UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-24040
PENNFED FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3297339
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(State or other jurisdiction of (I.R.S. Employer 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)
Registrant's telephone number, including area code: (973) 669-7366
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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
requirements for the past 90 days.
YES [X] NO[ ]
As of November 3, 1997, there were 4,822,574 shares of the Registrant's
Common Stock, par value $.01, outstanding.
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition
September 30, June 30,
1997 1997
----------- -----------
(Dollars in thousands)
Assets
Cash and cash equivalents ................................................ $ 8,548 $ 10,729
Investment securities held to maturity, at amortized cost, market
value of $60,554 and $35,432 at September 30, 1997 and
June 30, 1997 ......................................................... 60,165 35,290
Mortgage-backed securities held to maturity, at amortized cost,
market value of $273,184 and $291,125 at
September 30, 1997 and June 30, 1997 .................................. 268,977 288,539
Loan held for sale ....................................................... 571 --
Loans receivable, net of allowance for loan losses of $2,701 and
$2,622 at September 30, 1997 and June 30, 1997 ......................... 967,749 931,451
Premises and equipment, net .............................................. 17,214 16,435
Real estate owned, net ................................................... 1,534 884
Federal Home Loan Bank of New York stock, at cost ........................ 12,675 12,413
Accrued interest receivable, net ......................................... 7,916 7,196
Goodwill and other intangible assets ..................................... 15,302 15,918
Other assets ............................................................. 3,299 2,896
----------- -----------
$ 1,363,950 $ 1,321,751
=========== -----------
Liabilities and Stockholders' Equity
Liabilities:
Deposits ............................................................... $ 974,983 $ 918,160
Federal Home Loan Bank of New York advances ............................ 205,465 205,465
Other borrowings ....................................................... 65,050 82,750
Mortgage escrow funds .................................................. 9,158 8,855
Due to banks ........................................................... 6,193 7,237
Accounts payable and other liabilities ................................. 3,184 2,014
----------- -----------
Total liabilities .................................................... 1,264,033 1,224,481
----------- -----------
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition (continued)
September 30, June 30,
1997 1997
----------- -----------
(Dollars in thousands)
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,
5,950,000 shares issued and 4,822,574 and 4,822,124 shares outstanding
at September 30, 1997 and June 30, 1997 (excluding shares
held in treasury of 1,127,426
and 1,127,876 at September 30, 1997 and June 30,1997) ................ 60 60
Additional paid-in capital ............................................. 57,625 57,441
Restricted stock - Management Recognition Plan ......................... (1,062) (1,062)
Employee Stock Ownership Plan Trust debt ............................... (3,567) (3,671)
Retained earnings, partially restricted ................................ 63,403 61,051
Treasury stock, at cost, 1,127,426 and 1,127,876 shares at
September 30, 1997 and June 30, 1997 ................................. (16,542) (16,549)
----------- -----------
Total stockholders' equity ........................................... 99,917 97,270
----------- -----------
$ 1,363,950 $ 1,321,751
=========== ===========
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Three months ended September 30,
1997 1996
----------- -----------
(Dollars in thousands, except
per share amounts)
Interest and Dividend Income:
Interest and fees on loans ........................ $ 17,909 $ 13,344
Interest and dividends on investment securities ... 1,064 501
Interest on mortgage-backed securities ............ 4,854 5,871
----------- -----------
23,827 19,716
----------- -----------
Interest Expense:
Deposits .......................................... 11,676 9,475
Borrowed funds .................................... 3,989 2,355
----------- -----------
15,665 11,830
----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses ................................... 8,162 7,886
Provision for Loan Losses ........................... 150 175
----------- -----------
Net Interest and Dividend Income After
Provision for Loan Losses ......................... 8,012 7,711
----------- -----------
Non-Interest Income:
Service charges ................................... 436 440
Net loss from real estate operations .............. (39) (115)
Other ............................................. 88 84
----------- -----------
485 409
----------- -----------
Non-Interest Expenses:
Compensation and employee benefits ................ 2,073 1,919
Net occupancy expense ............................. 295 273
Equipment ......................................... 358 385
Advertising ....................................... 71 113
Amortization of intangibles ....................... 616 636
Federal deposit insurance premium ................. 140 458
SAIF recapitalization assessment .................. -- 4,813
Other ............................................. 668 638
----------- -----------
4,221 9,235
----------- -----------
Income (Loss) Before Income Taxes ................... 4,276 (1,115)
