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 December 31, 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 February 4, 1998, there were 4,822,965 shares of the Registrant's
Common Stock, par value $.01, outstanding.
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, June 30,
1997 1997
----------- -----------
(Dollars in thousands)
Assets
Cash and cash equivalents ....................................... $ 11,602 $ 10,729
Investment securities held to maturity, at amortized cost, market
value of $156,833 and $35,432 at December 31, 1997 and
June 30, 1997 ................................................ 156,364 35,290
Mortgage-backed securities held to maturity, at amortized cost,
market value of $253,428 and $291,125 at
December 31, 1997 and June 30, 1997 .......................... 249,183 288,539
Loans held for sale ............................................. 388 --
Loans receivable, net of allowance for loan losses of $2,814 and
$2,622 at December 31, 1997 and June 30, 1997 ................. 996,257 931,451
Premises and equipment, net ..................................... 17,288 16,435
Real estate owned, net .......................................... 1,885 884
Federal Home Loan Bank of New York stock, at cost ............... 15,065 12,413
Accrued interest receivable, net ................................ 8,994 7,196
Goodwill and other intangible assets ............................ 14,690 15,918
Other assets .................................................... 3,793 2,896
----------- -----------
$ 1,475,509 $ 1,321,751
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ...................................................... $ 971,295 $ 918,160
Federal Home Loan Bank of New York advances ................... 230,465 205,465
Other borrowings .............................................. 119,025 82,750
Mortgage escrow funds ......................................... 8,309 8,855
Due to banks .................................................. 8,308 7,237
Accounts payable and other liabilities ........................ 2,813 2,014
----------- -----------
Total liabilities ........................................... 1,340,215 1,224,481
----------- -----------
Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures ....................................... 34,500 --
Unamortized issuance expenses ................................... (1,850) --
----------- -----------
Net Trust Preferred securities .............................. 32,650 --
----------- -----------
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition (continued)
December 31, 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 4,822,965 and 4,822,124
shares outstanding at December 31, 1997 and June 30, 1997
(excluding shares held in treasury of 1,127,035 and
1,127,876 at December 31, 1997 and June 30,1997) ............ 60 60
Additional paid-in capital .................................... 57,830 57,441
Restricted stock - Management Recognition Plan ................ (1,062) (1,062)
Employee Stock Ownership Plan Trust debt ...................... (3,462) (3,671)
Retained earnings, partially restricted ....................... 65,815 61,051
Treasury stock, at cost, 1,127,035 and 1,127,876 shares at
December 31, 1997 and June 30, 1997 ......................... (16,537) (16,549)
----------- -----------
Total stockholders' equity .................................. 102,644 97,270
----------- -----------
$ 1,475,509 $ 1,321,751
=========== ===========
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Six months ended
December 31, December 31,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(dollars in 000's, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans ........................ $ 18,287 $ 14,970 $ 36,196 $ 28,314
Interest on federal funds sold .................... 10 -- 10 --
Interest and dividends on investment securities ... 2,252 369 3,316 870
Interest on mortgage-backed securities ............ 4,485 5,640 9,339 11,511
----------- ----------- ----------- -----------
25,034 20,979 48,861 40,695
----------- ----------- ----------- -----------
Interest Expense:
Deposits .......................................... 12,179 9,968 23,855 19,443
Borrowed funds .................................... 4,156 3,003 8,145 5,358
Trust Preferred securities ........................ 607 -- 607 --
----------- ----------- ----------- -----------
16,942 12,971 32,607 24,801
----------- ----------- ----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses ................................... 8,092 8,008 16,254 15,894
Provision for Loan Losses ........................... 150 152 300 327
----------- ----------- ----------- -----------
Net Interest and Dividend Income After
Provision for Loan Losses ......................... 7,942 7,856 15,954 15,567
----------- ----------- ----------- -----------
Non-Interest Income:
Service charges ................................... 475 406 911 846
Net loss from real estate operations .............. (50) (55) (89) (170)
Net gain on sales of loans ........................ 108 -- 108 --
Other ............................................. 71 54 159 138
----------- ----------- ----------- -----------
604 405 1,089 814
----------- ----------- ----------- -----------
Non-Interest Expenses:
Compensation and employee benefits ................ 2,071 1,910 4,144 3,829
Net occupancy expense ............................. 321 277 616 550
Equipment ......................................... 368 884 726 769
Advertising ....................................... 87 65 158 178
