstanding shares ............... (1) (176) (1,183) (1,360)
Issuance of 1,818 shares of
stock for options exercised and
DRP .............................. 5 1 6
Cash dividends of $0.07 per
common share ..................... (908) (908)
Decrease in unrealized gain on
investment securities available
for sale, net of income taxes
of $(38) ......................... (54) (54)
Net income for the three months
ended September 30, 2005 ......... 4,132 4,132
--------- -------- ---------- -------- ------------- ---------
Balance at September 30, 2005 ....... $ -- $ 132 $ 38,921 $ 86,776 $ 41 $ 125,870
========= ======== ========== ======== ============= =========
See notes to consolidated financial statements.
6
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended September 30,
--------------------------------
2004
As restated
2005 (Note 5)
----------- -----------
(unaudited) (unaudited)
(In thousands)
Cash Flows from Operating Activities:
Net income ................................................................ $ 4,132 $ 3,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans ................................................ (122) (24)
Proceeds from sales of loans originated for sale .......................... 2,463 2,631
Originations of loans held for sale ....................................... (2,389) (2,612)
Amortization of investment and mortgage-backed securities premium,
net .................................................................... 184 73
Depreciation and amortization ............................................. 864 446
Tax benefit related to stock options ...................................... -- 2,861
Amortization of intangible assets ......................................... -- 453
Amortization of premiums on loans and loan fees ........................... 538 468
Amortization of junior subordinated debentures issuance costs ............. 11 11
Income on BOLI ............................................................ (216) (128)
(Increase) decrease in accrued interest receivable, net of accrued
interest payable ....................................................... (136) 230
(Increase) decrease in other assets ....................................... 385 (348)
Decrease in accounts payable and other liabilities ........................ (3,372) (2,434)
Increase (decrease) in mortgage escrow funds .............................. 26 (2,627)
Other, net ................................................................ -- 5
----------- -----------
Net cash provided by operating activities ................................. 2,368 2,793
----------- -----------
Cash Flows from Investing Activities:
Purchases of investment securities held to maturity ....................... (14,976) --
Purchases of investment securities available for sale ..................... (48) (43)
Proceeds from principal repayments of mortgage-backed securities .......... 4,776 7,009
Net outflow from loan originations net of principal repayments of loans ... (77,249) (71,899)
Proceeds from loans sold .................................................. 18,516 1,854
Purchases of premises and equipment ....................................... (311) (197)
Net inflow from real estate owned activity ................................ 116 --
Purchases (redemptions) of Federal Home Loan Bank of New York stock ....... (2,195) 1,650
----------- -----------
Net cash used in investing activities ..................................... (71,371) (61,626)
----------- -----------
Cash Flows from Financing Activities:
Net increase in deposits .................................................. 23,701 47,217
Proceeds from advances from the Federal Home Loan Bank of New York
and other borrowings ................................................... 55,000 19,475
Repayment of advances from the Federal Home Loan Bank of New York
and other borrowings ................................................... (45,000) (50,000)
Increase in other short term borrowings ................................... 40,182 42,926
Cash dividends paid ....................................................... (908) (671)
Repurchases of outstanding shares, net of reissuances ..................... (1,354) (1,583)
----------- -----------
Net cash provided by financing activities ................................. 71,621 57,364
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ......................... 2,618 (1,469)
Cash and Cash Equivalents, Beginning of Period ............................... 15,220 14,859
----------- -----------
Cash and Cash Equivalents, End of Period ..................................... $ 17,838 $ 13,390
=========== ===========
7
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Three months ended September 30,
--------------------------------
2004
As restated
2005 (Note 5)
----------- -----------
(unaudited) (unaudited)
(In thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest .................................................................. $ 16,363 $ 13,521
=========== ===========
Income taxes .............................................................. $ 665 $ 200
=========== ===========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at lower of
cost or market ......................................................... $ 14,578 $ 1,850
=========== ===========
Transfer of loans receivable to real estate owned, net .................... $ 593 $ 473
=========== ===========
See notes to consolidated financial statements.
8
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries (including Penn Federal Savings
Bank (the "Bank")). These interim consolidated financial statements included
herein should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended June 30, 2005. The interim consolidated financial
statements reflect all normal and recurring adjustments which are, in the
opinion of management, considered necessary for a fair presentation of the
financial condition and results of operations for the periods presented. There
were no adjustments of a non-recurring nature recorded during the three months
ended September 30, 2005 and 2004. The interim results of operations presented
are not necessarily indicative of the results for the full year.