Income Tax Expense (Benefit) ........................ 1,590 (346)
----------- -----------
Net Income (Loss) ................................... $ 2,686 $ (769)
=========== ===========
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Income (continued)
Three months ended September 30,
1997 1996
----------- -----------
(Dollars in thousands, except
per share amounts)
Weighted average number of common shares outstanding:
Basic ............................................. 4,465,605 4,444,477
=========== ===========
Diluted ........................................... 4,834,851 4,658,203
=========== ===========
Net income (loss) per common share:
Basic ............................................. $ 0.60 $ (0.17)
=========== ===========
Diluted ........................................... $ 0.56 $ (0.17)
=========== ===========
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three months ended September 30,
1997 1996
-------- --------
(In thousands)
Cash Flows From Operating Activities:
Net income (loss) ........................................... $ 2,686 ($ 769)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Proceeds from sales of loans held for sale .................. 582 348
Originations of loans held for sale ......................... (1,153) (260)
(Gain) loss on sales of real estate owned ................... (1) 8
Amortization of investment and mortgage-backed
securities premiums, net .................................. 69 70
Depreciation and amortization ............................... 320 315
Provision for losses on loans and real estate owned ......... 185 260
Amortization of cost of stock plans ......................... 421 352
Amortization of intangibles ................................. 616 636
Amortization of premiums on loans and loan fees ............. 232 59
Decrease in accrued interest receivable, net of
accrued interest payable .................................. 779 1,091
(Increase) decrease in other assets ......................... (405) 1,735
Increase (decrease) in accounts payable and other liabilities 1,036 2,684
Increase in mortgage escrow funds ........................... 303 1,083
Increase (decrease) in due to banks ......................... (1,044) 440
Other, net .................................................. -- 2
-------- --------
Net cash provided by operating activities ................... 4,626 8,054
-------- --------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities ........... 125 5,000
Purchases of investment securities held to maturity ......... (25,000) --
Net outflow from loan originations net of principal
repayments of loans ....................................... (10,024) (28,935)
Purchases of loans .......................................... (27,554) (49,034)
Proceeds from principal repayments of
mortgage-backed securities ................................ 19,493 14,759
Purchases of premises and equipment ......................... (1,098) (104)
Proceeds from sales of real estate owned .................... 214 112
Purchases of Federal Home Loan Bank of New York stock ....... (262) (278)
-------- --------
Net cash used in investing activities ....................... (44,106) (58,480)
-------- --------
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
Three months ended September 30,
1997 1996
-------- --------
(In thousands)
Cash Flows From Financing Activities:
Net increase in deposits .................................... 55,324 16,655
Increase (decrease) in advances from the Federal Home
Loan Bank of New York and other borrowings ................ (17,700) 34,585
Cash dividends paid ......................................... (325) --
-------- --------
Net cash provided by financing activities ................... 37,299 51,240
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents .......... (2,181) 814
Cash and Cash Equivalents, Beginning of Period ................ 10,729 11,629
-------- --------
Cash and Cash Equivalents, End of Period ...................... $ 8,548 $ 12,443
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest..................................................... $ 13,968 $ 10,905
======== ========
Income taxes................................................. $ --- $ ---
======== ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net....... $ 899 $ 90
======== =========
See notes to consolidated financial statements.
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiary (with its subsidiary, the "Company") include the
accounts of PennFed and Penn Federal Savings Bank (the "Bank"), its wholly-owned
subsidiary. 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, 1997. 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, 1997 and 1996. The interim results of operations presented are not
necessarily indicative of the results for the full year.
When necessary, reclassifications have been made to conform to current period
presentation.
2. Adoption of Recently Issued Accounting Standards
Effective July 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes
standards for computing and presenting earnings per share ("EPS"), simplifying
the standards previously found in APB Opinion No. 15, "Earnings Per Share." The
previous presentation of primary EPS has been replaced with a presentation of
basic EPS. Dual presentation of basic and diluted EPS is required on the face of
the income statement as well as a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. The adoption of SFAS 128 did not
have a material effect on the Company's financial condition or results of
operations. EPS data presented for the three months ended September 30, 1996 has
been restated to conform with the provisions of SFAS 128.
3. Computation of EPS
The computation of EPS is presented in the following table.
