As filed with the Securities and Exchange Commission on September 19, 1997
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PENNFED FINANCIAL SERVICES, INC. PENNFED CAPITAL TRUST I
- ----------------------------------------- -------------------------
(Exact name of registrant as specified (Exact name of registrant as
in its charter) specified in its charter)
Delaware 22-3297339 Delaware Applied For
------------ -------------- ------------ ---------------
622 Eagle Rock Avenue 622 Eagle Rock Avenue
West Orange, New Jersey 07052 West Orange, New Jersey 07052
(973) 669-7366 (973) 669-7366
----------------------------- -----------------------------
(Address, including ZIP Code, and (Address, including ZIP Code, and
telephone number including area code, of telephone number including area
registrant's principal executive offices) code, of registrant's principal
executive offices)
Joseph L. LaMonica
President and Chief Executive Officer
PENNFED FINANCIAL SERVICES, INC.
622 Eagle Rock Avenue
West Orange, New Jersey 07052
(201) 669-7373
------------------------------------
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
Copies to:
James S. Fleischer, P.C. Robert C. Azarow, Esq.
Dave M. Muchnikoff, P.C. Thatcher Proffitt & Wood
Silver, Freedman & Taff, L.L.P. Two World Trade Center
1100 New York Avenue, N.W. 38/th/ Floor
Washington, D.C. 20005-3934 New York, New York 10098
(202) 414-6100 (212) 912-7400
___________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [_].
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box [_].
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering [_].
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [X].
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
Proposed
Proposed maximum
maximum aggregate Amount of
Title of each class Amount to be offering price offering registration
of security to be registered registered per share price fee
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__% Trust Preferred Securities, of PennFed Capital Trust I 1,380,000(1) $25.00 $34,500,000 $10,454.54
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__% Junior Subordinated Deferrable Interest Debentures of N/A
PennFed Financial Services, Inc. (2)
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PennFed Financial Services, Inc. Guarantee with respect to Trust N/A
Preferred Securities, (3)
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Total ......................................................... 1,380,000 $34,500,00
=================================================================================================================================
(1) Includes up to 180,000 additional Trust Preferred Securities which may be
acquired by the Underwriter to cover over-allotments, if any.
(2) The __% Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") will be purchased by PennFed Capital Trust I with
the proceeds of the sale of the Trust Preferred Securities, (the "Preferred
Securities"). No separate consideration will be received for the Junior
Subordinated Debentures distributed upon any liquidation of PennFed Capital
Trust I.
(3) No separate consideration will be received for the PennFed Financial
Services, Inc. Guarantee (the "Guarantee").
(4) This Registration Statement is deemed to cover the Junior Subordinated
Debentures of PennFed Financial Services, Inc. under the Indenture, the
rights of holders of Preferred Securities of PennFed Capital Trust I under a
trust agreement and the rights of holders of the Preferred Securities under
the Guarantee, the Expense Agreement entered into by PennFed Financial
Services, Inc. as described herein.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PROSPECTUS DATED SEPTEMBER 18, 1997
$30,000,000
PENNFED CAPITAL TRUST I
____% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
1,200,000 PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
[PennFed Financial Services, Inc. Logo]
PENNFED FINANCIAL SERVICES, INC.
The ____% Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent beneficial interests in PennFed Capital
Trust I, a trust created under the laws of the State of Delaware (the "Trust
Issuer"). PennFed Financial Services, Inc., a Delaware corporation ("PennFed"),
will be the owner of all of the beneficial interests represented by common
securities of the Trust Issuer (the "Common Securities" and, collectively with
the Preferred Securities, the "Trust Securities"). The Bank of New York is the
Property Trustee of the Trust Issuer. The Trust Issuer exists for the sole
purpose of issuing the Trust Securities and investing the proceeds from the sale
thereof in ___% Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") to be issued by the Company. The Junior Subordinated
Debentures will mature on _______, 2027 (the "Stated Maturity"). The Preferred
Securities will have a preference over the Common Securities under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise. See "Description of the Preferred
Securities--Subordination of the Common Securities."
(Continued on the following pages)
Application has been made to list the Preferred Securities on the Nasdaq
Stock Market's National Market under the symbol "PFSBP." See "Risk Factors--
Absence of Prior Public Market for the Preferred Securities; Trading Price and
Tax Considerations."
____________________________
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
____________________________
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS
AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR
THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Price to Underwriting Proceeds to
Public Commission(l) Issuer(2)(3)
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Per Preferred Security $ 25.00 (2) $ 25.00
Total(4) $30,000,000 (2) $30,000,000
(1) The Trust Issuer and PennFed have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures of
PennFed, PennFed has agreed to pay the Underwriter, as compensation for
their arranging the investment of such proceeds in the Junior Subordinated
Debentures, $_____ per Preferred Security, or $____ in the aggregate
($_______ in the aggregate if the over-allotment option is exercised in
full). See "Underwriting."
(3) Before deducting expenses payable by PennFed, estimated to be approximately
$____.
(4) The Trust Issuer and PennFed have granted the Underwriter a 30-day option
to purchase up to 180,000 additional Preferred Securities on the same terms
and conditions set forth above solely to cover over-allotments, if any. If
this option is exercised in full, the total Price to Public and Proceeds to
Issuer will be $34,500,000. See "Underwriting."
The Preferred Securities are offered by the Underwriter subject to receipt
and acceptance by it, prior sale and the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Preferred Securities will be made in book-
entry form through the book-entry facilities of The Depository Trust Company on
or about _________, 1997 against payment therefor in immediately available
funds.
RYAN, BECK & CO.
The date of this Prospectus is September 18, 1997
ii
(continued from the previous page)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depository ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of
Preferred Securities," Preferred Securities in definitive form will not be
issued and owners of beneficial interests in the global securities will not be
considered holders of the Preferred Securities. Settlement for the Preferred
Securities will be made in immediately available funds. The Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity for the Preferred Securities will therefore settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable quarterly in arrears on January 31, April 30, July
31 and October 31 of each year, commencing January 31, 1998, at the annual rate
of ___% of the Liquidation Amount (as defined herein) of $25 per Preferred
Security ("Distributions"). Subject to certain exceptions, PennFed has the
right to defer payment of interest on the Junior Subordinated Debentures at any
time or from time to time for a period not exceeding 20 consecutive quarters
with respect to each deferral period (each, an "Extension Period"), provided
that no Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of ___%, compounded quarterly, to the extent permitted by
applicable law), PennFed may elect to begin a new Extension Period subject to
the requirements set forth herein. If interest payments on the Junior
Subordinated Debentures are so deferred, Distributions on the Preferred
Securities will also be deferred, and PennFed will not be permitted, subject to
certain exceptions described herein, to declare or pay any cash distributions
with respect to the capital stock of PennFed or debt securities of PennFed that
rank pari passu with or junior to the Junior Subordinated Debentures.
During an Extension Period, interest on the Junior Subordinated Debentures
would continue to accrue (and the amount of Distributions to which holders of
the Preferred Securities are entitled would accumulate) at the rate of ___% per
annum, compounded quarterly, and holders of the Preferred Securities would be
required to include interest income in their gross income for United States
federal income tax purposes in advance of receipt of the cash distributions with
respect to such deferred interest payments. PennFed believes that the mere
existence of its right to defer interest payments should not cause the Preferred
Securities to be issued with original issue discount for federal income tax
purposes. However, it is possible that the Internal Revenue Service could take
the position that the likelihood of deferral was not a remote contingency within
the meaning of applicable Treasury Regulations. See "Description of the Junior
Subordinated Debentures-Right to Defer Interest Payment Obligation" and "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
iii
PennFed and the Trust Issuer believe that, taken together, the obligations
of PennFed under the Guarantee, the Trust Agreement, the Junior Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein),
constitute in the aggregate, a full, irrevocable and unconditional guarantee, on
a subordinated basis, of all of the Trust Issuer's obligations under the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures, the Expense Agreement and the Guarantee--Full
and Unconditional Guarantee." The Guarantee of PennFed (the "Guarantee")
guarantees the payment of Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in each case to the extent of
funds held by the Trust Issuer, as described herein. See "Description of the
Guarantee." If PennFed does not make interest payments on the Junior
Subordinated Debentures held by the Trust Issuer, the Trust Issuer will have
insufficient funds to pay Distributions on the Preferred Securities. The
Guarantee does not cover payment of Distributions when the Trust Issuer does not
have sufficient funds to pay such Distributions. In such event, a holder of the
Preferred Securities may institute a legal proceeding directly against PennFed
to enforce payment of amounts equal to such Distributions to such holder. See
"Description of the Junior Subordinated Debentures-Enforcement of Certain Rights
by Holders of the Preferred Securities."
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or their earlier redemption. Subject to regulatory approval, if then
required under applicable capital guidelines or regulatory policies, the Junior
Subordinated Debentures are redeemable prior to their Stated Maturity at the
option of the Company (i) on or after _____________, 2002, in whole at any time
or in part from time to time, or (ii) at any time, in whole (but not in part),
upon the occurrence and continuation of a Tax Event, an Investment Company Event
or a Capital Treatment Event (each as defined herein) at a redemption price (the
"Redemption Price") equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption plus 100%
of the principal amount thereof. See "Description of the Junior Subordinated
Debentures- Redemption or Exchange."
The obligations of PennFed under the Guarantee and the Junior Subordinated
Debentures will be unsecured and are subordinate and junior in right of payment
to all Senior Indebtedness (as defined in "Description of the Junior
Subordinated Debentures--Subordination") of PennFed. At June 30, 1997, PennFed
had no outstanding Senior Indebtedness. There is no limitation on the amount of
Senior Debt, or additional subordinated debt which is pari passu with the Junior
Subordinated Debentures, which PennFed may issue. PennFed may from time to time
incur indebtedness constituting Senior Indebtedness. See "Description of the
Junior Subordinated Debentures--Subordination."
iv
PennFed, as the holder of the Common Securities, will have the right at any
time to disolve the Trust Issuer. The ability of PennFed to do so may be
subject to PennFed's prior receipt of regulatory approval. In the event of the
dissolution of the Trust Issuer, after satisfaction of liabilities to creditors
of the Trust Issuer as required by applicable law, the holders of the Preferred
Securities will be entitled to receive a Liquidation Amount of $25 per Preferred
Security plus accumulated and unpaid Distributions thereon to the date of
payment, which may be in the form of a distribution of such amount in Junior
Subordinated Debentures, subject to certain exceptions. See "Description of the
Preferred Securities--Liquidation Distribution upon Termination."
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PennFed will provide to the holders of the Preferred Securities annual
reports containing financial statements audited by PennFed's independent
auditors. PennFed will also furnish annual reports on Form 10-K free of charge
to holders of the Preferred Securities who so request in writing addressed to
the Secretary of PennFed.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. ANY OF THE FOREGOING
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME WITHOUT NOTICE. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
v
[MAP INDICATING PENN FEDERAL'S BRANCH OFFICES]
vi
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes that the underwriters' over-allotment option will not be exercised.
PENNFED FINANCIAL SERVICES, INC.
GENERAL
PennFed Financial Services, Inc. ("PennFed" and with its subsidiary, where
appropriate, the "Company"), a Delaware corporation, was organized in March 1994
for the purpose of becoming the savings and loan holding company for Penn
Federal Savings Bank ("Penn Federal" or the "Bank") in connection with the
Bank's conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). PennFed owns all of the
outstanding stock of the Bank. All references to the Company, unless otherwise
indicated, prior to July 14, 1994 refer to the Bank and its subsidiary on a
consolidated basis. The Company's Common Stock is traded on the Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol "PFSB."
PennFed and the Bank are subject to comprehensive regulation, examination
and supervision by the Office of Thrift Supervision, Department of the Treasury
("OTS") and by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
a member of the Federal Home Loan Bank ("FHLB") System and its deposits are
insured up to applicable limits by the FDIC.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with borrowings and other funds, to
originate and purchase one- to four-family residential mortgage loans and, to a
lesser extent, commercial and multi-family real estate and consumer loans. See
"Business -Originations, Purchases, Sales and Servicing of Loans." The Company
also invests in mortgage-backed securities secured by one- to four-family
residential mortgages, U.S. Government and agency obligations and other
permissible investments.
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms, which generally include savings, money market, and a
variety of checking accounts, as well as certificate accounts. The Company
generally solicits deposits in its primary market areas.
At June 30, 1997, the Company had total assets of $1.3 billion, deposits of
$918.2 million, borrowings of $288.2 million and stockholders' equity of $97.3
million. The Bank exceeds all applicable minimum regulatory capital
requirements. At June 30, 1997, the Bank had tangible capital, core capital and
risk-based capital ratios of 5.61%, 5.64% and 12.22%, respectively. The
1
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Company's total stockholders' equity was $97.3 million at June 30, 1997 and its
stockholders' equity to total assets ratio at that date was 7.36%.
At June 30, 1997, the Company's gross loan portfolio totaled $928.9
million, including $831.8 million of one- to four-family residential first
mortgage loans, $56.8 million of commercial and multi-family real estate loans
and $40.2 million of consumer loans. In addition, on that date, the Company had
$288.5 million of mortgage-backed securities and $47.7 million of other
investment securities and FHLB of New York stock.
At June 30, 1997, the vast majority of the Company's first and second
mortgage loans (excluding mortgage-backed securities) were secured by properties
located in New Jersey. Of the loans secured by properties outside the State of
New Jersey, the majority are secured by one-to four-family loans and the balance
secured by commercial and multi-family real estate loans. See "Business-
Originations, Purchases, Sales and Servicing of Loans." The Company's revenues
are derived primarily from interest on loans, mortgage-backed securities and
investments, and income from service charges.
The Company had net income of $6.9 million and $7.8 million for the years
ended June 30, 1997 and June 30, 1996, respectively. Excluding the effect of a
one-time Savings Association Insurance Fund ("SAIF") recapitalization assessment
of approximately $3.1 million, net of taxes, the 1997 net income would have been
approximately $9.9 million.
Penn Federal, through its wholly-owned subsidiary, Penn Savings Insurance
Agency, Inc., offers insurance and uninsured annuity products to its customers.
See "Business-Subsidiary Activities."
The administrative offices of the Company are located at 622 Eagle Rock
Avenue, West Orange, New Jersey 07052-2989, and the telephone number at that
address is (973) 669-7366.
OPERATING STRATEGY
Management's primary goal continues to be to improve profitability, while
continuing to manage interest rate risk, so as to enhance stockholder value, and
to foster and maintain customer confidence. The Company's current strategies
focus on: (i) emphasizing lending secured by one-to four-family residential
mortgages, (ii) increasing the commercial and multi-family real estate and
consumer loan portfolios, (iii) maintaining asset quality, (iv) increasing
deposit balances, (v) managing the Company's exposure to interest rate risk, and
(vi) controlling non-interest expenses.
The Company is implementing these strategies as follows:
EMPHASIZING LENDING SECURED BY ONE- TO FOUR-FAMILY RESIDENTIAL FIRST
MORTGAGES. The Company has emphasized, and plans to continue to emphasize,
originating and purchasing traditional one-to four-family first mortgage loans
secured by properties in New Jersey. Correspondent loan
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purchases of one- to four-family mortgage loans through June 1997 have been
primarily secured by properties located throughout New Jersey with a limited
purchase of loans secured by real estate located in the Commonwealth of
Pennsylvania. The Company has approved the purchase of a limited amount of loans
secured by real estate located in the Commonwealth of Virginia and the
Commonwealth of Massachusetts through an existing correspondent relationship,
though none were purchased as of June 30, 1997. The Company originated or
purchased $337.3 million, $251.8 million and $123.3 million in one- to four-
family mortgage loans in fiscal 1997, 1996 and 1995, respectively. The Company's
interest income has been derived primarily from one- to four-family mortgage
loans on residential real estate which totaled $831.8 million or 89.55% of the
Company's gross loan portfolio at June 30, 1997.
INCREASING THE COMMERCIAL AND MULTI-FAMILY REAL ESTATE AND CONSUMER LOAN
PORTFOLIOS. In addition to one-to four-family residential first mortgage
lending, the Company plans to increase its emphasis on commercial and multi-
family real estate and consumer lending. Such loans reprice more frequently,
have shorter maturities, and/or have higher yields than one-to four-family first
mortgage loans. The Company originated $31.7 million, $23.4 million and $18.9
million of commercial and multi-family and consumer loans in fiscal 1997, 1996
and 1995, respectively. The Company has recently established a correspondent
relationship with a bank in New Jersey as part of an overall effort to increase
its commercial and multi-family real estate originations.
MAINTAINING ASSET QUALITY. The Company's loan portfolio consists primarily
of one- to four-family mortgages, which are considered to have less risk than
commercial and multi-family real estate or consumer loans.
The Company's non-performing assets consist of non-accruing loans and real
estate owned. The Company focuses on strong underwriting and collection
efforts and aggressive marketing of real estate owned properties. In addition,
the Company has occasionally restructured loans by reducing the interest rate or
deferring principal and interest payments in order to return the loan to a
performing status. As a result, non-performing assets as a percentage of total
assets was 0.48% at June 30, 1997 compared to 2.71% at June 30, 1993.
INCREASING DEPOSIT BALANCES. The Company's primary source of funds is
deposits. Deposits have increased 10%, 17% and 16% in fiscal 1997, 1996 and
1995, respectively. The Company plans to continue to emphasize deposit growth,
particularly longer term certificates of deposit, and increase its emphasis on
transaction accounts. It has recently emphasized the solicitation of deposits
from municipalities.
MANAGING THE COMPANY'S EXPOSURE TO INTEREST RATE RISK. The Company has an
asset/liability committee that meets no less than weekly to price loan and
deposit products and monthly to develop, implement and review policies to manage
interest rate risk. The Company has endeavored to manage its interest rate risk
through the pricing and diversification of its loan and deposit products,
including the focus on the origination and purchase of first mortgage loans with
shorter terms to maturity and/or with adjustable rate features, as well as the
origination of
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commercial and multi-family real estate and consumer loans which generally have
shorter expected average lives or reprice at shorter intervals than one- to
four-family residential first mortgage products. In addition, the Company has
purchased government agency mortgage-backed securities with short to
intermediate average lives which generally do not exceed 4.5 years or which have
adjustable rate features. Furthermore, as part of its interest rate risk
strategy, the Company has emphasized longer term certificates of deposit and
utilized intermediate term borrowings. The Company has also engaged in
intermediate term interest rate swaps designed to extend the maturities of six
month certificates of deposit to three to five years. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Interest Rate Sensitivity" and "-Asset/Liability Strategy."
CONTROLLING NON-INTEREST EXPENSES. Non-interest expenses are carefully
monitored, including ongoing reviews of staffing levels, supplies, facilities
and operations. Excluding the effects of the one-time SAIF recapitalization
assessment, the Company's ratio of non-interest expenses to average total assets
was 1.47% for the year ended June 30, 1997 compared to 1.84% for the prior
fiscal year. The Company's efficiency ratio, excluding the effects of the SAIF
assessment, was 43.92% for the year ended June 30, 1997 compared to 48.53% for
the prior fiscal year.
THE TRUST ISSUER
The Trust Issuer is a statutory business trust created under Delaware law
pursuant to (i) the Trust Agreement executed by the Company, as depositor, The
Bank of New York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee, and the Administrative Trustees named therein and (ii) the
filing of a certificate of trust with the Delaware Secretary of State on
________ __, 1997. The trust agreement will be amended and restated in its
entirety (as so amended, the "Trust Agreement"). All of the Common Securities
will be owned by the Company. The Company will acquire Common Securities in an
aggregate Liquidation Amount equal to 3% of the total capital of the Trust
Issuer. The Trust Issuer exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the Trust
Securities to acquire Junior Subordinated Debentures issued by the Company and
(iii) engaging in only those other activities necessary, advisable or incidental
thereto (such as registering the transfer of the Trust Securities).
Accordingly, the Junior Subordinated Debentures will be the sole assets of the
Trust Issuer, and payments under the Junior Subordinated Debentures will be the
sole revenue of the Trust Issuer. The principal executive office of the Trust
Issuer is 622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989 and its
telephone number is (973) 669-7366.
THE OFFERING
THE TRUST ISSUER........... PennFed Capital Trust I, a Delaware statutory
business trust (the "Trust Issuer").The sole
assets of the Trust Issuer will be the Junior
Subordinated Debentures.
4
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SECURITIES OFFERED......... 1,200,000 shares of ___% Cumulative Trust
Preferred Securities (the "Preferred
Securities"), evidencing preferred undivided
beneficial interests in the assets of the Trust
Issuer, which will consist only of the Junior
Subordinated Debentures.
OFFERING PRICE............. $25 per Preferred Security (Liquidation Amount
$25).
DISTRIBUTIONS.............. Holders of the Preferred Securities will be
entitled to receive cumulative cash Distributions
at an annual rate of ___% of the Liquidation
Amount of $25 per Preferred Security,
accumulating from the date of original issuance
and payable quarterly in arrears on January 31,
April 30, July 31 and October 31 of each year,
commencing on January 31, 1998. The distribution
rate and the distribution and other payment dates
for the Preferred Securities will correspond to
the interest rate and interest and other payment
dates on the Junior Subordinated Debentures. See
"Description of the Preferred Securities."
JUNIOR SUBORDINATED
DEBENTURES................. The Trust Issuer will invest the proceeds from
the issuance of the Trust Securities in an
equivalent amount of the Junior Subordinated
Debentures. The Junior Subordinated Debentures
will mature on ___________, 2027. The Junior
Subordinated Debentures will rank subordinate and
junior in right of payment to all Senior
Indebtedness of PennFed. At June 30, 1997,
PennFed had no outstanding Senior Indebtedness.
There is no limitation on the amount of Senior
Indebtedness, or Subordinated Debt (as defined in
"Description of Junior Subordinated Debentures-
Subordination") which is pari passu with the
Junior Subordinated Debentures, which PennFed may
issue. PennFed may from time to time, incur
indebtedness constituting Senior Indebtedness. In
addition, because PennFed is a holding company,
PennFed's obligations under the Junior
Subordinated Debentures will effectively be
subordinated to all existing and future
liabilities and obligations of its subsidiaries,
including the Bank. See "Risk Factors--
Subordination of the Guarantee and the Junior
Subordinated Debentures," "Risk Factors--Source
of Payments to Holders of Preferred Securities"
and "Description of the Junior Subordinated
Debentures--Subordination."
5
______________________________________________________________________________
_______________________________________________________________________________
GUARANTEE.................. Payments of Distributions out of funds held by
the Trust Issuer, and payments on liquidation of
the Trust Issuer or the redemption of the
Preferred Securities, are guaranteed by PennFed
to the extent the Trust Issuer has funds
available therefor. PennFed and the Trust Issuer
believe that, taken together, the obligations of
PennFed under the Guarantee, the Trust Agreement,
the Junior Subordinated Debentures, the Indenture
and the Expense Agreement, constitute, in the
aggregate, a full and unconditional guarantee, on
a subordinated basis, of all of the Trust
Issuer's obligations under the Preferred
Securities. See "Description of the Guarantee"
and "Relationship Among the Preferred Securities,
the Junior Subordinated Debentures, the Expense
Agreement and the Guarantee." The obligations of
PennFed under the Guarantee are subordinate and
junior in right of payment to all Senior
Indebtedness of PennFed. See "Risk Factors--
Subordination of the Guarantee and the Junior
Subordinated Debentures" and "Description of the
Guarantee. "
RIGHT TO DEFER
INTEREST PAYMENTS.......... So long as no event of default under the
Indenture has occurred and is continuing, PennFed
has the right under the Indenture at any time
during the term of the Junior Subordinated
Debentures to defer the payment of interest at
any time or from time to time for a period not
exceeding 20 consecutive quarters with respect to
each Extension Period, provided that no Extension
Period may extend beyond the Stated Maturity of
the Junior Subordinated Debentures. At the end of
such Extension Period, PennFed must pay all
interest then accrued and unpaid (together with
interest thereon at the annual rate of ___%,
compounded quarterly, to the extent permitted by
applicable law). During an Extension Period,
interest will continue to accrue and holders of
the Junior Subordinated Debentures (or holders of
the Preferred Securities, while outstanding) will
be required to accrue interest income for United
States federal income tax purposes in advance of
receipt of payment of such deferred interest. See
"Certain Federal Income Tax Consequences--
Interest Income and Original Issue Discount").
During any such Extension Period, PennFed may
not, and may not permit any subsidiary of PennFed
to, (i) declare or pay any dividends or
distributions on, or redeem, purchase,
6
_______________________________________________________________________________
_______________________________________________________________________________
acquire or make a liquidation payment with
respect to, any of PennFed's capital stock (other
than (a) the reclassification of any class of
PennFed's capital stock into another class of
capital stock, (b) dividends or distributions
payable in common stock of PennFed, (c) any
declaration of a dividend in connection with the
implementation of a stockholders' rights plan,
the issuance of stock under any such plan in the
future or the redemption or repurchase of any
such rights pursuant thereto, (d) payments under
the Guarantee and (e) purchases of common stock
related to the issuance of common stock or rights
under any of PennFed's benefit plans for its
directors, officers or employees), (ii) make any
payment of principal, interest or premium, if
any, on, or repay, repurchase or redeem, any debt
securities of PennFed that rank pari passu with
or junior in right of payment to the Junior
Subordinated Debentures, or (iii) make any
guarantee payments with respect to any guarantee
by PennFed of the debt securities of any
subsidiary of PennFed if such guarantee ranks
pari passu with or junior in right of payment to
the Junior Subordinated Debentures other than
payments pursuant to the Guarantee. Prior to the
termination of any such Extension Period, PennFed
may further defer the payment of interest on the
Junior Subordinated Debentures, provided that no
Extension Period may exceed 20 consecutive
quarters or extend beyond the Stated Maturity of
the Junior Subordinated Debentures. There is no
limitation on the number of times that PennFed
may elect to begin an Extension Period. See
"Description of the Junior Subordinated
Debentures--Right to Defer Interest Payment
Obligation" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue
Discount."
PennFed has no current intention of exercising
its right to defer payments of interest by
extending the interest payment period on the
Junior Subordinated Debentures. However, should
PennFed elect to exercise such right in the
future, the market price of the Preferred
Securities is likely to be adversely affected. As
a result of the existence of PennFed's right to
defer interest payments, the market price of the
Preferred Securities may be more volatile than
the market prices of other similar securities
that do not provide for such optional deferrals.
7
_______________________________________________________________________________
_______________________________________________________________________________
REDEMPTION................. The Junior Subordinated Debentures are subject to
redemption prior to their Stated Maturity at the
option of PennFed (i) on or after ___________,
2002, in whole at any time or in part from time
to time, or (ii) at any time, in whole (but not
in part), within 180 days following the
occurrence and continuation of a Tax Event, an
Investment Company Event or a Capital Treatment
Event (each as defined herein) in each case at a
redemption price equal to 100% of the principal
amount of the Junior Subordinated Debentures so
redeemed, together with any accrued and unpaid
interest to the date fixed for redemption.
If the Junior Subordinated Debentures are
redeemed prior to their Stated Maturity, the
Trust Issuer must apply the proceeds of such
redemption to redeem a Like Amount (as defined
herein) of the Preferred Securities and the
Common Securities. The Preferred Securities will
be redeemed upon repayment of the Junior
Subordinated Debentures at their Stated Maturity.
See "Description of the Preferred Securities--
Redemption."
DISTRIBUTION OF THE JUNIOR
SUBORDINATED DEBENTURES
UPON LIQUIDATION OF THE
TRUST ISSUER.............. PennFed will have the right at any time to
dissolve the Trust Issuer and, after satisfaction
of creditors of the Trust Issuer, if any, as
provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the
holders of the Preferred Securities and the
Common Securities in exchange therefor upon
liquidation of the Trust Issuer. The ability of
PennFed to do so may be subject to PennFed's
prior receipt of regulatory approval.
In the event of the liquidation of the Trust
Issuer, after satisfaction of the claims of
creditors of the Trust Issuer, if any, as
provided by applicable law, the holders of the
Preferred Securities will be entitled to receive
a Liquidation Amount of $25 per Preferred
Security plus accumulated and unpaid
Distributions thereon to the date of payment,
which may be in the form of a distribution of a
Like Amount (as defined herein) of the Junior
Subordinated Debentures, subject to certain
exceptions as described herein. See "Description
of the Preferred Securities--Liquidation of the
Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders."
8
_______________________________________________________________________________
________________________________________________________________________________
VOTING RIGHTS.............. Except in limited circumstances, the holders of
the Preferred Securities will have no voting
rights. See "Description of the Preferred
Securities--Voting Rights; Amendment of Trust
Agreement."
USE OF PROCEEDS............ All of the proceeds from the sale of the
Preferred Securities will be used by the Trust
Issuer to purchase Junior Subordinated
Debentures. PennFed intends that the net proceeds
from the sale of such Junior Subordinated
Debentures will be used for general corporate
purposes, including, but not limited to,
acquisitions by either the Company or the Bank
(although there presently exist no agreements or
understandings with respect to any such
acquisition), capital contributions to the Bank
to support growth and for working capital, and
the possible repurchase of shares of PennFed's
common stock, subject to acceptable market
conditions.
RISK FACTORS............... An investment in the Preferred Securities
involves substantial risks that should be
considered by prospective purchasers. In
addition, because holders of the Preferred
Securities may receive Junior Subordinated
Debentures on termination of the Trust Issuer,
and because payments on the Junior Subordinated
Debentures are the sole source of funds for
Distributions on and redemptions of the Preferred
Securities, prospective purchasers of the
Preferred Securities are also making an
investment decision with regard to the Junior
Subordinated Debentures and should carefully
review all of the information regarding the
Junior Subordinated Debentures contained herein.