Amortization of intangibles ....................... 612 630 1,228 1,266
Federal deposit insurance premium ................. 145 375 285 833
SAIF recapitalization assessment .................. -- -- -- 4,813
Other ............................................. 661 740 1,329 1,378
----------- ----------- ----------- -----------
4,265 4,381 8,486 13,616
----------- ----------- ----------- -----------
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income (continued)
Three months ended Six months ended
December 31, December 31,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(dollars in 000's, except per share amounts)
Income Before Income Taxes .......................... 4,281 3,880 8,557 2,765
Income Tax Expense .................................. 1,539 1,482 3,129 1,136
----------- ----------- ----------- -----------
Net Income .......................................... $ 2,742 $ 2,398 $ 5,428 $ 1,629
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic ............................................. 4,476,497 4,462,144 4,471,051 4,453,311
=========== =========== =========== ===========
Diluted ........................................... 4,852,536 4,713,577 4,835,800 4,703,160
=========== =========== =========== ===========
Net income per common share:
Basic ............................................. $ 0.61 $ 0.54 $ 1.21 $ 0.37
=========== =========== =========== ===========
Diluted ........................................... $ 0.57 $ 0.51 $ 1.12 $ 0.35
=========== =========== =========== ===========
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended December 31,
-----------------------------
1997 1996
--------- ---------
(In thousands)
Cash Flows From Operating Activities:
Net income .................................................. $ 5,428 $ 1,629
Adjustments to reconcile net income to net cash provided
by operating activities:
Net gain on sales of loans .................................. (108) --
Proceeds from sales of loans held for sale .................. 1,228 464
Originations of loans held for sale ......................... (1,616) (497)
Gain (loss) on sales of real estate owned ................... (23) 33
Amortization of investment and mortgage-backed
securities premiums, net .................................. 147 140
Depreciation and amortization ............................... 643 630
Provision for losses on loans and real estate owned ......... 370 412
Amortization of cost of stock plans ......................... 863 727
Amortization of intangibles ................................. 1,228 1,266
Amortization of premiums on loans and loan fees ............. 480 143
Amortization of Trust Preferred securities issuance costs ... 10 --
Increase in accrued interest receivable, net of
accrued interest payable .................................. (3,560) (1,429)
(Increase) decrease in other assets ......................... (897) 390
Increase (decrease) in accounts payable and other liabilities 532 (547)
Increase (decrease) in mortgage escrow funds ................ (546) 1,085
Increase in due to banks .................................... 1,071 1,117
Other, net .................................................. -- 4
--------- ---------
Net cash provided by operating activities ................... 5,250 5,567
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities ........... 125 13,000
Purchases of investment securities held to maturity ......... (121,200) --
Net outflow from loan originations net of principal
repayments of loans ....................................... (34,525) (54,375)
Purchases of loans .......................................... (54,687) (119,175)
Proceeds from principal repayments of
mortgage-backed securities ................................ 39,210 29,131
Proceeds from sales of loans ................................ 22,231 --
Purchases of premises and equipment ......................... (1,496) (235)
Proceeds from sales of real estate owned .................... 454 779
Purchases of Federal Home Loan Bank of New York stock ....... (2,652) (1,583)
--------- ---------
Net cash used in investing activities ....................... (152,540) (132,458)
--------- ---------
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Six months ended December 31,
-----------------------------
1997 1996
--------- ---------
(In thousands)
Cash Flows From Financing Activities:
Net increase in deposits .................................... 54,897 40,228
Increase in advances from the Federal Home Loan Bank of
New York and other borrowings ............................. 61,275 85,520
Net proceeds from issuance of Trust Preferred securities .... 32,640 --
Cash dividends paid ......................................... (649) (340)
Purchases of treasury stock ................................. -- (651)
--------- ---------
Net cash provided by financing activities ................... 148,163 124,757
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents .......... 873 (2,134)
Cash and Cash Equivalents, Beginning of Period ................ 10,729 11,629
--------- ---------
Cash and Cash Equivalents, End of Period ...................... $ 11,602 $ 9,495
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest .................................................... $ 33,856 $ 26,384
========= =========
Income taxes ................................................ $ 3,484 $ 1,364
========= =========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net ...... $ 1,502 $ 519
========= =========
See notes to consolidated financial statements.