2. 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 September 30,
2005, the benefit obligation of $1,038,000 was included in Accounts payable and
other liabilities in the Consolidated Statements of Financial Condition. At
September 30, 2005, the assumptions used in calculating the benefit obligation
included a 4% compensation increase rate and a discount rate of 5%. At September
30, 2004, 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, and does not expect to make, any contributions to these plans
during the fiscal year ending June 30, 2006.
Net periodic pension cost for the Company's SERP and DP included the following
components:
Three months ended September 30,
--------------------------------
2005 2004
------------- --------------
SERP DP SERP DP
----- ---- ----- ----
(In thousands)
Service cost ......................... $ 273 $ 33 $ 61 $ 11
Interest cost ........................ 16 2 7 1
Amortization of prior service cost ... 6 1 (2) (1)
----- ---- ----- ----
Net periodic pension expense ......... $ 295 $ 36 $ 66 $ 11
===== ==== ===== ====
3. Computation of Earnings Per Share ("EPS")
The computation of EPS is presented in the following table.
Three months ended September 30,
--------------------------------
2005 2004
----------- -----------
(Dollars in thousands, except
per share amounts)
Net income ....................................... $ 4,132 $ 3,788
=========== ===========
Number of shares outstanding:
Weighted average shares issued and outstanding ... 13,263,506 13,735,629
Plus: Average common stock equivalents ........... 436,843 460,093
----------- -----------
Average diluted shares ........................... 13,700,349 14,195,722
=========== ===========
Earnings per common share:
Basic ......................................... $ 0.31 $ 0.28
=========== ===========
Diluted ....................................... $ 0.30 $ 0.27
=========== ===========
9
4. Stockholders' Equity and Regulatory Capital
During the three months ended September 30, 2005, the Company repurchased 70,600
shares of its outstanding common stock at prices ranging from $18.63 to $19.75
per share, for a total cost of $1,360,000.
The Bank's regulatory capital amounts and ratios are presented in the following
table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------- ---------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ---------- -------- ------
(Dollars in thousands)
As of September 30, 2005
Tangible capital, and ratio to
adjusted total assets ........................ $170,419 8.02% $ 31,856 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets ........................ $170,419 8.02% $ 84,949 4.00% $106,186 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ......................... $170,419 14.87% N/A N/A $ 68,778 6.00%
Risk-based capital, and ratio to
risk-weighted assets ......................... $176,359 15.39% $ 91,704 8.00% $114,630 10.00%
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 I (core) capital, and ratio to
adjusted total assets ........................ $169,765 8.28% $ 82,001 4.00% $102,501 5.00%
Tier I (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%
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.
5. Restatement of Prior Year's Consolidated Statement of Cash Flows
The Consolidated Statement of Cash Flows for the three months ended September
30, 2004 has 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). The proceeds of such sales
previously were 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."
10
The following table sets forth the data as previously reported in the Company's
10-Q for the three months ended September 30, 2004 and the data as restated:
For the three months ended
September 30, 2004
----------------------------
As Previously
Reported As Restated
----------------------------
(In thousands)
Cash Flows from Operating Activities:
Proceeds from sales of loans originated for sale .................... $ 4,486 $ 2,631
Originations of loans held for sale ................................. -- (2,612)
Net cash provided by operating activities ........................... 7,260 2,793
Cash Flows from Investing Activities:
Net outflow from loan originations net of principal repayments of
loans ............................................................ (74,669) (71,899)
Proceeds from loans sold ............................................ -- 1,854
Net cash used in investing activities ............................... (66,093) (61,626)
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at lower of cost or
market ........................................................... 4,462 1,850
11
Item 2. 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 judgments
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 allowance, 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. Judgment 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.
12
Forward-Looking Statements
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in 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.