Three Months Ended
September 30,
1997 1996
---------- -----------
(dollars per thousand,
except per share amounts)
Net income (loss) $ 2,686 ($ 769)
========== ==========
Number of shares outstanding
Weighted average shares issued ....................... 5,950,000 5,950,000
Less: Weighted average shares held in treasury ....... 1,127,715 1,109,190
Less: Average shares held by the ESOP ................ 476,000 476,000
Plus: ESOP shares released or committed to be released
during the fiscal year .................... 119,320 79,667
---------- ----------
Average basic shares ........................... 4,465,605 4,444,477
Plus: Average common stock equivalents................ 369,246 213,726
---------- ----------
Average diluted shares ......................... 4,834,851 4,658,203
========== ==========
Earnings per common share
Basic .......................................... $ 0.60 ($ 0.17)
========== ==========
Diluted ........................................ $ 0.56 ($ 0.17)
========== ==========
3. Stockholders' Equity and Regulatory Capital
The Bank's capital amounts and ratios are presented in the following table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in 000's)
As of September 30, 1997
Tangible capital........................... $76,885 5.68% $20,301 1.50% N/A N/A
Core capital............................... $77,272 5.71% $54,153 4.00% $67,691 5.00%
Risk-based capital......................... $79,421 12.33% $51,539 8.00% $64,424 10.00%
As of June 30, 1997
Tangible capital........................... $73,470 5.61% $19,658 1.50% N/A N/A
Core capital............................... $73,907 5.64% $52,440 4.00% $65,550 5.00%
Risk-based capital......................... $75,929 12.22% $49,702 8.00% $62,127 10.00%
Savings and loan holding companies, such as PennFed, are not subject to capital
requirements for capital adequacy purposes or for prompt corrective action
requirements.
4. Subsequent Event
The Company has formed a trust subsidiary, PennFed Capital Trust I (the
"Trust"). Effective October 21, 1997, the Trust sold $34.5 million of 8.90%
cumulative trust preferred securities to the public. The Trust used the proceeds
from the sale of the preferred securities to purchase 8.90% junior subordinated
deferrable interest debentures issued by the Company. The junior subordinated
debentures mature in the year 2027 and are redeemable at any time after five
years. The Company will use the proceeds from the junior subordinated debentures
for general corporate purposes, including capital contributions to the Bank to
support future growth.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Company's provision for loan losses and operating expenses.
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 law, regulations or government policies may also have a material
impact on the Company.
Financial Condition
Total assets increased $42.2 million, or 3.2%, to $1.364 billion at September
30, 1997 from total assets of $1.322 billion at June 30, 1997. The increase was
primarily attributable to a $36.8 million increase in net loans receivable,
particularly in the Company's one- to four-family first mortgage loan portfolio.
At September 30, 1997, net loans receivable were $968.3 million compared to
$931.5 million at June 30, 1997. The increase in loans receivable was funded by
retail deposit growth.
Deposits increased $56.8 million to $975.0 million at September 30, 1997 from
$918.2 million at June 30, 1997. Other borrowings were $65.1 million at
September 30, 1997, a $17.7 million decrease from $82.8 million at June 30,
1997.
Non-performing assets at September 30, 1997 totaled $6.9 million, representing
0.51% of total assets, compared to $6.4 million, or 0.48% of total assets, at
June 30, 1997. Non-accruing loans were $5.4 million with a ratio of
non-performing loans to total loans of 0.56% of total loans, at September 30,
1997 as compared to $5.5 million, or 0.59% of total loans, at June 30, 1997.
Real estate owned increased to $1.5 million at September 30, 1997 from $884,000
at June 30, 1997.
Stockholders' equity at September 30, 1997 totaled $99.9 million compared to
$97.3 million at June 30, 1997. The increase primarily reflects the net income
recorded for the three months ended September 30, 1997.
Results of Operations
General. For the three months ended September 30, 1997 net income was $2.7
million, or $0.56 per diluted share, as compared to a net loss of $0.8 million,
or a net loss of $0.17 per diluted share for the comparable prior year period.
The three months ended September 30, 1996 included the effects of the one-time
Savings Association Insurance Fund ("SAIF") recapitalization assessment which
totaled $4.8 million, or an after-tax cost of $3.1 million, or $0.65 per share
on a diluted basis.
Interest and Dividend Income. Interest and dividend income for the three months
ended September 30, 1997 increased to $23.8 million from $19.7 million for the
three months ended September 30, 1996. The increase in the current year period
was due to an increase in average interest-earning assets, primarily residential
loans, partially offset by a decrease in the average yield earned on
interest-earning assets. Average interest-earning assets were $1.3 billion for
the three months ended September 30, 1997 compared to $1.1 billion for the
comparable prior year period. The average yield earned on interest-earning
assets decreased to 7.42% for the three months ended September 30, 1997 from
7.50% for the three months ended September 30, 1996.