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its wholly owned subsidiaries Penn Federal Savings
Bank (the "Bank") and PennFed Capital Trust I. 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 six months ended December 31, 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 and six months ended December 31,
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 Six months ended
December 31, December 31,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Net income ..................................... $ 2,742 $ 2,398 $ 5,428 $ 1,629
========== ========== ========== ==========
Number of shares outstanding
Weighted average shares issued ............... 5,950,000 5,950,000 5,950,000 5,950,000
Less: Weighted average shares held in treasury 1,127,282 1,101,255 1,127,498 1,105,222
Less: Average shares held by the ESOP ........ 476,000 476,000 476,000 476,000
Plus: ESOP shares released or committed to be
released during the fiscal year ... 129,779 89,399 124,549 84,533
---------- ---------- ---------- ----------
Average basic shares ................... 4,476,497 4,462,144 4,471,051 4,453,311
Plus: Average common stock equivalents ....... 376,039 251,433 364,749 249,849
---------- ---------- ---------- ----------
Average diluted shares ................. 4,852,536 4,713,577 4,835,800 4,703,160
========== ========== ========== ==========
Earnings per common share
Basic .................................. $ 0.61 $ 0.54 $ 1.21 $ 0.37
========== ========== ========== ==========
Diluted ................................ $ 0.57 $ 0.51 $ 1.12 $ 0.35
========== ========== ========== ==========
4. 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 December 31, 1997
Tangible capital........................... $100,476 6.91% $21,802 1.50% N/A N/A
Core capital............................... $100,813 6.93% $58,151 4.00% $72,689 5.00%
Risk-based capital......................... $103,063 15.20% $54,237 8.00% $67,796 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%
The previous table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB"). The following summarizes
the Company's capital position under the FRB's capital requirements for bank
holding companies.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in 000's)
Stockholders' equity....................... $ 102,644
Add: Qualifying preferred
securities............................. 29,430
Less: Goodwill............................. (1,201)
Deposit premium intangible......... (13,489)
------------
Tangible capital, and ratio to
adjusted total assets.................. $ 117,384 7.88% $ 22,353 1.50%
=========== =========
Add: Qualifying intangible assets.......... 337
-----------
Tier 1 (core) capital, and ratio to
adjusted total assets.................. $ 117,721 7.90% $ 44,706 3.00% $ 74,510 5.00%
=========== ========= ===========
Tier 1 (core) capital, and ratio to
risk-weighted assets................... $ 117,721 17.47% $ 26,957 4.00% $ 40,435 6.00%
=========== ========= ===========
Less: Equity investments and
investments in real estate............. (50)
Add: Allowance for loan losses............. 2,300
-----------
Total risk-based capital, and ratio
to risk-weighted assets................ $ 119,971 17.80% $ 53,914 8.00% $ 67,392 10.00%
=========== ========= ===========
Total assets............................... $ 1,475,509
===========
Adjusted total assets...................... $ 1,490,199
===========
Risk-weighted assets....................... $ 673,922
===========
5. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
The Company formed a wholly-owned 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 which are reflected on the
Statement of Financial Condition as Guaranteed Preferred Beneficial Interests in
the Company's Junior Subordinated Debentures (the "Trust Preferred securities").
The Trust used the proceeds from the sale of the Trust Preferred securities to
purchase 8.90% junior subordinated deferrable interest debentures issued by
PennFed. The sole assets of the Trust are the junior subordinated debentures
which mature on October 31, 2027 and are redeemable at any time after five
years. The obligations of the Company related to the Trust constitute a full and
unconditional guarantee by the Company of the Trust Issuer's obligations under
the Trust Preferred securities. 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. During the three months
ended December 31, 1997, PennFed made a $20 million capital contribution to the
Bank.