See "Risk Factors" and "Description of the Junior
Subordinated Debentures. "
NASDAQ NATIONAL MARKET
SYMBOL.................... Application has been made to have the Preferred
Securities approved for listing on The Nasdaq
Stock Market's National Market under the symbol
"PFSBP."
ERISA CONSIDERATIONS....... For a discussion of certain restrictions on
purchases, see "ERISA Considerations."
9
________________________________________________________________________________
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The Summary Consolidated Financial Data presented below has been derived
from the audited Consolidated Financial Statements of the Company (the Bank
prior to 1995), and are qualified in their entirety by reference to the more
detailed Consolidated Financial Statements and notes thereto, included elsewhere
within.
AT JUNE 30,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ------------- --------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED FINANCIAL CONDITION DATA:
Total assets ................................. $1,321,751 $1,086,524 $868,926 $ 680,157 $581,474
Loans receivable, net ........................ 931,451 652,571 467,677 383,357 399,334
Mortgage-backed securities ................... 288,539 346,068 319,436 204,870 123,288
Investment securities ........................ 35,290 21,288 17,558 11,167 11,302
Deposits ..................................... 918,160 836,416 713,524 614,860/(1)/ 525,268
Total borrowings ............................. 288,215 146,700 50,830 15,000 10,000
Stockholders' equity.......................... 97,270 90,564 94,170 41,985 37,432
Book value per common share................... 21.83 20.50 18.17 --- ---
Tangible book value per common share.......... 18.26 16.33 14.11 --- ---
(1) Includes approximately $53.8 million received and held on deposit for the
purchase of stock in the Company's initial public offering completed on
July 14, 1994.
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
1997/(1)/ 1996 1995 1994 1993
--------------------- -------- --------- --------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED OPERATING DATA:
Total interest and dividend income.................... $ 85,401 $68,123 $52,719 $43,045 $46,085
Total interest expense................................ 53,073 39,121 27,153 20,825 23,382
------------ ------- ------- ------- -------
Net interest and dividend income...................... 32,328 29,002 25,566 22,220 22,703
Provision for loan losses............................. 635 610 569 883 1,561
------------ ------- ------- ------- -------
Net interest income after provision for loan losses... 31,693 28,392 24,997 21,337 21,142
------------ ------- ------- ------- -------
Service charges....................................... 1,666 1,602 1,476 1,686 1,634
Net gain (loss) from real estate operations........... (181) 104 117 (541) (549)
Net gain (loss) on sales of loans..................... --- --- --- (19) 652
Net gain on sales of investment securities............ --- 94 --- --- 91
Other................................................. 298 402 532 540 35
------------ ------- ------- ------- -------
Total non-interest income............................. 1,783 2,202 2,125 1,666 1,863
------------ ------- ------- ------- -------
Total non-interest expenses........................... 22,385/(1)/ 17,642 17,561 15,556 15,688
------------ ------- ------- ------- -------
Income before taxes and cumulative effect of
change in accounting principle..................... 11,091 12,952 9,561 7,447 7,317
Income tax expense 4,205 5,111 3,921 3,005 2,647
Cumulative effect of change in accounting principle --- --- --- 111 ---
------------ ------- ------- ------- -------
Net income $ 6,886/(1)/ $ 7,841 $ 5,640 $ 4,553 $ 4,670
============ ======= ======= ======= =======
Net income per common share:
Primary $1.46/(1)/ $1.55 $1.08 $ --- $ ---
============ ======= ======= ======= =======
Fully diluted $1.44/(1)/ $1.55 $1.08 $ --- $ ---
============ ======= ======= ======= =======
(1) Fiscal 1997 includes the effect of a one-time SAIF recapitalization
assessment of approximately $4.8 million, or $3.1 million net of taxes.
Excluding this non-recurring assessment, total non-interest expenses would
have been $17.6 million, net income would have been $9.9 million, primary
earnings per share would have been $2.11 and fully diluted earning per
share would have been $2.09.
10
AT AND FOR THE YEAR ENDED JUNE 30,
------------------------------------------------
1997/(1)/ 1996 1995 1994 1993
---------- ------ ------ ------ ------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets (ratio of net income to
average total assets).......................................... 0.58%/(1)/ 0.82% 0.74% 0.76% 0.80%
Return on average stockholders' equity (ratio of
net income to average stockholders' equity).................... 7.42/(1)/ 8.36 5.97 11.40 13.25
Net interest rate spread during the year......................... 2.58 2.96 3.24 3.90 4.24
Net interest margin (net interest and dividend
income to average interest-earning assets)..................... 2.83 3.22 3.58 3.95 4.24
Ratio of average interest-earning assets to average
interest-bearing liabilities................................... 105.30 105.87 109.05 101.57 100.01
Ratio of earnings to fixed charges/(2)/:
Excluding interest on deposits 1.86x 3.35x 7.28x 10.44x 7,318.00x
Including interest on deposits 1.21x 1.33x 1.35x 1.36x 1.31x
Ratio of non-interest expense to average total assets............ 1.87%/(1)/ 1.84% 2.31% 2.58% 2.70%
Efficiency ratio (non-interest expense, excluding
amortization of intangibles, to net interest and
dividend income and non-interest income excluding
gains and real estate operations).............................. 57.95/(1)/ 48.53 58.63 59.10 59.09
ASSET QUALITY RATIOS:
Non-accruing loans to total loans at end of year................. 0.59 0.95 1.18 2.55 3.48
Allowance for loan losses to non-accruing loans
at end of year................................................. 47.80 42.52 51.39 31.04 22.31
Allowance for loan losses to total loans at end of year.......... 0.28 0.40 0.61 0.79 0.78
Non-performing assets to total assets at end of year............. 0.48 0.67 0.78 1.67 2.71
Ratio of net charge-offs during the year to average loans
outstanding during the year.................................... 0.08 0.16 0.19 0.25 0.43
CAPITAL RATIOS:
Stockholders' equity to total assets at end of year.............. 7.36 8.34 10.84 6.17 6.44
Average stockholders' equity to average total assets............. 7.76 9.80 12.44 6.63 6.06
Tangible capital to tangible assets at end of year/(3)/.......... 5.61 5.92 6.29 5.55 5.55
Core capital to adjusted tangible assets at end of year/(3)/..... 5.64 5.97 6.38 5.71 5.81
Risk-based capital to risk-weighted assets at end of year/(3)/... 12.22 13.47 14.49 13.16 11.61
OTHER DATA:
Number of branch offices at end of year.......................... 17 17 17 16 16
Number of deposit accounts at end of year........................ 85,400 81,700 78,800 63,100 64,800
(1) Fiscal 1997 results include the effect of a one-time SAIF recapitalization
assessment of approximately $4.8 million, or $3.1 million net of taxes.
Excluding this non-recurring assessment, return on average assets would
have been 0.83%, return on average stockholders' equity would have been
10.70%, the ratio of non-interest expense to average total assets would
have been 1.47% and the efficiency ratio would have been 43.92%.
(2) The ratio of earnings to fixed charges excluding interest on deposits is
calculated by dividing income before taxes and extraordinary items before
interest on borrowings by interest on borrowings on a pretax basis. The
ratio of earnings to fixed charges including interest on deposits is
calculated by dividing income before income taxes and extraordinary items
before interest on deposits and borrowings by interest on deposits plus
interest on borrowings on a pretax basis.
(3) Represents regulatory capital ratios for the Bank.
11
RISK FACTORS
An investment in the Preferred Securities involves a high degree of risk.
Prospective investors should carefully consider, together with the other
information contained in this Prospectus, the following factors in evaluating
the Company, its business and the Trust Issuer before purchasing the Preferred
Securities offered hereby. Prospective investors should note, in particular,
that this Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve substantial risks and uncertainties. When used in
this Prospectus, the words "anticipate," "believe," "estimate," "may," "intend"
and "expect" and similar expressions identify certain of such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. The considerations listed below represent certain important
factors the Company believes could cause such results to differ. These
considerations are not intended to represent a complete list of the general or
specific risks that may affect the Company and the Trust Issuer. It should be
recognized that other risks, including general economic factors and expansion
strategies, may be significant, presently or in the future, and the risks set
forth below may affect the Company and the Trust Issuer to a greater extent than
indicated.
RISK FACTORS RELATING TO THE OFFERING
SUBORDINATION OF THE GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES
The obligations of PennFed under the Guarantee issued by PennFed for the
benefit of the holders of the Preferred Securities and under the Junior
Subordinated Debentures issued to the Trust Issuer will be unsecured and will
rank subordinate and junior in right of payment to all Senior Indebtedness of
PennFed. At June 30, 1997, PennFed had no outstanding Senior Indebtedness.
There is no limitation on the amount of Senior Indebtedness, or subordinated
debt which is pari passu with the Junior Subordinated Debentures, which PennFed
may issue. Because PennFed is a holding company, the right of PennFed to
participate in any distribution of assets of any subsidiary, including the Bank,
upon such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Preferred Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that subsidiary
(including depositors in the Bank), except to the extent that PennFed may itself
be recognized as a creditor of that subsidiary. If PennFed is a creditor of a
subsidiary, the claims of PennFed would be subject to any prior security
interest in the assets of the subsidiary and any indebtedness of the subsidiary
senior to that of PennFed. Accordingly, the Junior Subordinated Debentures and
the Guarantee will be effectively subordinated to all existing and future
liabilities of PennFed's subsidiaries, including the Bank. At June 30, 1997 the
Bank had liabilities of $1.2 billion (including $918.2 million in deposits).
Only the capital stock of PennFed is currently junior in right of payment to the
Junior Subordinated Debentures to be issued to the Trust Issuer. Holders of the
Junior Subordinated Debentures will be able to look only to the assets of
PennFed for payments on the Junior Subordinated Debentures. None of the
Indenture, the
12
Guarantee, the Expense Agreement or the Trust Agreement places any limitation on
the amount of secured or unsecured debt, including Senior Indebtedness, that may
be incurred by PennFed. PennFed may, from time to time, incur indebtedness
constituting Senior Indebtedness. See "Description of the Guarantee--Status of
the Guarantee" and "Description of the Junior Subordinated Debentures--
Subordination."
SOURCE OF PAYMENTS TO HOLDERS OF PREFERRED SECURITIES
As a savings and loan holding company, PennFed conducts its operations
principally through its subsidiaries and, therefore, its principal source of
cash, other than its investing and financing activities, is the receipt of
dividends from the Bank. Since PennFed is without significant assets other than
the capital stock of the Bank, the ability of PennFed to pay interest on the
principal of the Junior Subordinated Debentures to the Trust Issuer (and
consequently, the Trust Issuer's ability to pay Distributions on the Preferred
Securities and PennFed's ability to pay its obligations under the Guarantee)
will be dependent on the ability of the Bank to pay dividends to PennFed in
amounts sufficient to service PennFed's obligations. PennFed may become
obligated to make other payments with respect to securities issued by PennFed in
the future which are pari passu or have a preference over the Junior
Subordinated Debentures issued to the Trust Issuer with respect to the payment
of principal, interest or dividends. There is no restriction on the ability of
PennFed to issue, or limitations on the amount of securities which PennFed may
issue, which are pari passu or have a preference over the Junior Subordinated
Debentures issued to the Trust Issuer, nor is there any restriction on the
ability of the Bank to issue additional capital stock or incur additional
indebtedness.
There are legal limitations on the source and amount of dividends that a
savings bank such as the Bank is permitted to pay. The current OTS regulation
applicable to the payment of dividends or other capital distributions by savings
institutions imposes limits on capital distributions based on an institution's
regulatory capital levels and net income. An institution that meets or exceeds
all of its fully phased-in capital requirements (both before and after giving
effect to the distribution) and is not in need of more than normal supervision
would be a "Tier 1 association." A Tier 1 association may make capital
distributions during a calendar year of up to the greater of (i) 100% of net
income for the current calendar year plus 50% of the amount by which the lesser
of the association's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year or (ii) 75% of its net income over the most
recent four quarters. At June 30, 1997, the Bank could have paid dividends
totaling approximately $16.6 million. Any additional capital distributions
would require prior regulatory approval. The Bank currently exceeds its fully
phased-in capital requirements and qualifies as a Tier 1 association under the
regulation, but there is no assurance that the Bank will continue to so qualify.
See "Regulation-Regulatory Capital Requirements."
An institution that meets the minimum regulatory capital requirements but
does not meet the fully phased-in capital requirements would be a "Tier 2
association," which may make capital distributions of between 25% and 75% of its
net income over the most recent four-quarter period, depending on the
institution's risk-based capital level. A "Tier 3 association" is defined as an
13
institution that does not meet all of the minimum regulatory capital
requirements and therefore may not make any capital distributions without the
prior approval of the OTS.
Savings institutions must provide the OTS with at least 30 days written
notice before making any capital distributions. All such capital distributions
are also subject to the OTS' right to object to a distribution on safety and
soundness grounds.
RIGHT TO DEFER INTEREST PAYMENT OBLIGATION; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
So long as no event of default under the Indenture has occurred and is
continuing, PennFed has the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures, at any time or from time to
time, for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Trust
Issuer would also be deferred (and the amount of Distributions to which holders
of the Preferred Securities are entitled would accumulate additional
Distributions thereon at the rate of ___% per annum, compounded quarterly from
the relevant payment date for such Distributions) during any such Extension
Period. During any such Extension Period, PennFed may not, and may not permit
any subsidiary of PennFed to, (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of PennFed's capital stock, (other than (a) the reclassification of
PennFed's capital stock into another class of capital stock, (b) dividends or
distributions in common stock of PennFed, (c) any declaration of a dividend in
connection with the implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (d) payments under the Guarantee
and (e) purchases of common stock related to the issuance of common stock or
rights under any of PennFed's benefit plans for its directors, officers or
employees), (ii) make any payment of principal, interest or premium, if any, on
or repay, repurchase or redeem any debt securities of PennFed that rank pari
passu with or junior in interest to the Junior Subordinated Debentures or (iii)
make any guarantee payments with respect to any guarantee by PennFed of the debt
securities of any subsidiary of PennFed if such guarantee ranks pari passu with
or junior in interest to the Junior Subordinated Debentures other than payments
pursuant to the Guarantee. Prior to the termination of any such Extension
Period, PennFed may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarters or extend beyond the Stated
Maturity of the Junior Subordinated Debentures. Upon the termination of any
Extension Period and the payment of all interest then accrued and unpaid on the
Junior Subordinated Debentures (together with interest thereon at the annual
rate of ___%, compounded quarterly from the relevant payment date for such
interest, to the extent permitted by applicable law), PennFed may elect to begin
a new Extension Period subject to the above requirements. There is no
limitation on the number of times that PennFed may elect to begin an Extension
Period so long as no event of default under the Indenture has occurred and is
continuing. See "Description of the Preferred Securities--Distributions" and
"Description of the Junior Subordinated Debentures--Right to Defer Interest
Payment Obligation."
14
If an Extension Period were to occur, a holder of the Preferred Securities
would continue to accrue income (in the form of original issue discount) for
United States federal income tax purposes in respect of its pro rata share of
the interest accruing on the Junior Subordinated Debentures held by the Trust
Issuer. As a result, a holder of the Preferred Securities would be required to
include such income in gross income for United States federal income tax
purposes in advance of the receipt of cash and would not receive the cash
related to such income from the Trust Issuer if the holder disposed of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount" and "--Sales or Redemption of the Preferred Securities."
PennFed has no current intention of exercising its right to defer payments
of interest on the Junior Subordinated Debentures. However, should PennFed
elect to exercise such right in the future, the market price of the Preferred
Securities would likely be adversely affected. A holder that disposed of its
Preferred Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continued to hold its
Preferred Securities. In addition, as a result of the existence of PennFed's
right to defer interest payments, the market price of the Preferred Securities
may be more volatile than the market prices of other similar securities that are
not subject to such deferrals.
OPTIONAL REDEMPTION AFTER 2002
PennFed has the right to redeem the Junior Subordinated Debentures prior to
their stated Maturity on or after ______, 2002 in whole at one time or in part
from time to time. The exercise of such right may be subject to PennFed having
received prior regulatory approval. See "Description of the Junior Subordinated
Debentures--General."
REDEMPTION DUE TO TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL TREATMENT EVENT
PennFed has the right, but not the obligation, to redeem the Junior
Subordinated Debentures in whole (but not in part) within 180 days following the
occurrence of a Tax Event, an Investment Company Event or a Capital Treatment
Event (whether occurring before or after __________, 2002), and, therefore,
cause a mandatory redemption of the Preferred Securities. The exercise of such
right may be subject to PennFed having received prior regulatory approval.
A "Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Preferred
Securities under the Trust Agreement, there is more than an insubstantial risk
that (i) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by PennFed on the Junior Subordinated Debentures is not, or within 90 days of
the date of
15
such opinion will not be, deductible by PennFed, in whole or in part, for United
States federal income tax purposes or (iii) the Trust Issuer is, or will be
within 90 days of the date of such opinion, subject to more than a de minimis
amount of other taxes, duties or other governmental charges. The Trust Issuer or
PennFed must request and receive an opinion with regard to such matters within a
reasonable period of time after it becomes aware of the possible occurrence of
any of the events described in clauses (i) through (iii) above.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), which change occurs or becomes effective
on or after the date of original issuance of the Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or such proposed change, pronouncement, action or decision
is announced on or after the date of original issuance of the Preferred
Securities, there is more than an insubstantial risk that the Preferred
Securities would not constitute Tier 1 Capital (or the then equivalent thereof)
applied as if PennFed (or its successor) were a bank holding company for
purposes of applicable capital adequacy guidelines of the Federal Reserve (or
any successor regulatory authority with jurisdiction over bank holding
companies), or any capital adequacy guidelines as then in effect and applicable
to PennFed.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as are being opined upon.
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES; REDEMPTION
AND TAX CONSEQUENCES
PennFed has the right at any time to dissolve the Trust Issuer and, after
the satisfaction of liabilities to creditors of the Trust Issuer as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Preferred Securities in exchange therefor in liquidation of
the Trust Issuer. The exercise of such right may be subject to PennFed having
received prior regulatory approval. PennFed will have the right, in certain
circumstances, to redeem the Junior Subordinated Debentures in whole or in part,
in lieu of a distribution of the Junior Subordinated Debentures by the Trust
Issuer, in which event the Trust Issuer will redeem the Preferred Securities on
a pro rata basis to the same extent as the Junior Subordinated Debentures are
redeemed by PennFed. Any such distribution or redemption prior to the Stated
Maturity will be subject to prior regulatory approval if then required under
applicable capital guidelines or regulatory policies. See "Description of the
Preferred Securities--Liquidation of the Trust Issuer and
16
Distribution of the Junior Subordinated Debentures to Holders" and "Description
of the Junior Subordinated Debentures--Redemption or Exchange."
Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust Issuer would
not be a taxable event to holders of the Preferred Securities. If, however, the
Trust Issuer were characterized as an association taxable as a corporation at
the time of the dissolution of the Trust Issuer, the distribution of the Junior
Subordinated Debentures would constitute a taxable event to holders of Preferred
Securities. Moreover, any redemption of the Preferred Securities for cash would
be a taxable event to such holders. See "Certain Federal Income Tax
Consequences--Distribution of the Junior Subordinated Debentures to Holders of
the Preferred Securities" and "--Sales or Redemption of the Preferred
Securities."
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the Trust
Issuer. The Preferred Securities or the Junior Subordinated Debentures may
trade at a discount to the price that the investor paid to purchase the
Preferred Securities offered hereby. Because holders of Preferred Securities
may receive Junior Subordinated Debentures as a result of the liquidation of the
Trust, and because payments on the Junior Subordinated Debentures are the sole
source of funds for Distributions and redemptions of the Preferred Securities,
prospective purchasers of Preferred Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and should carefully
review all the information regarding the Junior Subordinated Debentures
contained herein.
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the liquidation of the Trust Issuer, PennFed will use
its reasonable efforts to list the Junior Subordinated Debentures on the Nasdaq
Stock Market's National Market or SmallCap Market or such stock exchanges, if
any, on which the Preferred Securities are then listed.
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities the
following payments, to the extent not paid by the Trust Issuer: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities in exchange therefor), the lesser of (a) the aggregate of the
Liquidation Amount and all accumulated and unpaid Distributions to the date of
payment, to the extent that the Trust Issuer has funds on hand available
therefor at such time, and (b) the amount of assets of the Trust Issuer
remaining available for distribution to holders of the Preferred Securities
after payment of creditors of the Trust Issuer as required by applicable law.
17
If PennFed were to default on its obligation to pay amounts payable under
the Junior Subordinated Debentures, the Trust Issuer would lack funds for the
payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee. Any holder of the Preferred
Securities may institute a legal proceeding directly against PennFed to enforce
its rights under the Guarantee without first instituting a legal proceeding
against the Trust Issuer, the Guarantee Trustee or any other person or entity.
In the event an event of default under the Indenture shall have occurred and be
continuing and such event is attributable to the failure of PennFed to pay
interest on or principal of the Junior Subordinated Debentures on the applicable
payment date, a holder of the Preferred Securities may institute a legal
proceeding directly against PennFed for enforcement of payment to such holder of
the principal of or interest on such Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Preferred
Securities of such holder (a "Direct Action"). The exercise by PennFed of its
right, as described herein, to defer the payment of interest on the Junior
Subordinated Debentures does not constitute an event of default under the
Indenture. In connection with any Direct Action, PennFed will have a right of
set-off under the Indenture to the extent of any payment made by PennFed to such
holder of the Preferred Securities in the Direct Action. Except as described
herein, holders of the Preferred Securities will not be able to exercise
directly any other remedy available to the holders of the Junior Subordinated
Debentures or assert directly any other rights in respect of the Junior
Subordinated Debentures. The Bank of New York will act as the guarantee trustee
under the Guarantee (the "Guarantee Trustee") and will hold the Guarantee for
the benefit of the holders of the Preferred Securities. The Bank of New York
will also act as Debenture Trustee for the Junior Subordinated Debentures and as
Property Trustee, and The Bank of New York (Delaware) will act as Delaware
Trustee under the Trust Agreement. See "Description of the Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of the Preferred
Securities," "Description of the Junior Subordinated Debentures--Debenture
Events of Default" and "Description of the Guarantee." The Trust Agreement
provides that each holder of the Preferred Securities by acceptance thereof
agrees to the provisions of the Guarantee and the Indenture.
LIMITED COVENANTS
The covenants in the Indenture are limited and there are no covenants in
the Trust Agreement. As a result, neither the Indenture nor the Trust Agreement
protects holders of Junior Subordinated Debentures or Preferred Securities,
respectively, in the event of a material adverse change in PennFed's financial
condition or results of operations or limits the ability of PennFed or any
subsidiary to incur or assume additional indebtedness or other obligations.
Additionally, neither the Indenture nor the Trust Agreement contains any
financial ratios or specified levels of liquidity to which PennFed must adhere.
Therefore, the provisions of these governing instruments should not be
considered a significant factor in evaluating whether PennFed will be able to or
will comply with its obligations under the Junior Subordinated Debentures or the
Guarantee.
18
LIMITED VOTING RIGHTS
Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities and the
exercise of the Trust Issuer's rights as holder of the Junior Subordinated
Debentures and the Guarantee. Holders of the Preferred Securities will not be
entitled to vote to appoint, remove or replace the Property Trustee, the
Delaware Trustee or the Administrative Trustees, as such voting rights are
vested exclusively in PennFed, as the holder of the Common Securities (except,
with respect to the Property Trustee and the Delaware Trustee, upon the
occurrence of certain events described herein). The Property Trustee, the
Administrative Trustees and PennFed may amend the Trust Agreement without the
consent of holders of the Preferred Securities to ensure that the Trust Issuer
will be classified for United States federal income tax purposes as a grantor
trust even if such action adversely affects the interests of such holders. See
"Description of the Preferred Securities--Voting Rights; Amendment of the Trust
Agreement" and "--Removal of the Trust Issuer Trustees."
ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES; TRADING PRICE AND
TAX CONSIDERATIONS
There is no current public market for the Preferred Securities.
Application has been made to list the Preferred Securities on the Nasdaq Stock
Market's National Market. However, one of the requirements for listing and
continued listing is the presence of two market makers for the Preferred
Securities. PennFed has been advised that the Underwriter intends to make a
market in the Preferred Securities. However, the Underwriter is not obligated
to do so and such market making may be discontinued at any time. Therefore,
there is no assurance that an active trading market will develop for the
Preferred Securities or, if such market develops, that it will be maintained or
that the market price will equal or exceed the public offering price set forth
on the cover page of this Prospectus. Accordingly, holders of Preferred
Securities may experience difficulty reselling them or may be unable to sell
them at all. The public offering price for the Preferred Securities has been
determined through negotiations between PennFed and the Underwriter. Prices for
the Preferred Securities will be determined in the marketplace and may be
influenced by many factors, including prevailing interest rates, the liquidity
of the market for the Preferred Securities, investor perceptions of PennFed and
general industry and economic conditions.
Further, should PennFed exercise its option to defer any payment of
interest on the Junior Subordinated Debentures, the Preferred Securities would
be likely to trade at prices that do not fully reflect the value of accrued but
unpaid interest with respect to the underlying Junior Subordinated Debentures.
In the event of such a deferral, a holder of Preferred Securities that disposed
of its Preferred Securities between record dates for payments of Distributions
(and consequently did not receive a Distribution from the Trust Issuer for the
period prior to such disposition) would nevertheless be required to include
accrued but unpaid interest on the Junior Subordinated Debentures through the
date of disposition in income as ordinary income and to add such amount to the
adjusted tax basis of the Preferred Securities disposed of. Such holder would
recognize a capital loss to the extent the selling price (which might not fully
reflect the value of accrued but unpaid interest) was less than its adjusted tax
basis (which would include all accrued but unpaid
19
interest). Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
See "Certain Federal Income Tax Consequences--Sales or Redemption of the
Preferred Securities."
POSSIBLE TAX LAW CHANGES AFFECTING THE PREFERRED SECURITIES
Under current law, PennFed will be able to deduct interest on the Junior
Subordinated Debentures. However, there is no assurance that future legislation
will not affect the ability of the Company to deduct interest on the Junior
Subordinated Debentures. Such a change would give rise to a Tax Event. A Tax
Event would permit PennFed, upon receipt of regulatory approval if then required
under applicable capital guidelines or regulatory policies, to cause a
redemption of the Preferred Securities before, as well as after, __, 2002. See
"Description of the Junior Subordinated Debentures--Redemption or Exchange."
RISK FACTORS RELATING TO THE COMPANY
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability is dependent to a large extent on its net interest
income, which is the difference between its income on interest-earning assets
and its expense on interest-bearing liabilities. The Bank, like most financial
institutions, is affected by changes in general interest rate levels and by
other economic factors beyond its control. Interest rate risk arises in part
from mismatches (i.e., the interest sensitivity gap) between the dollar amount
of repricing or maturing assets and liabilities, and is measured in terms of the
ratio of the interest rate sensitivity gap to total assets. More assets than
liabilities repricing or maturing over a given time frame is considered asset-
sensitive and is reflected as a positive gap, and more liabilities than assets
repricing or maturing over a given time frame is considered liability-sensitive
and is reflected as a negative gap. A liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and reduce earnings in a rising interest rate environment, while an
asset-sensitive position (i.e., a positive gap) will generally enhance earnings
in a rising interest rate environment and will reduce earnings in a falling
interest rate environment. Fluctuations in interest rates are not predictable
or controllable. At June 30, 1997, the Bank had a one year cumulative negative
gap of 7.44%. This negative one year gap position may, as noted above, have a
negative impact on earnings in a rising interest rate environment. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity."
There can be no assurances of the Company's ability to continue to achieve
positive net interest income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate Sensitivity."
20
ALLOWANCE FOR LOAN LOSSES
Industry experience indicates that a portion of the Company's loans will
become delinquent and a portion of the loans will require partial or entire
charge-off. Regardless of the underwriting criteria utilized by the Company,
losses may be experienced as a result of various factors beyond the Company's
control, including, among other things, changes in market conditions affecting
the value of properties and problems affecting the credit of the borrower. The
Company's determination of the adequacy of its allowance for loan losses is
based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the views of the Company's regulators (who have the authority to
require additional reserves), and geographic and industry loan concentration.
However, if delinquency levels were to increase as a result of adverse general
economic conditions, especially in New Jersey where the Company's exposure is
greatest, the loan loss reserve so determined by the Company may not be
adequate. Further, to the extent that the Company is successful in its strategy
of increasing its commercial and multi-family real estate and consumer loan
portfolios, the Company may determine that it is prudent to increase its
allowance for loan losses in recognition of the risks inherent in such loan
portfolios relative to the Company's one- to four-family loan portfolio. See
"Business-Commercial and Multi-Family Real Estate Lending" and "-Consumer
Lending." There can be no assurance that the allowance will be adequate to
cover loan losses or that the Company will not experience significant losses in
its loan portfolios which may require significant increases to the allowance for
loan losses in the future. At June 30, 1997, the Company's allowance for loan
losses to total loans was 0.28% and the allowance for loan losses to non-
accruing loans was 47.8%.
REGULATORY OVERSIGHT
The Bank is subject to extensive regulation, supervision and examination by
the OTS as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. The Bank is a member
of the FHLB of New York and is subject to certain limited regulation by the
Federal Reserve Board. As the holding company of the Bank, PennFed is also
subject to regulation and oversight by the OTS. Such regulation and supervision
governs the activities in which an institution may engage and is intended
primarily for the protection of the FDIC insurance funds and depositors.