Overview
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 78.8% at September 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. Since June 30, 2005,
the Company's net loans receivable and loans held for sale increased $57.7
million. This increase was primarily attributable to strong loan origination
levels and to the absence of accelerated prepayments. During the three months
ended September 30, 2005, the Company sold $20.8 million of fixed rate loans 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. The number of deposit accounts at September 30, 2005 was
relatively the same as the number of accounts at June 30, 2005, however, the
average deposit balance per account, excluding wholesale certificates of
deposit, has increased 1.8% since June 30, 2005. 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. Since June 30, 2005, deposits increased $24.5 million,
primarily due to a $33.0 million increase in retail certificates of deposit
partially offset by an $8.4 million decrease in core deposits (checking, money
market and savings accounts). Checking and money market account balances
increased $16.4 million since June 30, 2005, while savings accounts decreased
$24.9 million. The decrease in savings accounts since June 30, 2005 was
attributable to a rise in short term interest rates, which has shifted savings
account funds to certificates of deposit, as these deposits are more sensitive
to shifts in rates.
13
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 will also 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 periods
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.
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.
Growth in the loan portfolio at a lower average yield and the higher cost of
funds on deposits and other borrowings contributed to a compression in the net
interest margin for the three months ended September 30, 2005, when compared to
the prior year period. However, compared to the three months ended September 30,
2004, the lower level of loan prepayments and greater amount of loan
originations during the three months ended September 30, 2005 positively
impacted the Company's interest income and contributed to growth in the average
balance of loans outstanding. Interest income for the three months ended
September 30, 2005 increased $1.9 million, compared to the prior year period.
The Company's interest income is primarily driven by interest earned on
residential first mortgage loans, which increased $1.5 million for the three
months ended September 30, 2005, when compared to the same period in the prior
year. Higher cost of funds on deposits and other borrowings, due to the short
term interest rate environment, combined with an increase in the average balance
of deposits and other borrowings, were the primary factors responsible for an
increase of $2.8 million in interest expense on deposits and borrowings for the
current year period, when compared to the three months ended September 30, 2004.
Overall, net interest income decreased $879,000 and the net interest margin
decreased from 2.38% to $2.05% during the three months ended September 30, 2005
compared to the prior year period.
Non-interest income during the current year period increased $2.9 million, when
compared to the level in the prior year period. During the three months ended
September 30, 2005, increases in fees and service charges, net gain on sales of
loans and income on BOLI were partially offset by a decrease in other
non-interest income, when compared to the prior year period. Fees and service
charges, primarily loan fees, accounted for the largest variance between the
current and prior year periods. This variance was primarily due to a $2.7
million prepayment premium on a large-balance commercial real estate loan that
was received during the three months ended September 30, 2005.
A number of factors were primarily responsible for the $1.6 million increase in
non-interest expenses during the three months ended September 30, 2005, compared
to the prior year period. The largest period-to-period variance was due to a
$1.4 million prepayment penalty on certain Federal Home Loan Bank ("FHLB") of
New York advances prepaid during the current year period. $35.0 million of FHLB
of New York advances with a weighted average interest rate of 5.95% and a
weighted average remaining term of 28 months were replaced with $35.0 million of
new FHLB of New York advances with a weighted average interest rate of 4.20% and
a weighted average remaining term of 43 months. In addition, current period
expenses not occurring during the three months ended September 30, 2004 included
acceleration of depreciation on branch automation system software no longer
utilized, an increase in the Company's obligation under certain long-term
benefit plans and increased costs associated with Sarbanes-Oxley compliance.
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
14
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.
Financial Condition
Assets. Total assets increased $73.1 million to $2.124 billion at September 30,
2005 from total assets of $2.051 billion at June 30, 2005. This increase was
primarily due to a $61.5 million increase in net loans receivable, reflecting
strong loan origination levels and the absence of accelerated loan prepayment
activity, and a $14.9 million increase in investment securities held to
maturity.
Liabilities. Deposits increased $24.5 million to $1.364 billion at September 30,
2005 from $1.339 billion at June 30, 2005. This increase was primarily due to a
$33.0 million increase in retail certificates of deposit partially offset by an
$8.4 million decrease in core deposits (checking, savings, and money market
accounts). At September 30, 2005, checking and money market accounts increased
$16.4 million offset by a decrease in savings accounts of $24.9 million, when
compared to June 30, 2005. At September 30, 2005, FHLB of New York advances and
other borrowings totaled $573.6 million, reflecting a $50.2 million increase
from the $523.4 million at June 30, 2005.
Stockholders' Equity. Stockholders' equity at September 30, 2005 totaled $125.9
million compared to $124.1 million at June 30, 2005. The increase primarily
reflects the net income recorded for the three months ended September 30, 2005,
partially offset by the repurchase of 70,600 shares of the Company's outstanding
stock at an average price of $19.26 per share and the declaration of a cash
dividend.