6. Subsequent Event
On January 13, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend, payable on February 10, 1998
to common stockholders of record as of January 27, 1998. Proforma earnings per
common share amounts, after giving retroactive effect to the stock split, are
presented below for the per share amounts disclosed in the financial statements.
Three months ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1997 1996 1997 1996
--------- ---------- ---------- ----------
Net income per common share (as reported):
Basic $ 0.61 $ 0.54 $ 1.21 $ 0.37
========= ========== ========== ==========
Diluted $ 0.57 $ 0.51 $ 1.12 $ 0.35
========= ========== ========== ==========
Net income per common share (proforma):
Basic $ 0.305 $ 0.270 $ 0.605 $ 0.185
========== ========== ========== ==========
Diluted $ 0.285 $ 0.255 $ 0.560 $ 0.175
========== ========== ========== ==========
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 $153.8 million, or 11.6%, to $1.476 billion at December
31, 1997 from total assets of $1.322 billion at June 30, 1997. The increase was
primarily attributable to a $121.1 million increase in investment securities and
a $65.2 million increase in net loans receivable, particularly in the Company's
one- to four-family first mortgage loan portfolio. At December 31, 1997, net
loans receivable were $996.6 million compared to $931.5 million at June 30,
1997. The increase in investment securities and loans receivable was partially
attributable to the leveraging of the proceeds from the Trust Preferred
securities offering. The growth was funded by the proceeds from the issuance of
the Trust Preferred securities, an increase in retail deposits, additional
medium-term FHLB of New York advances and increased other borrowings as well as
principal payments on mortgage-backed securities.
Deposits increased $53.1 million to $971.3 million at December 31, 1997 from
$918.2 million at June 30, 1997. FHLB of New York advances were $230.5 million
at December 31, 1997, a $25 million increase from $205.5 million at June 30,
1997. In addition, the Company had $119.0 million of other borrowings at
December 31, 1997, a $36.3 million increase from $82.7 million at June 30, 1997.
Non-performing assets at December 31, 1997 totaled $7.1 million, representing
0.48% of total assets, compared to $6.4 million, or 0.48% of total assets, at
June 30, 1997. Non-performing loans were $5.2 million with a ratio of
non-performing loans to total loans of 0.52%, at December 31, 1997 as compared
to $5.5 million, or 0.59% of total loans, at June 30, 1997. Real estate owned
increased to $1.9 million at December 31, 1997 from $884,000 at June 30, 1997.
Stockholders' equity at December 31, 1997 totaled $102.6 million compared to
$97.3 million at June 30, 1997. The increase primarily reflects the net income
recorded for the six months ended December 31, 1997.
Results of Operations
General. For the three months ended December 31, 1997 net income was $2.7
million, or $0.57 per diluted share, as compared to net income of $2.4 million,
or $0.51 per diluted share for the comparable prior year period. For the six
months ended December 31, 1997 net income was $5.4 million, or $1.12 per diluted
share. These results compare to net income of $1.6 million, or $0.35 per diluted
share for the six months ended December 31, 1996. The six months ended December
31, 1996 included the effects of the one-time Savings Association Insurance Fund
("SAIF") recapitalization assessment which totaled $4.8 million ($3.1 million
after-tax), or $0.65 per share on a diluted basis.
Interest and Dividend Income. Interest and dividend income for the three and six
months ended December 31, 1997 increased to $25.0 million and $48.9 million,
respectively, from $21.0 million and $40.7 million for the three and six months
ended December 31, 1996. The increase in the current year periods were 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 $1.35 billion and $1.32 billion for
the three and six months ended December 31, 1997, respectively, compared to
$1.12 billion and $1.09 billion for the comparable prior year periods. The
average yield earned on interest-earning assets decreased to 7.39% and 7.40% for
the three and six months ended December 31, 1997, respectively, from 7.49% for
the three and six months ended December 31, 1996.
