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, 1999
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.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3297339
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
---------------------------------------------- ----------
(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, 1999, there were issued and outstanding 8,845,268
shares of the Registrant's Common Stock.
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
September 30, June 30,
1999 1999
------------ ------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 9,497 $ 9,900
Investment securities held to maturity, at amortized cost, market value of
$296,105 and $281,880 at September 30, 1999 and June 30, 1999 313,090 293,282
Mortgage-backed securities held to maturity, at amortized cost, market value
of $114,539 and $128,617 at September 30, 1999 and June 30, 1999 114,193 127,983
Loans held for sale -- 5,180
Loans receivable, net of allowance for loan losses of $3,363 and $3,209
at September 30, 1999 and June 30, 1999 1,095,459 1,061,431
Premises and equipment, net 19,502 19,240
Real estate owned, net 647 936
Federal Home Loan Bank of New York stock, at cost 17,186 16,623
Accrued interest receivable, net 11,228 9,680
Goodwill and other intangible assets 10,555 11,118
Other assets 2,186 3,390
------------ ------------
$ 1,593,543 $ 1,558,763
============ --==========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,063,684 $ 1,063,600
Federal Home Loan Bank of New York advances 304,465 244,465
Other borrowings 62,275 88,738
Mortgage escrow funds 10,481 10,102
Due to banks 5,233 7,385
Accounts payable and other liabilities 3,844 4,230
------------ ------------
Total liabilities 1,449,982 1,418,520
------------ ------------
Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures 34,500 34,500
Unamortized issuance expenses (1,741) (1,757)
------------ ------------
Net Trust Preferred securities 32,759 32,743
------------ ------------
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition (continued)
September 30, June 30,
1999 1999
------------ ------------
(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, 11,900,000
and 11,897,858 shares issued and 8,845,268 and 8,813,416 shares
outstanding at September 30, 1999 and June 30, 1999 (excluding shares
held in treasury of 3,054,732 and 3,084,442 at
September 30, 1999 and June 30, 1999) 60 59
Additional paid-in capital 59,813 59,488
Restricted stock - Management Recognition Plan (36) --
Employee Stock Ownership Plan Trust debt (2,683) (2,804)
Retained earnings, partially restricted 83,276 80,673
Treasury stock, at cost, 3,054,732 and 3,084,442 shares at
September 30, 1999 and June 30, 1999 (29,628) (29,916)
------------ ------------
Total stockholders' equity 110,802 107,500
------------ ------------
$ 1,593,543 1,558,763
============ --==========
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended September 30,
--------------------------------
1999 1998
----------- -----------
(Dollars in thousands, except
per share amounts)
Interest and Dividend Income:
Interest and fees on loans $ 19,037 $ 20,199
Interest on federal funds sold -- 3
Interest and dividends on investment securities 5,583 3,788
Interest on mortgage-backed securities 2,015 3,248
----------- -----------
26,635 27,238
----------- -----------
Interest Expense:
Deposits 11,409 12,648
Borrowed funds 5,285 5,513
Trust Preferred securities 783 783
----------- -----------
17,477 18,944
----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses 9,158 8,294
Provision for Loan Losses 210 175
----------- -----------
Net Interest and Dividend Income After Provision
for Loan Losses 8,948 8,119
----------- -----------
Non-Interest Income:
Service charges 556 541
Net gain (loss) from real estate operations 30 (37)
Net gain on sales of loans 33 417
Other 189 94
----------- -----------
808 1,015
----------- -----------
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income (continued)
Three months ended September 30,
--------------------------------
1999 1998
----------- -----------
(Dollars in thousands, except
per share amounts)
Non-Interest Expenses:
Compensation and employee benefits 2,511 2,235
Net occupancy expense 383 327
Equipment 440 425
Advertising 82 76
Amortization of intangibles 562 598
Federal deposit insurance premium 159 159
Other 832 852
----------- -----------
4,969 4,672
----------- -----------
Income Before Income Taxes 4,787 4,462
Income Tax Expense 1,705 1,611
----------- -----------
Net Income $ 3,082 $ 2,851
=========== ===========
Weighted average number of common shares outstanding:
Basic 8,296,598 8,663,450
=========== ===========
Diluted 8,909,660 9,327,443
=========== ===========
Net income per common share:
Basic $ 0.37 $ 0.33
=========== ===========
Diluted $ 0.35 $ 0.31
=========== ===========
See notes to consolidated financial statements.