Regulatory authorities have been granted extensive discretion in connection with
their supervisory and enforcement activities and regulations have been
implemented which have increased capital requirements, increased insurance
premiums and have resulted in increased administrative, professional and
compensation expenses. Any change in the regulatory structure or the applicable
statutes or regulations could have a material impact on the Company and the Bank
and their operations. Additional legislation and regulations may be enacted or
adopted in the future which could significantly affect the powers, authority and
operations of the Bank and the Bank's competitors which in turn could have a
material adverse effect on the Bank and its operations. See "Regulation."
21
COMPOSITION OF LOAN PORTFOLIO
Most of the loans in the Company's portfolio are secured by real estate.
At June 30, 1997, approximately 97% of the Company's gross loans receivable were
secured by properties located in New Jersey. Conditions in the real estate
markets in which the collateral for the Company's mortgage loans are located
strongly influence the level of the Company's non-performing loans and its
results of operations. Real estate values are affected by, among other things,
changes in general or local economic conditions, changes in governmental rules
or policies, the availability of loans to potential purchasers, and natural
disasters. Declines in real estate markets could negatively impact the value of
the collateral securing the Company's loans and its results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Lending Activities."
As of June 30, 1997, $831.8 million, or 89.5% of the Company's gross loan
portfolio consisted of loans secured by first liens on one- to four- family
residences. At that date, $97.0 million or 10.5% of the first liens on Company's
gross loan portfolio consisted of commercial and multi-family real estate and
consumer loans. Although these assets generally were originated at loan to value
ratios of 75% or less and have higher yields than one- to four-family loans,
such loans are generally more sensitive to economic conditions, involve higher
concentrations of investment in a single borrower or project, are more dependent
on initial estimates of value, are more difficult to monitor and carry a higher
level of credit risk than do residential loans. See "Business -Commercial Multi-
family and Real Estate Lending," "-Consumer Lending," and "--Non-
Performing and Classified Assets."
COMPETITION
The Company faces substantial competition in purchasing and originating
real estate loans and in attracting deposits. The Company's competition in
originating real estate loans is principally from banks, other thrifts, mortgage
banking companies, real estate financing conduits, and small insurance
companies. In purchasing real estate loans the Company competes with other
participants in the secondary mortgage market. Many entities competing with the
Company enjoy competitive advantages over the Company relative to a potential
borrower or seller in terms of a prior business relationship, wide geographic
presence or more accessible branch office locations, the ability to offer
additional services or more favorable pricing alternatives, a lower origination
and operating cost structure, and other relevant items. The Company does not
have a significant market share of the real estate lending activities in the
areas in which it conducts operations, and increased competition in those areas
from traditional competitors or new sources could result in a decrease in the
origination or purchase of mortgage loans and could adversely affect the
Company's results of operations. In its deposit gathering activities, the
Company competes with insured depository institutions such as thrifts, credit
unions, and banks, as well as uninsured investment alternatives including money
market funds. These competitors may offer higher rates than the Company, which
could result in the Company either attracting fewer deposits or in requiring the
Company to increase the rates it pays to attract deposits. Increased deposit
competition could adversely affect the Company's ability to generate the funds
necessary for its lending operations and could adversely affect the Company's
results of operations. See "Business -- Competition."
22
USE OF PROCEEDS
All of the proceeds from the sale of the Preferred Securities will be
invested, by the Trust Issuer in Junior Subordinated Debentures. The net
proceeds to the Company from the sale of the Junior Subordinated Debentures are
estimated to be approximately $_____ million ($____ million if the Underwriter's
over-allotment option is exercised in full after deduction of the underwriting
discount and estimated expenses), PennFed intends to use the net proceeds from
the sale of the Junior Subordinated Debentures for general corporate purposes,
including, but not limited to, acquisitions by either the Company or the Bank
(although there presently exist no agreements or understandings with respect to
any such acquisition), capital contributions to the Bank to support growth and
for working capital, and possible repurchase of shares of PennFed's common
stock, subject to acceptable market conditions.
MARKET FOR THE PREFERRED SECURITIES
Application has been made to list the Preferred Securities on the Nasdaq
Stock Market's National Market under the symbol "PFSBP." Although the
Underwriter has informed the Company that it presently intends to make a market
in the Preferred Securities, the Underwriter is not obligated to do so and any
such market making may be discontinued at any time. Accordingly, there is no
assurance that an active and liquid trading market will develop or, if
developed, that such a market will be sustained. The offering price and
distribution rate have been determined by negotiations among representatives of
the Company and the Underwriter, and the offering price of the Preferred
Securities may not be indicative of the market price following the offering. See
"Underwriting."
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust Issuer will be treated as a
subsidiary of the Company and, accordingly, the Trust Issuer's financial
statements will be included in the consolidated financial statements of the
Company. The Preferred Securities will be presented as a separate line item in
the consolidated statements of financial condition of the Company under the
caption "Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures" and appropriate disclosures about the Preferred
Securities will be included in the notes to the consolidated financial
statements. For financial reporting purposes, the Company will record
distributions payable on the Preferred Securities as an interest expense in the
consolidated statements of operations.
In its future financial reports, the Company will: (i) present the
Preferred Securities on the Company's statements of financial condition as a
separate line item entitled "Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures;" (ii) include in a footnote to the
financial statements disclosure that the sole assets of the Trust Issuer are the
Junior Subordinated Debentures specifying the principal amount, interest rate
and maturity date of Junior Subordinated Debentures held; and (iii) if Staff
Accounting Bulletin No. 53 treatment is sought,
23
include, in an audited footnote to the financial statements, disclosure that (a)
the Trust Issuer is wholly owned, (b) the sole assets of the Trust Issuer are
its Junior Subordinated Debentures, and (c) the obligations of the Company under
the Junior Subordinated Debentures, the Indenture, the Trust Agreement and the
Guarantee, in the aggregate, constitute a full and unconditional guarantee by
the Company of the Trust Issuer's obligations under the Preferred Securities.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997, as adjusted to give effect to the consummation of
the offering of the Preferred Securities. The following data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of the
Company included elsewhere in this document.
As
Actual Adjusted
---------- ------------
(In thousands)
Deposits.............................................................................................. $ 918,160 $ 918,160
Borrowings:
FHLB of New York advances............................................................................. 205,465 205,465
Other borrowings...................................................................................... 82,750 82,750
---------- ----------
Total deposits and borrowed funds................................................................. 1,206,375 1,206,375
---------- ----------
Guaranteed Preferred Beneficial Interests in the Company's Junior Subordinated
Debentures/(1)/................................................................................... 0 30,000
---------- ----------
Stockholders' equity:
Serial Preferred Stock $.01 par value; authorized--7,000,000 shares;
no shares issued..................................................................................
Common stock, $.01 par value, 15,000,000 shares authorized, 5,950,000 shares
issued and 4,822,124 shares outstanding at June 30, 1997 (excluding shares held
in treasury of 1,127,876 at June 30, 1997)........................................................ 60 60
Additional paid-in, capital........................................................................... 57,441 57,441
Retained earnings, partially restricted............................................................... 61,051 61,051
Reduction for Employee Stock Ownership Plan Trust debt................................................ (3,671) (3,671)
Reduction for Restricted Stock - Management Recognition Plan.......................................... (1,062) (1,062)
Treasury Stock, at cost (16,549) (16,549)
--------- -----------
Total stockholders' equity........................................................................ 97,270 97,270
--------- -----------
___________________
(1) Preferred Securities of the Trust Issuer representing beneficial interests
in $30.0 million aggregate principal amount of the Junior Subordinated
Debentures issued by the Company to the Trust Issuer. The Junior
Subordinated Debentures will bear interest at the annual rate of ___% of
the principal amount thereof, payable quarterly and will mature on
_________, 2027. The Company owns all of the Common Securities of the
Trust Issuer.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
related notes included elsewhere in this Prospectus.
GENERAL
In July 1994, PennFed became the savings and loan holding company of the
Bank. Currently, the results of operations of the Company are primarily those of
the Bank.
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.
As noted previously, the deposits of savings associations, such as the
Bank, are presently insured by the SAIF, which, along with the BIF, are the two
insurance funds administered by the FDIC. Financial institutions which were
members of the BIF, prior to September 30, 1996, experienced substantially lower
deposit insurance premiums because the BIF had achieved its required level of
reserves while the SAIF had not yet achieved its required reserves. As a result
of legislation signed into law on September 30, 1996, the SAIF recapitalization
plan provided for a one-time assessment of 0.657% of deposits which was imposed
on all SAIF insured institutions to enable the SAIF to achieve its required
level of reserves. The assessment was based on deposits as of March 31, 1995,
and the Bank's special assessment was approximately $4.8 million, or $3.1
million, net of taxes. Accordingly, this special one-time SAIF recapitalization
assessment significantly increased non-interest expenses and adversely effected
the Company's results of operations for the year ended June 30, 1997. Following
the recapitalization assessment, beginning January 1, 1997 deposit insurance
premiums decreased significantly from the 0.23% of deposits previously paid by
the Bank to 0.00% plus the assessment to be paid to the Financing Corporation
("FICO"). Such assessment for the quarterly period beginning July 1, 1997
amounted to 0.063% of deposits, on an annualized basis. See "Regulation -
Insurance of Accounts and Regulation by the FDIC."
25
MANAGEMENT STRATEGY
Management's primary goal continues to be to improve profitability, while
continuing to manage interest rate risk, so as to enhance stockholder value, and
to foster and maintain customer confidence. The Company's current strategies
focus on: (i) emphasizing lending secured by one-to four-family residential
mortgages, (ii) increasing the commercial and multi-family and consumer loan
portfolios, (iii) maintaining asset quality, (iv) increasing deposit balances,
(v) managing the Company's exposure to interest rate risk, and (vi) controlling
non-interest expenses.
EMPHASIZING LENDING SECURED BY ONE- TO FOUR-FAMILY RESIDENTIAL FIRST
MORTGAGES. The Company has emphasized, and plans to continue to emphasize,
originating and purchasing traditional one-to four-family first mortgage loans
secured by properties located in New Jersey. Correspondent loan purchases of
one- to four-family mortgage loans through June 1997 have been primarily secured
by properties located throughout New Jersey with a limited purchase of loans
secured by real estate located in the Commonwealth of Pennsylvania. The Company
has approved the purchase of a limited amount of loans secured by real estate
located in the Commonwealth of Virginia and the Commonwealth of Massachusetts
through an existing correspondent relationship, though none were purchased as of
June 30, 1997. The Company originated or purchased $337.3 million, $251.8
million and $123.3 million in one- to four-family mortgage loans in fiscal 1997,
1996 and 1995, respectively. The Company's interest income has been derived
primarily from one- to four-family mortgage loans on residential real estate
which totaled $831.8 million or 89.55% of the Company's gross loan portfolio at
June 30, 1997.
INCREASING THE COMMERCIAL AND MULTI-FAMILY AND CONSUMER LOAN PORTFOLIOS.
In addition to one-to four-family residential first mortgage lending, the
Company plans to increase its emphasis on commercial and multi-family and
consumer lending. Such loans reprice more frequently, have shorter maturities,
and/or have higher yields than one-to four-family first mortgage loans. The
Company originated $31.7 million, $23.4 million and $18.9 million of commercial
and multi-family and consumer loans in fiscal 1997, 1996 and 1995, respectively.
The Company has recently established a correspondent relationship with a bank in
New Jersey as part of an overall effort to increase its commercial and multi-
family real estate originations.
MAINTAINING ASSET QUALITY. The Company's loan portfolio consists primarily
of one- to four-family mortgages, which are considered to have less risk than
commercial and multi-family real estate or consumer loans.
The Company's non-performing assets consist of non-accruing loans and real
estate owned. The Company focuses on strong underwriting and collection
efforts and aggressive marketing of real estate owned properties. In addition,
the Company has occasionally restructured loans by reducing the interest rate or
deferring principal and interest payments in order to return the loan to a
performing status. As a result, non-performing assets as a percentage of total
assets was 0.48% at June 30, 1997 compared to 2.71% at June 30, 1993.
26
INCREASING DEPOSIT BALANCES. The Company's primary source of funds is
deposits. Deposits have increased 10%, 17% and 16% in fiscal 1997, 1996 and
1995, respectively. The Company plans to continue to emphasize deposit growth,
particularly longer term certificates of deposit, and increase its emphasis on
transaction accounts. It has recently emphasized the solicitation of deposits
from municipalities.
MANAGING THE COMPANY'S EXPOSURE TO INTEREST RATE RISK. The Company has an
asset/liability committee that meets no less than weekly to price loan and
deposit products and monthly to develop, implement and review policies to manage
interest rate risk. The Company has endeavored to manage its interest rate risk
through the pricing and diversification of its loan and deposit products,
including the focus on the origination and purchase of first mortgage loans with
shorter terms to maturity and/or with adjustable rate features, as well as the
origination of commercial and multi-family real estate and consumer loans which
generally have shorter expected average lives or reprice at shorter intervals
than one- to four-family residential first mortgage products. In addition, the
Company has purchased government agency mortgage-backed securities with short
to intermediate average lives which generally do not exceed 4.5 years or which
have adjustable rate features. Furthermore, as part of its interest rate risk
strategy, the Company has emphasized longer term certificates of deposit and
utilized intermediate term borrowings. The Company has also engaged in
intermediate term interest rate swaps designed to extend the maturities of six
month certificates of deposit to three to five years. See "-Interest Rate
Sensitivity" and "-Asset/Liability Strategy."
CONTROLLING NON-INTEREST EXPENSES. Non-interest expenses are carefully
monitored, including ongoing reviews of staffing levels, supplies, facilities
and operations. Excluding the effects of the one-time SAIF recapitalization
assessment, the Company's ratio of non-interest expenses to average total assets
was 1.47% for the year ended June 30, 1997 compared to 1.84% for the prior
fiscal year. The Company's efficiency ratio, excluding the effects of the SAIF
assessment, was 43.92% for the year ended June 30, 1997 compared to 48.53% for
the prior fiscal year.
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
27
at a faster pace than the yield on its rate sensitive assets, thereby
diminishing future net interest income. In a falling interest rate environment,
a negative gap would indicate that the cost of rate sensitive liabilities would
decline at a faster pace than the yield on rate sensitive assets and improve net
interest income. For an institution with a positive gap, the reverse would be
expected.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Company's exposure to interest rate risk.
Management maintains an asset/liability committee consisting of the Chief
Executive Officer, the Chief Operating Officer, the Finance Group Executive, the
Lending Group Executive, the Retail Banking Group Executive, the Treasurer, the
Controller and the Director of Product Management/Customer Service, which meets
regularly and reviews the Company's interest rate risk position and makes
recommendations for adjusting this position. In addition, the Board reviews on a
monthly basis the Company's asset/liability position, including simulations of
the effect on the Company's capital and earnings of various interest rate
scenarios and operational strategies.
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps. Except for the
effects of prepayments and scheduled principal amortization on mortgage related
assets, the table presents principal cash flows and related weighted average
interest rates by the earlier of term to repricing or contractual term to
maturity. Callable government agency securities are assumed to be called within
one year. For interest rate swaps, the table presents notional amounts and
weighted average interest rates by contractual maturity dates.
Residential fixed and adjustable rate loans are assumed to have annual
payment rates between 12% and 18% of the portfolio. Commercial and multi-family
real estate loans are assumed to prepay at an annualized rate between 7% and 38%
while consumer loans are assumed to prepay at a 30% rate. Fixed and adjustable
rate mortgage-backed securities, including Collateralized Mortgage Obligations
("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"), have annual
payment assumptions ranging from 15% to 34%. Demand loans and loans which have
no repayment schedule or stated final maturity, are assumed to be due within six
months. Loan and mortgage-backed securities balances are net of non-performing
loans and are not adjusted for unearned discounts, premiums, and deferred loan
fees.
The Company assumes, based on historical information, that $135.9 million
or 80% of savings accounts at June 30, 1997, are core deposits and are,
therefore, expected to roll-off after five years. The remaining savings accounts
are assumed to roll-off over the first eighteen months. Transaction accounts,
excluding money market accounts, are assumed to roll-off after five years. Money
market accounts are assumed to be variable accounts and are reported as
repricing within six months. No roll-off rate is applied to certificates of
deposit. Fixed maturity deposits reprice at maturity.
28
MATURING OR REPRICING
--------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER
---------- ---------- --------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
Fixed-rate mortgage loans including
one- to four-family and commercial
and multi-family.................................. $ 71,704 $ 73,395 $ 65,488 $ 57,935 $ 52,484 $ 169,452
Average interest rate............................. 7.76% 7.80% 7.80% 7.79% 7.80% 7.85%
Adjustable rate mortgage loans
including one- to four-family and
commercial and multi-family...................... $116,889 $ 47,421 $ 92,714 $ 37,422 $ 54,869 $ 44,261
Average interest rate............................. 7.67% 7.51% 7.32% 7.67% 7.48% 7.65%
Consumer loans including demand
loans............................................. $ 24,396 $ 5,967 $ 4,315 $ 3,171 $ 1,503 $ ---
Average interest rate............................. 8.47% 8.98% 8.98% 8.98% 8.98% ---%
Mortgage-backed securities......................... $107,173 $ 36,893 $ 53,710 $ 46,348 $ 14,700 $ 28,819
Average interest rate............................. 7.36% 6.99% 6.96% 6.88% 7.08% 7.08%
Investment securities and other.................... $ 47,412 $ 101 $ --- $ --- $ --- $ 190
Average interest rate............................. 7.18% 5.67% ---% ---% ---% 9.47%
Total interest-earning assets.................... $367,574 $ 163,777 $216,227 $144,876 $123,556 $ 242,722
======= ======= ======= ======= ======= =======
Savings deposits................................... $ 22,643 $ 11,321 $ --- $ --- $ --- $ ---
Average interest rate............................. 2.20% 2.20% ---% ---% ---% 2.20%
Money market and demand deposits
(transaction accounts)............................ $ 15,461 $ --- $ --- $ --- $ --- $ 66,901
Average interest rate............................. 2.10% ---% ---% ---% ---% 0.95%
Certificates of deposit............................ $395,100 $ 126,037 $ 88,755 $ 17,148 $ 36,684 $ 94
Average interest rate............................. 5.50% 5.88% 6.59% 5.90% 6.28% 6.90%
FHLB of New York advances.......................... $ 30,000 $ 55,000 $ 90,000 $ --- $ 30,000 $ 465
Average interest rate............................. 5.80% 6.09% 6.17% ---% 6.42% 7.39%
Other borrowings................................... $ 72,750 $ --- $ --- $ --- $ 10,000 $ ---
Average interest rate............................. 6.23% ---% ---% ---% 6.24% ---%
Total deposits and borrowings.................... $535,954 $ 192,358 $178,755 $ 17,148 $ 76,684 $ 203,319
======= ======= ======= ======= ======= ========
Interest rate swaps (pay fixed, receive
floating)........................................ $(70,000) $ 20,000 $ 40,000 $ --- $ 10,000 $ ---
Average pay rate.................................. ---% 6.70% 6.46% ---% 6.25% ---%
Average receive rate.............................. 5.79% ---% ---% ---% ---% ---%
Total deposits and borrowings,
including the effects of interest
rate swaps..................................... $465,954 $ 212,358 $218,755 $ 17,148 $ 86,684 $ 203,319
======= ======= ======= ======= ======= ========
Interest-earning assets less
deposits and borrowings
(interest-rate sensitivity gap)................... $(98,380) $ (48,581) $ (2,528) $127,728 $ 36,872 $ 39,403
======= ======== ======= ======= ======= ========
Cumulative interest rate
sensitivity gap.................................. $(98,380) $(146,961) $(149,489) $(21,761) $ 15,111 $54,514
======= ========= ======== ======= ======= ======
Cumulative interest-rate sensitivity
gap as a percentage of total assets at
June 30, 1997.................................... (7.44)% (11.12)% (11.31)% (1.65)% 1.14% 4.12%
===== ====== ====== ===== ==== ====
Cumulative interest-rate sensitivity
gap as a percentage of total interest-
earning assets at June 30, 1997.................. (7.82)% (11.68)% (11.88)% (1.73)% 1.20% 4.33%
===== ===== ===== ===== ==== ====
Cumulative interest-earning assets
as a percentage of cumulative
deposits and borrowings at
June 30, 1997..................................... 78.89% 78.33% 83.34% 97.62% 101.51% 104.53%
===== ===== ===== ===== ====== ======
MATURING OR REPRICING
----------------------------
YEAR ENDED JUNE 30,
----------------------------
FAIR
TOTAL VALUE
------------ --------------
Fixed-rate mortgage loans including
one- to four-family and commercial
and multi-family.................................. $ 490,458 $ 491,107
Average interest rate............................. 7.81%
Adjustable rate mortgage loans
including one- to four-family and
commercial and multi-family..................... $ 393,576 $ 385,059
Average interest rate............................. 7.52%
Consumer loans including demand
loans............................................ $ 39,352 $ 39,591
Average interest rate............................. 8.66%
Mortgage-backed securities......................... $ 287,643 $ 291,125
Average interest rate............................. 7.12%
Investment securities and other.................... $ 47,703 $ 47,845
Average interest rate............................. 7.18%
Total interest-earning assets.................... $1,258,732 $1,254,727
========= =========
Savings deposits................................... $ 169,823 $ 169,823
Average interest rate............................. 2.20%
Money market and demand deposits
(transaction accounts)............................ $ 82,362 $ 82,362
Average interest rate............................. 1.17%
Certificates of deposit............................ $ 663,818 $ 665,043
Average interest rate............................. 5.77%
FHLB of New York advances.......................... $ 205,465 $ 205,919
Average interest rate............................. 6.13%
Other borrowings................................... $ 82,750 $ 82,671
Average interest rate............................. 6.23%
Total deposits and borrowings.................... $1,204,218 $1,205,818
========= =========
Interest rate swaps (pay fixed, receive
floating)........................................ $ --- $ 169
=========
Average pay rate.................................. 6.50%
Average receive rate.............................. 5.79%
Total deposits and borrowings,
including the effects of interest
rate swaps....................................... $1,204,218
=========
Interest-earning assets less
deposits and borrowings
(interest-rate sensitivity gap).................. $ 54,514
=========
29
At June 30, 1997, the Company's total deposits and borrowings maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing within one year by $98.4 million, representing a one year negative gap
of 7.44% of total assets, compared to a one year negative gap of 13.97% of total
assets at June 30, 1996. See - "Asset/Liability Strategy." The Company's
negative gap position improved from June 30, 1996 as a result of significant
growth in medium-term funds and adjustable rate residential first and second
mortgage loan products. New loan activity was strong and residential refinance
activity remained relatively slow during the year. Second mortgage activity was
re-focused and emphasized variable and medium-term fixed rate products. As a
result of continued emphasis on generating longer term deposits, growth in two
through five year certificates of deposit far out paced activity in the shorter-
term products. Furthermore, in an effort to lengthen the maturities of interest
bearing liabilities, the Company supplemented funding needs through the use of
FHLB of New York medium-term advances and engaged in interest rate swaps.
Callable government agency securities, with final maturities of seven years or
less, but initially callable within one year and periodically thereafter, have
also been purchased to supplement loan growth. Such investments are anticipated
to be called prior to their stated final maturities.
In evaluating the Company's exposure to interest rate risk, certain
limitations inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgages,
have features which restrict changes in interest rates in the short-term and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase. The
Company considers all of these factors in monitoring its exposure to interest
rate risk.
NET PORTFOLIO VALUE. The Company's interest rate sensitivity is regularly
monitored by management through selected interest rate risk ("IRR") measures
set forth by the 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.
As of June 30, 1997, the Bank's internally generated initial NPV ratio was
8.15%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 5.48%. The change in the NPV ratio, or the Bank's Sensitivity Measure
was 2.67%. NPV is also measured
30
internally on a consolidated basis. As of June 30, 1997, the Company's initial
NPV ratio was 8.76%, the Post-Shock ratio was 6.12%, and the Sensitivity Measure
was 2.64%. 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 (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, 1997,
the Bank's initial NPV ratio, as measured by the OTS, was 7.23%. The Bank's
Post-Shock ratio was 4.02% and the Sensitivity Measure was 3.21%. At June 30,
1996 the Bank's initial NPV ratio was 6.95%, its Post-Shock ratio was 3.20% and
the Sensitivity Measure was 3.75%.
In addition to monitoring NPV and gap, management also monitors the
duration of assets and liabilities and the effects on net interest income
resulting from parallel and non-parallel increases or decreases in rates.
At June 30, 1997, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 11.2% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
ASSET/LIABILITY STRATEGY
The primary elements of the Company's asset/liability strategy include the
following:
1. The Company focuses on shortening the average life and duration of its
portfolio of one-to four- family mortgage loans by promoting one year adjustable
rate products, with initial fixed rate terms of 1, 3 and 5 years, 15 and 30 year
bi-weekly mortgages and fixed rate products with terms of 10, 15 and 20 years.
2. The Company is increasing its emphasis on the origination of variable
rate home equity lines and fixed rate second mortgage loans as well as variable
and fixed rate commercial and multi-family real estate loans having maturities
or terms to repricing significantly shorter than one-to four- family residential
mortgage loans.
3. During fiscal 1997, the Company purchased government agency guaranteed
investments with final maturities within seven years which are initially
callable within one year and periodically thereafter. Such investments are
expected to be called prior to their final maturities. The Company may continue
to purchase such investments, as well as government agency
31
guaranteed mortgage-backed securities with an expected average life at purchase
of 4.5 years or less, as needed, in accordance with its strategic objectives.
4. The Company emphasizes the lengthening of maturities of its
liabilities through its pricing of longer-term certificates of deposit and by
utilizing intermediate term FHLB of New York advances and interest rate swaps,
subject to market conditions.
5. The Company is increasing its emphasis on transaction accounts as
such funds are lower cost alternatives to certificates of deposit and FHLB of
New York advances and strengthen customer relationships.
Approximately 75%, or $199.4 million, of the total net growth of $265.9
million experienced in one-to four- family mortgages between June 30, 1996 and
June 30, 1997 was accomplished in the adjustable rate portfolio and
approximately 97%, or $5.1 million, of the $5.2 million total net growth in the
consumer lending portfolio was attributable to growth in variable rate home
equity lines of credit. Adjustable rate commercial and multi-family real estate
loans increased approximately 42% from June 30, 1996 to $32.7 million, while
fixed rate commercial and multi-family real estate loans declined approximately
17% to $24.1 million.
Additionally, medium and long-term funds increased approximately 42.5%, or
$220.4 million, from June 30, 1996 through the use of interest rate swaps
(designed to synthetically lengthen the maturities of short-term deposits) as
well as growth in two through five year certificates of deposit, FHLB of New
York advances and other borrowings. Short-term funds (one year or less)
remained relatively constant.
Generally, the investment policy of the Company is to invest funds not
utilized in its lending activities or required for other corporate purposes
among various categories of investments and maturities based upon the Company's
asset/liability management policies. Investments generally include U.S. Treasury
and government agency securities and mortgage-backed securities.
Additionally, the Company emphasizes and promotes its savings, money market
and transaction accounts, and certificates of deposit with varying maturities
through five years, principally within its primary market areas. The balances
of savings, money market and transaction accounts, which represented
approximately 27.5%, or $252.2 million, of total deposits at June 30, 1997,
tend to be less susceptible to rapid changes in interest rates than certificates
of deposit balances.
Collectively, these strategies resulted in a narrowing of the Company's
interest rate gap and a reduction in IRR during fiscal 1997. Management will
continue to monitor and employ such strategies, as necessary, in conjunction
with its overall strategic objectives.
32
ANALYSIS OF NET INTEREST INCOME. The following table sets forth certain
information relating to the Company's consolidated statements of financial
condition and the consolidated statements of income for the years ended June 30,
1997, 1996 and 1995, 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.