Results of Operations
General. For the three months ended September 30, 2005, net income was $4.1
million, or $0.30 per diluted share, compared to net income of $3.8 million, or
$0.27 per diluted share, for the comparable prior year period.
Interest and Dividend Income. Interest and dividend income for the three months
ended September 30, 2005 increased to $27.7 million from $25.8 million for the
three months ended September 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 the current year period compared to
the prior year period. Average interest-earning assets were $2.017 billion for
the three months ended September 30, 2005, compared to $1.881 billion for the
three months ended September 30, 2004. The average yield earned on
interest-earning assets for the three months ended September 30, 2005 of 5.47%
remained the same as the prior year period.
Interest income on residential one- to four-family mortgage loans for the three
months ended September 30, 2005 increased $1.5 million when compared to the
prior year period. 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 $130.2 million for
the three months ended September 30, 2005, when compared to the prior year
period, as the result of strong 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 5.24% for the three months ended
September 30, 2005 from 5.32% for the comparable prior year period, reflecting
the payoff or refinance of higher yielding loans and the origination of lower
yielding loans over the last twelve months.
Interest income on commercial and multi-family real estate loans decreased
$87,000 for the three months ended September 30, 2005, when compared to the
prior year period. The decrease in interest income on commercial and
multi-family real estate loans was attributable to a decrease in the average
outstanding balance on these loans. The average outstanding balance of
commercial and multi-family real estate loans decreased $4.0 million for the
three months ended September 30, 2005, when compared to the prior year period.
In addition, the average yield earned on commercial and multi-family real estate
loans decreased to 6.82% for the three months ended September 30, 2005, when
compared to 6.88% for the three months ended September 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.
Interest income on consumer loans increased $556,000 for the three months ended
September 30, 2005, when
15
compared to the prior year period. The increase in interest income on consumer
loans for the three months ended September 30, 2005 was partially due to an
increase in the average yield earned on this portfolio. The average yield earned
on consumer loans increased to 5.61% for the three months ended September 30,
2005 from 5.21% for the three months ended September 30, 2004. The increase in
interest income on consumer loans is also due to an increase in the average
balance outstanding on these loans. For the three months ended September 30,
2005, the average balance outstanding on consumer loans increased $30.7 million
over the comparable prior year period.
Interest income on investment securities and other interest-earning assets
increased $164,000 for the three months ended September 30, 2005, when compared
to the prior year period. The increase in interest income on investment
securities and other interest-earning assets for the three months ended
September 30, 2005 was due to an increase in the average yield to 5.56% as
compared to 5.42% for the three months ended September 30, 2004. The average
outstanding balance of investment securities and other interest-earning assets
remained relatively unchanged from the three months ended September 30, 2004
when compared to the three months ended September 30, 2005.
Interest income on the mortgage-backed securities portfolio decreased $265,000
for the three months ended September 30, 2005, when compared to the prior year
period. The decrease in interest income on mortgage-backed securities for the
three months ended September 30, 2005 was primarily due to a decrease in the
average balance outstanding of $20.5 million for the three months ended
September 30, 2005, when compared to the three months ended September 30, 2004.
The average yield earned on mortgage-backed securities decreased slightly to
5.07% for the three months ended September 30, 2005 from 5.09% for the three
months ended September 30, 2004.
Interest Expense. Interest expense increased $2.8 million for the three months
ended September 30, 2005, when compared to the prior year period. For the three
months ended September 30, 2005, the Company's cost of funds increased, as well
as the balance of total average deposits and borrowings, when compared to the
prior year period. The average rate on deposits and borrowings was 3.55% for the
three months ended September 30, 2005, an increase from 3.22% for the prior year
period, as a result of a rise in short-term market interest rates. Total average
deposits and borrowings increased $136.6 million for the three months ended
September 30, 2005, when compared to the three months ended September 30, 2004.
For the three months ended September 30, 2005, the average rate paid on deposits
increased to 2.74% from 2.30% for the three months ended September 30, 2004.
Average deposit balances increased $134.9 million to $1.342 billion for the
three months ended September 30, 2005 from $1.207 billion for the comparable
prior year period. The growth in deposits is partially reflective of the
interest rate environment, the addition of the three new branches opened since
January 2004 and the increase in 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 for the three months ended
September 30, 2005 increased slightly to 5.74% from 5.71% for the three months
ended September 30, 2004 due to the maturity of lower costing advances. The
average balance of FHLB of New York advances decreased $15.8 million for the
three months ended September 30, 2005, when compared to the prior year period.