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended September 30,
1999 1998
-------- --------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income $ 3,082 $ 2,851
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans (33) (417)
Proceeds from sales of loans held for sale 5,324 26,766
Net gain on sales of real estate owned (36) (7)
Amortization of investment and mortgage-backed securities
premium, net 60 101
Depreciation and amortization 352 345
Provision for losses on loans and real estate owned 210 208
Amortization of cost of stock plans 446 533
Amortization of intangibles 562 598
Amortization of premiums on loans and loan fees 405 483
Amortization of Trust Preferred securities issuance costs 16 16
Increase in accrued interest receivable, net of accrued
interest payable (1,105) (882)
Decrease in other assets 1,204 1,867
Decrease in accounts payable and other liabilities (420) (132)
Increase in mortgage escrow funds 379 364
Decrease in due to banks (2,152) (6,847)
Other, net (48) --
-------- --------
Net cash provided by operating activities 8,246 25,847
-------- --------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities 165 27,070
Purchases of investment securities held to maturity (19,991) (42,688)
Net outflow from loan originations net of principal repayments of loans (13,661) (36,325)
Purchases of loans (21,208) (9,808)
Proceeds from principal repayments of mortgage-backed securities 13,813 22,559
Purchases of mortgage-backed securities (65) --
Proceeds from sale of premises and equipment 250 --
Purchases of premises and equipment (816) (851)
Proceeds from sale of real estate owned 440 329
Purchases of Federal Home Loan Bank of New York stock (563) (1,233)
-------- --------
Net cash used in investing activities (41,636) (40,947)
-------- --------
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Three months ended September 30,
1999 1998
-------- --------
(Dollars in thousands)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits (359) 53,866
Increase (decrease) in advances from the Federal Home Loan Bank
of New York and other borrowings 33,537 (34,875)
Cash dividends paid (343) (313)
Purchases of treasury stock, net of reissuance 152 (2,301)
-------- --------
Net cash provided by financing activities 32,987 16,377
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (403) 1,277
Cash and Cash Equivalents, Beginning of Period 9,900 10,960
-------- --------
Cash and Cash Equivalents, End of Period $ 9,497 $ 12,237
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 17,120 $ 17,143
======== ========
Income taxes $ 209 $ ---
======== ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net $ 114 $ 19
======== ========
Transfer of loans receivable to loans held for sale, at market $ 111 $ ---
======== ========
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 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, 1999. 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, 1999 and 1998. 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. Computation of EPS
The computation of EPS is presented in the following table.
Three months ended September 30,
1999 1998
----------- -----------
(Dollars in thousands, except
per share amounts)
Net income $ 3,082 $ 2,851
=========== ===========
Number of shares outstanding:
Weighted average shares issued 11,899,371 11,900,000
Less: Weighted average shares held in treasury 3,066,216 2,608,412
Less: Average shares held by the ESOP 952,000 952,000
Plus: ESOP shares released or committed to be released
during the fiscal year 415,443 323,862
----------- -----------
Average basic shares 8,296,598 8,663,450
Plus: Average common stock equivalents 613,062 663,993
----------- -----------
Average diluted shares 8,909,660 9,327,443
=========== ===========
Earnings per common share:
Basic $ 0.37 $ 0.33
=========== ===========
Diluted $ 0.35 $ 0.31
=========== ===========
3. Stockholders' Equity and Regulatory Capital
The Bank's capital amounts and ratios are presented in the following table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------- ---------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of September 30, 1999
Tangible capital, and ratio to
adjusted total assets................... $124,740 7.87% $23,766 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets................... $124,740 7.87% $63,376 4.00% $79,220 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets.................... $124,740 15.84% $31,505 4.00% $47,258 6.00%
Total risk-based capital, and ratio to
risk-weighted assets.................... $127,924 16.24% $63,011 8.00% $78,763 10.00%
As of June 30, 1999
Tangible capital, and ratio to
adjusted total assets................... $121,910 7.88% $23,207 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets................... $121,943 7.88% $61,888 4.00% $77,360 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets.................... $121,943 15.90% $30,687 4.00% $46,030 6.00%
Total risk-based capital, and ratio to
risk-weighted assets.................... $124,976 16.29% $61,374 8.00% $76,717 10.00%
The above table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB"). The following table
summarizes the Company's capital amounts and ratios under the FRB's capital
requirements for bank holding companies.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------- ---------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of September 30, 1999
Tangible capital, and ratio to
adjusted total assets................... $133,639 8.44% $23,748 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets................... $133,639 8.44% $63,328 4.00% $79,159 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets.................... $133,639 17.24% $31,004 4.00% $46,506 6.00%
Total risk-based capital, and ratio to
risk-weighted assets.................... $136,824 17.65% $62,009 8.00% $77,511 10.00%
As of June 30, 1999
Tangible capital, and ratio to
adjusted total assets................... $128,385 8.29% $23,217 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets................... $128,419 8.30% $61,913 4.00% $77,391 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets.................... $128,419 16.98% $30,253 4.00% $45,380 6.00%
Total risk-based capital, and ratio to
risk-weighted assets.................... $131,452 17.38% $60,507 8.00% $75,633 10.00%
4. Subsequent Event
On October 27, 1999, the Company announced a 5% stock repurchase program to be
in effect over the next 18 months.