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------------
1997 1996
------------------------------------- ---------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ OUTSTANDING EARNED/
BALANCE PAID YIELD/RATE BALANCE PAID YIELD/RATE
----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
One- to four-family mortgage loans...... $ 713,260 $53,554 7.51% $457,167 $35,078 7.67%
Commercial and multi-family real estate
loans................................... 54,396 4,912 9.03 49,378 4,817 9.76
Consumer loans........................... 35,977 3,302 9.18 33,362 3,380 10.13
---------- ------- -------- -------
Total loans receivable.................. 803,633 61,768 7.69 539,907 43,275 8.02
Mortgage-backed securities............... 317,394 22,030 6.94 329,821 22,549 6.84
Investment securities and other.......... 22,611 1,603 7.09 31,264 2,299 7.35
---------- ------- -------- -------
Total interest-earning assets........... 1,143,638 $85,401 7.47 900,992 $68,123 7.56
======= =======
Non-interest earning assets.............. 53,664 56,302
---------- --------
Total assets............................ $1,197,302 $957,294
========== ========
DEPOSITS AND BORROWINGS:
Money market and demand deposits
(transaction accounts).................. $ 80,099 $ 977 1.22% $ 79,360 $ 1,371 1.73%
Savings deposits......................... 174,114 3,876 2.23 181,839 4,114 2.26
Certificates of deposit.................. 615,870 35,319 5.73 494,337 28,116 5.69
---------- ------- -------- -------
Total deposits.......................... 870,083 40,172 4.62 755,536 33,601 4.45
FHLB of New York advances................ 147,945 9,078 6.14 65,625 3,827 5.83
Other borrowings......................... 68,084 3,823 5.62 29,846 1,693 5.67
---------- ------- -------- -------
Total deposits and borrowings........... 1,086,112 $53,073 4.89 851,007 $39,121 4.60
======= =======
Other liabilities........................ 18,337 12,446
---------- --------
Total liabilities....................... 1,104,449 863,453
Stockholders' equity....................... 92,853 93,841
---------- --------
Total liabilities and stockholders'
equity................................. $1,197,302 $957,294
========== ========
Net interest income and net interest
rate spread............................... $32,328 2.58% $29,002 2.96%
======= ==== ======= ====
Net interest-earning assets and interest
margin.................................... $ 57,526 2.83% $ 49,985 3.22%
========== ===== ======== =====
Ratio of interest-earning assets to
deposits and borrowings.................. 105.30% 105.87%
====== ======
----------------------------------------------
1995
----------------------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/
BALANCE PAID YIELD/RATE
----------- -------- ----------
INTEREST-EARNING ASSETS:
One- to four-family mortgage loans...... $327,888 $26,008 7.93%
Commercial and multi-family real estate
loans................................... 47,367 4,667 9.85
Consumer loans........................... 33,029 3,389 10.26
-------- -------
Total loans receivable.................. 408,284 34,064 8.34
Mortgage-backed securities............... 270,136 16,143 5.98
Investment securities and other.......... 36,189 2,512 6.94
-------- -------
Total interest-earning assets........... 714,609 $52,719 7.38
=======
Non-interest earning assets.............. 44,393
--------
Total assets............................ $759,002
========
DEPOSITS AND BORROWINGS:
Money market and demand deposits
(transaction accounts).................. $ 71,606 $ 1,311 1.83%
Savings deposits......................... 182,947 4,165 2.28
Certificates of deposit.................. 372,469 20,155 5.41
-------- -------
Total deposits.......................... 627,022 25,631 4.09
FHLB of New York advances................ 17,028 878 5.16
Other borrowings......................... 11,281 644 5.71
-------- ------- -----
Total deposits and borrowings........... 655,331 $27,153 4.14
=======
Other liabilities........................ 9,272
--------
Total liabilities....................... 664,603
Stockholders' equity....................... 94,399
--------
Total liabilities and stockholders'
equity................................. $759,002
========
Net interest income and net interest
rate spread............................... $25,566 3.24%
======= ====
Net interest-earning assets and interest
margin.................................... $ 59,278 3.58%
======== ====
Ratio of interest-earning assets to
deposits and borrowings.................. 109.05%
======
33
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and deposits and borrowings have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (1) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (2) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (3) changes attributable to
changes in rate/volume (changes in rate multiplied by changes in volume), and
(4) the net change.
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1997 VS. 1996
----------------------------------------------------------- --------
INCREASE (DECREASE)
DUE TO
-------------------------------------------- TOTAL --------
INCREASE
VOLUME RATE RATE/VOLUME (DECREASE) VOLUME
------------- -------- ------------- ------------ --------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
One- to four-family mortgage loans... $19,650 $ (752) $ (422) $18,476 $10,252
Commercial and multi-family real
estate loans........................ 489 (358) (36) 95 198
Consumer loans....................... 265 (318) (25) (78) 34
------- ------- ------ ------- -------
Total loans receivable.............. 20,404 (1,428) (483) 18,493 10,484
Mortgage-backed securities........... (850) 344 (13) (519) 3,569
Investment securities and other...... (636) (83) 23 (696) (342)
------- ------- ------ ------- -------
Total interest-earning assets....... $18,918 $(1,167) $ (473) $17,278 $13,711
======= ======= ====== ======= =======
DEPOSITS AND BORROWINGS:
Money market and demand deposits
(transaction accounts).............. $ 13 $ (403) $ (4) $ (394) $ 142
Savings deposits..................... (175) (66) 3 (238) (25)
Certificates of deposit.............. 6,912 234 57 7,203 6,593
------- ------- ------ ------- -------
Total deposits...................... 6,750 (235) 56 6,571 6,710
FHLB of New York advances............ 4,801 200 250 5,251 2,508
Other borrowings..................... 2,169 (17) (22) 2,130 1,059
------- ------- ------ ------- -------
Total deposits and borrowings....... $13,720 $ (52) $ 284 $13,952 $10,277
======= ======= ====== ======= =======
Net change in net interest income.... $ 5,198 $(1,115) $( 757) $ 3,326 $ 3,434
======= ======= ====== ======= =======
-----------------------------------------------
1996 VS.1995
-----------------------------------------------
INCREASE (DECREASE)
DUE TO
----------------------------- TOTAL
INCREASE
RATE RATE/VOLUME (DECREASE)
------------- ----------- -------------
INTEREST-EARNING ASSETS:
One- to four-family mortgage loans... $ (850) $(332) $ 9,070
Commercial and multi-family real
estate loans........................ (46) (2) 150
Consumer loans....................... (43) --- (9)
------ ----- -------
Total loans receivable.............. (939) (334) 9,211
Mortgage-backed securities........... 2,325 512 6,406
Investment securities and other...... 149 (20) (213)
------ ----- -------
Total interest-earning assets....... $1,535 $ 158 $15,404
====== ===== =======
DEPOSITS AND BORROWINGS:
Money market and demand deposits
(transaction accounts).............. $ (74) $ (8) $ 60
Savings deposits..................... (26) --- (51)
Certificates of deposit.............. 1,029 339 7,961
------ ----- -------
Total deposits...................... 929 331 7,970
FHLB of New York advances............ 115 326 2,949
Other borrowings..................... (4) (6) 1,049
------ ----- -------
Total deposits and borrowings....... $1,040 $ 651 $11,968
====== ===== =======
Net change in net interest income.... $ 495 $(493) $ 3,436
====== ===== =======
34
FINANCIAL CONDITION
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JUNE 30, 1996
Total assets increased $235.2 million, or 21.6%, to $1.322 billion at June
30, 1997 from total assets of $1.087 billion at June 30, 1996. The increase was
primarily attributable to a $278.9 million increase in net loans receivable,
particularly in the Company's one- to four-family first mortgage loan portfolio.
At June 30, 1997, net loans receivable were $931.5 million compared to $652.6
million at June 30, 1996. The increase in loans receivable was funded by retail
deposit growth, additional medium-term FHLB of New York advances and increased
other borrowings as well as principal payments on mortgage-backed securities.
Non-performing assets at June 30, 1997 totaled $6.4 million, representing
0.48% of total assets, compared to $7.3 million, or 0.67% of total assets, at
June 30, 1996. Non-accruing loans decreased to $5.5 million and the ratio of
non-accruing loans to total loans decreased to 0.59% at June 30, 1997 as
compared to $6.2 million, or 0.95% at June 30, 1996. Real estate owned
decreased to $884,000 at June 30, 1997 from $1.1 million at June 30, 1996.
Deposits increased $81.7 million to $918.2 million at June 30, 1997 from
$836.4 million at June 30, 1996. FHLB of New York advances were $205.5 million
at June 30, 1997, a $100.5 million increase from $105.0 million at June 30,
1996. In addition, at June 30, 1997 the Company had $82.8 million of other
borrowings, consisting of $72.8 million of short-term and overnight borrowings
and a $10.0 million reverse repurchase agreement maturing in December 2001.
Other borrowings at June 30, 1996 totaled $41.7 million and consisted of short-
term and overnight borrowings.
Stockholders' equity at June 30, 1997 totaled $97.3 million compared to
$90.6 million at June 30, 1996. The increase primarily reflects the net income
recorded for the year ended June 30, 1997, partially offset by the repurchase of
32,500 shares of the outstanding stock at an average price of $20.04 per share
and the declaration of dividends.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND JUNE
30, 1996
GENERAL. For the year ended June 30, 1997, net income was $6.9 million, or
$1.46 per primary share, including the effects of the one-time SAIF
recapitalization assessment. The SAIF recapitalization assessment for the
Company totaled $4.8 million, or an after-tax cost of $3.1 million, or $0.65 per
share. Excluding the effects of the SAIF assessment, net income for the year
ended June 30, 1997, of $9.9 million or $2.11 per primary share compared
favorably to net income of $7.8 million, or $1.55 per primary share, for the
year ended June 30, 1996.
35
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the year
ended June 30, 1997 increased to $85.4 million from $68.1 million for the year
ended June 30, 1996. The increase in the current year was due to an increase in
average interest-earning assets, primarily residential loans, partially offset
by a decrease in the average yield earned on interest-earning assets. Average
interest-earning assets were $1.1 billion for the year ended June 30, 1997
compared to $901.0 million for the comparable prior fiscal year. The average
yield on interest-earning assets decreased to 7.47% for the year ended June 30,
1997 from 7.56% for the year ended June 30, 1996.
Interest income on residential one- to four-family mortgage loans for the
year ended June 30, 1997 increased $18.5 million to $53.6 million, or 52.7% when
compared to the prior fiscal year. The increase in interest income on
residential one- to four-family mortgage loans was due to an increase of $256.1
million to $713.3 million in the average balance outstanding for the year ended
June 30, 1997 over the prior fiscal year. The increase in the average balance
on residential one- to four-family mortgage loans was partially offset by a
decrease of 0.16% in the average yield earned on this loan portfolio to 7.51%
for the year ended June 30, 1997 from the prior fiscal year.
INTEREST EXPENSE. Interest expense increased $14.0 million to $53.1 million
for the year ended June 30, 1997, from $39.1 million for fiscal 1996. The
increase was attributable to an increase in total average deposits, primarily
certificates of deposit, and borrowings coupled with an increase in the
Company's cost of funds. Average deposits and borrowings increased $235.1
million to $1.1 billion for the year ended June 30, 1997 compared to the 1996
period. The average rate paid on deposits and borrowings increased to 4.89% for
the year ended June 30, 1997 from 4.60% for the prior fiscal year.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income for the
year ended June 30, 1997, was $32.3 million, reflecting an increase from $29.0
million recorded in the prior fiscal year. The increase reflects the Company's
growth in assets, primarily in adjustable rate residential one- to four-family
mortgage loans. The net interest rate spread and net interest margin for the
current fiscal year were 2.58% and 2.83%, respectively, a decline from 2.96%
and 3.22%, respectively, during fiscal 1996. The decline was partially
attributable to the Company's efforts to reduce its sensitivity to changes in
interest rates by extending the average life of liabilities and focusing on
adjustable rate one- to four-family mortgage loans. This resulted in the
Company paying higher rates to attract longer term deposits and initially
receiving lower yields on adjustable rate loans than would otherwise be
obtainable on fixed rate loans. Since the Company's liabilities generally
reprice more quickly than its assets, net interest rate spread and net interest
margins will likely decrease if interest rates rise.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended
June 30, 1997 was $635,000 compared to $610,000 for the prior fiscal year. The
allowance for loan losses at June 30, 1997 of $2.6 million is comparable to the
June 30, 1996 level. The allowance for loan losses as a percentage of non-
performing loans was 47.80% at June 30, 1997, compared to 42.52% at June 30,
1996. See "Business - Non-Performing and Classified Assets."
36
NON-INTEREST INCOME. For the year ended June 30, 1997 non-interest income
was $1.8 million compared to $2.2 million for the prior fiscal year. The
decrease was partially attributable to a net loss from real estate operations of
$181,000 compared to a net gain from real estate operations of $104,000 for the
prior fiscal year. The decrease in net gains from real estate operations is
partially reflective of additional reserves established in accordance with
internal policies and guidelines on real estate properties currently owned by
the Company. Additionally, non-interest income for the year ended June 30, 1996
included a $94,000 gain on sale of investments available for sale and a $62,000
gain on sale of a property no longer used in operations.
NON-INTEREST EXPENSES. The Company's non-interest expenses were $22.4
million for the year ended June 30, 1997. Non-interest expenses for the year
ended June 30, 1997 included $4.8 million for the one-time SAIF recapitalization
assessment. Excluding this SAIF assessment, non-interest expenses for the year
ended June 30, 1997 would have been comparable to the $17.6 million reported for
the year ended June 30, 1996. The Company's non-interest expenses, excluding
the SAIF assessment, as a percent of average assets declined to 1.47% for the
year ended June 30, 1997 from 1.84% for the prior fiscal year.
As noted above, beginning January 1, 1997 deposit insurance premiums have
decreased significantly from the 0.23% of deposits previously paid by the Bank
to 0.063% for the FICO assessment.
INCOME TAX EXPENSE. Income tax expense for the year ended June 30, 1997 was
$4.2 million compared to $5.1 million for the prior fiscal year. Excluding the
effects of the one-time SAIF recapitalization assessment, income tax expense of
$6.0 million was recorded for fiscal 1997. The effective tax rate was 37.9% for
the year ended June 30, 1997. Excluding the effect of the one-time SAIF
recapitalization assessment, the effective tax rate was 37.5% for the year ended
June 30, 1997 compared to 39.5% for the year ended June 30, 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND JUNE
30, 1995
GENERAL. For the year ended June 30, 1996 net income was $7.8 million, or
$1.55 per share, compared to net income of $5.6 million, or $1.08 per share, for
the year ended June 30, 1995. The results for fiscal 1995 included several
significant non-recurring charges related to the March 1995 acquisition of three
former Carteret Federal Savings Bank ("Carteret") branches and related deposits
(the "Acquisition").
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the year
ended June 30, 1996 increased to $68.1 million from $52.7 million for the year
ended June 30, 1995. The increase in fiscal 1996 was due to an increase in
average interest-earning assets, primarily one- to four- family residential
loans, and to a much lesser extent, an increase in the average yield earned on
interest-earning assets. Average interest-earning assets were $901.0 million
for the year ended June 30, 1996, versus $714.6 million for the prior fiscal
year. The average yield earned on interest-earning assets increased to 7.56%
for the year ended June 30, 1996 from 7.38% for the prior fiscal year.
37
Interest income on residential one- to four-family mortgage loans for the
year ended June 30, 1996 increased $9.1 million to $35.1 million, or 34.9%, when
compared to fiscal 1995. The increase in interest income on residential one- to
four-family mortgage loans was due to an increase of $129.3 million in the
average balance outstanding for fiscal 1996 over the prior fiscal year. The
increase in the average balance on residential one- to four-family mortgage
loans was partially offset by a decrease of 0.26% in the average yield earned on
this loan portfolio to 7.67% for the year ended June 30, 1996 from the
comparable prior fiscal year.
Interest income on the mortgage-backed securities portfolio increased $6.4
million to $22.5 million, or 39.7%, for the year ended June 30, 1996, as
compared to the prior fiscal year. The increase in interest income on mortgage-
backed securities reflects increases in the average balance outstanding of $59.7
million to $329.8 million for the year ended June 30, 1996 over the prior fiscal
year. In addition, the average yield earned on these securities increased 0.86%
to 6.84% for fiscal 1996 when compared to the year ended June 30, 1995.
Interest on investment securities and other interest-earning assets
decreased $214,000 for the year ended June 30, 1996 from the prior fiscal year
due to a decrease in the average balance outstanding for fiscal year 1996
partially offset by an increase in the average yield earned on these securities.
INTEREST EXPENSE. Interest expense increased to $39.1 million for the year
ended June 30, 1996 from $27.2 million for fiscal 1995. The increase was
attributable to an increase in total average deposits and borrowings coupled
with an increase in the Company's cost of funds. Average deposits and
borrowings increased $195.7 million to $851.0 million for the year ended June
30, 1996 compared to the prior fiscal year. The average rate paid on deposits
and borrowings increased to 4.60% for the year ended June 30, 1996 from 4.14%
for the prior fiscal year.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income for the
year ended June 30, 1996 was $29.0 million, reflecting an increase from $25.6
million recorded in the prior fiscal year. The increase reflects substantial
asset growth, primarily in residential one- to four-family mortgage loans and
securities. The net interest rate spread was 2.96% for the year ended June 30,
1996 and 3.24% for the year ended June 30, 1995. Net interest margin for the
year ended June 30, 1996 was 3.22%, a decline from 3.58% during fiscal 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended June 30, 1996 was $610,000 compared to $569,000 for the prior year. The
allowance for loan losses at June 30, 1996 of $2.6 million reflects a $230,000
decrease from the June 30, 1995 level. The allowance for loan losses as a
percentage of non-performing loans was 42.52% at June 30, 1996, compared to
51.39% at June 30, 1995. The decrease in the allowance ratio was primarily
attributable to the payoff of a $1.3 million troubled debt restructured
commercial real estate loan which required the utilization of approximately
$400,000 of specific reserves previously allocated to the loan.
38
NON-INTEREST INCOME. For the year ended June 30, 1996 non-interest income
was $2.2 million, an increase of $77,000 when compared to the prior fiscal year.
The increase was primarily due to a $94,000 gain on sale of investments
available for sale and a $126,000 increase in income from service charges. The
fiscal 1996 net gain from real estate operations of $104,000 was comparable to
the prior fiscal year. Finally, non-interest income for the year ended June 30,
1996 included a $62,000 gain on sale of a property no longer used in operations.
For the year ended June 30, 1995, non-interest income included a $400,000
recovery from a litigation settlement, partially offset by a $200,000 loss on
disposition of computer equipment.
NON-INTEREST EXPENSES. The Company's non-interest expenses of $17.6
million for the fiscal year ended June 30, 1996 was relatively unchanged from
the prior fiscal year ended June 30, 1995. The Company's non-interest expenses
as a percent of average assets declined significantly to 1.84% for the fiscal
year ended June 30, 1996 from 2.31% for the prior fiscal year. Total non-
interest expenses for fiscal 1996 included a $1.2 million increase in
amortization of intangibles, due to the Acquisition, and a $355,000 increase in
Federal deposit insurance premiums, reflective of the growth in deposits. The
results for the prior fiscal year included $297,000 of Acquisition related
expenses, $470,000 of expenses related to the termination of the Company's
defined benefit pension plan and $300,000 of deposit servicing expenses also
relating to the Acquisition.
INCOME TAX EXPENSE. Income tax expense for the year ended June 30, 1996
was $5.1 million compared to $3.9 million for the prior fiscal year. The
effective tax rate was 39.5% for fiscal 1996 and 41.0% for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The Company's primary sources of funds are deposits, principal
and interest payments on loans and mortgage-backed securities, and borrowings
from the FHLB of New York. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan repayments
are more influenced by interest rates, general economic conditions and
competition. The Company has competitively set rates on deposit products for
selected terms and, when necessary, has supplemented deposits with longer term
or less expensive alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 5% of net withdrawable savings
deposits and borrowings payable on demand or in one year or less during the
preceding calendar month. Liquid assets for purposes of this ratio include cash,
accrued interest receivable, certain time deposits, U.S. Treasury and Government
agencies and other securities and obligations generally having remaining
maturities of less than five years. The Company's most liquid assets are cash
and cash equivalents, short term investments and mortgage-backed securities.
The levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At June 30, 1997 and
1996, liquidity
39
eligible assets totaled $99.5 million and $128.9 million, respectively. At June
30, 1997 and 1996, the Bank's liquidity ratios were 10.36% and 15.17%,
respectively.
In the event that the Company should require funds beyond its ability to
generate them internally, additional sources of funds are available through the
use of FHLB of New York advances and reverse repurchase agreements. In addition,
the Company may access funds, if necessary, through the use of a $50.0 million
overnight line of credit and a $50.0 million one-month overnight repricing line
of credit from the FHLB of New York. 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 commitments, and to
meet operating expenses. At June 30, 1997, the Company had outstanding
commitments to extend credit which amounted to $27.1 million (including $17.4
million in available lines of credit) and commitments to purchase loans of $32.7
million. 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 fiscal
1997 and 1996 cash needs were principally provided by increased deposits and an
increase in advances from the FHLB of New York and other borrowings. During
fiscal 1997, the cash provided was principally used for investing activities,
which included the origination and purchase of loans. During fiscal 1996 the
cash provided was principally used for investing activities, which included the
purchase of investment and mortgage-backed securities and the origination and
purchase of loans. In addition to cash provided by operating activities, during
fiscal 1995 the cash needs of the Company were principally provided by increased
deposits, primarily from the Acquisition, and an increase in borrowings. The
cash was principally utilized for investing activities, which included the
purchase of mortgage-backed securities and 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 June 30, 1997,
the Bank exceeded all regulatory capital requirements and qualified as a "well-
capitalized" institution. See "Regulation" and Note P -- Stockholders' Equity
and Regulatory Capital, in the Notes to Consolidated Financial Statements.
The Company initiated a quarterly cash dividend on its common stock of
$0.07 per share in the second quarter of fiscal 1997 and paid a total of $0.21
per share during the fiscal year ended June 30, 1997. The declaration and
payment of dividends are subject to, among other things, PennFed's financial
condition and results of operations, regulatory capital requirements, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors. The Company may not
pay dividends during an Extension Period. See "Description of the Preferred
Securities - Distributions," and "Description of the Junior Subordinated
Debentures - Restrictions on Certain Payments."
40
BUSINESS
GENERAL
PennFed, a Delaware corporation, was organized in March 1994 for the
purpose of becoming the savings and loan holding company for the Bank in
connection with the Conversion. PennFed owns all of the outstanding stock of the
Bank.
PennFed and the Bank are subject to comprehensive regulation, examination
and supervision by the OTS and by the FDIC. The Bank is a member of the FHLB
System and its deposits are insured up to applicable limits by the FDIC.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with borrowings and other funds, to
originate and purchase one- to four- family residential mortgage loans, and, to
a lesser extent, commercial and multi-family real estate and consumer loans. See
"-Originations, Purchases, Sales and Servicing of Loans." The Company also
invests in mortgage-backed securities secured by one- to four-family residential
mortgages, U.S. Government and agency obligations and other permissible
investments.
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms, which generally include savings, money market, and a
variety of checking accounts, as well as certificate accounts. The Company
generally solicits deposits in its primary market areas.
At June 30, 1997, the Company had total assets of $1.3 billion, deposits of
$918.2 million, borrowings of $288.2 million and stockholders' equity of $97.3
million.
At June 30, 1997, the Company's gross loan portfolio totaled $928.9
million, including $831.8 million of one- to four-family residential first
mortgage loans, $56.8 million of commercial and multi-family real estate loans
and $40.2 million of consumer loans. In addition, on that date, the Company had
$288.5 million of mortgage-backed securities and $47.7 million of other
investment securities and FHLB of New York stock.
41
At June 30, 1997, the vast majority of the Company's first and second
mortgage loans (excluding mortgage-backed securities) were secured by properties
located in New Jersey. Of the loans secured by properties outside the State of
New Jersey, the majority are secured by one-to four-family loans and the balance
secured by commercial and multi-family real estate loans. See "-Originations,
Purchases, Sales and Servicing of Loans." The Company's revenues are derived
primarily from interest on loans, mortgage-backed securities and investments,
and income from service charges.
Penn Federal, through its wholly-owned subsidiary, Penn Savings Insurance
Agency, Inc., offers insurance and uninsured annuity products to its customers.
See "-Subsidiary Activities."
The administrative offices of the Company are located at 622 Eagle Rock
Avenue, West Orange, New Jersey 07052-2989, and the telephone number at that
address is (973) 669-7366.
MARKET AREA
The Company's primary market areas are comprised of the Ironbound section
of the City of Newark and surrounding urban communities, the suburban Essex
County areas and selected areas of central/southern New Jersey, which are
serviced through seventeen full service offices. Penn Federal was organized in
the Ironbound section of Newark in 1941 and the home office of the Bank remains
there. The City of Newark and immediately adjacent communities of East Newark
and Harrison are primarily urban blue collar areas with two or more family
dwellings and some manufacturing and industry. Deposits at Bank branches in
these areas comprise 35% of total Bank deposits. The suburban Essex County area
consists of communities with predominantly single family homes, and a white
collar commuter population that works in New York or Newark, or engages in local
retail trade or industry. Suburban Essex County is the Bank's largest market
area, accounting for approximately 40% of total Bank deposits at June 30, 1997.
Penn Federal's central/southern New Jersey branches, with 25% of total Bank
deposits, serve retirement populations and expanding townhouse, multi-family and
single family home developments. The Bank also purchases a significant volume
of one- to four-family residential loans secured by properties located primarily
in New Jersey. See "- Originations, Purchases, Sales and Servicing of Loans."
LENDING ACTIVITIES
General. The Company primarily originates and purchases fixed and
adjustable rate, one-to four-family first mortgage loans. The Company's general
policy is to originate and purchase such mortgages with maturities between 10
and 30 years. Adjustable rate mortgage ("ARM") loans are originated and
purchased in order to increase the percentage of loans with more frequent
repricing than fixed rate, one- to four-family mortgage loans. The Company
underwrites mortgage loans generally using Federal Home Loan Mortgage
Corporation ("FHLMC") and Fannie Mae ("FNMA") guidelines, although loan amounts
may exceed agency limits. See "-Loan Portfolio Composition" and "-One- to Four-
Family Residential Mortgage Lending."
42
The Company also originates commercial and multi-family real estate loans
and consumer loans. Such loans generally reprice more frequently, have shorter
maturities, and/or have higher yields than fixed rate, one- to four-family
mortgage loans. At June 30, 1997, the Company's total net loan portfolio was
$931.5 million.
Residential and consumer loan applications may be approved by various
officers up to $1.0 million. Commercial and multi-family real estate loan
applications are initially considered and approved at various levels of
authority, depending on the amount of the loan. All commercial and multi-family
real estate loans between $500,000 and $1.0 million must be approved by the
Executive Loan Committee which consists of the President, three executive
officers and the Vice President of Commercial Lending. The approval of the
Company's Board of Directors is required for all loans above $1.0 million.
The aggregate amount of loans that the Company is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Company could have invested in any one real
estate project is the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation-Federal Regulation of Savings Associations." At June
30, 1997, the maximum amount which the Company could have lent to any one
borrower and the borrower's related entities was approximately $11.4 million.
The Company's current policy is to limit such loans to a maximum of 50% of the
regulatory limit or $3.0 million, whichever is less. At June 30, 1997, the
Company did not have any loans or series of loans to one borrower with
outstanding balances in excess of $2.8 million. See "-Commercial and Multi-
Family Real Estate Lending." At June 30, 1997, the Company's largest group of
loans to one borrower totaled $2.8 million and consisted of three commercial
real estate loans aggregating $1.9 million and one commercial real estate loan
for $894,000 for which the borrower on the three commercial real estate loans is
only a guarantor. Each loan is secured by an apartment building located in one
of the Company's primary market areas. At June 30, 1997, there was a total of
14 loans or lender relationships in excess of $1.0 million, for a total amount
of $23.6 million. At that date, $23.0 million of these were performing in
accordance with their respective repayment terms while $574,000 were 30 days
past due and $58,000 were 60 days past due. See "-Non-Performing and Classified
Assets."
43
Loan Portfolio Composition. The following table sets forth the composition
of the Company's loan portfolio at the dates indicated.
JUNE 30,
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-family/(1)/........................ $831,843 89.55% $565,924 86.68% $386,125 82.17%
Construction.................................... --- --- --- --- --- ---
Commercial and multi-family..................... 56,811 6.12 52,014 7.97 50,448 10.74
-------- ------ -------- ------ -------- ------
Total first mortgage loans.................... 888,654 95.67 617,938 94.65 436,573 92.91
-------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Second mortgages.............................. 23,665 2.55 23,912 3.66 21,105 4.49
Home equity lines of credit................... 14,040 1.51 8,955 1.37 9,792 2.08
Other......................................... 2,512 0.27 2,117 0.32 2,461 0.52
-------- ------ -------- ------ -------- ------
Total consumer loans........................ 40,217 4.33 34,984 5.35 33,358 7.09
-------- ------ -------- ------ -------- ------
Total loans................................. 928,871 100.00% 652,922 100.00% 469,931 100.00%
====== ====== ======
LESS:
Loans in process................................ --- --- ---
Unamortized premiums, deferred loan fees,
and other, net................................. 5,202 2,279 606
Allowance for loan losses....................... (2,622) (2,630) (2,860)
-------- -------- --------
Total loans receivable, net................... $931,451 $652,571 $467,677
======== ======== ========
----------------------------------------------------
1994 1993
------------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ---------- -----------
FIRST MORTGAGE LOANS:
One- to four-family/(1)/........................ $301,843 78.13% $304,838 75.70%
Construction.................................... 177 0.04 378 0.09
Commercial and multi-family..................... 49,135 12.72 53,120 13.19
-------- ------ -------- ------
Total first mortgage loans.................... 351,155 90.89 358,336 88.98
-------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Second mortgages.............................. 22,532 5.83 30,175 7.49
Home equity lines of credit................... 10,840 2.81 11,640 2.89
Other......................................... 1,825 0.47 2,568 0.64
-------- ------ -------- ------
Total consumer loans........................ 35,197 9.11 44,383 11.02
-------- ------ -------- ------
Total loans................................. 386,352 100.00% 402,719 100.00%
====== ======
LESS:
Loans in process................................ (44) (70)
Unamortized premiums, deferred loan fees,
and other, net................................. 109 (189)
Allowance for loan losses....................... (3,060) (3,126)
-------- --------
Total loans receivable, net................... $383,357 $399,334
======== ========
____________
(1) One- to four-family loans include loans held for sale of $88,000, $536,000,
and $1,995,000, at June 30, 1996, 1994 and 1993, respectively. There were
no loans held for sale at June 30, 1997 and 1995.
44
Loan Maturity. The following schedule sets forth the contractual maturity
of the Company's loan portfolio as of June 30, 1997. Loans that have adjustable
rates are shown as amortizing to final maturity rather than when the interest
rates are next subject to change. Loans with balloon payments are also shown as
amortizing to final maturity (i.e., when the balloon payment is due). All
balances are shown on a gross basis and, thus, include no premium or discount
adjustments. Savings account loans, included in consumer loans, which have no
stated final maturity are reported as due within one year. The table does not
reflect the effects of possible prepayments or scheduled principal amortization.