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
increased $17.5 million for the three months ended September 30, 2005, when
compared to the three months ended September 30, 2004. The average rate paid on
other borrowings increased to 3.50% for the three months ended September 30,
2005, from 2.22% for the comparable prior year period, as a result of higher
market interest rates.
Interest expense on junior subordinated debentures increased $151,000 for the
three months ended September 30, 2005, when compared to the prior year period.
The increase in interest expense was due to an increase in the average cost of
these borrowings to 8.05% for the three months ended September 30, 2005 from
6.66% for the prior year period. The average balance of junior subordinated
debentures increased $45,000 for the three months ended September 30, 2005
compared to the three months ended September 30, 2004.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three months ended September 30, 2005 was
$10.2 million compared to $11.1 million recorded in the prior year period. For
the three months ended September 30, 2005, average net interest-earning assets
decreased $259,000 when compared to the three months ended September 30, 2004.
The net interest rate spread and net interest margin for the three months ended
September 30, 2005 were 1.92% and 2.05%, respectively, a decrease from 2.25% and
2.38% for the three months ended September 30, 2004. The net interest margin
compressed during the current year period when compared to the prior year period
principally due to growth in the loan portfolio at relatively lower returns
coupled with the upward repricing of certain deposits and borrowings.
16
Provision for Loan Losses. There was no provision for loan losses recorded for
the three months ended September 30, 2005 and 2004, which is consistent with 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 September 30, 2005 was $5.9 million compared to
$6.1 million at June 30, 2005. The allowance for loan losses as a percentage of
non-accruing loans was 296.10% at September 30, 2005, compared to 231.00% at
June 30, 2005. Non-accruing loans were $2.0 million at September 30, 2005
compared to $2.6 million at June 30, 2005. The allowance for loan losses as a
percentage of total loans at September 30, 2005 was 0.39% compared to 0.41% at
June 30, 2005, primarily due to the increase in the balance of the overall loan
portfolio. See the discussion on the allowance for loan losses in this Form 10-Q
under "Critical Accounting Policies".
Non-Interest Income. For the three months ended September 30, 2005, non-interest
income was $4.0 million compared to $1.1 million for the prior year period. The
increase in non-interest income for the three months ended September 30, 2005
was primarily due to an increase in fees and service charges, when compared to
the prior year period.
Fee and service charge income for the three months ended September 30, 2005 was
$3.5 million, reflecting an increase of $2.7 million from the $726,000 recorded
for the prior year period. Fees and service charges increased during the three
months ended September 30, 2005 primarily due to a prepayment premium of $2.7
million earned on the payoff of a large-balance commercial real estate loan.
During the three months ended September 30, 2005, the net gain on sales of loans
was $122,000 compared to $24,000 for the three months ended September 30, 2004.
Approximately $20.8 million of fixed rate one- to four-family residential
mortgage loans were sold into the secondary market and to other financial
institutions during the three months ended September 30, 2005. During the three
months ended September 30, 2004, approximately $4.5 million of fixed rate one-
to four-family residential mortgage loans were sold into the secondary market
and to other financial institutions.
Non-Interest Expenses. Non-interest expenses for the three months ended
September 30, 2005 were $7.8 million, or 1.49% of average assets. For the
comparable prior year period, non-interest expenses were $6.1 million, or 1.26%
of average assets. The current period expense level reflects $1.4 million of
penalties associated with prepaying $35.0 million of FHLB of New York advances,
$259,000 of increased obligation under certain long-term benefit plans and
$372,000 of accelerated depreciation expense for branch automation system
software that is no longer used. In addition, costs associated with regulatory
burden, especially compliance with Sarbanes-Oxley Section 404, continue to
require additional expenditures.
Income Tax Expense. Income tax expense was relatively unchanged at $2.3 million
for the three months ended September 30, 2005 and the three months ended
September 30, 2004. However, the effective tax rate for the three months ended
September 30, 2005 was 35.7% compared to 37.4 % for the three months ended
September 30, 2004. The increase in the effective tax rate for the prior year
period was primarily due to adjustments in valuation allowances established
against state deferred tax assets.