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.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake -- and specifically declines any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
Total assets increased $34.8 million to $1.594 billion at September 30, 1999
from total assets of $1.559 billion at June 30, 1999. The increase was due to
the originations and purchases of loans and purchases of investment securities
offset by principal payments on loans and mortgage-backed securities.
Deposits remained unchanged at $1.064 billion at September 30, 1999 and at June
30, 1999. Growth in retail certificates of deposit was offset by a reduction in
municipal certificates of deposit. Federal Home Loan Bank ("FHLB") of New York
advances increased $60.0 million from $244.5 million at June 30, 1999,
reflecting growth in medium-term borrowings. Other borrowings, including
overnight borrowings, totaled $62.3 million at September 30, 1999, a $26.4
million decrease from $88.7 million at June 30, 1999.
Non-performing assets at September 30, 1999 totaled $4.1 million, representing
0.26% of total assets, compared to $4.6 million, or 0.30% of total assets, at
June 30, 1999. Non-accruing loans totaled $3.5 million, with a ratio of
non-accruing loans to total loans of 0.31%, at September 30, 1999 as compared to
$3.7 million, or 0.34% of total loans, at June 30, 1999. Real estate owned
decreased to $647,000 at September 30, 1999 from $936,000 at June 30, 1999.
Stockholders' equity at September 30, 1999 totaled $110.8 million compared to
$107.5 million at June 30, 1999. The increase primarily reflects the net income
recorded for the three months ended September 30, 1999, partially offset by the
declaration of dividends.
Results of Operations
General. For the three months ended September 30, 1999 net income was $3.1
million, or $0.35 per diluted share, compared to net income of $2.9 million, or
$0.31 per diluted share, for the comparable prior year period.
Interest and Dividend Income. Interest and dividend income for the three months
ended September 30, 1999 decreased to $26.6 million from $27.2 million for the
three months ended September 30, 1998. The decrease in the current year period
was primarily due to a decrease in the average yield earned on interest-earning
assets. The average yield earned on interest-earning assets decreased to 7.00%
for the three months ended September 30, 1999 from 7.16% for the three months
ended September 30, 1998.
Interest income on residential one- to four-family mortgage loans for the three
months ended September 30, 1999 decreased $1.6 million when compared to the
prior year period. The decrease in interest income on residential one- to
four-family mortgage loans was due to a decrease of $66.2 million in the average
balance outstanding for the three months ended September 30, 1999 compared to
the prior year period. The decrease in interest income on residential one- to
four-family mortgage loans was also due to a decrease of 17 basis points in the
average yield earned on this loan portfolio to 6.94% for the three months ended
September 30, 1999 from 7.11% for the comparable prior year period.
Interest on investment securities and other interest-earning assets increased
$1.8 million for the three months ended September 30, 1999 from the comparable
prior year period. The increase was primarily due to an increase of $108.5
million in the average balance outstanding for the current year period over the
prior year period. The increase in the average balance on investment securities
and other interest-earning assets was partially offset by a 19 basis point
decrease in the average yield earned on these securities for the three months
ended September 30, 1999 when compared to the prior year period.
Interest income on the mortgage-backed securities portfolio decreased $1.2
million for the three months ended September 30, 1999 as compared to the prior
year period. The decrease in interest income on mortgage-backed securities
primarily reflects a $71.1 million decrease in the average balance outstanding
for the three months ended September 30, 1999 compared to the prior year period.