AFTER TEN
AFTER ONE AFTER THREE AFTER FIVE THROUGH AFTER
ONE YEAR THROUGH THROUGH THROUGH TWENTY TWENTY
OR LESS THREE YEARS FIVE YEARS TEN YEARS YEARS YEARS TOTAL
-------- ----------- ----------- ---------- --------- --------- ---------
(IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-family..................... $ 729 $ 3,036 $ 6,868 $28,786 $194,704 $597,720 $831,843
Commercial and multi-family............. 4,759 7,504 5,983 10,160 20,527 7,878 56,811
------ ------- ------- ------- -------- -------- --------
Total first mortgage loans............. 5,488 10,540 12,851 38,946 215,231 605,598 888,654
Consumer loans.......................... 2,315 1,894 2,431 10,308 22,518 751 40,217
------ ------- ------- ------- -------- -------- --------
Total loans, gross..................... $7,803 $12,434 $15,282 $49,254 $237,749 $606,349 $928,871
====== ======= ======= ======= ======== ======== ========
Loans due after June 30, 1998 which have fixed interest rates amount to
$510.8 million, while those with adjustable rates amount to $410.3 million,
detailed as follows:
DUE AFTER JUNE 30, 1998
------------------------------------------
FIXED ADJUSTABLE TOTAL
------------ --------------- -----------
(IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-family.......................... $468,860 $362,254 $831,114
Commercial and multi-family real estate...... 18,082 33,970 52,052
-------- -------- --------
Total first mortgage loans.................. 486,942 396,224 883,166
Consumer..................................... 23,863 14,039 37,902
-------- -------- --------
Total loans, gross.......................... $510,805 $410,263 $921,068
======== ======== ========
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Company's in-house originations staff,
marketing efforts, its present customers, walk-in customers and referrals from
real estate agents, mortgage brokers and builders. The Company focuses its
lending efforts primarily on the origination of loans secured by first mortgages
on owner-occupied, one- to four-family residences. During the fiscal year ended
June 30, 1997, the Company originated $74.2 million of fixed-rate real estate
loans secured by one- to four-family residential real estate. ARM loans
originated during fiscal 1997 totaled $67.5 million. Substantially, all of the
Company's one- to four-family residential mortgage originations are secured by
properties located in the State of New Jersey.
45
In addition, the Company has correspondent relationships with two other
institutions through which, during fiscal 1997, it purchased $28.6 million of
newly originated fixed and $166.9 million of newly originated adjustable rate
one- to four-family residential first mortgages, most of which are secured by
properties located in the State of New Jersey and a limited amount of which are
secured by properties located in the Commonwealth of Pennsylvania. These loans
are underwritten by the correspondent institutions using the Company's
guidelines and a portion of those loans are re-underwritten by the Bank on a
test basis. All loans purchased are supported by customary representations and
warranties provided by the correspondent institutions. At June 30, 1997, the
Company's one- to four- family residential mortgage loans totaled $831.8
million, or approximately 89.6% of the Company's gross loan portfolio. In the
event the Company is unable to maintain these two correspondent relationships,
its ability to purchase one- to four-family residential first mortgage loans
meeting its underwriting criteria could be adversely affected. See "-
Originations, Purchases, Sales and Servicing of Loans."
The Company currently originates one- to four-family residential mortgage
loans with terms of up to 30 years in amounts up to 95% of the appraised value
of the security property. The Company generally requires that private mortgage
insurance be obtained in an amount sufficient to reduce the Company's exposure
to 80% or less of the loan-to-value level.
Currently, loans are primarily originated for investment purposes and are,
therefore, being held to maturity in the Company's loan portfolio. Interest
rates charged on loans are competitively priced according to market conditions.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Properties securing real estate loans
made by the Company are appraised by independent appraisers approved by the
Board of Directors. The Company requires borrowers to obtain title insurance
and fire and property insurance (including flood insurance, if necessary) in the
amount of the loan or the replacement cost, whichever is less. Real estate
loans originated and purchased by the Company generally contain a "due on sale"
clause allowing the Company to declare the unpaid principal balance due and
payable upon the sale of the security property.
Commercial and Multi-Family Real Estate Lending. The Company also engages
in commercial and multi-family real estate lending in its market areas. At June
30, 1997, the Company had $56.8 million of commercial and multi-family real
estate loans which represented 6.1% of the Company's gross loan portfolio. This
amount includes less than $300,000 of lines of credit secured by non-real estate
business assets. At June 30, 1997, the average per loan balance of the
Company's commercial and multi-family real estate loans outstanding was
$277,000.
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, mixed-use buildings, small office
buildings, restaurants, warehouses and strip shopping centers. Commercial and
multi-family real estate loans typically have terms that do not exceed 15 years
and have a variety of rate adjustment features and other terms. Generally, the
46
loans are made in amounts up to 75% of the appraised value of the security
property. Adjustable rate commercial and multi-family real estate loans
normally provide for a margin over the U.S. Treasury security adjusted to a
constant maturity of five years, with periodic adjustments after five years, or
over the Prime Rate as reported in the Wall Street Journal. To a lesser extent,
the Company also originates commercial and multi-family real estate loans with a
margin over shorter-term U. S. Treasury securities. In underwriting these
loans, the Company analyzes the current financial condition of the borrower, the
borrower's credit history, and the reliability and predictability of the cash
flow generated by the property securing the loan. The Company usually requires
personal guarantees of the borrowers. Appraisals on properties securing
commercial real estate loans originated by the Company are performed by
independent appraisers approved by the Board of Directors. The Company has
recently established a correspondent relationship with a bank in New Jersey as
part of an overall effort to increase its commercial and multi-family real
estate originations.
Commercial and multi-family real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (e.g., if leases are not obtained or renewed,
or a bankruptcy court modifies a lease term, or a major tenant is unable to
fulfill its lease obligations), the borrower's ability to repay the loan may be
impaired.
Consumer Lending. The Company offers a variety of secured consumer loans,
including home equity lines of credit, second mortgages, automobile loans and
loans secured by savings deposits. In addition, the Company offers unsecured
overdraft checking protection. The Company currently originates substantially
all of its consumer loans in its primary market areas. Since 1992, the Company
has originated consumer loans only on a direct basis, where the Company extends
credit directly to the borrower. Prior to that date, the Company purchased
second mortgages from various affiliated and unaffiliated third parties. At
June 30, 1997, the Company had $3.4 million in purchased second mortgages, of
which $541,000 were non-performing at that date. See "-Non-Performing Assets
and Classified Assets."
The Company originates adjustable rate home equity lines of credit and
fixed rate second mortgage loans generally up to $125,000. Home equity lines of
credit and second mortgage loans together with loans secured by all prior liens,
are generally limited to 75% or less of the appraised value of the property
securing the loan. Second mortgage loans have a maximum term of up to 15 years.
Home equity lines of credit may have varying terms up to 20 years. These loans
are underwritten utilizing criteria similar to the Company's first mortgage
loans. As of June 30, 1997, second mortgage loans and home equity lines of
credit amounted to $37.7 million or 4.1% of the Company's gross loan portfolio.
47
At June 30, 1997, the Company's total consumer loan portfolio was $40.2
million, or 4.3% of its gross loan portfolio, of which approximately 65% were
fixed rate loans and 35% were adjustable rate loans.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral from a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS
For the fiscal year ended June 30, 1997, the Company originated $173.5
million of loans, compared to $143.0 million and $54.5 million in fiscal 1996
and 1995, respectively. Mortgage loan originations are handled by employees of
the Company. Separate origination facilities are not maintained.
During the fiscal years ended June 30, 1997, 1996 and 1995, the Company
purchased $195.5 million, $132.2 million and $87.7 million of one- to four-
family residential first mortgage loans, respectively, primarily through
correspondent relationships with other institutions. The purchased loans
represent both fixed and adjustable rate one- to four-family first mortgages
secured by properties primarily located throughout New Jersey. During fiscal
1997, a limited amount of loans secured by properties located in the
Commonwealth of Pennsylvania were purchased. All loans are purchased on a non-
recourse basis.
From time to time the Company sells one- to four-family mortgage loans,
without recourse, to FHLMC and other secondary market purchasers. The Company
sold loans in aggregate amounts of $585,000, $273,000 and $1.4 million during
the years ended June 30, 1997, 1996 and 1995, respectively.
When loans are sold, the Company may retain the responsibility for
servicing the loans. The Company receives a fee for performing these services.
The Company serviced for others one- to
48
four-family mortgage loans with an aggregate outstanding principal balance of
$78.8 million, $89.2 million and $80.0 million at June 30, 1997, 1996 and 1995,
respectively. The increase in 1996 was due to the purchase of one- to four-
family residential mortgage loan servicing rights for approximately $19.9
million of loans.
The following table sets forth the activity in the Company's loan portfolio
for the years indicated.
YEAR ENDED JUNE 30,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Net loans receivable at beginning of year....... $652,571 $467,677 $383,357
PLUS:
Loans originated:
One- to four-family........................... 141,736 119,583 35,588
Commercial and multi-family real estate....... 12,225 7,477 7,147
Consumer...................................... 19,501 15,966 11,745
-------- -------- --------
Total loans originated....................... 173,462 143,026 54,480
-------- -------- --------
Loans purchased:
One- to four-family........................... 195,514 132,238 87,728
Consumer...................................... --- --- 146
-------- -------- --------
Total loans purchased........................ 195,514 132,238 87,874
-------- -------- --------
Total loans originated and purchased........ 368,976 275,264 142,354
LESS:
One- to four-family loans sold................ 585 273 1,362
Loan principal payments and other, net........ 87,821 88,557 53,978
Loans transferred to real estate owned........ 1,690 1,540 2,694
-------- -------- --------
Net loans receivable at end of year............. $931,451 $652,571 $467,677
======== ======== ========
NON-PERFORMING AND CLASSIFIED ASSETS
Generally, when a borrower fails to make a required payment on a real
estate secured loan or other secured loan the Company institutes collection
procedures by mailing a delinquency notice. The customer is contacted again, by
telephone, if the delinquency is not promptly cured. In many cases,
delinquencies are cured promptly; however, if a loan secured by real estate or
other collateral has been delinquent for more than 60 days, a letter of notice
of intention to foreclose is sent and the customer is requested to make
arrangements to bring the loan current. At 90 days past due, unless satisfactory
arrangements have been made, immediate repossession commences or foreclosure
49
procedures are instituted. For unsecured loans, the collection procedures are
similar; however, at 90 days past due, a reserve or charge-off is recommended
and, subsequently, a law suit is filed, if necessary.
At June 30, 1997, the Company's loans delinquent 60 to 89 days totaled $1.5
million; $1.0 million were one- to four-family mortgage loans; $348,000 were
commercial and multi-family real estate loans; and $114,000 were consumer loans.
The table below sets forth the Company's amounts and categories of non-
performing assets and restructured loans. Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more than
90 days. There are no loans delinquent more than 90 days which are still
accruing. Real estate owned represents assets acquired in settlement of loans
and is shown net of valuation allowances. Restructured loans are all performing
in accordance with modified terms and are, therefore, considered performing.
AT JUNE 30,
--------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
NON-ACCRUING LOANS:
One- to four-family........................... $3,567 $4,009 $3,040 $ 5,739 $ 8,486
Construction.................................. --- --- --- 132 ---
Commercial and multi-family real estate....... 1,053 913 1,090 1,966 3,629
Consumer...................................... 865 1,264 1,435 2,021 1,896
------ ------ ------ ------- -------
Total non-accruing loans..................... 5,485 6,186 5,565 9,858 14,011
Real estate owned, net........................ 884 1,083 1,177 1,469 1,726
------ ------ ------ ------- -------
Total non-performing assets.................. 6,369 7,269 6,742 11,327 15,737
Restructured loans............................ 1,451 2,340 2,922 2,289 2,320
------ ------ ------ ------- -------
Total risk elements.......................... $7,820 $9,609 $9,664 $13,616 $18,057
====== ====== ====== ======= =======
Non-accruing loans as a percentage of total
loans...................................... 0.59% 0.95% 1.18% 2.55% 3.48%
====== ====== ====== ======= =======
Non-performing assets as a percentage of
total assets............................... 0.48% 0.67% 0.78% 1.67% 2.71%
====== ====== ====== ======= =======
Total risk elements as a percentage of total
assets...................................... 0.59% 0.88% 1.11% 2.00% 3.11%
====== ====== ====== ======= =======
For the year ended June 30, 1997, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $139,000, none of which was included in interest
income during this period.
For the year ended June 30, 1997, gross interest income which would have
been recorded had the restructured loans paid in accordance with their original
terms amounted to $263,000. For the year ended June 30, 1997, the actual amount
included in interest income, which was paid in accordance with the modified loan
terms, was $210,000.
50
Non-Performing Assets. Non-accruing loans at June 30, 1997 were comprised
of 47 one- to four-family loans aggregating $3.6 million, 29 second mortgage
loans aggregating $865,000 and five commercial and multi-family real estate
loans at June 30, 1997, totaling $1.1 million.
Real estate owned at June 30, 1997 included 10 one- to four-family
properties totaling $505,000, the largest of which had a net book value of
$93,000, and two commercial properties with a total net book value of $379,000.
Restructured Loans. In the normal course of business the Company has
restructured the terms of certain loans. At June 30, 1997, restructured loans
consisted of two commercial real estate loans with individual book balances of
$768,000 and $683,000. These loans have been performing in accordance with
their modified terms.
Other Loans of Concern. As of June 30, 1997, there were $3.7 million of
other loans not included in the table or discussed above where known information
about the possible credit problems of borrowers caused management to have doubts
as to the ability of the borrower to comply with present loan repayment terms
and which may result in disclosure of such loans in the future. Set forth below
is a description of other loans of concern with book values in excess of $1.0
million.
Included in other loans of concern is a loan with a book value of $1.8
million which the Company is monitoring due to periodic delinquencies. The loan
is secured by a first mortgage lien on a banquet facility in Essex County, New
Jersey, as well as personal and corporate guarantees. As of June 30, 1997, the
loan was current, and performing in accordance with its repayment terms.
Also, included in other loans of concern at June 30, 1997 are six loans to
one borrower and one loan to an affiliated party totaling $1.1 million acquired
in the 1989 acquisition of First Federal Savings and Loan Association of
Montclair. The six loans consist of one commercial real estate loan of
$454,000, four one-to four-family loans totaling $241,000 and an $88,000 line of
credit. The loan to an affiliated party consists of a commercial real estate
loan of $272,000. All of these loans are secured by properties located in New
Jersey. The commercial real estate loans are secured by mixed-use properties
consisting of retail stores and apartments located in Essex County, New Jersey.
All of these loans were originated from 1985 to 1989 with thirty year terms. At
June 30, 1997, $423,000 of these loans were performing in accordance with their
respective repayment terms while $574,000 were 30 days past due and $58,000 were
60 days past due. The Company continues to monitor these loans due to their
periodic delinquencies.
All of the other loans of concern have been considered by management in
conjunction with the analysis of the adequacy of the allowance for loan losses.
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
51
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that the establishment of a specific loss reserve is
warranted.
When a savings institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required to either establish a specific reserve
equal to 100% of that portion of the asset so classified or to charge-off such
amount.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the assets in its portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets at June 30, 1997, the Bank's classified
assets, including real estate owned, totaled $8.0 million, with $7.4 million
classified as substandard and $618,000 classified as loss. Total classified
assets represent 8.2% of the Company's stockholders' equity and 0.6% of the
Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on 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, the
loan classifications discussed above, 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
52
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
examination.
The following table sets forth an analysis of the Company's allowance for
loan losses at, and for, the dates indicated.
YEAR ENDED JUNE 30,
-------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
Balance at beginning of year............................... $2,630 $2,860 $3,060 $3,126 $ 3,378
Charge-offs:
One- to four-family...................................... (392) (195) (267) (489) (5)
Commercial and multi-family real estate.................. (147) (508) (223) (93) (170)
Consumer................................................. (146) (238) (279) (395) (1,745)
------ ------ ------ ------ -------
(685) (941) (769) (977) (1,920)
------ ------ ------ ------ -------
Recoveries:
One- to four-family...................................... --- --- --- 28 49
Commercial and multi-family real estate................... --- 101 --- --- ---
Consumer.................................................. 42 --- --- --- 58
------ ------ ------ ------ -------
42 101 --- 28 107
------ ------ ------ ------ -------
Net charge-offs............................................ (643) (840) (769) (949) (1,813)
Additions charged to operations............................ 635 610 569 883 1,561
------ ------ ------ ------ -------
Balance at end of year..................................... $2,622 $2,630 $2,860 $3,060 $ 3,126
====== ====== ====== ====== =======
Ratio of net charge-offs during the year to
average loans outstanding during the year................ 0.08% 0.16% 0.19% 0.25% 0.43%
====== ====== ====== ====== =======
Ratio of allowance for loan losses to total
loans at end of year..................................... 0.28% 0.40% 0.61% 0.79% 0.78%
====== ====== ====== ====== =======
Ratio of allowance for loan losses to non-
accruing loans at end of year........................... 47.80% 42.52% 51.39% 31.04% 22.31%
====== ====== ====== ====== =======
53
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized in the following table. The portion of the allowance
allocated to each loan category does not represent the total available for
possible future losses within that category since the total allowance is
applicable to the entire loan portfolio.
JUNE 30,
-------------------------------------------------------------------------------------------------
1996 1997 1995 1994 1993
----------------- ------------------- ------------------- ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
One-to four-family............ $1,463 89.55% $1,290 86.68% $ 657 82.17% $ 726 78.17% $ 816 75.79%
Commercial and
multi-family real estate...... 654 6.12 782 7.97 1,602 10.74 1,726 12.72 1,804 13.19
Consumer....................... 505 4.33 558 5.35 601 7.09 608 9.11 506 11.02
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total........................ $2,622 100.00% $2,630 100.00% $2,860 100.00% $3,060 100.00% $3,126 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
54
INVESTMENT ACTIVITIES
The Bank must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Historically, the Bank has maintained its liquid assets
above the minimum requirements imposed by the OTS regulations and at a level
believed adequate to meet requirements of normal daily activities, repayment of
maturing debt and potential deposit outflows. As of June 30, 1997, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable deposit
accounts and current borrowings) was 10.36%. See "Regulation-Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and Federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to provide collateral for borrowings and to fulfill the Company's
asset/liability management policies.
At June 30, 1997, the Company had a securities portfolio consisting
principally of U.S. government obligations and securities of various federal
agencies, including mortgage-backed securities. These investments carry a low
risk weighting for OTS risk-based capital purposes, generally satisfy OTS
liquid-asset requirements and are of relatively short duration. See
"Regulation-Regulatory Capital Requirements" and "Regulation-Liquidity."
Investment Securities. At June 30, 1997, the Company's investment
securities (including a $12.4 million investment in FHLB of New York stock)
totaled $47.7 million, or 3.6% of its total assets. It is the Company's general
policy to purchase U.S. Government securities and federal agency obligations and
other investment grade securities in accordance with its strategic objectives,
including, but not limited to, achieving growth and/or interest rate risk
measurement targets.
OTS regulations restrict investments in corporate debt and equity
securities by the Company. See "Regulation-Federal Regulation of Savings
Associations" for a discussion of additional restrictions on the Company's
investment activities.
55
The following table indicates the composition of the investment securities
portfolio, excluding FHLB of New York stock, based on the final maturities of
each investment. At June 30, 1997, the weighted average life of this portfolio
was 1.0 year, based on the shorter of the remaining maturity, next repricing
date or initial call date.
JUNE 30, 1997
-------------------------------------------------------------------------
AFTER ONE AFTER FIVE YEARS
ONE YEAR YEAR THROUGH THROUGH TOTAL INVESTMENT
OR LESS FIVE YEARS TEN YEARS SECURITIES
---------- ----------- ---------------- ---------- ------------
BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE MARKET VALUE
---------- ----------- ---------------- ---------- ------------
(DOLLARS IN THOUSANDS)
U.S. government and agency obligations............... $4,999 $ --- $30,000 $34,999 $35,125
Obligations of states and political
subdivisions..................................... --- 101 190 291 307
------ ----- ------- ------- -------
Total investment securities.......................... $4,999 $ 101 $30,190 $35,290 $35,432
====== ===== ======= ======= =======
Weighted average yield at year end................... 7.95% 5.70% 7.44% 7.51%
====== ===== ======= =======
The Company's investment securities portfolio at June 30, 1997 did not
contain securities of any issuer or tax-exempt securities with an aggregate book
value in excess of 10% of the Company's retained earnings, excluding those
issued by the U.S. Government or its agencies.
The Company's investments, including the mortgage-backed securities
portfolio, are managed in accordance with a written investment policy adopted by
the Board of Directors.
At June 30, 1997, there were no investment securities held for sale.
Mortgage-Backed Securities. The Company, from time to time, purchases
mortgage-backed securities in accordance with its strategic objectives,
including, but not limited to, achieving growth and/or interest rate risk
measurement targets. No purchases were made in fiscal 1997. At June 30, 1997,
mortgage-backed securities totaled $288.5 million, or 21.8% of the Company's
total assets, of which approximately 27% consisted of adjustable rate
securities. The type of securities purchased is based upon the Company's
asset/liability management strategy and balance sheet objectives. Most of the
mortgage-backed securities purchased by the Company over the last several years
were secured by loans with five or seven year balloon terms, 15 year fixed rate
terms or one and three year adjustable rate terms. The Company's current
investment strategy emphasizes mortgage-backed securities with high credit
quality and relatively short duration. The Company has invested primarily in
federal agency securities, principally those of the Government National Mortgage
Association ("GNMA"), FHLMC and FNMA.
56
The following table indicates the composition of the mortgage-backed
securities portfolio, excluding unamortized premiums, based on the final
maturities of each security.
JUNE 30, 1997
-----------------------------------------------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS AFTER
ONE YEAR THROUGH THROUGH TEN TOTAL
OR LESS FIVE YEARS TEN YEARS YEARS MORTGAGE-BACKED SECURITIES
----------- ----------- ----------- -------- --------------------------
BOOK BOOK BOOK BOOK BOOK MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- -------- ----------- -------------
(DOLLARS IN THOUSANDS)
GNMA.......................................... $ -- $ -- $ 872 $ 3,121 $ 3,993 $ 4,205
FHLMC......................................... 8,580 56,943 9,097 109,408 184,028 186,350
FNMA.......................................... -- 20,928 2,829 74,927 98,684 99,632
CMOs/REMICs................................... -- -- -- 938 938 938
-------- -------- ------- -------- -------- --------
Total mortgage-backed securities.............. $ 8,580 $ 77,871 $12,798 $188,394 $287,643 $291,125
======== ======== ======= ======== ======== ========
Weighted average yield at year end............ 7.00% 6.78% 7.38% 7.26% 7.12%
======== ======== ======= ======== ========
57
The GNMA, FHLMC and FNMA certificates are modified pass-through mortgage-
backed securities that represent undivided interests in underlying pools of
fixed rate, or certain types of adjustable rate, single-family residential
mortgages issued by these government-sponsored entities. GNMA's guarantee to the
certificate holder of timely payments of principal and interest is backed by the
full faith and credit of the U.S. government. FNMA and FHLMC provide the
certificate holder a guarantee of timely payments of interest and scheduled
principal payments, whether or not they have been collected.
CMOs are special types of pass-through debt in which the stream of
principal and interest payments on the underlying mortgages or mortgage-backed
securities is used to create classes with different maturities and, in some
cases, amortization schedules, as well as a residual interest, with each such
class possessing different risk characteristics. REMICs are similar, except
REMICs are typically issued by a special purpose entity, such as a trust,
corporation or partnership which pools pass-through securities to create
different classes. Management believes these securities may represent
attractive alternatives relative to other investments due to the wide variety of
maturity and repayment options available through such investments. The CMOs and
REMICs acquired by the Company are not interest only or principal only or
residual interests. The Company held $938,000 of CMOs and REMICs at June 30,
1997.
The following table sets forth the Company's mortgage-backed securities
purchase and repayment activities for the years indicated.
YEAR ENDED JUNE 30,
---------------------------------
1997 1996 1995
---------- ---------- -----------
(IN THOUSANDS)
Mortgage-backed securities, net:
At beginning of year.................... $346,068 $319,436 $204,870
Securities purchased.................... --- 99,085 148,036
Less:
Principal repayments.................... 57,266 72,028 32,013
Amortization of premiums................ 263 425 1,457
-------- -------- --------
At end of year.......................... $288,539 $346,068 $319,436
======== ======== ========
58
The following table sets forth the composition of the Company's investment
and mortgage-backed securities portfolios at the dates indicated.
JUNE 30,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ -------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
BOOK MARKET BOOK BOOK MARKET BOOK BOOK MARKET BOOK
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- --------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INVESTMENT SECURITIES:
U.S. government and agency
obligations................. $ 34,999 $ 35,125 73.37% $ 20,997 $ 21,183 71.57% $ 16,987 $ 17,255 71.00%
Obligations of states and
political subdivisions...... 291 307 0.61 291 319 0.99 501 535 2.10
Other........................ --- --- --- --- --- --- 70 70 0.29
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total investment securities. 35,290 35,432 73.98 21,288 21,502 72.56 17,558 17,860 73.39
FHLB of New York stock....... 12,413 12,413 26.02 8,052 8,052 27.44 6,368 6,368 26.61
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total investment
securities and FHLB of
New York stock............. $ 47,703 $ 47,845 100.00% $ 29,340 $ 29,554 100.00% $ 23,926 $ 24,228 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
Weighted average life of
investment securities....... 1.0 years 2.5 years 2.2 years
excluding FHLB of New York
stock/(1)/
MORTGAGE-BACKED SECURITIES:
GNMA....................... $ 3,993 $ 4,205 1.38% $ 4,904 $ 5,090 1.42% $ 6,142 $ 6,413 1.92%
FHLMC...................... 184,028 186,350 63.78 221,777 221,240 64.09 213,065 215,423 66.70
FNMA....................... 98,684 99,632 34.20 115,896 115,603 33.49 96,110 97,340 30.09
CMOs/REMICs................ 938 938 0.33 1,348 1,342 0.39 2,235 2,231 0.70
Other pass-through
securities/(2)/........... --- --- --- 984 1,056 0.28 1,161 1,161 0.36
-------- -------- ------ -------- -------- ------ -------- -------- ------
287,643 291,125 99.69 344,909 344,331 99.67 318,713 322,568 99.77
Unamortized premiums, net.... 896 --- 0.31 1,159 --- 0.33 723 --- 0.23
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total mortgage-backed
securities............... $288,539 $291,125 100.00% $346,068 $344,331 100.00% $319,436 $322,568 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
____________________________
(1) The weighted average life of investment securities is based on the shorter
of the remaining maturity, next repricing date or initial call date.
(2) Other pass-through securities is composed of an A-rated privately issued
pass-through security.
59
SOURCES OF FUNDS
General. The Company's sources of funds are deposits, borrowings, payment
of principal and interest on loans and mortgage-backed securities, interest
received on or maturities of other investment securities and funds provided from
operations.
Borrowings, including FHLB of New York advances, have been used as a
supplement to deposits to fund asset growth and as a mechanism to extend the
average life of the Company's liabilities.
Deposits. The Company offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company's deposits consist of savings,
money market and demand deposit accounts, as well as certificate accounts
currently ranging in terms up to 60 months. The Company solicits deposits
primarily from its market areas and relies primarily on competitive pricing
policies, advertising and customer service to attract and retain deposits. In
the latter part of fiscal 1997, the Company initiated a program to solicit
deposits from municipalities in its market areas. As of June 30, 1997,
certificates of deposit from municipalities totaled $17.1 million.
The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management, liquidity and profitability
objectives. In this regard, the Company has from time-to-time paid slightly
higher rates than its competitors to attract longer-term certificates of
deposit. Based on its experience, the Company believes that its savings, money
market and demand deposit accounts are relatively stable sources of deposits.
However, the ability of the Company to attract and maintain certificates of
deposit and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions. At June 30, 1997, the Company had
$1.0 million of brokered deposits. See Note I - Deposits - of the Notes to
Consolidated Financial Statements.
60
The flow of deposits is influenced significantly by general economic
conditions, changes in interest rates and competition. The following table sets
forth the deposit flows of the Company during the periods indicated.
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Opening balance.......................................................... $836,416 $713,524 $614,860
Net deposits (withdrawals)............................................... 47,233 93,407 (7,094)
Conversion deposits...................................................... --- --- (53,780)
Deposits acquired........................................................ --- --- 136,811
Interest credited........................................................ 34,511 29,485 22,727
-------- -------- --------
Ending balance........................................................... $918,160 $836,416 $713,524
======== ======== ========
Net increase............................................................. $ 81,744 $122,892 $ 98,664
======== ======== ========
Percent increase......................................................... 9.77% 17.22% 16.05%
======== ======== ========
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 1997.
MATURITY
------------------------------------------------------------
OVER OVER OVER
3 MONTHS 3 TO 6 6 TO 12 12
OR LESS MONTHS MONTHS MONTHS TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
Certificates of deposit less than $100,000..................... $109,988 $109,303 $123,226 $240,359 $582,876
Certificates of deposit of $100,000 or more.................... 27,367 12,498 12,719 28,358 80,942
-------- -------- -------- -------- --------
Total certificates of deposit.................................. $137,355 $121,801 $135,945 $268,717 $663,818
======== ======== ======== ======== ========
Borrowings. Although deposits are the Company's primary source of funds,
the Company's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread, when the
Company desires additional capacity to fund loan demand or to extend the life of
its liabilities.