Interest income on residential one- to four-family mortgage loans for the three
months ended September 30, 1997 increased $4.4 million to $15.8 million, or
39.2%, when compared to the prior year period. The increase in interest income
on residential one- to four-family mortgage loans was due to a $250.7 million
increase in the average balance outstanding to $849.6 million for the three
months ended September 30, 1997 compared to $598.9 million for the prior year
period. The increase in the average balance on residential one- to four-family
mortgage loans was partially offset by a decrease of 0.14% in the average yield
earned on this loan portfolio to 7.42% for the three months ended September 30,
1997 from the comparable prior year period.
Interest income on the mortgage-backed securities portfolio decreased $1.0
million, or 17.3%, for the three months ended September 30, 1997 as compared to
the prior year period. The decrease in interest income on mortgage-backed
securities primarily reflects a $58.3 million decrease in the average balance
outstanding to $280.4 million for the three months ended September 30, 1997
compared to $338.8 million for the prior year period.
Interest on investment securities and other interest-earning assets increased
$563,000 for the three months ended September 30, 1997 from the comparable prior
year period due to a $30.1 million increase in the average balance outstanding
for the current year period and a 0.15% increase in the average yield earned on
these securities.
Interest Expense. Interest expense increased $3.8 million to $15.7 million for
the three months ended September 30, 1997 from $11.8 million for the comparable
1996 period. The increase was attributable to an increase in total average
deposits, primarily certificates of deposit, and borrowings coupled with an
increase in the Company's cost of funds. Average deposits and borrowings
increased $219.2 million to $1.2 billion for the three months ended September
30, 1997 compared to the 1996 period. The average rate paid on deposits and
borrowings increased to 5.10% for the three months ended September 30, 1997 from
4.70% for the comparable prior year period.
Net Interest and Dividend Income. Net interest and dividend income for the three
months ended September 30, 1997 was $8.2 million, reflecting an increase from
$7.9 million recorded in the comparable prior year period. The increase reflects
the Company's growth in assets, primarily in adjustable rate residential one- to
four-family mortgage loans. The net interest rate spread and net interest margin
for the three months ended September 30, 1997 were 2.32% and 2.54%,
respectively, a decline from 2.80% and 3.00%, respectively, during the
comparable prior year period. The decline was partially attributable to the
Company's efforts to reduce its sensitivity to changes in interest rates
by extending the average life of liabilities and focusing on adjustable rate
one- to four-family mortgage loans. This resulted in the Company paying higher
rates to attract longer-term deposits and initially receiving lower yields on
adjustable rate loans than would otherwise be obtainable on fixed rate loans.
Since the Company's liabilities generally reprice more quickly than its assets,
net interest rate spread and net interest margins will likely decrease if
interest rates rise.
Provision for Loan Losses. The provision for loan losses for the three months
ended September 30, 1997 was $150,000 compared to $175,000 for the prior year
period. The allowance for loan losses at September 30, 1997 of $2.7 million
reflects a $79,000 increase from the June 30, 1997 level. The allowance for loan
losses as a percentage of non-performing loans was 49.91% at September 30, 1997,
compared to 47.80% at June 30, 1997.
Non-Interest Income. For the three months ended September 30, 1997 non-interest
income was $485,000 compared to $409,000 for the prior year period. The increase
was primarily attributable to a decrease in the net loss on real estate
operations. The net loss from real estate operations was $39,000 for the three
months ended September 30, 1997 compared to a net loss from real estate
operations of $115,000 for the prior year period. The decrease in the loss from
real estate operations reflects a lower level of reserves required to be
established in accordance with internal policies and guidelines on real estate
properties currently owned by the Company.
Non-Interest Expenses. The Company's non-interest expenses were $4.2 million for
the three months ended September 30, 1997 compared to $9.2 million for the prior
year period. The three months ended September 30, 1997 included $4.8 million for
the one-time SAIF recapitalization assessment. Excluding the effects of the SAIF
assessment, non-interest expenses for the three months ended September 30, 1997
are slightly lower than the comparable 1996 period. The Company's non-interest
expenses as a percent of average assets declined to 1.26% for the three months
ended September 30, 1997 from 1.60% for the comparable prior year period,
excluding the SAIF assessment.