Interest Expense. Interest expense decreased $1.5 million for the three months
ended September 30, 1999 from $18.9 million for the comparable 1998 period. The
decrease was attributable to a $12.8 million decrease in total average deposits
and borrowings and a 36 basis point decline in the Company's cost of funds. The
average rate paid on deposits, borrowings and Trust Preferred securities
decreased to 4.82% for the three months ended September 30, 1999 from 5.18% for
the comparable prior year period.
Net Interest and Dividend Income. Net interest and dividend income for the three
months ended September 30, 1999 was $9.2 million, reflecting an increase from
$8.3 million recorded in the comparable prior year period. The increase
primarily reflects the Company's improvement in net interest rate spread. The
net interest rate spread and net interest margin for the three months ended
September 30, 1999 were 2.18% and 2.43%, respectively, an increase from 1.98%
and 2.21%, respectively, for the comparable prior year period. The increase in
the net interest rate spread and net interest margin were primarily attributable
to the decrease in the average rate paid on deposits and borrowings.
Provision for Loan Losses. The provision for loan losses for the three months
ended September 30, 1999 was $210,000 compared to $175,000 for the prior year
period. The allowance for loan losses at September 30, 1999 of $3.4 million
reflects a $154,000 increase from the June 30, 1999 level. The allowance for
loan losses as a percentage of non-accruing loans was 97.37% at September 30,
1999, compared to 87.44% at June 30, 1999.
Non-Interest Income. For the three months ended September 30, 1999 non-interest
income was $808,000 compared to $1.0 million for the prior year period. The
decrease was primarily attributable to a $384,000 reduction in the net gain on
sales of loans during the three months ended September 30, 1999 as compared to
the prior year period. For the three months ended September 30, 1999 $5.3
million of one- to four-family residential mortgage loans were sold in the
secondary market for a net gain of $33,000. This compares to a $417,000 net gain
on sales of $26 million of one- to four-family residential mortgage loans during
the three months ended September 30, 1998. Due to the higher interest rate and
steeper yield curve environment in the current period, loan sale activity was
reduced from the fiscal 1999 level, as the majority of new production was
retained in portfolio. The level of such activity will continue to be evaluated
with primary consideration given to interest rate risk and long-term
profitability objectives. The decrease in net gain on sales of loans during the
current period was partially offset by a $15,000 increase in service charge
income, a $67,000 increase in the net gain (loss) from real estate operations
and a $95,000 increase in other non-interest income, when compared to the prior
year period. Other non-interest income for the three months ended September 30,
1999 included a $48,000 gain on the sale of a former branch location and a
$51,000 increase in earnings from the Investment Services at Penn Federal
program. Through this program, customers have convenient access to financial
consulting/advisory services and related non-deposit investment products.
Non-Interest Expenses. The Company's non-interest expenses were $5.0 million for
the three months ended September 30, 1999 compared to $4.7 million for the prior
year period. In February 1999 and June 1999, the Company opened new branches in
Toms River and Livingston, NJ, respectively. Growth in retail branches and in
loan origination and servicing capacity, as well as investment in technology
over the last eighteen months, has resulted in a slight increase in non-interest
expenses in the current period when compared to the prior year period. The
Company's non-interest expenses as a percent of average assets increased to
1.26% for the three months ended September 30, 1999 from 1.18% for the
comparable prior year period.
Income Tax Expense. Income tax expense was $1.7 million for the three months
ended September 30, 1999 compared to $1.6 million for the three months ended
September 30, 1998. The effective tax rate for the three months ended September
30, 1999 was 35.6%. The effective tax rate was 36.1% for the three months ended
September 30, 1998.