The Company's borrowings have consisted of advances from the FHLB of New
York, and to a lesser extent, reverse repurchase agreements. FHLB of New York
advances can be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities.
61
The following table sets forth the maximum month-end balance, average
balance and weighted average cost of FHLB of New York advances and other
borrowings for the periods indicated.
YEAR ENDED JUNE 30,
------------------------------------
1997 1996 1995
-------- -------- -------
(DOLLARS IN THOUSANDS)
MAXIMUM BALANCE FOR THE YEAR ENDED:
FHLB of New York advances..................................................... $205,465 $105,000 $35,000
Other borrowings:
FHLB of New York overnight repricing line of credit......................... 46,610 46,650 16,670
FHLB of New York one-month overnight repricing line of credit............... 15,000 20,000 5,000
Reverse repurchase agreements maturing within one year...................... 30,100 10,000 5,000
Reverse repurchase agreements maturing after one year....................... 10,000 --- ---
-------- -------- -------
Total other borrowings.................................................... $101,710 $ 76,650 $26,670
======== ======== =======
AVERAGE BALANCE FOR THE YEAR ENDED:
FHLB of New York advances..................................................... $147,945 $ 65,625 $17,028
Other borrowings:
FHLB of New York overnight repricing line of credit......................... 29,537 23,101 9,991
FHLB of New York one-month overnight repricing line of credit............... 8,886 4,141 430
Reverse repurchase agreements maturing within one year...................... 24,244 2,604 860
Reverse repurchase agreements maturing after one year....................... 5,417 --- ---
-------- -------- -------
Total other borrowings.................................................... $ 68,084 $ 29,846 $11,281
======== ======== =======
BALANCE AT JUNE 30:
FHLB of New York advances..................................................... $205,465 $105,000 $35,000
Other borrowings:
FHLB of New York overnight repricing line of credit......................... 32,650 36,700 15,830
FHLB of New York one-month overnight repricing line of credit............... 10,000 5,000 ---
Reverse repurchase agreements maturing within one year...................... 30,100 --- ---
Reverse repurchase agreements maturing after one year....................... 10,000 --- ---
-------- -------- -------
Total other borrowings................................................... $ 82,750 $ 41,700 $15,830
======== ======== =======
WEIGHTED AVERAGE COST OF FUNDS FOR THE YEAR ENDED:
FHLB of New York advances..................................................... 6.14% 5.83% 5.16%
Other borrowings:
FHLB of New York overnight repricing line of credit......................... 5.47% 5.61% 5.63%
FHLB of New York one-month overnight repricing line of credit............... 5.48% 5.35% 5.63%
Reverse repurchase agreements maturing within one year...................... 5.50% 5.81% 6.19%
Reverse repurchase agreements maturing after one year....................... 6.24% --- ---
WEIGHTED AVERAGE COST OF FUNDS AT JUNE 30:
FHLB of New York advances..................................................... 6.13% 5.93% 5.86%
Other borrowings:
FHLB of New York overnight repricing line of credit......................... 6.63% 5.69% 6.63%
FHLB of New York one-month overnight repricing line of credit............... 6.38% 5.63% ---
Reverse repurchase agreements maturing within one year...................... 5.74% --- ---
Reverse repurchase agreements maturing after one year....................... 6.24% --- ---
62
SUBSIDIARY ACTIVITIES
As a federally chartered savings association, Penn Federal is permitted by
OTS regulations to invest up to 2% of its assets, or $26.5 million at June 30,
1997, in the stock of, or loans to, service corporation subsidiaries. As of
such date, the net book value of Penn Federal's investment in its service
corporation was $15,500. Penn Federal may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes and up to 50% of its total capital in conforming
loans to service corporations in which it owns more than 10% of the capital
stock. In addition to investments in service corporations, federal associations
are permitted to invest an unlimited amount in operating subsidiaries engaged
solely in activities which a federal association may engage in directly.
Penn Federal currently has a single service corporation, which is known as
Penn Savings Insurance Agency, Inc. ("PSIA"). PSIA offers insurance and
uninsured annuity products to the Company's customers and members of the general
public.
Penn Federal intends to form a Delaware operating subsidiary to hold and
manage its investment portfolio.
COMPETITION
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from commercial banks, other savings associations,
mortgage banking companies and credit unions making loans secured by real estate
located in the State of New Jersey. Commercial banks, credit unions and finance
companies provide vigorous competition in consumer lending. The Company
competes for real estate and other loans principally on the basis of the quality
of services it provides to borrowers, interest rates and loan fees it charges,
and the types of products offered.
The Company attracts substantially all of its deposits through its
branches, primarily from the communities in which those offices are located;
therefore, competition for those deposits is principally from commercial banks,
savings associations, credit unions and brokerage houses. The Company competes
for these deposits by offering a variety of deposit accounts at competitive
rates, quality customer service, convenient business hours and branch locations
with interbranch deposit and withdrawal privileges.
LEGAL PROCEEDINGS
The Company is involved from time to time as plaintiff or defendant in
various legal actions arising in the normal course of its business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's consolidated financial position or
results of operations.
63
REGULATION
GENERAL
Penn Federal is a federally chartered savings bank, the deposits of which
are federally insured up to applicable limits. Accordingly, the Bank is subject
to comprehensive federal regulation and oversight extending to all its
operations. Penn Federal is a member of the FHLB of New York and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the savings and loan holding company of
Penn Federal, PennFed is also subject to federal regulation and oversight. The
purpose of the regulation of PennFed and other holding companies is to protect
subsidiary savings associations. The Bank is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of Penn Federal are insured
by the FDIC. As a result, the FDIC has certain regulatory and examination
authority over the Bank. For purposes of the "Regulation" discussion, the terms
"savings bank," "savings association" and "savings institution" would apply to
the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Penn Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of the Bank were as of
June 1996 and May 1992, respectively.
All savings associations are subject to a semi-annual OTS assessment, based
upon the savings association's total assets and supervisory evaluation. The
Bank's OTS assessment for the fiscal year ended June 30, 1997 was $217,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Penn Federal and PennFed.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist and/or removal and prohibition
orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS.
Except under certain circumstances, public disclosure of interim and final
enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of Penn
Federal is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
64
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. At June 30, 1997, the Bank was in compliance with each of
these restrictions. Federal savings associations meeting the Qualified Thrift
Lender Test or comparable requirement are also generally authorized to branch
nationwide. See "-Qualified Thrift Lender Test."
The OTS, as well as the other federal banking agencies, has developed
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, internal controls and audit systems, asset
quality, earning standards, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. Failure to submit a plan or to comply
with an approved plan would subject the institution to further enforcement
action.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Penn Federal's deposits are insured by the SAIF, which is administered by
the FDIC. Deposits are insured up to applicable limits by the FDIC. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the deposit
insurance funds. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the institution's deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's SAIF deposit premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums, based upon their level of capital
and supervisory evaluation. The current SAIF premium schedule ranges from 0.00%
to 0.27% of deposits. Under the system, institutions classified as well
capitalized (generally those institutions with a core capital ratio of at least
5% and a risk-based capital ratio of at least 10%) and considered financially
sound with only a few weaknesses pay the lowest premium, while institutions that
are less than adequately capitalized and considered to pose a substantial risk
of loss to the SAIF, pay the highest premium. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period. The Bank has been notified by the FDIC that for the semi-annual
assessment period beginning July 1, 1997, it will be assessed insurance premiums
at an annual rate of 0.00%. In addition to the SAIF assessment, the FDIC is
authorized to collect an assessment against SAIF-assessable deposits to be paid
to the Financing Corporation ("FICO"). The actual FICO assessment rate that is
applied to deposits is not tied to the FDIC risk classification and is
determined on a quarterly basis. For the quarterly period beginning July 1,
1997, the Company's FICO assessment rate is 0.063% of deposits, on an annualized
basis.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF
65
insured deposits. In setting these increased assessments, the FDIC must seek to
restore the reserve ratio to that designated reserve level, or such higher
reserve ratio as established by the FDIC. The FDIC may also impose special
assessments on SAIF members to repay amounts borrowed from the U.S. Treasury or
for any other reason deemed necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the Bank Insurance Fund
(the "BIF") of the FDIC in order to maintain the reserve ratio of the BIF at
1.25% of BIF insured deposits. The current BIF premium schedule also ranges
from 0.00% to 0.27% of deposits. Until December 31, 1999, or such earlier date
on which the last savings association ceases to exist, the FICO rate applied to
BIF deposits must equal one-fifth the FICO assessment rate that is applied to
SAIF deposits.
Prior to September 30, 1996, financial institutions which were members of
the BIF were assessed substantially lower deposit insurance premiums because the
BIF had achieved its required level of reserves while the SAIF had not yet
achieved its required reserves. As a result of legislation signed into law on
September 30, 1996, the SAIF recapitalization plan provided for a one-time
assessment of 0.657% of deposits, which was imposed on all institutions with
SAIF-insured deposits, to enable the SAIF to achieve its required level of
reserves. The assessment was based on deposits as of March 31, 1995, and the
Bank's special assessment was approximately $4.8 million, or $3.1 million, net
of taxes. Following the recapitalization assessment, beginning January 1, 1997
deposit insurance premiums were decreased significantly from the 0.23% of
deposits previously paid by the Bank to 0.00%, plus the FICO assessment
described above.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations, such as Penn Federal, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock. In addition, all intangible assets,
other than certain amounts of mortgage servicing rights, must be deducted from
assets and capital for calculating compliance with the requirements. At June
30, 1997, Penn Federal had $15.9 million of intangible assets other than
qualifying mortgage servicing rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities
66
solely as agent for its customers are "includable" subsidiaries that are
consolidated for capital purposes in proportion to the association's level of
ownership. For excludable subsidiaries, the debt and equity investments in such
subsidiaries are fully deducted from assets and capital. The Bank has one
subsidiary, Penn Savings Insurance Agency, Inc. which is an includable
subsidiary.
At June 30, 1997, Penn Federal had tangible capital of $73.5 million, or
5.61% of adjusted total assets, which is approximately $53.8 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets up to 25% of adjusted total assets. At June 30, 1997,
Penn Federal had $0.4 million of intangibles which were subject to these tests.
As a result of the prompt corrective action provisions discussed below, however,
a savings association must maintain a core capital ratio of at least 4% to be
considered adequately capitalized unless its supervisory condition is such to
allow it to maintain a 3% ratio.
At June 30, 1997, Penn Federal had core capital equal to $73.9 million, or
5.64% of adjusted total assets, which is approximately $21.5 million above the
4% ratio required to be considered adequately capitalized.
The OTS risk-based capital requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of selected items, such as certain permanent and
maturing capital instruments that do not qualify as core capital and allowances
for loan and lease losses up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. At June 30, 1997, the Bank had no capital
instruments that qualify as supplementary capital and had $2.1 million of
allowances for loan and lease losses, all of which was included since it was
less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments (as
defined by regulation), that portion of land loans and nonresidential
construction loans in excess of an 80% loan to value ratio and reciprocal
holdings of qualifying capital instruments. At June 30, 1997, Penn Federal had
$50,000 of such exclusions from capital and assets.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of assets. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by FNMA or FHLMC.
67
On June 30, 1997, Penn Federal had total risk-based capital of $75.9
million (including $73.9 million in core capital and $2.1 million in allowable
supplementary capital) and risk-weighted assets of $621.3 million (including
$9.0 million in converted off-balance sheet assets) resulting in risk-based
capital of 12.22% of risk-weighted assets. This amount was $26.2 million above
the 8% requirement in effect on that date.
The OTS has adopted a regulation that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure multiplied by the present value
of its assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
OTS has indefinitely postponed the effective date of the rule. However, if
effective, this new rule should have no effect on the Bank's ability to comply
with its risk-based capital requirement.
The federal banking agencies, including the OTS, have also adopted
regulations authorizing the agencies to require a depository institution to
maintain additional total capital to account for concentration of credit risk
and the risk of non-traditional activities.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and, until such plan is approved by the
OTS, may not increase its assets, acquire another institution, establish a
branch or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions,
discussed below, that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more additional mandated specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
divestiture, merger or acquisition of the association. An association that
becomes "critically undercapitalized" (i.e., a ratio of tangible equity to total
assets of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations.
68
Any undercapitalized association is also subject to actions by the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver. The OTS is also authorized to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Penn
Federal may have a substantial adverse effect on the Bank's operations and
profitability and the market value of PennFed's common stock. Stockholders do
not have preemptive rights, and therefore, if the Company is directed by the OTS
or the FDIC to issue additional shares of common stock, such issuance may result
in the dilution in the percentage of ownership of existing stockholders.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on associations
with respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the association's minimum
capital requirements or the amount required to be maintained for the liquidation
account established in connection with the Conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "-Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year. However, a Tier 1 association deemed to be
in need of more than normal supervision by the OTS may be downgraded to a Tier 2
or Tier 3 association as a result of such a determination. Penn Federal meets
the requirements for a Tier 1 association and has not been notified of a need
for more than normal supervision. Tier 2 associations, which are associations
that before and after the proposed distribution meet their current minimum
capital requirements, may make capital distributions of up to 75% of net income
over the most recent four quarter period ("safe-harbor level").
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe-harbor provisions and Tier 1 associations proposing to make any
capital distribution need only
69
submit written notice to the OTS 30 days prior to such distribution. As a
subsidiary of PennFed, the Bank is required to give the OTS 30 days notice prior
to declaring any dividend on its stock. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Regulatory Capital Requirements."
LIQUIDITY
All savings associations, including Penn Federal, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5%. In addition, short-term liquid assets (e.g., cash,
certain time deposits, certain bankers acceptances and short-term U.S. Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, Penn Federal was in compliance with both
requirements, with an overall liquidity ratio of 10.36% and a short-term
liquidity ratio of 2.15%. The OTS has recently issued a proposal to eliminate
the short-term liquidity requirement designed to reduce the regulatory burden on
savings associations.
ACCOUNTING
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with generally accepted
accounting principles ("GAAP"). Under the policy statement, management must
support its classification of and accounting for loans and securities (i.e.,
whether held for investment, sale or trading) with appropriate documentation.
Penn Federal is in compliance with these policy statements.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent risk
and that financial reports must incorporate any other accounting regulations or
orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings associations, including Penn Federal, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
its portfolio assets (as defined by regulation) in qualified thrift investments
on a monthly average for nine out of every 12 months on a rolling basis. Such
assets primarily consist of residential housing related loans and investments.
At June 30, 1997, the Bank met the test and has always met the test since its
effective date.
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Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB of New York
borrowings and is subject to national bank limits for payment of dividends. If
such association has not requalified or converted to a national bank within
three years after the failure, it must divest itself of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB of New York borrowings, which may result in
prepayment penalties. If any association that fails the QTL test is controlled
by a holding company, then within one year after the failure, the holding
company must register as a bank holding company and become subject to all
restrictions on bank holding companies. See "-Holding Company Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
CRA. The CRA requires the OTS, in connection with the examination of Penn
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Penn
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
November 1996 and received a rating of outstanding.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to affiliates, are restricted to a percentage of the association's
capital. Affiliates of Penn Federal include PennFed and any company which is
under common control with the Bank. In addition, a savings association may not
lend to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. Penn Federal's subsidiary
is not deemed an affiliate; however, the OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case by case basis.
71
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
PennFed is a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, PennFed is required to register and file reports
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over PennFed, which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association.
As a unitary savings and loan holding company, PennFed generally is not
subject to activity restrictions. If PennFed acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company and the activities of PennFed and any of its subsidiaries
(other than Penn Federal or any other SAIF-insured savings association) would
become subject to such restrictions unless such other associations each qualify
as a QTL and were acquired in a supervisory acquisition.
If Penn Federal fails the QTL test, PennFed must obtain the approval of the
OTS prior to continuing after such failure, directly or through any other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure, PennFed must register as, and will become subject to,
the restrictions applicable to bank holding companies. See "-Qualified Thrift
Lender Test." The activities authorized for a bank holding company are more
limited than are the activities authorized for a unitary or multiple savings and
loan holding company.
PennFed must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
FEDERAL SECURITIES LAW
The common stock of PennFed is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). PennFed is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
PennFed stock held by persons who are affiliates (generally executive
officers, directors and principal stockholders) of PennFed may not be resold
without registration or unless sold in
72
accordance with certain resale restrictions. If PennFed meets specified current
public information requirements, each affiliate of PennFed is able to sell in
the public market, without registration, a limited number of shares in any
three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking accounts). At June 30, 1997, Penn Federal was in
compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
Penn Federal is a member of the FHLB of New York, which is one of 12
regional FHLBs that provides loans and correspondent services to its members.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB, which are subject to the oversight of the Federal Housing
Finance Board. All borrowings from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB.
As a member, Penn Federal is required to purchase and maintain stock in the
FHLB of New York. At June 30, 1997, the Bank had $12.4 million in FHLB of New
York stock, which was in compliance with this requirement. In past years, Penn
Federal has received substantial dividends on its FHLB of New York stock. Over
the past five fiscal years such dividends have averaged 7.42%.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB of New York stock in the
future.
For the year ended June 30, 1997, dividends paid by the FHLB of New York to
Penn Federal totaled $625,000, resulting in a 6.39% yield.
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FEDERAL AND STATE TAXATION
Savings banks that meet certain definitions, tests and other conditions
prescribed by the Internal Revenue Code are allowed to deduct, with limitations,
a bad debt deduction. This deduction is computed as a percentage of taxable
income before such deduction or based upon actual loss experience. During fiscal
1997, the Company's bad debt deduction was based upon actual loss experience.
During the fiscal years 1996 and 1995, the Company employed the percentage of
taxable income method.
On August 20, 1996 legislation was signed into law which repealed the
percentage of taxable income method for the tax bad debt deduction. This repeal
is effective for the Company's taxable year beginning July 1, 1996. In addition,
the legislation requires the Company to include in taxable income its tax bad
debt reserves in excess of its base year reserves (i.e., the balance of its bad
debt reserves as of June 30, 1988 over a six, seven, or eight year period,
depending upon the attainment of certain loan origination levels. Since the
percentage of taxable income method for tax bad debt deduction and the
corresponding increase in the tax bad debt reserve in excess of the base year
have been recorded as temporary differences pursuant to SFAS 109, this change in
the tax law had no effect on the Company's statement of operations.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Net operating losses can offset no more than
90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a stockholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1997, the Bank's Excess for tax purposes totaled
approximately $14.5 million.
PennFed files consolidated federal income tax returns with the Bank and its
subsidiary. Savings associations, such as the Bank, that file federal income tax
returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the non-
savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
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To the extent a savings association makes "non-dividend distributions,"
such distributions will be considered to have been made from the association's
tax bad debt reserves (including the base year reserve) and then from the
association's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the association's income. Non-dividend
distributions include distributions in excess of the association's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the association's current or accumulated
earnings and profits will not be so included in the association's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 34% federal corporate tax rate. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
The Bank and its consolidated subsidiary have been audited by the Internal
Revenue Service ("IRS") with respect to consolidated federal income tax returns
through December 31, 1991. There were no material adjustments made to taxable
income as originally reported to the IRS. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, PennFed) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Company and its consolidated subsidiaries.
New Jersey Taxation. The Bank is taxed under the New Jersey Savings
Institution Tax Act. The tax is an annual privilege tax imposed at a rate of 3%
on the net income of the Bank as reported for federal income tax purposes, with
certain modifications. PennFed is taxed under the New Jersey Corporation
Business Tax Act, and if it meets certain tests, will be taxed as an investment
company at an effective annual rate for the taxable year ended June 30, 1997 of
2.3% of New Jersey Taxable Income (as defined). If it fails to meet such tests,
it will be taxed at an annual rate of 9% of New Jersey Taxable Income. It is
anticipated, based upon representations of PennFed regarding its current and
future holdings and operations, that PennFed will be taxed as an investment
company.
Delaware Taxation. As a Delaware holding company, PennFed is exempt from
Delaware corporate income tax, but is required to file an annual report with and
pay an annual fee to the State of Delaware. PennFed is also subject to an annual
franchise tax imposed by the State of Delaware.
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MANAGEMENT
The following table sets forth the names and ages of directors and
executive officers of the Company and the Bank, as well as the positions of
officers held by such persons as of June 30, 1997.
NAME AGE POSITIONS HELD
---- --- --------------
William C. Anderson 49 Chairman of the Board of the Company
Joseph L. LaMonica 47 Director, President and Chief Executive Officer
of the Company
Patrick D. McTernan 45 Director, Executive Vice President, General
Counsel and Secretary of the Company
Lucy T. Tinker 57 Executive Vice President and Chief Operating
Officer of the Company
Barbara J. Sanders 45 Senior Vice President and Lending Group
Executive of the Bank
Jeffrey J. Carfora 39 Senior Vice President and Chief Financial Officer
of the Company and Finance Group Executive
of the Bank
Barbara A. Flannery 41 Senior Vice President and Retail Banking Group
Executive of the Bank
Marvin D. Schoonover 47 Director of the Company
Amadeu L. Carvalho 68 Director of the Company
Mario Teixeira, Jr. 61 Director of the Company
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Officers are elected annually by the Board of Directors. The business
experience of each executive officer and director is set forth below.
William C. Anderson - Mr. Anderson has been Chairman of the Board of the
Company since its incorporation in March 1994. Mr. Anderson is also the Chairman
of the Board and President of John Young Company, Inc., a real estate agency
located in Caldwell, New Jersey. Mr. Anderson has been a director of the Bank
since 1979.
Joseph L. LaMonica - Mr. LaMonica has been President and Chief Executive
Officer and Director of the Company since its incorporation in March 1994, and
of Penn Federal since 1988. Mr. LaMonica has served Penn Federal in various
capacities since joining the Bank in 1980. He also is a member of the Board of
Directors of the Saint James Foundation, a philanthropic organization, and
serves in an advisory capacity to the Ironbound Ambulance Squad. He currently
serves on the Board of Governors of the New Jersey Savings League. Mr. LaMonica
has been a director of the Bank since 1987.
Patrick D. McTernan - Mr. McTernan has been Executive Vice President,
General Counsel and Secretary and Director of the Company since its
incorporation. He joined Penn Federal in 1989 as Senior Vice President and
General Counsel and was promoted to Executive Vice President and General Counsel
in 1992. He also serves as corporate Secretary. Prior to his employment with the
Bank, he was a partner in the law firm of Adams and McTernan located in South
Orange, New Jersey. He is currently a member of the Legal Committee of the New
Jersey Savings League. Mr. McTernan has been a director of the Bank since 1989.
Lucy T. Tinker - Ms. Tinker is responsible for the daily operations of the
Bank. Ms. Tinker also assists President LaMonica in the development of corporate
policies and goals. Ms. Tinker joined Penn Federal in 1989 as Vice President and
Treasurer. In 1990, she was appointed Senior Vice President and Finance Group
Executive. She was appointed Executive Vice President and Chief Operating
Officer in 1993.
Barbara J. Sanders - Ms. Sanders manages the Bank's lending operations
which include commercial, residential and consumer lending, collections,
servicing and quality control. Ms. Sanders has held her current position since
1990.
Jeffrey J. Carfora - Mr. Carfora manages the Bank's finance division which
includes financial and tax accounting and reporting, strategic planning and
budgeting, and treasury and asset/liability management. Prior to joining Penn
Federal in 1993, Mr. Carfora was with Carteret Savings Bank.
Barbara A. Flannery - Ms. Flannery is responsible for the retail branch
network. Ms. Flannery has served Penn Federal in various capacities since
joining the Bank in 1980, including the management of product development,
marketing and various aspects of branch activities.
77
Marvin D. Schoonover - Mr. Schoonover is a Senior Account Executive with
the EMAR Group, Inc., an insurance agency located in Livingston, New Jersey, and
is responsible for the marketing, sales and servicing of commercial property and
casualty insurance. Mr. Schoonover first joined the EMAR Group, Inc. in 1980.
Mr. Schoonover also is a licensed real estate salesperson. Mr. Schoonover has
been a director of the Bank since 1990 and of the Company since its
incorporation.
Amadeu L. Carvalho - Mr. Carvalho, retired Controller of the Singer
Company, currently is in private accounting practice in Elizabeth, New Jersey.
His practice includes tax services and business and strategic planning for small
and medium size companies. Mr. Carvalho has been a director of the Bank since
1990 and of the Company since its incorporation.
Mario Teixeira, Jr. - Mr. Teixeira has been a licensed funeral director
since 1961. He is owner and President of the Buyus Funeral Home in Newark and
owns the Bernauer Funeral Home and the Rucki Funeral Home, both located in
Newark, as well as the Shaw-Buyus Home for Services, located in Kearny, New
Jersey. In addition, Mr Teixeira is a partner in BRSB Preneed Association, a
partnership specializing in funerals. Mr. Teixeira has been a director of the
Bank since 1971 and of the Company since its incorporation.
DESCRIPTION OF THE PREFERRED SECURITIES
GENERAL
The following is a summary of certain terms and provisions of the Preferred
Securities. This summary of certain terms and provisions of the Preferred
Securities does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the Trust Agreement. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. Unless otherwise expressly stated or the context
otherwise requires, all references to the "Company" appearing under this caption
"Description of the Preferred Securities" and under the caption "Description of
the Junior Subordinated Debentures" shall mean PennFed Financial Services, Inc.
excluding its consolidated subsidiaries.
DISTRIBUTIONS
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Trust Issuer. Distributions on such Preferred Securities
will be payable at the annual rate of ___% of the stated Liquidation Amount of
$25, payable quarterly in arrears on January 31, April 30, July 31 and October
31 of each year, to the holders of the Preferred Securities on the relevant
record dates. The record date will be the 15th day of the month in which the
relevant Distribution payment date occurs. Distributions will accumulate from
the date of the initial issuance of the Preferred Securities and are cumulative.
The first Distribution payment date for the Preferred Securities will be January
31, 1998. The amount of Distributions payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months. In the event that any date
on which Distributions are payable on the Preferred Securities is not a Business
Day, then payment of the Distributions
78
payable on such date will be made on the next succeeding day that is a Business
Day (and without any additional Distributions or other payment in respect of any
such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable (each date on which Distributions are payable in
accordance with the foregoing, a "Distribution Date"). A "Business Day" shall
mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in the City of New York are authorized or required by law or
executive order to remain closed or a day on which the principal corporate trust
office of the Property Trustee or the Debenture Trustee is closed for business.
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture to defer the payment
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral of interest, quarterly Distributions on the Preferred Securities by the
Trust Issuer will also be deferred during any such Extension Period.
Distributions to which holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at the rate per annum of ___%
thereof, compounded quarterly from the relevant payment date for such
Distributions. The term "Distributions" as used herein, shall include any such
additional Distributions. During any such Extension Period, the Company may not,
and may not permit any subsidiary of the Company to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock other
than payments pursuant to the Guarantee (other than (a) the reclassification of
any class of the Company's capital stock into another class of capital stock,
(b) dividends or distributions in common stock of the Company, (c) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers or employees), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures other than payments pursuant to the Guarantee.
Prior to the termination of any such Extension Period, the Company may further
defer the payment of interest on the Junior Subordinated Debentures, provided
that no Extension Period may exceed 20 consecutive quarters periods or extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any such Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the rate of ___%,
compounded quarterly, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period. There is no limitation on the number
of times that the Company may elect to begin an Extension Period. See
"Description of the Junior Subordinated Debentures--Right
79
to Defer Interest Payment Obligation" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
The revenue of the Trust Issuer available for distribution to holders of
its Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust Issuer will invest the proceeds from
the issuance and sale of its Trust Securities. See "Description of the Junior
Subordinated Debentures." If the Company does not make interest payments on the
Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Preferred Securities. The payment of
Distributions (if and to the extent the Trust Issuer has funds legally available
for the payment of such Distributions and cash sufficient to make such payments)
is guaranteed by the Company on a limited basis as set forth herein under
"Description of the Guarantee."
The Company has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures.
SUBORDINATION OF THE COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amount of the Preferred Securities and the Common Securities;
provided, however, that if on any Distribution Date or Redemption Date an event
of default under the Indenture shall have occurred and be continuing, no payment
of any Distribution on, or Redemption Price of, any of the Common Securities,
and no other payment on account of the redemption, liquidation or other
acquisition of such Common Securities, shall be made unless payment in full in
cash of all accumulated and unpaid Distributions on all of the outstanding
Preferred Securities for all Distribution periods terminating on or prior
thereto, or, in the case of payment of the Redemption Price, the full amount of
such Redemption Price on all of the outstanding Preferred Securities then called
for redemption shall have been made or provided for, and all funds available to
the Property Trustee shall first be applied to the payment in full in cash of
all Distributions on, or Redemption Price of, the Preferred Securities then due
and payable.
In the case of any event of default under the Trust Agreement resulting
from an event of default under the Indenture, the Company as holder of the
Common Securities will be deemed to have waived any right to act with respect to
any such event of default under the Trust Agreement until the effect of all such
events of default with respect to the Preferred Securities shall have been
cured, waived or otherwise eliminated. Until any such events of default under
the Trust Agreement shall have been so cured, waived or otherwise eliminated,
the Property Trustee shall act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Company as holder of the Common Securities,
and only the holders of the Preferred Securities will have the right to direct
the Property Trustee to act on their behalf.