Interest income on residential one- to four-family mortgage loans for the three
and six months ended December 31, 1997 increased $3.2 million, or 24.9%, and
$7.6 million, or 31.6%, respectively, when compared to the prior year period.
The increase in interest income on residential one- to four-family mortgage
loans was due to $184.5 million and $217.6 million increases in the average
balance outstanding to $870.7 million and $860.2 million for the three and six
months ended December 31, 1997, respectively, compared to $686.2 million and
$642.6 million for the prior year periods. The increase in the average balance
on residential one- to four-family mortgage loans was partially offset by a
decrease of 0.11% and 0.12% in the average yield earned on this loan portfolio
to 7.40% and 7.41% for the three and six months ended December 31, 1997,
respectively, from the comparable prior year periods.
Interest on investment securities and other interest-earning assets increased
$1.9 million and $2.5 million for the three and six months ended December 31,
1997, respectively, from the comparable prior year periods. The increase is
primarily due to a $103.9 million and $66.9 million increase in the average
balance outstanding and a 0.05% and a 0.11% increase in the average yield earned
on these assets for the three and six months ended December 31, 1997,
respectively.
Interest income on the mortgage-backed securities portfolio decreased $1.2
million and $2.2 million, or 20.5% and 18.9%, for the three and six months ended
December 31, 1997, respectively, as compared to the prior year periods. The
decrease in interest income on mortgage-backed securities primarily reflects a
$65.4 million and $61.8 million decrease in the average balance outstanding to
$259.3 million and $269.9 million for the three and six months ended December
31, 1997, respectively, compared to $324.7 million and $331.7 million for the
prior year periods.
Interest Expense. Interest expense increased $4.0 million and $7.8 million for
the three and six months ended December 31, 1997, respectively, from $13.0
million and $24.8 million for the comparable 1996 periods. 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.
Interest expense also increased due to the issuance of the Trust Preferred
securities. Average deposits and borrowings increased $197.8 million and $208.5
million for the three and six months ended December 31, 1997, respectively,
compared to the 1996 periods. The average rate paid on deposits, borrowings and
Trust Preferred securities increased to 5.16% and 5.17% for the three and six
months ended December 31, 1997, respectively, from 4.84% and 4.77% for the
comparable prior year periods.
Net Interest and Dividend Income. Net interest and dividend income for the three
and six months ended December 31, 1997 was $8.1 million and $16.3 million,
respectively, reflecting an increase from $8.0 million and $15.9 million
recorded in the comparable prior year periods. The increase reflects the
Company's growth in assets, primarily in investment securities and residential
one- to four-family mortgage loans. The increase in net interest and dividend
income was partially offset by the timing differences between the receipt of the
proceeds from the Trust Preferred securities offering and full implementation of
the Company's reinvestment strategy. The net interest rate spread and net
interest margin for the three months ended December 31, 1997 were 2.23% and
2.39%, respectively, a decline from 2.65% and 2.86%, respectively, during the
comparable prior year period. Net interest rate spread and net interest margin
were 2.23% and 2.46%, respectively, for the six months ended December 31, 1997,
compared to 2.72% and 2.93% for the comparable prior year period. For the three
months ended December 31, 1997, the decline in net interest rate spread was
partially due to the addition of the Trust Preferred securities. For the six
months ended December 31, 1997, the declines in the net interest rate spread and
margin were also 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. In addition, the interest
rate environment during the current year periods reflecting a flattening of the
yield curve has contributed to compressed net interest margins for many
financial institutions.
Provision for Loan Losses. The provision for loan losses for the three and six
months ended December 31, 1997 was $150,000 and $300,000, respectively, compared
to $152,000 and $327,000 for the prior year periods. The allowance for loan
losses at December 31, 1997 of $2.8 million reflects a $192,000 increase from
the June 30, 1997 level. The allowance for loan losses as a percentage of
non-performing loans was 54.01% at December 31, 1997, compared to 47.80% at June
30, 1997.