17
Analysis of Net Interest Income
The following table sets forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income for the three months ended September 30, 2005 and 2004 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.
Three Months Ended September 30,
------------------------------------------------------------------------
2005 2004
----------------------------------- -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
----------- ---------- -------- ----------- ---------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage loans ............. $ 1,174,141 $ 15,429 5.24% $ 1,043,983 $ 13,919 5.32%
Commercial and multi-family real estate loans .. 166,557 2,901 6.82 170,603 2,988 6.88
Consumer loans ................................. 150,354 2,126 5.61 119,621 1,570 5.21
----------- ---------- ----------- ----------
Total loans receivable ...................... 1,491,052 20,456 5.46 1,334,207 18,477 5.51
Investment securities and other ................ 450,404 6,263 5.56 450,365 6,099 5.42
Mortgage-backed securities ..................... 76,028 964 5.07 96,538 1,229 5.09
----------- ---------- ----------- ----------
Total interest-earning assets ............... 2,017,484 $ 27,683 5.47 1,881,110 $ 25,805 5.47
========== ==========
Non-interest earning assets ....................... 69,777 61,912
----------- -----------
Total assets ................................ $ 2,087,261 $ 1,943,022
=========== ===========
Deposits and borrowings:
Money market and demand deposits ............... $ 229,677 $ 678 1.17% $ 167,246 $ 95 0.23%
Savings deposits ............................... 376,191 2,422 2.55 428,319 2,416 2.24
Certificates of deposit ........................ 735,938 6,157 3.32 611,354 4,501 2.92
----------- ---------- ----------- ----------
Total deposits .............................. 1,341,806 9,257 2.74 1,206,919 7,012 2.30
FHLB of New York advances ...................... 417,185 6,117 5.74 432,992 6,315 5.71
Other borrowings ............................... 140,846 1,258 3.50 123,338 699 2.22
Junior subordinated debentures ................. 42,087 859 8.05 42,042 708 6.66
----------- ---------- ----------- ----------
Total deposits and borrowings ............... 1,941,924 $ 17,491 3.55 1,805,291 $ 14,734 3.22
========== ==========
Other liabilities ................................. 19,330 17,785
----------- -----------
Total liabilities ........................... 1,961,254 1,823,076
Stockholders' equity .............................. 126,007 119,946
----------- -----------
Total liabilities and stockholders' equity .. $ 2,087,261 $ 1,943,022
=========== ===========
Net interest income and net interest rate spread .. $ 10,192 1.92% $ 11,071 2.25%
========== ======== ========== ========
Net interest-earning assets and net interest
margin ......................................... $ 75,560 2.05% $ 75,819 2.38%
=========== ======== =========== ========
Ratio of interest-earning assets to deposits and
borrowings ..................................... 103.89% 104.20%
======== ========
(1) Annualized.
18
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.
Three Months Ended September 30, 2005 vs. 2004
----------------------------------------------
Increase (Decrease) Due to
----------------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
-------- -------- -------- ----------
(In thousands)
Interest-earning assets:
One- to four-family mortgage loans .......... $ 1,745 $ (209) $ (26) $ 1,510
Commercial and multi-family real estate loans (62) (26) 1 (87)
Consumer loans .............................. 405 120 31 556
-------- -------- -------- ----------
Total loans receivable ................... 2,088 (115) 6 1,979
Investment securities and other ............. 1 163 -- 164
Mortgage-backed securities .................. (261) (5) 1 (265)
-------- -------- -------- ----------
Total interest-earning assets ............ $ 1,828 $ 43 $ 7 $ 1,878
======== ======== ======== ==========
Deposits and borrowings:
Money market and demand deposits ............ $ 36 $ 400 $ 147 $ 583
Savings deposits ............................ (292) 338 (40) 6
Certificates of deposit ..................... 920 611 125 1,656
-------- -------- -------- ----------
Total deposits ........................... 664 1,349 232 2,245
FHLB of New York advances ................... (229) 32 (1) (198)
Other borrowings ............................ 97 406 56 559
Junior subordinated debentures .............. 1 150 -- 151
-------- -------- -------- ----------
Total deposits and borrowings ............ $ 533 $ 1,937 $ 287 $ 2,757
======== ======== ======== ==========
Net change in net interest income ............. $ 1,295 $ (1,894) $ (280) $ (879)
======== ======== ======== ==========
19
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets at the dates indicated. 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.