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, 1999 and 1998, 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,
-----------------------------------------------------------------------------
1999 1998
------------------------------------ -----------------------------------
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................................... $ 929,523 $16,143 6.94% $ 995,729 $17,720 7.11%
Commercial and multi-family real
estate loans............................ 73,049 1,554 8.35 64,804 1,434 8.83
Consumer loans............................. 74,449 1,340 7.14 56,451 1,045 7.34
---------- ------- ----------- -------
Total loans receivable.................. 1,077,021 19,037 7.05 1,116,984 20,199 7.22
Federal funds sold......................... --- --- --- 240 3 5.21
Investment securities and other............ 319,616 5,583 6.99 211,102 3,788 7.18
Mortgage-backed securities................. 120,969 2,015 6.66 192,032 3,248 6.77
---------- ------- ----------- -------
Total interest-earning assets........... 1,517,606 $26,635 7.00 1,520,358 $27,238 7.16
======= =======
Non-interest earning assets.................... 56,137 58,435
---------- ----------
Total assets ........................... $1,573,743 $1,578,793
========== ==========
Deposits, borrowings and Trust
Preferred securities:
Money market and demand deposits........... $ 110,982 $ 289 1.03% $ 95,602 $ 312 1.29%
Savings deposits........................... 165,212 692 1.66 164,804 831 2.00
Certificates of deposit.................... 774,774 10,428 5.36 792,145 11,505 5.79
---------- ------- ----------- -------
Total deposits.......................... 1,050,968 11,409 4.32 1,052,551 12,648 4.79
FHLB of New York advances.................. 273,906 4,123 5.93 262,413 4,006 6.02
Other borrowings........................... 81,865 1,162 5.55 104,532 1,507 5.64
---------- ------- ----------- -------
Total deposits and borrowings........... 1,406,739 16,694 4.71 1,419,496 18,161 5.08
Trust Preferred securities................. 32,751 783 9.56 32,689 783 9.58
---------- ------- ----------- -------
Total deposits, borrowings and
Trust Preferred securities.......... 1,439,490 $17,477 4.82 1,452,185 $18,944 5.18
======= =======
Three Months Ended September 30,
-----------------------------------------------------------------------------
1999 1998
------------------------------------ -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
---------- ------- ---- ----------- ------- ----
(Dollars in thousands)
Other liabilities.............................. 25,405 23,012
---------- -----------
Total liabilities....................... 1,464,895 1,475,197
Stockholders' equity........................... 108,848 103,596
---------- -----------
Total liabilities and stockholders'
equity ............................. $1,573,743 $ 1,578,793
========== ===========
Net interest income and net
interest rate spread....................... $ 9,158 2.18% $ 8,294 1.98%
======== ==== ======== ====
Net interest-earning assets and
interest margin ........................... $ 78,116 2.43% $ 68,173 2.21%
========== ==== =========== ====
Ratio of interest-earning assets to
deposits, borrowings and Trust
Preferred securities..................... 105.43% 104.69%
====== ======
(1) Annualized.
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets. Loans are placed on non-accrual status when the
collection of principal or interest becomes delinquent more than 90 days. There
are no loans delinquent more than 90 days which are still accruing. Real estate
owned represents assets acquired in settlement of loans and is shown net of
valuation allowances.
September 30, June 30,
1999 1999
------ ------
(Dollars in thousands)
Non-accruing loans:
One- to four-family $2,762 $2,937
Commercial and multi-family 95 46
Consumer 597 687
------ ------
Total non-accruing loans 3,454 3,670
Real estate owned, net 647 936
------ ------
Total non-performing assets 4,101 4,606
------ ------
Total risk elements $4,101 $4,606
====== ======
Non-accruing loans as a percentage of total loans 0.31% 0.34%
====== ======
Non-performing assets as a percentage of total assets 0.26% 0.30%
====== ======
Total risk elements as a percentage of total assets 0.26% 0.30%
====== ======
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, 1999, the Company had a total
allowance for loan losses of $3.4 million representing 97.37% of total
non-accruing loans and 0.31% of total 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 may improve net interest income. For an institution
with a positive gap, the reverse would be expected.
At September 30, 1999, the Company's total deposits, borrowings and Trust
Preferred securities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing within one year by $277.0 million,
representing a one year negative gap of 17.38% of total assets. At June 30,
1999, the one year negative gap was 13.61% of total assets. The Company's
negative gap position widened from June 30, 1999 partially as a result of an
increase in interest rates and a steeper yield curve. Prepayment expectations
have declined and asset cash flows have lengthened. Under the current interest
rate environment, it is assumed that certain callable investment securities may
not be called at their call date, thereby extending the life of these
securities. Also contributing to the increase in the negative gap position was
the maturity of $30 million notional amount of interest rate swap contracts.
Partially offsetting the increase in the negative gap position was an increase
in core deposits and medium-term certificates of deposit as well as the addition
of medium-term borrowings.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates in the short-term and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate significantly from those assumed in
calculating the gap position. Finally, the ability of many borrowers to service
their debt may 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 change
in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates,
whichever produces a larger decline. At least quarterly, and generally monthly,
management models the change in net portfolio value ("NPV") over a variety of
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. An NPV ratio, in any
interest rate scenario, is defined as the NPV in that rate scenario divided by
the market value of assets in the same scenario.