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REDEMPTION
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or earlier redemption as provided in the Indenture. The proceeds from
such repayment or redemption shall be applied by the Property Trustee to redeem
a Like Amount (as defined below) of the Preferred Securities upon not less than
30 nor more than 60 days notice prior to the date fixed for repayment or
redemption, at a redemption price equal to the aggregate Liquidation Amount of
such Preferred Securities plus accumulated and unpaid Distributions thereon (the
"Redemption Price") to the date of redemption (the "Redemption Date"). For a
description of the Stated Maturity and redemption provisions of the Junior
Subordinated Debentures, see "Description of the Junior Subordinated Debentures-
General" and" --Redemption or Exchange."
The Company has the option to redeem the Junior Subordinated Debentures
prior to maturity on or after ________, 2002, in whole at any time or in part
from time to time, and thereby cause a mandatory redemption of a Like Amount of
the Preferred Securities. See "Description of the Junior Subordinated
Debentures--Redemption or Exchange." Any time that a Tax Event, an Investment
Company Event or a Capital Treatment Event (each as defined below) shall occur
and be continuing, the Company has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of the Preferred Securities in whole (but not in part). See "Description of the
Junior Subordinated Debentures--Redemption or Exchange."
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of a Like Amount of the Junior Subordinated Debentures. Redemptions
of the Preferred Securities shall be made and the Redemption Price shall be paid
on each Redemption Date only to the extent that the Trust Issuer has funds on
hand available for the payment of such Redemption Price. See also "Description
of the Preferred Securities--Subordination of the Common Securities."
If the Trust Issuer gives a notice of redemption in respect of the
Preferred Securities, then, by 10:00 a.m., New York City time, on the Redemption
Date, to the extent funds are available, the Property Trustee will deposit
irrevocably with the DTC funds sufficient to pay the applicable Redemption Price
and will give DTC irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing
such Preferred Securities. Notwithstanding the foregoing, Distributions payable
on or prior to the Redemption Date for the Preferred Securities called for
redemption shall be payable to the holders of the Preferred Securities on the
relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then, upon the
date of such deposit, all rights of the holders of such Preferred Securities so
called for redemption will cease, except the right of the holders of such
Preferred Securities to receive the Redemption Price, but without interest on
such Redemption Price, and such Preferred Securities will cease to be
outstanding.
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In the event that any date fixed for redemption of the Preferred Securities
is not a Business Day, then payment of the Redemption Price payable on such date
will be made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that, if such
Business Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day. In the event that payment of the Redemption
Price in respect of the Preferred Securities called for redemption is improperly
withheld or refused and not paid either by the Trust Issuer or by the Company
pursuant to the Guarantee as described under "Description of the Guarantee,"
Distributions on such Preferred Securities will continue to accrue at the then
applicable rate, from the Redemption Date originally established by the Trust
Issuer for such Preferred Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by private
agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of the Junior Subordinated Debentures to holders of the Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for the Preferred Securities on the relevant record date, which
date shall be one business day prior to the relevant Redemption Date, however,
in the event the Preferred Securities do not remain in book entry form, the
relevant record date shall be the date at least 15 days prior to the Redemption
Date or liquidation date, as applicable.
If less than all of the Preferred Securities and Common Securities issued
by the Trust Issuer are to be redeemed on a Redemption Date, then the aggregate
Liquidation Amount of the Preferred Securities and Common Securities to be
redeemed shall be allocated pro rata to the Preferred Securities and the Common
Securities based upon the relative Liquidation Amounts of such classes. The
particular Preferred Securities to be redeemed shall be selected not more than
60 days prior to the Redemption Date by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, or if the
Preferred Securities are then held in the form of a global preferred security in
accordance with DTC's customary procedures. The Property Trustee shall promptly
notify the trust registrar in writing of the Preferred Securities selected for
redemption and, in the case of any Preferred Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For all purposes of
the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of the Preferred Securities shall relate, in the case
of the Preferred Securities redeemed or to be redeemed only in part, to the
portion of the aggregate Liquidation Amount of the Preferred Securities which
has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of the Preferred Securities to
be redeemed at its registered address. Unless the Company defaults in payment
of the Redemption Price on the Junior
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Subordinated Debentures, on and after the Redemption Date interest will cease to
accrue on the Junior Subordinated Debentures or portions thereof called for
redemption.
LIQUIDATION OF THE TRUST ISSUER AND DISTRIBUTION OF THE JUNIOR SUBORDINATED
DEBENTURES TO HOLDERS
The Company has the right at any time to dissolve the Trust Issuer and,
after satisfaction of the liabilities of creditors of the Trust Issuer as
provided by applicable law, cause Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities and Common Securities in
exchange therefor upon liquidation of the Trust Issuer.
After the liquidation date fixed for any distribution of the Junior
Subordinated Debentures for Preferred Securities (i) such Preferred Securities
will no longer be deemed to be outstanding, and (ii) DTC or its nominee, as the
registered holder of Preferred Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution with respect to Preferred Securities held by
DTC or its nominee, (iii) any certificates representing the Preferred Securities
not held by DTC or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the stated Liquidation Amount of
such Preferred Securities, and bearing accrued and unpaid interest in an amount
equal to the accumulated and unpaid Distributions on such series of the
Preferred Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or reissuance.
Under current United States federal income tax law and interpretations, a
distribution of the Junior Subordinated Debentures should not be a taxable event
to holders of the Preferred Securities. Should there be a change in law, a
change in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Distribution of the Junior
Subordinated Debentures to Holders of the Preferred Securities."
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Trust Agreement, the Trust Issuer shall automatically
dissolve upon expiration of its term and shall dissolve on the first to occur of
(i) certain events of bankruptcy, dissolution or liquidation of the Company,
subject in certain instances to any such event remaining in effect for a period
of 90 consecutive days; (ii) the distribution of a Like Amount of the Junior
Subordinated Debentures to the holders of its Preferred Securities, if the
Company, as depositor, has given written direction to the Property Trustee to
dissolve the Trust Issuer (which direction is optional and wholly within the
discretion of the Company, as depositor); (iii) redemption of all of the
Preferred Securities as described under "Description of the Preferred
Securities-Redemption;" and (iv) the entry of an order for the dissolution of
the Trust Issuer by a court of competent jurisdiction.
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If an early dissolution occurs as described in clause (i), (ii) or (iv) of
the preceding paragraph, the Trust Issuer shall be liquidated by the Trust
Issuer Trustees as expeditiously as the Trust Issuer Trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of the
Trust Issuer, if any, as provided by applicable law, to the holders of the
Preferred Securities a Like Amount of the Junior Subordinated Debentures, unless
such distribution is determined by the Property Trustee not to be practical, in
which event such holders will be entitled to receive out of the assets of the
Trust Issuer available for distribution to holders, after satisfaction of
liabilities to creditors of the Trust Issuer, if any, as provided by applicable
law, an amount equal to, in the case of holders of the Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust Issuer has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust Issuer on Preferred Securities shall be paid on a pro rata basis. The
Company, as the holder of the Common Securities, will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
Preferred Securities, except that if an event of default under the Indenture has
occurred and is continuing, the Preferred Securities shall have a priority over
the Common Securities with respect to any such distributions.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
issued thereunder (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) the occurrence of an event of default under the Indenture (see
"Description of the Junior Subordinated Debentures--Debenture Events of
Default"); or
(ii) default in the payment of any Distribution when it becomes due
and payable, and continuation of such default for a period of 30 days; or
(iii) default in the payment of any Redemption Price of any Preferred
Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Trust Issuer Trustees in the Trust
Agreement (other than a covenant or warranty a default in the performance
of which or the breach of which is dealt with in clause (ii) or (iii)
above), and continuation of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to the
defaulting Trust Issuer Trustee or Trustees by the holders of at least 25%
in aggregate Liquidation Amount of the outstanding Preferred Securities, a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" under the
Trust Agreement; or
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(v) the occurrence of certain events of bankruptcy or insolvency
with respect to the Property Trustee and the failure by the Company to
appoint a successor Property Trustee within 60 days thereof.
Within 90 days after the occurrence of any Event of Default actually known
to the Property Trustee, the Property Trustee shall transmit notice of such
Event of Default to the holders of the Preferred Securities, the Administrative
Trustees and the Company, as depositor, unless such Event of Default shall have
been cured or waived. The Company, as depositor, and the Administrative
Trustees are required to file annually with the Property Trustee a certificate
as to whether or not they are in compliance with all the conditions and
covenants applicable to them under the Trust Agreement.
If an event of default under the Indenture has occurred and is continuing,
the Preferred Securities shall have a preference over the Common Securities as
described above. See "Description of the Preferred Securities--Subordination of
the Common Securities" and "--Liquidation Distribution Upon Termination". The
existence of an event of default does not entitle the holders of the Preferred
Securities to accelerate the payment thereof.
REMOVAL OF THE TRUST ISSUER TRUSTEES
Unless an event of default under the Indenture shall have occurred and be
continuing, any Trust Issuer Trustee may be removed at any time by the holder of
the Common Securities. If an event of default under the Indenture has occurred
and is continuing, the Property Trustee and the Delaware Trustee may be removed
at such time by the holders of a majority in Liquidation Amount of the
outstanding Preferred Securities. In no event will the holders of the Preferred
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Company as the holder of the Common Securities. No resignation or removal of
any Trust Issuer Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act, if applicable, or of any jurisdiction in which any part of the
Trust Property (as defined in the Trust Agreement) may at the time be located,
the Company, as the holder of the Common Securities, shall have power to appoint
one or more persons either to act as a co-trustee, jointly with the Property
Trustee, of all or any part of such Trust Property, or to act as separate
trustee of any such property, in either case with such powers as may be provided
in the instrument of appointment, and to vest in such person or persons in such
capacity any property, title, right or power deemed necessary or desirable,
subject to the provisions of the Trust Agreement. In the event an event of
default under the Indenture has occurred and is continuing, the Property Trustee
alone shall have power to make such appointment.
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MERGER OR CONSOLIDATION OF THE TRUST ISSUER TRUSTEES
Any entity into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such Trustee shall be a party or any entity
succeeding to all or substantially all the corporate trust business of such
Trustee, shall be the successor of such Trustee under the Trust Agreement,
provided such entity shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST ISSUER
The Trust Issuer may not merge with or into, consolidate, amalgamate, be
replaced by, convey, transfer or lease its properties and assets substantially
as an entirety to any entity or other Person, except as described below or as
otherwise described in the Trust Agreement. The Trust Issuer may, at the
request of the Company, with the consent of the Administrative Trustees and
without the consent of the holders of the Preferred Securities, the Property
Trustee or the Delaware Trustee, merge with or into, consolidate, amalgamate, be
replaced by, convey, transfer or lease its properties and assets substantially
as an entirety to, a trust organized as such under the laws of any State:
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of the Trust Issuer with respect to the Preferred Securities or (b)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank the same as the Preferred Securities in
priority with respect to Distributions and payments upon liquidation, redemption
and otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures, (iii) the Successor Securities are
registered or listed, or any Successor Securities will be registered or listed
upon notification of issuance, on any national securities exchange or other
organization on which the Preferred Securities are then registered or listed
(including, if applicable, the Nasdaq Stock Market's National Market), if any,
(iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose substantially identical to that of the Trust Issuer, (vii) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
the Company has received an opinion from independent counsel to the Trust Issuer
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust Issuer nor such successor entity will be
required to register as an investment company under the Investment Company Act
of 1940, as amended (the "Investment Company Act") and (viii) the Company or any
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permitted successor or assignee owns all of the common securities or its
equivalent of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Trust Issuer shall not,
except with the consent of holders of 100% in Liquidation Amount of the
Preferred Securities, consolidate, amalgamate, merge with or into or be replaced
by or convey, transfer or lease its properties and assets substantially as an
entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Trust Issuer or the successor entity to be classified as other than a grantor
trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of the Guarantee--
Amendments and Assignment" and as otherwise required by law and the Trust
Agreement, the holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities, (i) with respect to acceptance of
appointment of a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement or (iii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that the Trust Issuer will be classified for United States
federal income tax purposes as a grantor trust at all times that the Preferred
Securities are outstanding or to ensure that the Trust Issuer will not be
required to register as an "investment company" under the Investment Company
Act; provided, however, that in the case of clause (ii), such action shall not
adversely affect in any material respect the interests of any holder of the
Preferred Securities, and any such amendments of the Trust Agreement shall
become effective when notice thereof is given to the holders of the Preferred
Securities. The Trust Agreement may be amended by the Trust Issuer Trustees and
the Company with (i) the consent of holders representing not less than a
majority (based upon Liquidation Amounts) of the outstanding Preferred
Securities and (ii) receipt by the Trust Issuer Trustees of an opinion of
counsel to the effect that such amendment or the exercise of any power granted
to the Trust Issuer Trustees in accordance with such amendment will not affect
the Trust Issuer's status as a grantor trust for United States federal income
tax purposes or the Trust Issuer's exemption from status as an "investment
company" under the Investment Company Act, provided that without the consent of
each holder of the Preferred Securities, the Trust Agreement may not be amended
to (a) change the amount or timing of any Distribution on the Preferred
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Preferred Securities as of a specified date or (b)
restrict the right of a holder of the Preferred Securities to institute suit for
the enforcement of any such payment on or after such date.
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So long as the Junior Subordinated Debentures are held by the Property
Trustee, the Trust Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee or executing any trust or power conferred on the Property Trustee with
respect to the Junior Subordinated Debentures, (ii) waive any past default that
is waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or the Junior Subordinated Debentures, where such consent shall
be required, without, in each case, obtaining the prior approval of the holders
of a majority in aggregate Liquidation Amount of all outstanding Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of the Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of each holder of the Preferred Securities. The Trust Issuer
Trustees shall not revoke any action previously authorized or approved by a vote
of the holders of the Preferred Securities except by subsequent vote of the
holders of the Preferred Securities. The Property Trustee shall notify each
holder of the Preferred Securities of any notice of default with respect to the
Junior Subordinated Debentures. In addition to obtaining the foregoing
approvals of the holders of the Preferred Securities, prior to taking any of the
foregoing actions, the Trust Issuer Trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the Trust Issuer will not be
classified as an association taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of the Preferred Securities may be given
at a meeting of holders of the Preferred Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
meeting at which holders of the Preferred Securities are entitled to vote, or of
any matter upon which action by written consent of such holders is to be taken,
to be given to each holder of record of the Preferred Securities in the manner
set forth in the Trust Agreement.
No vote or consent of the holders of the Preferred Securities will be
required for the Trust Issuer to redeem and cancel the Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trust Issuer Trustees or
any affiliate of the Company or the Trust Issuer Trustees shall, for purposes of
such vote or consent, be treated as if they were not outstanding.
LIQUIDATION VALUE
The amount payable on the Preferred Securities in the event of any
liquidation of the Trust Issuer is $25 per Preferred Security plus accumulated
and unpaid Distributions, which may be in the form of a distribution of such
amount in Junior Subordinated Debentures, subject to certain exceptions. See
"Description of the Preferred Securities --Liquidation Distribution Upon
Termination."
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EXPENSES AND TAXES
In the Indenture, the Company, as borrower, has agreed to pay all debts and
other obligations (other than with respect to the Preferred Securities) and all
costs and expenses of the Trust Issuer (including costs and expenses relating to
the organization of the Trust Issuer, the fees and expenses of the Trust Issuer
Trustee and the costs and expenses relating to the operation of the Trust
Issuer) and to pay any and all taxes and all costs and expenses with respect
thereto (other than United States withholding taxes) to which the Trust Issuer
might become subject. The foregoing obligations of the Company under the
Indenture are for the benefit of, and shall be enforceable by, any person to
whom any such debts, obligations, costs, expenses and taxes are owed (a
"Creditor") whether or not such Creditor has received notice thereof. Any such
Creditor may enforce such obligations of the Company directly against the
Company, and the Company has irrevocably waived any right or remedy to require
that any such Creditor take any action against the Trust Issuer or any other
person before proceeding against the Company. The Company has also agreed in
the Indenture to execute such additional agreements as may be necessary or
desirable to give full effect to the foregoing.
BOOK ENTRY, DELIVERY AND FORM
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of DTC's nominee. Unless and until it is
exchangeable in whole on in part for the Preferred Securities in definitive
form, a global security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of such Depository or a nominee of such
successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or persons
that may hold interests through Participants. The Company expects that, upon
the issuance of a global security, DTC will credit, on its book-entry
registration and transfer system, the Participants' accounts with their
respective principal amounts of the Preferred Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of Persons held
through Participants). Beneficial owners will not receive written confirmation
from DTC of their purchase, but are expected to receive written confirmations
from the Participants through which the beneficial owner entered into the
transaction. Transfers of ownership interests will be accomplished by entries
on the books of Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Junior Subordinated Indenture. Except as provided
below, owners of beneficial interests in a global security will not be entitled
to receive physical delivery of the Preferred Securities in definitive form and
will not be considered the owners
89
or holders thereof under the Junior Subordinated Indenture. Accordingly, each
person owning a beneficial interest in such a global security must rely on the
procedures of DTC and, if such person is not a Participant, on the procedures of
the Participant through which such person owns its interest, to exercise any
rights of a holder of Preferred Securities under the Junior Subordinated
Indenture. The Company understands that, under DTC's existing practices, in the
event that the Company requests any action of holders, or an owner of a
beneficial interest in such a global security desires to take any action which a
holder is entitled to take under the Junior Subordinated Indenture, DTC would
authorize the Participants holding the relevant beneficial interests to take
such action, and such Participants would authorize beneficial owners owning
through such Participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them. Redemption notices will
also be sent to DTC. If less than all of the Preferred Securities are being
redeemed, the Company understands that it is DTC's existing practice to
determine by lot the amount of the interest of each Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Trust Issuer Trustee, the Administrators, any Paying
Agent or any other agent of the Company or the Trust Issuer Trustees will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date.
Payments by Participants to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participant and not of DTC, the Company, the
Trust Issuer Trustees, the Paying Agent or any other agent of the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Company or the Trust Issuer Trustees. If DTC notifies the Company that it
is unwilling to continue as such, or if it is unable to continue or ceases to be
a clearing agency registered under the Exchange Act and a successor depository
is not appointed by the Company within ninety days after receiving such notice
or becoming aware that DTC is no longer so registered, the Company will issue
the Preferred Securities in definitive form upon registration of transfer of, or
in exchange for, such global security. In addition, the Company may at any time
and in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
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DTC has advised the Company and the Trust Issuer as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Certain of such Participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Preferred Securities will be made by the Underwriter in
immediately available funds.
Secondary trading in preferred securities of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as
to the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Preferred Securities are not held by DTC, such payments will be made
by check mailed to the address of the holder entitled thereto. as such address
appears on the securities register for the Trust Securities. The paying agent
(the "Paying Agent") will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrators. The
Paying Agent will be permitted to resign as Paying Agent upon 30 days' written
notice to the Property Trustee and the Administrators. If the Property Trustee
is no longer the Paying Agent, the Property Trustee will appoint a successor
(which must be a bank or trust company reasonably acceptable to the
Administrators) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of the Trust Issuer, except for
the payment of any tax or other governmental charges that may
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be imposed in connection with any transfer or exchange. In the event of any
redemption, the Trust Issuer will not be required to (i) issue, register the
transfer of, or exchange any Preferred Securities during a period beginning at
the opening of business 15 days before the date of mailing of a notice of
redemption of any Preferred Securities called for redemption and ending at the
close of business on the day of such mailing; or (ii) register the transfer of
or exchange any Preferred Securities so selected for redemption, in whole or in
part, except the unredeemed portion of any such Preferred Securities being
redeemed in part.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee will take such action as it deems advisable and in the best interests of
the holders of the Preferred Securities and will have no liability except for
its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust Issuer in such a way that the Trust Issuer
will not be deemed to be an "investment company" required to be registered under
the Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of the Company for
United States federal income tax purposes. In this connection, the Company and
the Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Trust Issuer or the Trust
Agreement, that the Company and the Administrative Trustees determine in their
discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the laws of the State of Delaware.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture (the
"Indenture") between the Company and The Bank of New York, as trustee (the
"Debenture Trustee"). The Indenture will be qualified as an Indenture under the
Trust Indenture Act. This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture, and
to the Trust Indenture Act. Wherever particular defined terms of the Indenture
are referred to, but not defined herein, such defined terms are incorporated
herein by reference. The form of the Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
GENERAL
Concurrently with the issuance of the Preferred Securities, the Trust
Issuer will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures.
The Junior Subordinated Debentures will bear interest at the annual rate of
______%, payable quarterly in arrears on January 31, April 30, July 31, and
October 31 of each year (each, an "Interest Payment Date"), commencing January
31, 1998, to the person in whose name each Subordinated Debenture is registered,
subject to certain exceptions, at the close of business on the Business Day next
preceding such Interest Payment Date. It is anticipated that, until the
liquidation, if any, of the Trust Issuer, the Junior Subordinated Debentures
will be held in the name of the Property Trustee in trust for the benefit of the
holders of the Preferred Securities. The amount of interest payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months.
In the event that any date on which interest is payable on the Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on the date such payment was
originally payable. Accrued interest that is not paid on the applicable
Interest Payment Date will bear additional interest on the amount thereof (to
the extent permitted by law) at the rate per annum of ____% thereof, compounded
quarterly from the relevant Interest Payment Date. The term "interest" as used
herein shall include quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional
Interest (as defined below), as applicable.
The Junior Subordinated Debentures will mature on ____________, 2027 (the
"Stated Maturity").
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt and Subordinated Debt
(collectively "Senior Indebtedness") of the Company. Because the Company is a
holding company, the right of the Company to participate in any distribution of
assets of any subsidiary, including the Bank, upon such subsidiary's liquidation
or reorganization or otherwise, is subject to the prior claims of creditors of
that subsidiary, except to the extent that the Company may itself be recognized
as a creditor of that
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subsidiary. Accordingly, the Junior Subordinated Debentures will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, and holders of the Junior Subordinated Debentures should look only
to the assets of the Company for payments on the Junior Subordinated Debentures.
The Indenture does not limit the incurrence or issuance of other secured or
unsecured debt of the Company, including Senior Debt and Subordinated Debt,
whether under the Indenture or any existing or other indenture that the Company
may enter into in the future or otherwise.
RIGHT TO DEFER INTEREST PAYMENT OBLIGATION
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture at any time or from
time to time during the term of the Junior Subordinated Debentures to defer the
payment of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. At the end of each Extension Period, the
Company must pay all interest then accrued and unpaid on the Junior Subordinated
Debentures (together with interest on such unpaid interest at the annual rate of
____%, compounded quarterly from the relevant Interest Payment Date, to the
extent permitted by applicable law, referred to herein as "Compounded
Interest"). During an Extension Period, interest would continue to accrue and
holders of the Junior Subordinated Debentures would be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not, and may not permit
any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) the
reclassification of any class of the Company's capital stock into another class
of capital stock, (b) dividends or distributions in common stock of the Company,
(c) any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers or employees) or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures other then payments pursuant to the Guarantee;
and (iii) the Company shall not redeem, purchase or acquire less than all the
outstanding Junior Subordinated Debentures or any of the Preferred Securities.
Prior to the termination of any such Extension Period, the Company may further
defer the payment of interest, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of ____%,
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compounded quarterly, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period subject to the above requirements. No
interest shall be due and payable during an Extension Period, except at the end
thereof. The Company must give the Property Trustee, the Administrative Trustees
and the Debenture Trustee notice of its election of such Extension Period at
least one Business Day prior to the earlier of (i) the date interest on the
Junior Subordinated Debentures would have been payable except for the election
to begin such Extension Period or (ii) the date the Administrative Trustees are
required to give notice of the record date, or the date such Distributions are
payable, to the Nasdaq Stock Market's National Market or other applicable self-
regulatory organization or to holders of the Preferred Securities as of the
record date or the date such Distributions are payable, but in any event not
less than one Business Day prior to such record date. The Debenture Trustee
shall give notice of the Company's election to begin a new Extension Period to
the holders of the Preferred Securities. There is no limitation on the number of
times that the Company may elect to begin an Extension Period.
ADDITIONAL INTEREST
If the Trust Issuer or the Property Trustee is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Company will pay such additional amounts (the "Additional Sums") on
the Junior Subordinated Debentures as shall be required so that the
Distributions payable by the Trust Issuer shall not be reduced as a result of
any such additional taxes, duties or other governmental charges.
REDEMPTION OR EXCHANGE
The Company will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after ____, 2002, in whole at any time or
in part from time to time, or (ii) at any time in whole (but not in part),
within 180 days following the occurrence of a Tax Event, an Investment Company
Event or a Capital Treatment Event, in each case at a redemption price equal to
the accrued and unpaid interest on the Junior Subordinated Debentures so
redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. Any such redemption prior to the Stated Maturity will be subject to
prior regulatory approval if then required.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act, which change
becomes effective on or after the date of original issuance of the Preferred
Securities.
"Capital Treatment Event" means the receipt by the Trust of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision
95
interpreting or applying such laws or regulations, which amendment or change is
effective or such proposed change, pronouncement, action or decision is
announced on or after the date of original issuance of the Preferred Securities,
there is more than an insubstantial risk that the Preferred Securities would not
constitute Tier 1 Capital (or the then equivalent thereof) applied as if the
Company (or its successor) were a bank holding company for purposes of the
capital adequacy guidelines of the Federal Reserve (or any successor regulatory
authority with jurisdiction over bank holding companies), or any capital
adequacy guidelines as then in effect and applicable to the Company. There are
currently no capital adequacy guidelines applicable to savings bank holding
companies such as the Company.
The Junior Subordinated Debentures will not be subject to any sinking fund.
"Tax Event" means the receipt by the Trust Issuer of an Opinion of Counsel
to the effect that, as a result of any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein, or as a result of any official administrative pronouncement or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or which pronouncement or decision is announced on or after
the date of issuance of the Preferred Securities under the Trust Agreement,
there is more than an insubstantial risk that (i) the Trust Issuer is, or will
be within 90 days of the date of such opinion, subject to United Stated federal
income tax with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States federal
income tax purposes or (iii) the Trust Issuer is, or will be within 90 days of
the date of such opinion, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as being opined upon, that is delivered to
the Trustee.
"Additional Interest" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust Issuer
on the outstanding Preferred Securities and Common Securities shall not be
reduced as a result of any additional taxes, duties and other governmental
charges to which the Trust Issuer has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of the Preferred
Securities, Preferred Securities having a Liquidation Amount equal to that
portion of the principal amount of the Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities pro rata based upon the
relative Liquidation Amounts of such Preferred Securities and the proceeds of
which will be used to pay the Redemption Price of such Preferred Securities and
(ii) with respect to a distribution of the Junior Subordinated Debentures to
holders of the Preferred Securities in exchange therefor in connection with a
dissolution or liquidation of the Trust Issuer, Junior Subordinated Debentures
having a
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principal amount equal to the Liquidation Amount of the Preferred Securities of
the holder to whom such Junior Subordinated Debentures would be distributed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each Holder of the Junior Subordinated
Debentures to be redeemed at its registered address. Unless the Company
defaults in payment of the redemption price, on and after the redemption date
interest ceases to accrue on the Junior Subordinated Debentures or portions
thereof called for redemption.
REGISTRATION, DENOMINATION AND TRANSFER
The Junior Subordinated Debentures will initially be registered in the name
of the Trust Issuer. If the Junior Subordinated Debentures are distributed to
holders of Preferred Securities, it is anticipated that the depository
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global security
will be made to Cede & Co., the nominee for DTC, as the registered holder of the
Junior Subordinated Debentures, as described under "Description of Preferred
Securities -- Book Entry, Delivery and Form." If Junior Subordinated Debentures
are issued in certificated form, principal and interest will be payable, the
transfer of the Junior Subordinated Debentures will be registrable, and Junior
Subordinated Debentures will be exchangeable for Junior Subordinated Debentures
of other authorized denominations of a like aggregate principal amount, at the
corporate trust office of the Debenture Trustee in New York, New York or at the
offices of any Paying Agent or transfer agent appointed by the Company, provided
that payment of interest may be made at the option of the Company by check
mailed to the address of the persons entitled thereto. However, a holder of $1
million or more in aggregate principal amount of Junior Subordinated Debentures
may receive payments of interest (other than interest payable at the Stated
Maturity) by wire transfer of immediately available funds upon written request
to the Debenture Trustee not later than 15 calendar days prior to the date on
which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations. and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory
97
written instrument of transfer, duly executed), at the office of the securities
registrar appointed under the Indenture or at the office of any transfer agent
designated by the Company for such purpose without service charge and upon
payment of any taxes and other governmental charges as described in the
Indenture. The Company will appoint the Debenture Trustee as securities
registrar under the Indenture. The Company may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
RESTRICTIONS ON CERTAIN PAYMENTS
The Company will also covenant, as to the Junior Subordinated Debentures,
that it will not, and will not permit any subsidiary of the Company to, (i)
declare or pay any dividends or distributions on, or redeem, purchase, acquire
or make a liquidation payment with respect to, any of the Company's capital
stock (other than (a) the reclassification of any class of the Company's capital
stock into another class of capital stock, (b) dividends or distributions in
common stock of the Company, (c) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, the issuance of stock
under any such plan in the future or the redemption or repurchase of any such
rights pursuant thereto, (d) payments under the Guarantee and (e) purchases of
common stock related to the issuance of common stock or rights under any of the
Company's benefit plans for its directors, officers or employees), (ii) make any
payment of principal, interest or premium, if any, on or repay or repurchase or
redeem any debt securities of the Company that rank pari passu with or junior in
interest to the Junior Subordinated Debentures other than payments pursuant to
the Guarantee or (iii) the Company shall not redeem, purchase or acquire less
than all the outstanding Junior Subordinated Debentures or any of the Preferred
Securities if at such time (i) there shall have occurred an Event of Default
under the Indenture with respect to the Junior Subordinated Debentures, (ii) if
the Junior Subordinated Debentures are held by the Trust Issuer, the Company
shall be in default with respect to its payment of any obligations under the
Guarantee relating to such Preferred Securities or (iii) the Company shall have
given notice of its selection of an Extension Period as provided in the
Indenture with respect to the Junior Subordinated Debentures
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and shall not have rescinded such notice, or such Extension Period, or any
extension thereof, shall be continuing.