September 30, June 30,
2005 2005
------------- --------
(Dollars in thousands)
Non-accruing loans:
One- to four-family .................................................. $ 752 $ 1,713
Commercial and multi-family .......................................... 1,239 904
Consumer ............................................................. 7 2
------------- --------
Total non-accruing loans .......................................... 1,998 2,619
Real estate owned, net .................................................. 477 --
------------- --------
Total non-performing assets/risk elements ......................... $ 2,475 $ 2,619
============= ========
Non-accruing loans as a percentage of total loans ....................... 0.13% 0.18%
============= ========
Non-performing assets/risk elements as a percentage of total assets ..... 0.12% 0.13%
============= ========
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.
At September 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 $377.8 million, representing a one year negative
gap of 17.79% of total assets, compared to a one year negative gap of $166.8
million, or 8.13%, of total assets at June 30, 2005. The Company's gap position
changed from June 30, 2005 as the estimated short-term cash flows for the
Company's interest-bearing liabilities have exceeded the estimated cash flows
from interest-earning assets. With respect to assets, the projected redemption
of callable U.S. government agency securities extended beyond one year with the
rise in market rates, while prepayment expectations on loans and mortgage-backed
securities have declined. For liabilities, growth in short-term retail
certificates of deposit and other wholesale borrowings due within one year, as
well as a shift in core deposit balances from longer duration savings accounts
to shorter duration money market accounts, have contributed to the increase in
the negative gap.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates
20
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 gap
position. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Company considers all of
these factors in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is 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. Office of
Thrift Supervision ("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 September 30, 2005, the Bank's internally generated initial NPV ratio was
9.74%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 7.30%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 2.44%. As of September 30, 2005, the Company's internally generated
initial NPV ratio was 9.61%, the Post-Shock ratio was 6.93%, and the Sensitivity
Measure was negative 2.68%. As of June 30, 2005, the Bank's Post-Shock NPV ratio
and Sensitivity Measure were 8.33% and negative 1.86%, respectively, and the
Company's Post-Shock NPV ratio and Sensitivity Measure were 8.27% and negative
1.70%, respectively. Both the Post-Shock NPV ratio and the Sensitivity Measure
deteriorated since June 30, 2005. The deterioration in the Sensitivity Measure
is primarily attributable to a rise in the projected duration of assets and an
increase in the sensitivity of FHLB of New York convertible advances. Asset
duration increased principally due to a shift in the projected redemption date
of U.S. government agency securities to beyond one year, as well as a decline in
prepayment estimates that resulted from a rise in longer term market rates.
Higher market rates improved retail deposit and wholesale borrowing values but
reduced their average duration. 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
June 30, 2005 (the latest date for which information is available), the Bank's
initial NPV ratio, as measured by the OTS, was 8.86%, the Bank's Post-Shock
ratio was 5.35% and the Sensitivity Measure was negative 3.51%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At September 30, 2005, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 13% 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, projections over the next year assume a rise in
interest rates and a slight tightening followed by a slight widening 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.
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
21
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, reverse repurchase agreements and various
overnight repricing lines of credit. The Company uses its liquid resources
principally to fund maturing certificates of deposit and deposit withdrawals, to
purchase loans and securities, to fund existing and future loan commitments, and
to meet operating expenses. Management believes that loan repayments and other
sources of funds will be adequate to meet the Company's foreseeable liquidity
needs. Future liquidity requirements are not expected to be significantly
different from historical experience.
The Company's cash inflows for the three months ended September 30, 2005
included $21.0 million of proceeds from the sale of loans, a $23.7 million
increase in deposits (net of accrued interest payable), a $95.2 million increase
in FHLB of New York advances and other borrowings, including short term
borrowings, and principal repayments of loans and mortgage-backed securities.
During the three months ended September 30, 2005, the cash provided was used to
repay $45.0 million of maturing FHLB of New York advances and other borrowings
and to fund investing activities, which included the origination of loans and
the purchase of $15.0 million of investment securities.
The Company's cash inflows for the three months ended September 30, 2004
included $4.5 million of proceeds from the sale of loans, principal repayments
of loans and mortgage-backed securities, a $47.2 million increase in deposits
(net of accrued interest payable) and a $62.4 million increase in FHLB of New
York advances and other borrowings, including short term borrowings. During the
three months ended September 30, 2004, the cash provided was used to repay $50.0
million of maturing FHLB of New York advances and other borrowings and to fund
the origination of loans.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's most significant form of market risk is interest rate risk, as the
majority of its assets and liabilities are sensitive to changes in interest
rates. See the discussion in this Form 10-Q under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity."