As of September 30, 1999, the Bank's internally generated initial NPV ratio was
9.52%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 6.92%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was 2.60%. NPV is also measured internally on a consolidated basis. As of
September 30, 1999, the Company's initial NPV ratio was 10.06%, the Post-Shock
ratio was 7.39%, and the Sensitivity Measure was 2.67%. Variances between the
Bank's and the Company's NPV ratios are attributable to balance sheet items
which are adjusted during consolidation, such as investments, intercompany
borrowings and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions and, 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 (unconsolidated) 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, 1999
(the latest date for which information is available), the Bank's initial NPV
ratio, as measured by the OTS, was 8.01%, the Bank's Post-Shock ratio was 4.96%
and the Sensitivity Measure was 3.05%.
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, 1999, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 10.20% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
Year 2000
By following a carefully prescribed Year 2000 Project Plan, all mission-critical
systems, including interfaces to the main systems, have been completely
renovated and tested. Significant progress is being made to inform customers of
the Company's Year 2000 preparedness. The Company intends to continue to test
systems and plans throughout the remainder of calendar year 1999, as well as to
sponsor regional seminars for customers. The Board of Directors continues to be
updated on a monthly basis. The OTS also continues to review all of its
regulated institutions for Year 2000 preparedness.
Due to variables outside the direct control of the Company, contingency planning
is an ongoing process. Contingency planning includes, among other things,
potential disruptions in vital utility services, which could negatively impact
the Company's ability to service its customers. The Company has developed, and
the Board of Directors has reviewed and approved, a business resumption
contingency plan. This plan focuses on and attempts to anticipate potential
problems that may arise, and provides alternative contingency planning
strategies to mitigate risk. The business resumption contingency plan identifies
actions that could help reduce the likelihood or lessen the impact of a Year
2000 problem, as well as identifies the appropriate response actions to be taken
in the event that a problem does occur.
A critical component of Year 2000 preparedness is to ensure adequate liquidity.
Given current retail and wholesale market rates of interest on funds with terms
extending over calendar year-end, the Company's cost of funds could increase as
December 31, 1999 approaches.
The Company is continuing to review and assess the Year 2000 status of its
larger borrowers. All commercial and multi-family loans have been evaluated for
Year 2000 exposure through an independent review process. As part of the current
credit approval process, all new and renewed commercial and multi-family loans
are evaluated for Year 2000 risk. The Company has requested that each of its
larger borrowers provide information regarding the nature of steps being taken
by the borrowers to address their own Year 2000 issues.
The cost for the Year 2000 effort incurred in fiscal 1999 was $45,000.
Additional future costs are not expected to have a material effect on the
results of operations and are estimated to be $25,000. No additional
expenditures are currently anticipated for hardware or software upgrades. The
estimated remaining costs are expected to cover any ongoing testing and
contingency planning. The actual and estimated expenditures do not include
manpower costs of Company personnel associated with a task force, who retain
their individual operational responsibilities in addition to Year 2000 duties.
The costs are based upon management's analysis of the information currently
available to it. No assurance can be given that issues relating to the Year 2000
will not have a material adverse effect on the Company's financial condition or
results of operations.
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. The current required percentage is 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 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. All mortgage-backed securities are
includable in liquid assets, as well. 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, 1999 and June
30, 1999, the Bank's liquidity ratios were 19.50% and 21.30%, 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.
The Company's cash needs for the three months ended September 30, 1999 were
provided by operating activities, an increase in advances from the FHLB of New
York and principal repayments on loans and mortgage-backed securities. 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.
During the three months ended September 30, 1998, the cash needs of the Company
were principally provided by operating activities, including sales of loans, an
increase in deposits, proceeds from maturities of investment securities and
principal repayments on mortgage-backed securities. 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.
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,
1999, the Bank exceeded all regulatory capital requirements and qualified as a
"well-capitalized" institution (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
(a) Exhibits
Exhibit 11: Statement Regarding Computation of Per Share Earnings.
Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K
On July 28, 1999, PennFed Financial Services, Inc. (the Company)
issued a press release announcing its fourth quarter results.
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 12, 1999 By: /s/ Joseph L. LaMonica
----------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: November 12, 1999 By: /s/ Lucy T. Tinker
------------------
Lucy T. Tinker
Senior Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: November 12, 1999 By: /s/ Jeffrey J. Carfora
----------------------
Jeffrey J. Carfora
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)