Non-Interest Income. For the three and six months ended December 31, 1997
non-interest income was $604,000 and $1.1 million, respectively, compared to
$405,000 and $814,000 for the prior year periods. Included in the 1997 periods
is a total of $108,000 of net gain on sales of loans, of which $91,000
represents a gain recorded on an approximate $20 million loan sale undertaken to
manage prepayment risk. In addition to these gains, growth in non-interest
income was primarily attained through the introduction of charging non-customers
for ATM transactions, fees recorded for the origination of loans provided to
other investors and an increase in regular service charges. Furthermore, for the
six months ended December 31, 1997, the increase was partially attributable to a
decrease in the net loss on real estate operations. The net loss from real
estate operations was $89,000 for the six months ended December 31, 1997
compared to a net loss from real estate operations of $170,000 for the prior
year period.
Non-Interest Expenses. The Company's non-interest expenses of $4.3 million for
the three months ended December 31, 1997 were slightly below the $4.4 million of
non-interest expenses recorded for the three months ended December 31, 1996. For
the three months ended December 31, 1997, non-interest expenses included
approximately $100,000 of various expenses associated with the opening of a new
branch in Bayville, New Jersey. Non-interest expenses were $8.5 million for the
six months ended December 31, 1997 compared to $13.6 million for the prior year
period. The six months ended December 31, 1996 included $4.8 million for the
one-time SAIF recapitalization assessment. Excluding the effects of the SAIF
assessment, non-interest expenses for the six months ended December 31, 1997 are
slightly lower than the comparable 1996 period. The Company's non-interest
expenses as a percent of average assets declined to 1.21% and 1.23% for the
three and six months ended December 31, 1997, respectively, from 1.49% and 1.54%
for the comparable prior year periods, excluding the SAIF assessment.
Income Tax Expense. Income tax expense for the three and six months ended
December 31, 1997 was $1.5 million and $3.1 million, respectively, compared to
$1.5 million and $1.1 million for the three and six months ended December 31,
1996. Excluding the effects of the one-time SAIF recapitalization assessment,
income tax expense of $2.9 million was recorded for the prior year six month
period. The effective tax rate for the three and six months ended December 31,
1997 was 35.9% and 36.6%, respectively. Excluding the effect of the one-time
SAIF recapitalization assessment, the effective tax rate was 38.2% for both the
three and six months ended December 31, 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 and six months ended December 31, 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 December 31,
---------------------------------------------------------------------------
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............... $ 870,725 $16,101 7.40% $ 686,203 $12,887 7.51%
Commercial and multi-family real
estate loans................................... 56,299 1,273 9.04 53,569 1,235 9.22
Consumer loans................................... 43,991 913 8.24 35,241 848 9.55
---------- ------- ---------- -------
Total loans receivable......................... 971,015 18,287 7.53 775,013 14,970 7.73
Mortgage-backed securities....................... 259,310 4,485 6.92 324,664 5,640 6.95
Investment securities and other.................. 124,248 2,262 7.28 20,382 369 7.24
---------- ------- ---------- -------
Total interest-earning assets.................. 1,354,573 $25,034 7.39 1,120,059 $20,979 7.49
======= =======
Non-interest earning assets...................... 53,274 53,730
---------- ----------
Total assets................................... $1,407,847 $1,173,789
========== ==========
Deposits and borrowings:
Money market and demand deposits.................. $ 82,112 $ 248 1.20% $ 80,445 $ 250 1.23%
Savings deposits.................................. 166,532 921 2.19 176,918 999 2.24
Certificates of deposit........................... 740,914 11,010 5.90 603,071 8,719 5.74
---------- ------- ---------- -------
Total deposits.................................. 989,558 12,179 4.88 860,434 9,968 4.60
FHLB of New York advances......................... 205,411 3,190 6.16 125,393 1,941 6.14
Other borrowings.................................. 65,027 966 5.82 76,372 1,062 5.44
---------- ------- ---------- -------
Total deposits and borrowings................... 1,259,996 16,335 5.14 1,062,199 12,971 4.84
Trust Preferred securities........................ 25,662 607 9.26 --- --- ---
---------- ------- ---------- -------
Total deposits, borrowings and Trust
Preferred securities....................... 1,285,658 $16,942 5.16 1,062,199 $12,971 4.84
======= =======
Other liabilities................................. 21,330 20,354
---------- ----------
Total liabilities............................... 1,306,988 1,082,553
Stockholders' equity.............................. 100,859 91,236
---------- ----------
Total liabilities and stockholders' equity...... $1,407,847 $1,173,789
========== ==========
Net interest income and net interest rate
spread......................................... $ 8,092 2.23% $ 8,008 2.65%
======= ==== ======= ====
Net interest-earning assets and interest
margin......................................... $ 68,915 2.39% $ 57,860 2.86%
=========== ==== ========= ====
Ratio of interest-earning assets to
deposits, borrowings and Trust Preferred
securities................................. 105.36% 105.45%
=========== =========
(1) Annualized.