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures:
An evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Act")) was
carried out as of September 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
September 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 September 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.
In connection with its review of the Company's consolidated financial statements
for the quarter ended December 31, 2004, KPMG LLP, the Company's independent
registered public accounting firm, discussed with the Company's management the
applicability of Statement of Financial Accounting Standards ("SFAS") No. 102,
Statement of Cash Flows, Exemption of Certain Enterprises and Classification of
Cash Flows from Certain Securities Acquired for Resale. In previously issued
22
consolidated statements of cash flows, the Company had accounted for all loan
sale activity as operating activities. SFAS No. 102 provides that sales of loans
initially originated by the Company for retention in its portfolio (as opposed
to loans originated for the purpose of resale) must be accounted for in the
statements of cash flows as investing activities. Beginning with its
consolidated financial statements for the quarter ended December 31, 2004, the
Company has accounted for its loan sale activities in the statements of cash
flows in the manner required by SFAS No. 102 and corrected the classification in
prior period statements to be consistent with this presentation. At the time of
the filing of the December 31, 2004 Form 10-Q, the Company deemed the change to
be a reclassification - not an error requiring restatement; accordingly, no Form
8-K to report the change was then required.
On August 31, 2005, in connection with the preparation of the June 30, 2005 Form
10-K, management revisited the reclassification item in discussions with
Deloitte & Touche LLP, the Company's former independent registered public
accounting firm, and KPMG LLP. Following these discussions, management concluded
that restatement of the previously filed consolidated statements of cash flows
was appropriate. Management informed the Audit Committee of the Board of
Directors of the Company of these discussions and its conclusion at the meeting
of the Audit Committee on September 1, 2005. In order to ensure the
effectiveness of the Company's disclosure controls and procedures, senior
management advised the key personnel involved in the preparation and review of
the Company's financial statements of the correct method of accounting for the
origination and sale of loans in accordance with SFAS No. 102.
The Company's restated consolidated statement of cash flows for the three months
ended September 30, 2004 appears in this Form 10-Q under Item 1. Financial
Statements, and the affected components are shown in Note 5 in the Notes to
Consolidated Financial Statements. The restatement caused net cash provided by
operating activities to decrease, and net cash used in investing activities to
decrease, dollar for dollar, by $4,467,000 for the three months ended September
30, 2004. The restatement had no effect on net cash provided by financing
activities or the net change in cash and cash equivalents for that period.
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.
23
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the Company's stock repurchase activity
for each month during the three months ended September 30, 2005. All
shares repurchased during the three months ended September 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
Repurchases for the Month Repurchased Per Share Announced Plan Under the Plan
- ----------------------------- ------------ ---------- ------------------- ------------------
July 1 - July 31, 2005 ...... -- -- -- 391,000
Aug. 1 - Aug. 31, 2005 ...... 20,900 $ 19.07 20,900 370,100
Sept. 1 - Sept. 30, 2005 .... 49,700 $ 19.34 49,700 320,400
------------ ---------- -------------------
Total repurchases ........... 70,600 $ 19.26 70,600
============ ========== ===================
At September 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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
--------------------------------
Date: November 9, 2005 By: /s/ Joseph L. LaMonica
--------------------------------------------
Joseph L. LaMonica
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2005 By: /s/ Claire M. Chadwick
--------------------------------------------
Claire M. Chadwick
Senior Executive Vice President,
Chief Financial Officer and Controller
(Principal Financial and Accounting Officer)
25
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 (i)
(xii) Description of Director Fees (i)
(xiii) Description of Long-Term Care Insurance Program (i)
11 Statement re: computation of per share earnings (j)
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
22 Published report regarding matters submitted to vote of security holders None
23 Consents of independent registered public accounting firm and counsel None
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
Form 8-A/A-2, the Third Amendment to the Stockholders 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.
26
(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) 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 13, 2005 (File No. 0-24040). Such previously filed
document is hereby incorporated by reference in accordance with Item
601 of Regulation S-K.
(j) Refer to Footnote 3., "Computation of Earnings Per Share ("EPS")"
included in the September 30, 2005 Form 10-Q.
27