Income Tax Expense. Income tax expense for the three months ended September 30,
1997 was $1.6 million compared to an income tax benefit of $346,000 for the
three months ended September 30, 1996. Excluding the effects of the one-time
SAIF recapitalization assessment, income tax expense of $1.4 million was
recorded for the prior year period. The effective tax rate for the three months
ended September 30, 1997 was 37.2%. Excluding the effect of the one-time SAIF
recapitalization assessment, the effective tax rate was 38.2% for the three
months ended September 30, 1996.
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, 1997 and 1996, 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,
---------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
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................. $ 849,647 $15,752 7.42% $598,942 $11,317 7.56%
Commercial and multi-family real
estate loans..................................... 55,892 1,261 9.02 52,305 1,212 9.27
Consumer loans..................................... 40,576 896 8.76 34,200 815 9.45
---------- ------- -------- -------
Total loans receivable........................... 946,115 17,909 7.57 685,447 13,344 7.79
Mortgage-backed securities......................... 280,449 4,854 6.92 338,772 5,871 6.93
Investment securities and other.................... 58,142 1,064 7.32 27,997 501 7.17
---------- ------- -------- -------
Total interest-earning assets.................... 1,284,706 $23,827 7.42 1,052,216 $19,716 7.50
======= =======
Non-interest earning assets........................ 50,931 53,952
---------- ----------
Total assets..................................... $1,335,637 $1,106,168
========== ==========
Deposits and borrowings:
Money market and demand deposits.................... $ 81,388 $ 248 1.21% $ 78,935 $ 236 1.19%
Savings deposits.................................... 168,158 928 2.19 176,793 998 2.24
Certificates of deposit............................. 709,078 10,500 5.88 583,823 8,241 5.60
---------- ------- -------- -------
Total deposits.................................... 958,624 11,676 4.83 839,551 9,475 4.48
FHLB of New York advances........................... 205,465 3,190 6.16 106,394 1,629 6.07
Other borrowings.................................... 53,583 799 5.83 52,497 726 5.41
---------- ------- -------- -------
Total deposits and borrowings..................... 1,217,672 $15,665 5.10 998,442 $11,830 4.70
======= =======
Other liabilities................................... 20,085 15,687
----------- ----------
Total liabilities................................. 1,237,757 1,014,129
Stockholders' equity................................ 97,880 92,039
----------- ----------
Total liabilities and stockholders' equity........ $1,335,637 $1,106,168
========== ==========
Net interest income and net interest rate
spread........................................... $ 8,162 2.32% $ 7,886 2.80%
======= ==== ======== ====
Net interest-earning assets and interest
margin........................................... $ 67,034 2.54% $ 53,774 3.00%
=========== ==== =========== ====
Ratio of interest-earning assets to
deposits and borrowings.......................... 105.51% 105.39%
============ ============
(1) Annualized.
Non-Performing Assets
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 become delinquent more than
90 days. There are no loans delinquent more than 90 days which are still
accruing. Real estate owned represents assets acquired in settlement of loans
and is shown net of valuation allowances. Restructured loans are performing in
accordance with modified terms and are, therefore, considered performing.
September 30, June 30,
1997 1997
------ ------
(Dollars in thousands)
Non-accruing loans:
One- to four-family .................................. $3,694 $3,567
Commercial and multi-family .......................... 839 1,053
Consumer ............................................. 879 865
------ ------
Total non-accruing loans ........................... 5,412 5,485
------ ------
Real estate owned, net ................................. 1,534 884
------ ------
Total non-performing assets ........................ 6,946 6,369
Restructured loans ..................................... 1,441 1,451
------ ------
Total risk elements ................................ $8,387 $7,820
====== ======
Non-accruing loans as a percentage of total loans ...... 0.56% 0.59%
====== ======
Non-performing assets as a percentage of total assets .. 0.51% 0.48%
====== ======
Total risk elements as a percentage of total assets .... 0.61% 0.59%
====== ======
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based upon management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters,
loan classifications, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the lower of
cost or estimated fair value less costs to dispose of such properties. If fair
value at the date of foreclosure is lower than the balance of the related loan,
the difference will be charged-off to the allowance for loan losses at the time
of transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on real estate owned is established by
a charge to operations.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to record additions to the
allowance level based upon their assessment of the information available to them
at the time of their examination. At September 30, 1997, the Company had a total
allowance for loan losses of $2.7 million representing 49.91% of total
non-performing loans.