Six Months Ended December 31,
---------------------------------------------------------------------------
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................. $ 860,185 $31,853 7.41% $ 642,572 $24,204 7.53%
Commercial and multi-family real
estate loans..................................... 56,095 2,534 9.03 52,937 2,447 9.24
Consumer loans..................................... 42,283 1,809 8.49 34,720 1,663 9.50
---------- ------- ---------- -------
Total loans receivable........................... 958,563 36,196 7.55 730,229 28,314 7.75
Mortgage-backed securities......................... 269,880 9,339 6.92 331,718 11,511 6.94
Investment securities and other.................... 91,070 3,326 7.30 24,190 870 7.19
---------- ------- ---------- -------
Total interest-earning assets.................... 1,319,513 $48,861 7.40 1,086,137 $40,695 7.49
======= =======
Non-interest earning assets........................ 52,040 53,841
---------- ----------
Total assets..................................... $1,371,553 $1,139,978
========== ==========
Deposits and borrowings:
Money market and demand deposits.................... $ 81,750 $ 496 1.20% $ 79,690 $ 486 1.21%
Savings deposits.................................... 167,345 1,849 2.19 176,856 1,997 2.24
Certificates of deposit............................. 724,996 21,510 5.89 593,447 16,960 5.67
---------- ------- ----------- -------
Total deposits.................................... 974,091 23,855 4.86 849,993 19,443 4.54
FHLB of New York advances........................... 205,438 6,381 6.16 115,893 3,570 6.11
Other borrowings.................................... 59,305 1,764 5.82 64,434 1,788 5.43
---------- ------- ----------- -------
Total deposits and borrowings..................... 1,238,834 32,000 5.12 1,030,320 24,801 4.77
Trust Preferred securities.......................... 12,831 607 9.39 --- --- ---
---------- ------- ----------- -------
Total deposits, borrowings and Trust
Preferred securities......................... 1,251,665 $32,607 5.17 1,030,320 $24,801 4.77
======= =======
Other liabilities................................... 20,425 18,021
---------- -----------
Total liabilities................................. 1,272,090 1,048,341
Stockholders' equity................................ 99,463 91,637
---------- -----------
Total liabilities and stockholders' equity........ $1,371,553 $ 1,139,978
========== ===========
Net interest income and net interest rate
spread........................................... $16,254 2.23% $15,894 2.72%
======= ==== ======= ====
Net interest-earning assets and interest
margin........................................... $ 67,848 2.46% $ 55,817 2.93%
=========== ==== ========== ====
Ratio of interest-earning assets to
deposits, borrowings and Trust Preferred
securities................................... 105.42% 105.42%
=========== ==========
(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 generally placed on
non-accrual status when the collection of principal or interest becomes
delinquent more than 90 days. At December 31, 1997, there was one commercial
loan totaling $345,000 which was delinquent more than 90 days but which was
still accruing due to circumstances surrounding the payoff of the loan. 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.
December 31, June 30,
1997 1997
------ ------
(Dollars in thousands)
Non-performing loans:
One- to four-family .................................. $3,489 $3,567
Commercial and multi-family .......................... 838 1,053
Consumer ............................................. 883 865
------ ------
Total non-performing loans ......................... 5,210 5,485
------ ------
Real estate owned, net ................................. 1,885 884
------ ------
Total non-performing assets ........................ 7,095 6,369
Restructured loans ..................................... 1,432 1,451
------ ------
Total risk elements ................................ $8,527 $7,820
====== ======
Non-performing loans as a percentage of total loans .... 0.52% 0.59%
====== ======
Non-performing assets as a percentage of total assets .. 0.48% 0.48%
====== ======
Total risk elements as a percentage of total assets .... 0.58% 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 December 31, 1997, the Company had a total
allowance for loan losses of $2.8 million representing 54.01% 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 December 31, 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 $55.9 million, representing a one year negative gap
of 3.82% 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 December 31, 1997, the Bank's internally generated initial NPV was 9.71%.