Interest Rate Sensitivity
Interest Rate Gap. The interest rate risk inherent in assets and liabilities may
be determined by analyzing the extent to which such assets and liabilities are
"interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest-earning assets maturing or
repricing within a defined period and the amount of interest-bearing liabilities
maturing or repricing within the same period is defined as the interest rate
sensitivity gap. An institution is considered to have a negative gap if the
amount 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, 1997, 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 $85.0 million, representing a one year negative gap
of 6.31% of total assets. At June 30, 1997, the one year negative gap was 7.44%
of total assets.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of analysis must be considered. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate mortgages, have features which restrict changes
in interest rates in the short-term and over the life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
may deviate significantly from those assumed in calculating the gap position.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase. The Company considers all of these factors
in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through selected interest rate risk ("IRR") measures set
forth by the Office of Thrift Supervision ("OTS"). The IRR measures used by the
OTS include an IRR "Exposure Measure" or "Post-Shock" NPV ratio and a
"Sensitivity Measure." A low Post-Shock NPV ratio indicates greater exposure to
IRR. Greater exposure can result from a low initial NPV ratio or high
sensitivity to changes in interest rates. The Sensitivity Measure is the decline
in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates,
whichever produces a larger decline. At least quarterly, and generally monthly,
management models the change in net portfolio value ("NPV") over a variety of
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. An NPV ratio, in any
interest rate scenario, is defined as the NPV in that rate scenario divided by
the market value of assets in the same scenario.
At September 30, 1997, the Bank's internally generated initial NPV was 8.38%.
Following a 2% increase in interest rates, the Bank's "Post-Shock" NPV ratio was
5.93%. The change in the NPV ratio, or the Bank's Sensitivity Measure was 2.45%.
NPV is also measured internally on a consolidated basis. As of September 30,
1997, the Company's initial NPV ratio was 9.04%, the Post-Shock ratio was 6.63%,
and the Sensitivity Measure was 2.41%. Variances between the Bank's and the
Company's NPV ratios are attributable to balance sheet items which are adjusted
during consolidation, such as intercompany borrowings and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions and, as such, generally result in lower levels
of presumed interest rate risk (i.e., higher Post-Shock NPV ratio and lower
Sensitivity Measure) than OTS measurements indicate.
The OTS measures the Bank's IRR on a quarterly basis using data from the
quarterly Thrift Financial Reports, coupled with non-institution specific
assumptions which are based on national averages. As of June 30, 1997 (the
latest date for which information is available), the Bank's initial NPV ratio,
as measured by the OTS, was 7.23%. The Bank's Post-Shock ratio was 4.02% and the
Sensitivity Measure was 3.21%.
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, 1997, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 11.4% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 5% of net withdrawable deposits
and borrowings payable on demand or in one year or less during the preceding
calendar month. Liquid assets for purposes of this ratio include cash, accrued
interest receivable, certain time deposits, U.S. Treasury and Government
agencies and other securities and obligations generally having remaining
maturities of less than five years. The Company's most liquid assets are cash
and cash equivalents, short-term investments and mortgage-backed securities. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At September 30, 1997 and June
30, 1997, the Bank's liquidity ratios were 9.83% and 10.36%, respectively.
The Company uses its liquid resources principally to fund maturing certificates
of deposit and deposit withdrawals, to purchase loans and securities, to fund
existing and future loan commitments, and to meet operating expenses. Management
believes that loan repayments and other sources of funds will be adequate to
meet the Company's foreseeable liquidity needs.
In addition to cash provided by operating activities, the Company's cash needs
for the three months ended September 30, 1997 were principally provided by
increased deposits. During this period, the cash provided was used for investing
activities, which included the origination and purchase of loans and the
purchase of investment securities, as well as to reduce borrowings. In addition
to cash provided by operating activities, during the three months ended
September 30, 1996 the cash needs of the Company were principally provided by
increased deposits and an increase in advances from the FHLB of New York and
other borrowings. The cash was principally utilized for investing activities,
which included the origination and purchase of loans.
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk adjusted assets; a
leverage ratio of core capital to total adjusted assets; and a tangible capital
ratio expressed as a percentage of total adjusted assets. As of September 30,
1997, the Bank substantially exceeded all regulatory capital standards (see Note
3. - Stockholders' Equity and Regulatory Capital, in the Notes to Consolidated
Financial Statements).
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
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 13, 1997 By:/s/ Joseph L. LaMonica
----------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: November 13, 1997 By:/s/ Lucy T. Tinker
------------------
Lucy T. Tinker
Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: November 13, 1997 By: /s/ Jeffrey J. Carfora
----------------------
Jeffrey J. Carfora
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)