Following a 2% increase in interest rates, the Bank's "Post-Shock" NPV ratio was
7.83%. The change in the NPV ratio, or the Bank's Sensitivity Measure, was
1.88%. NPV is also measured internally on a consolidated basis. As of December
31, 1997, the Company's initial NPV ratio was 10.66%, the Post-Shock ratio was
8.68%, and the Sensitivity Measure was 1.98%. 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 September 30, 1997 (the
latest date for which information is available), the Bank's initial NPV ratio,
as measured by the OTS, was 7.27%. The Bank's Post-Shock ratio was 4.29% and the
Sensitivity Measure was 2.98%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At December 31, 1997, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 14.4% 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. Prior to November 1997, the required percentage
was 5% of total net withdrawable deposits and borrowings payable on demand or in
one year or less during the preceding calendar month. Due to a change in the
federal regulations, the requirement has been reduced to 4% of net withdrawable
deposits payable on demand or in one year or less and borrowings payable on
demand or in one year or less both as of the end of the preceding calendar
quarter. Liquid assets for purposes of these ratios 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. Under the new regulations all
mortgage-backed securities are includable in liquid assets. 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 December 31, 1997 and June 30, 1997, the Bank's liquidity ratios were
20.68% 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 six months ended December 31, 1997 were provided by increased deposits
as well as an increase in advances from the FHLB of New York and other
borrowings. Furthermore, proceeds from the Trust Preferred securities offering,
principal repayments of mortgage-backed securities and sales of loans
contributed to meeting the Company's cash needs. 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. In addition to cash
provided by operating activities, during the six months ended December 31, 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 December 31,
1997, the Bank substantially exceeded all regulatory capital standards (see Note
4. - 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
(a) The Annual Meeting of Stockholders (Annual Meeting) was held
on October 24, 1997.
(b) Directors elected:
Joseph L. LaMonica
Mario Teixeira, Jr.
(c) At the Annual Meeting the stockholders considered:
(i) the election of two directors,
(ii) the amendment of the Company's 1994 Stock Option and
Incentive Plan to increase the number of shares of
common stock available for awards thereunder from
595,000 to 835,623 and
(iii) the ratification of the appointment of Deloitte &
Touche LLP as auditors for the Company for the fiscal
year ending June 30, 1998.
The vote on the election of two directors was as follows:
FOR WITHHELD
--- --------
Joseph L. LaMonica 3,483,973 267,038
Mario Teixeira, Jr. 3,498,617 252,394
There were no broker non-votes with respect to the proposal.
The vote on the amendment of the Company's 1994 Stock Option
and Incentive Plan to increase the number of shares of common
stock available for awards thereunder from 595,000 to 835,623
was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
3,096,911 638,557 15,543
There were no broker non-votes with respect to the proposal.
The vote on the ratification of the appointment of Deloitte &
Touche LLP as auditors for the Company for the fiscal year
ending June 30, 1998 was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
3,634,715 93,823 22,473
There were no broker non-votes with respect to the proposal.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11: Statement Regarding Computation of Per Share
Earnings.
Exhibit 27: Financial Data Schedule.
(b) A Form 8-K was filed on October 21, 1997 regarding the sale
through a public offering of cumulative trust preferred
securities by PennFed Capital Trust I, a subsidiary of the
Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: February 9, 1998 By:/s/ Joseph L. LaMonica
----------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: February 9, 1998 By:/s/ Lucy T. Tinker
------------------
Lucy T. Tinker
Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: February 9, 1998 By:/s/ Jeffrey J. Carfora
----------------------
Jeffrey J. Carfora
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)