MODIFICATION OF INDENTURE
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies, provided that any such action
does not materially adversely affect the interest of the holders of the Junior
Subordinated Debentures or the ability to qualify, or maintain the qualification
of, the Indenture under the Trust Indenture Act. The Indenture contains
provisions permitting the Company and the Debenture Trustee, with the consent of
the holders of not less than a majority in principal amount of the Junior
Subordinated Debentures affected, to modify the Indenture in a manner affecting
the rights of the holders of the Junior Subordinated Debentures, provided that
no such modification may, without the consent of the holder of each outstanding
Subordinated Debenture so affected, (i) extend the Stated Maturity of the Junior
Subordinated Debentures, reduce the principal amount thereof or reduce the rate
or extend the time of payment of interest thereon or (ii) reduce the percentage
of principal amount of the Junior Subordinated Debentures, the holders of which
are required to consent to any such modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default":
(i) failure for 30 days to pay interest (including Additional
Interest or Compounded Interest, if any) on the Junior Subordinated
Debentures when due (subject to the deferral of certain due dates in the
case of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due, whether at maturity, upon declaration of acceleration
of maturity or otherwise; or
(iii) failure to observe or perform certain other covenants contained
in the Indenture for 90 days after written notice to the Company from the
Debenture Trustee or the holders of at least 25% in aggregate outstanding
principal amount of the outstanding Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of
the Company, subject in certain instances to any such event remaining in
effect for a period of 60 consecutive days.
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The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. The Debenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures may annul such declaration and waive the default
if the default (other than the non-payment of the principal of the Junior
Subordinated Debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures affected thereby may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal or interest (unless such default has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee) or
a default in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each outstanding
Subordinated Debenture. The Company is required to file annually with the
Debenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or principal
on the Junior Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of the Preferred Securities may institute a legal
proceeding directly against the Company for enforcement of payment to such
holder of the principal of or interest on the Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder (a "Direct Action"). The Company may not
amend the Indenture to remove the foregoing right to bring a Direct Action
without the prior written consent of the holders of all of the Preferred
Securities. If the right to bring a Direct Action is removed, the Trust Issuer
may become subject to the reporting obligations under the Exchange Act. The
Company shall have the right under the Indenture to set-off any payment made to
such holder of the Preferred Securities by the Company in connection with a
Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures. See
"Description of the Preferred Securities--Events of Default; Notice."
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CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other entity or convey, transfer or lease its properties and assets
substantially as an entirety to any entity, and no entity shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless: (i) in the event the
Company consolidates with or merges into another entity or conveys or transfers
its properties and assets substantially as an entirety to any entity, the
successor entity is organized under the laws of the United States or any state
or the District of Columbia, and such successor entity expressly assumes the
Company's obligations on the Junior Subordinated Debentures issued under the
Indenture; (ii) immediately after giving effect thereto, no Debenture Event of
Default, and no event which, after notice or lapse of time or both, would become
a Debenture Event of Default, shall have occurred and be continuing; and (iii)
certain other conditions as prescribed by the Indenture are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all of the Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Company deposits or causes to
be deposited with the Debenture Trustee funds, in trust, for the purpose and in
an amount in the currency or currencies in which the Junior Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal and interest to the date of the
deposit or to the Stated Maturity, as the case may be, then the Indenture will
cease to be of further effect (except as to the Company's obligations to pay all
other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Company will be
deemed to have satisfied and discharged the Indenture.
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that the Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon the
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Indebtedness will
first be entitled to receive payment in full of principal of (and premium, if
any) and interest, if any, on such Senior Indebtedness before the holders of the
Junior Subordinated Debentures, or the Property Trustee on behalf of the
holders, will be entitled to receive
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or retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debentures.
In the event of the acceleration of the maturity of any of the Junior
Subordinated Debentures, the holders of all Senior Indebtedness outstanding at
the time of such acceleration will first be entitled to receive payment in full
of all amounts due thereon (including any amounts due upon acceleration) before
the holders of the Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior Indebtedness or an
event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Debt" means with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent: (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; (vi) all
indebtedness of such Person whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products,
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another Person and all dividends
of another Person the payment of which, in either case, such Person has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise.
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include:
(i) any Debt of the Company which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, and (iii) any Debt to any employee of the Company.
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"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of the Company (other than the Debentures), except that
Subordinated Debt shall not include debentures sold by the Company to the Trust.
The Indenture places no limitation on the amount of Senior Indebtedness,
that may be incurred by the Company. The Company may from time to time incur
indebtedness constituting Senior Indebtedness.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of New York, without
regard to conflicts of laws principles thereof.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
As described under "Description of the Preferred Securities--Liquidation of
the Trust Issuer and Distribution of the Junior Subordinated Debentures to
Holders," under certain circumstances involving the termination of the Trust
Issuer, Junior Subordinated Debentures may be distributed to the holders of the
Preferred Securities in exchange therefor upon liquidation of the Trust Issuer,
after satisfaction of liabilities to creditors of the Trust Issuer as provided
by applicable law. Any such distribution will be subject to receipt of prior
regulatory approval if then required. If the Junior Subordinated Debentures are
distributed to the holders of Preferred Securities upon the liquidation of the
Trust Issuer, the Company will use its best efforts to list the Junior
Subordinated Debentures on the Nasdaq Stock Market's National Market or such
stock exchanges, if any, on which the Preferred Securities are then listed.
There can be no assurance as to the market price of any Junior Subordinated
Debentures that may be distributed to the holders of the Preferred Securities.
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PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the offices of the Debenture Trustee in the city of
New York or at the offices of such Paying Agent or Paying Agents as the Company
may designate from time to time, except that at the option of the Company
payment of any interest may be made (i) by check mailed to the address of the
Person entitled thereto as such address shall appear in the Securities Register
or (ii) by transfer to an account maintained by the Person entitled thereto as
specified in the Securities Register, provided that proper transfer instructions
have been received by the Regular Record Date. Payment of any interest on the
Junior Subordinated Debentures will be made to the Person in whose name the
Subordinated Debenture is registered at the close of business on the Regular
Record Date for such interest, except in the case of Defaulted Interest. The
Company may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent; however, the Company will at all times be
required to maintain a Paying Agent in each Place of Payment for the Junior
Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Company in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for two
years after such principal or interest has become due and payable shall be
repaid to the Company upon written request of the Company on May 31 of each year
or (if then held in trust by the Company) will be discharged from such trust and
the holders of the Junior Subordinated Debentures shall thereafter look, as
general unsecured creditors, only to the Company for payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent for
the Junior Subordinated Debentures. Junior Subordinated Debentures may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed) at the
office of the registrar. The Company may at any time rescind the designation of
any such transfer agent or approve a change in the location through which any
such transfer agent acts; provided that the Company maintains a transfer agent
in the place of payment. The Company may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures. In the
event of any redemption, neither the Company nor the Debenture Trustee will be
required to (i) issue, register the transfer of or exchange Junior Subordinated
Debentures during a period beginning at the opening of business 15 days before
the day of selection for redemption of Junior Subordinated Debentures and ending
at the close of business on the day of mailing of the relevant notice of
redemption, or (ii) transfer or exchange any Junior Subordinated Debentures so
selected for redemption, except, in the case of any Junior Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.
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DESCRIPTION OF THE GUARANTEE
A Guarantee will be executed and delivered by the Company concurrently with
the issuance of the Preferred Securities for the benefit of the holders from
time to time of such Preferred Securities (the "Guarantee"). The Bank of New
York will act as trustee ("Guarantee Trustee") under the Guarantee. This
summary of certain provisions of the Guarantee does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Guarantee. Wherever particular defined terms of the Guarantee
are referred to, but not defined herein, such defined terms are incorporated
herein by reference. The form of the Guarantee has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Trust Issuer may have or assert other
than the defense of payment. The following payments with respect to the
Preferred Securities, to the extent not paid by or on behalf of the Trust Issuer
(the "Guarantee Payments"), will be subject to the Guarantee: (i) any accrued
and unpaid Distributions required to be paid on the Preferred Securities, to the
extent that the Trust Issuer has funds on hand available therefor at such time,
(ii) the Redemption Price with respect to any Preferred Securities called for
redemption, to the extent that the Trust Issuer has funds on hand available
therefor at such time, or (iii) upon a voluntary or involuntary dissolution,
winding up or termination of the Trust Issuer (unless the Junior Subordinated
Debentures are distributed to holders of the Preferred Securities), the lesser
of (a) the Liquidation Distribution, to the extent that the Trust Issuer has
funds available therefor at such time, and (b) the amount of assets of the Trust
Issuer remaining available for distribution to holders of the Preferred
Securities after satisfaction of liabilities to creditors of the Trust Issuer as
required by applicable law. The Company's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by the
Company to the holders of the Preferred Securities or by causing the Trust
Issuer to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust Issuer's obligations under the Preferred Securities, but will apply
only to the extent that the Trust Issuer has funds sufficient to make such
payments, and is not a guarantee of collection.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Trust Issuer, the Trust Issuer will not be able to pay
Distributions on the Preferred Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior Debt of the Company. See "Description of the Guarantee--
Status of the Guarantee." Because the Company is a holding company, the right
of the Company to participate in any distribution of assets of any subsidiary
upon such subsidiary's liquidation or reorganization or otherwise is subject to
the prior claims of creditors of that subsidiary, except to the extent the
Company may itself be recognized as a creditor of that subsidiary. Accordingly,
the
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Company's obligations under the Guarantee will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, and claimants
should look only to the assets of the Company for payments thereunder. The
Guarantee does not limit the incurrence or issuance of other secured or
unsecured debt of the Company, including Senior Debt, whether under the
Indenture, any other indenture that the Company may enter into in the future, or
otherwise. The Company may from time to time to incur indebtedness constituting
Senior Indebtedness.
The Company and the Trust Issuer believe that the Company has, through the
Guarantee, the Trust Agreement, the Junior Subordinated Debentures, the
Indenture and the Expense Agreement, taken together, fully, irrevocably and
unconditionally guaranteed all of the Trust Issuer's obligations under the
Preferred Securities, on a subordinated basis. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee of the Trust Issuer's obligations under the Preferred Securities. See
"Relationship Among the Preferred Securities, the Junior Subordinated
Debentures, the Expense Agreement and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against any other person or entity). The Guarantee will be
held for the benefit of the holders of the Preferred Securities. The Guarantee
will not be discharged except by payment of the Guarantee Payments in full to
the extent not paid by the Trust Issuer or upon distribution to the holders of
the Preferred Securities of the Junior Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of such
outstanding Preferred Securities. The manner of obtaining any such approval
will be as set forth under "Description of the Preferred Securities--Voting
Rights; Amendment of the Trust Agreement." All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
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EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payments or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of such Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in the performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under
no obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of the Preferred Securities unless it is offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that might be incurred thereby. The Guarantee Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Guarantee Trustee reasonably believes repayment
or adequate indemnity is not reasonably assured to it.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust Issuer, or (c)
distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities in exchange therefor. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Preferred Securities must restore payment of any sums paid under the
Preferred Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York, without regard to conflicts of laws principles
thereof.
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THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by the Company under the
Trust Agreement (the "Expense Agreement"), the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Trust Issuer
becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust Issuer, other than obligations of the Trust Issuer to
pay to the holders of the Preferred Securities the amounts due such holders
pursuant to the terms of the Preferred Securities. Third party creditors of
the Trust Issuer may proceed directly against the Company under the Expense
Agreement, regardless of whether such creditors had notice of the Expense
Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES, THE EXPENSE
AGREEMENT AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust Issuer has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." The Company and the Trust
Issuer believe that, taken together, the Company's obligations under the Junior
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of distributions and other amounts due on
the Preferred Securities, on a subordinated basis. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee of the Trust Issuer's obligations under the Preferred Securities. If
and to the extent that the Company does not make payments on the Junior
Subordinated Debentures, the Trust Issuer will not pay Distributions or other
amounts due on its Preferred Securities. The Guarantee does not cover payment
of Distributions when the Trust Issuer does not have sufficient funds to pay
such Distributions. In such event, the remedy of a holder of the Preferred
Securities is to institute a Direct Action against the Company for enforcement
of payment of such Distributions to such holder. The obligations of the Company
under the Guarantee are subordinate and junior in right of payment to all Senior
Debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate stated Liquidation Amount
of the Preferred Securities and Common Securities; (ii) the interest rate and
interest and
108
other payment dates on the Junior Subordinated Debentures will match the
Distribution rate and Distribution and other payment dates for the Preferred
Securities; (iii) the Company shall pay for all and any costs, expenses and
liabilities of the Trust Issuer except the Trust Issuer's obligations to holders
of its Preferred Securities; and (iv) the Trust Agreement further provides that
the Trust Issuer will not engage in any activity that is not consistent with the
limited purposes of the Trust Issuer.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of making such payment, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES
A holder of a Preferred Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust Issuer
or any other person or entity.
A default or event of default under any Senior Debt of the Company would
not constitute a default or event of default under the Indenture. However, in
the event of payment defaults under, or acceleration of, Senior Debt of the
Company, the subordination provisions of the Indenture provide that no payments
may be made in respect of the Junior Subordinated Debentures until such Senior
Debt has been paid in full or any payment default thereunder has been cured or
waived. Failure to make required payments on the Junior Subordinated Debentures
would constitute an event of default under the Indenture.
LIMITED PURPOSE OF THE TRUST ISSUER
The Preferred Securities evidence a preferred undivided beneficial interest
in the Trust Issuer, and the Trust Issuer exists for the sole purpose of issuing
its Preferred Securities and Common Securities and investing the proceeds
thereof in Junior Subordinated Debentures. A principal difference between the
rights of a holder of a Preferred Security and a holder of a Subordinated
Debenture is that a holder of a Subordinated Debenture is entitled to receive
from the Company the principal amount of and interest accrued on Junior
Subordinated Debentures held, while a holder of the Preferred Securities is
entitled to receive Distributions from the Trust Issuer (or from the Company
under the Guarantee) if, and to the extent, the Trust Issuer has funds available
for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust Issuer involving the liquidation of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Trust Issuer,
if any, as provided by applicable law, the holders of the Preferred Securities
will be entitled to receive, out of assets held by the Trust Issuer, the
Liquidation
109
Distribution in cash. See "Description of the Preferred Securities-Liquidation
Distribution Upon Termination." Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Property Trustee, as holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated in right of payment to all Senior Debt as set forth in the
Indenture, but entitled to receive payment in full of principal and interest,
before any stockholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed to pay for all
costs, expenses and liabilities of the Trust Issuer (other than the Trust
Issuer's obligations to the holders of its Preferred Securities), the positions
of a holder of such Preferred Securities and a holder of the Junior Subordinated
Debentures relative to other creditors and to stockholders of the Company in the
event of liquidation or bankruptcy of the Company are expected to be
substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of the Preferred
Securities. This summary addresses only the tax consequences to a person that
acquires Preferred Securities on their original issue at their original offering
price and does not address the tax consequences to persons that may be subject
to special treatment under United States federal income tax law, such as banks,
insurance companies, thrift institutions, regulated investment companies, real
estate investment trusts, employee benefit plans, tax-exempt organizations,
dealers in securities or currencies, persons that will hold Preferred Securities
as part of a position in a "straddle" or as part of a "hedging", "conversion" or
other integrated investment transaction for federal income tax purposes, persons
whose functional currency is not the United States dollar or persons that do not
hold Preferred Securities as capital assets.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Silver, Freedman & Taff, L.L.P. ("Silver Freedman"),
special tax counsel to the Company and the Trust Issuer. This summary is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service rulings and pronouncements and judicial
decisions now in effect, all of which are subject to change at any time. Such
changes may be applied retroactively in a manner that could cause the tax
consequences to vary substantially from the consequences described below,
possibly adversely affecting a beneficial owner of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Possible Tax Law Changes." The
authorities on which this summary is based are subject to various
interpretations, and it is therefore possible that the federal income tax
treatment of the purchase, ownership and disposition of the Preferred Securities
may differ from the treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, AS WELL
AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
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CLASSIFICATION OF THE TRUST ISSUER
In the opinion of Silver Freedman, under current law, the Trust Issuer will
not be classified as an association taxable as a corporation for United States
federal income tax purposes. As a result, each beneficial owner of Preferred
Securities (a "Securityholder") will be required to include in its gross income
its pro rata share of the interest (or accrued original issue discount) with
respect to the Junior Subordinated Debentures. See "--Interest Income and
Original Issue Discount." No amount included in income with respect to the
Preferred Securities will be eligible for the dividends-received deduction.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations (the "Regulations"), if the terms and
conditions of a debt instrument make the likelihood that stated interest will
not be timely paid a "remote" contingency, such contingency will be ignored in
determining whether the debt instrument is issued with original issue discount
("OID"). The Company believes that the likelihood of its exercising its option
to defer payments of interest on the Junior Subordinated Debentures is remote,
since exercising that option would prevent it from declaring dividends on any
class of its stock. Based on the foregoing, the Company intends to take the
position that the Junior Subordinated Debentures were not issued with OID and,
accordingly, a Securityholder should include in gross income only such
Securityholder's pro rata share of stated interest on the Junior Subordinated
Debentures in accordance with such Securityholder's method of tax accounting.
The Regulations have not yet been addressed in any rulings or other
published interpretations by the Internal Revenue Service (the "IRS"). In the
opinion of Silver Freedman, it is not unreasonable for the Company to take the
position that the Junior Subordinated Debentures will not be issued with OID.
However, it is possible the IRS could take the position that the likelihood of
deferral was not a remote contingency within the meaning of the Regulations.
Under the Regulations, if the Company were to exercise its option to defer
payments of interest after treating the Junior Subordinated Debentures as issued
without OID, the Junior Subordinated Debentures would be treated as re-issued
with OID at that time, and all stated interest (and de minimis OID, if any) on
the Junior Subordinated Debentures would thereafter be treated as OID as long as
the Junior Subordinated Debentures remained outstanding. In such event, all of
a Securityholder's income with respect to the Junior Subordinated Debentures
would be accounted for as OID on an economic accrual basis regardless of such
Securityholder's method of tax accounting, and actual distributions of stated
interest would not be includable in gross income. Consequently, a
Securityholder would be required to include OID in gross income even though the
Company would not make any actual cash payments during an Extension Period.
A Securityholder that disposed of Preferred Securities prior to the record
date for the payment of Distributions following an Extension Period would
include OID in gross income but would not receive any cash related thereto from
the Trust Issuer. Any amount of OID included in
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a Securityholder's gross income (whether or not during an Extension Period)
would increase such Securityholder's tax basis in its Preferred Securities, and
the amount of Distributions not includable in gross income would reduce such
Securityholder's tax basis in its Preferred Securities.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF THE PREFERRED
SECURITIES
Under current law, a distribution by the Trust Issuer of the Junior
Subordinated Debentures as described under the caption "Description of the
Preferred Securities-Liquidation of the Trust Issuer and Distribution of the
Junior Subordinated Debentures to Holders" will be nontaxable and will result in
a Securityholder's receiving directly its pro rata share of the Junior
Subordinated Debentures previously held indirectly through the Trust Issuer,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Preferred Securities before
such distribution. A Securityholder will account for interest in respect of the
Junior Subordinated Debentures received from the Trust Issuer in the manner
described above under "Certain Federal Income Tax Consequences--Interest Income
and Original Issue Discount."
SALES OR REDEMPTION OF THE PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of the
Preferred Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized and the Securityholder's adjusted tax
basis in the Preferred Securities sold or so redeemed. Gain or loss recognized
by a Securityholder on Preferred Securities held for more than one year will
generally be taxable as long-term capital gain or loss. Pursuant to the
Taxpayer Relief Act of 1997, on or after July 29, 1997, Preferred Securities
held by an individual for more than 18 months are accorded a capital gains tax
rate of 20% (or a rate of 10%, if the individual taxpayer is in the 15% tax
bracket). On or after July 29, 1997, Preferred Securities held by an individual
for more than one year, but not more than 18 months, are accorded a capital
gains tax rate of 28%.
If the Company were to exercise its option to defer payments of interest on
the Junior Subordinated Debentures, the Preferred Securities might trade at a
price that did not fully reflect the value of accrued but unpaid interest with
respect to the underlying Junior Subordinated Debentures. A Securityholder that
disposed of its Preferred Securities between record dates for payments of
Distributions (and consequently did not receive a Distribution from the Trust
Issuer for the period prior to such disposition) would nevertheless be required
to include in income as ordinary income accrued but unpaid interest on the
Junior Subordinated Debentures through the date of disposition and to add such
amount to its adjusted tax basis in its Preferred Securities disposed of. Such
Securityholder would recognize a capital loss on the disposition of its
Preferred Securities to the extent the selling price (which might not fully
reflect the value of accrued but unpaid interest) was less than the
Securityholder's adjusted tax basis in the Preferred Securities (which would
include accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for federal income
tax purposes.
112
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership or a non-resident fiduciary of a foreign estate or trust.
Under current United States federal income tax law: (i) payments by the
Trust Issuer or any of its paying agents to any Securityholder who or which is a
United States Alien Holder will not be subject to United States federal
withholding tax; provided, that (a) the Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (b) the Securityholder is not a
controlled foreign corporation that is related to the Company through stock
ownership and (c) either (A) the Securityholder certifies to the Trust Issuer or
its agent, under penalties of perjury, that it is not a United States holder and
provides its name and address or (B) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution") certifies to the
Trust Issuer or its agent, under penalties of perjury, that such statement has
been received from the Securityholder by it or by a Financial Institution
holding such security for the Securityholder and furnishes the Trust Issuer or
its agent with a copy thereof, and (ii) a United States Alien Holder of a
Preferred Security will not be subject to United States federal withholding tax
on any gain realized upon the sale or other disposition of a Preferred Security.
Proposed Treasury regulations (the "Proposed Regulations") would provide
alternative methods for satisfying the certification requirement described in
clause (i)(c) above. The Proposed Regulations also would require, in the case
of Preferred Securities held by a foreign partnership, that (x) the
certification described in clause (i)(c) above be provided by the partners
rather than by the foreign partnership and (y) the partnership provide certain
information, including a United States taxpayer identification number. A look-
through rule would apply in the case of tiered partnerships. The Proposed
Regulations are proposed to be effective for payments made after December 31,
1997. There can be no assurance that the regulations will be adopted or as to
the provisions that they will include if and when adopted in temporary or final
form. The Trust Issuer will issue a Form 1042 or Form 1042S, where appropriate.
INFORMATION REPORTING TO SECURITYHOLDERS
Generally, income on the Preferred Securities will be reported to
Securityholders on Forms 1099-INT, which will be mailed to Securityholders by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, Preferred Securities may
be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any withheld amounts will be
allowed as a credit against the Securityholder's United States federal income
tax, provided the required information is provided to the Internal Revenue
Service on a timely basis.
113
ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be considered a
"party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or a "disqualified person" within
the meaning of Section 4975 of the Code with respect to many employee benefit
plans ("Plans") that are subject to ERISA. The purchase of the Preferred
Securities by a Plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975(e)(1) of the
Code and with respect to which the Company, or any affiliate of the Company, is
a service provider (or otherwise is a party in interest or a disqualified
person) may constitute or result in a prohibited transaction under ERISA or
Section 4975 of the Code, unless the Preferred Securities are acquired pursuant
to and in accordance with an applicable exemption. Any pension or other
employee benefit plan proposing to acquire any Preferred Securities should
consult with its counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated ________, 1997, among the Company, the Trust
Issuer and Ryan, Beck & Co. (the "Underwriter"), the Trust Issuer has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Trust Issuer, $30,000,000 aggregate Liquidation Amount of Preferred Securities
at the public offering price subject to the underwriting commissions set forth
on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent and that the Underwriter will
purchase all of the Preferred Securities offered hereby if any of such Preferred
Securities are purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Preferred Securities to the public and other dealers at
the public offering price set forth on the cover page of this Prospectus and
will share with certain dealers from its commission a concession not in excess
of $____ per Preferred Security. The Underwriter may allow, and such dealers
may reallow, a concession not in excess of $____ per Preferred Security to
certain other dealers. After the public offering, the offering price and other
selling terms may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an additional
$4,500,000 aggregate Liquidation Amount of the Preferred Securities at the
public offering price plus accrued Distributions, if any, from ________, 1997.
To the extent that the Underwriter exercises such option, the Company will be
obligated, pursuant to the option, to sell such Preferred Securities to the
Underwriter. The Underwriter may exercise such option only to cover over-
allotments made in connection with the sale of the Preferred Securities offered
hereby. If purchased, the Underwriter will offer such additional Preferred
Securities on the same terms as those on which the $30,000,000 aggregate
Liquidation Amount of the Preferred Securities are being offered.
114
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $____ per Preferred Security (or $_______ ($_______ if the
over-allotment option is exercised in full) in the aggregate). The Company has
also agreed to reimburse the Underwriter for its reasonable out-of-pocket
expenses, including legal fees and expenses relating to the Offering of the
Preferred Securities.
In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Trust Issuer. In such a
case, to cover all or part of the short position, the Underwriter may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriter also may engage in stabilizing transactions in
which it bids for, and purchases, shares of the Preferred Securities at a level
above that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriter also may reclaim any selling concessions allowed to
an Underwriter or dealer if the Underwriter repurchases shares distributed by
the Underwriter or dealer. Any of the foregoing transactions may result in the
maintenance of a price for the Preferred Securities at a level above that which
might otherwise prevail in the open market. Neither the Company nor the
Underwriter makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriter is not required to engage in
any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Preferred Securities are a new issue of securities with no established
trading market. The Company and the Trust Issuer have been advised by the
Underwriter that it intends to make a market in the Preferred Securities.
However, the Underwriter is not obligated to do so and such market making may be
interrupted or discontinued at any time without notice at the sole discretion of
the Underwriter. Application has been made by the Company to list the Preferred
Securities on the Nasdaq National Market, but one of the requirements for
listing and continuing listing is the presence of two market makers for the
Preferred Securities, and the presence of a second market maker cannot be
assured. Accordingly, no assurance can be given as to the development or
liquidity of any market for the Preferred Securities.
115
The Company and the Trust Issuer have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act.
The Underwriter has in the past and may in the future perform various
services for the Company, including investment banking services, for which it
has and will receive customary fees for such services.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the creation of the
Trust Issuer will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Company and the Trust Issuer. The validity of the Guarantee and
the Junior Subordinated Debentures will be passed upon for the Company by
Silver, Freedman & Taff, L.L.P. Certain legal matters will be passed upon for
the Underwriters by Thacher Proffitt & Wood. Certain matters relating to the
United States federal income tax considerations will be passed upon for the
Company by Silver, Freedman & Taff, L.L.P.
EXPERTS
The consolidated financial statements of the Company and subsidiary as of
June 30, 1997 and 1996 and for each of the three years in the period ended June
30, 1997 included in the Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
herein, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite
1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
116
The Company and the Trust Issuer have filed with the Commission a
Registration Statement on Form S-2 (together with all amendments thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company, the Trust Issuer, the Preferred Securities and the Junior Subordinated
Debentures, reference is made to the Registration Statement, including the
exhibits thereto. Any statements contained herein concerning the provisions of
any document filed as an exhibit to the Registration Statement are not
necessarily complete, and, in each instance, reference is made to the copy of
such document so filed for a more complete description of the matter involved.
Each such statement is qualified in its entirely by such reference. The
Registration Statement may be inspected without charge at the principal office
of the Commission in Washington, D.C., and copies of all or part of it may be
obtained from the Commission upon payment of the prescribed fees.
No separate financial statements of the Trust Issuer have been included
herein. The Company does not consider that such financial statements would be
material to holders of Preferred Securities because (i) all of the voting
securities of the Trust Issuer will be owned by the Company, a reporting company
under the Exchange Act, (ii) the Trust Issuer has no independent operations but
exists for the sole purpose of issuing securities representing undivided
beneficial interests in the assets of the Trust Issuer and investing the
proceeds thereof in Junior Subordinated Debentures issued by the Company, and
(iii) the obligations of the Company described herein to provide certain
indemnities in respect of and be responsible for certain costs, expenses, debts
and liabilities of the Trust Issuer under the Indenture and pursuant to the
Trust Agreement, the guarantee issued by the Company with respect to the
Preferred Securities, the Junior Subordinated Debentures purchased by the Trust
Issuer, the related Indenture and the Expense Agreement, taken together,
constitute, in the belief of the Company and the Trust Issuer full and
unconditional guarantee of payments due on the Preferred Securities. See
"Description of the Junior Subordinated Debentures" and "Description of the
Guarantee."
The Trust Issuer is not currently subject to the information reporting
requirements of the Exchange Act and the Company does not expect that the Trust
Issuer will file reports, proxy statements and other information under the
Exchange Act with the Commission.
117
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PENNFED FINANCIAL SERVICES, INC.
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at June 30, 1997 and 1996
Consolidated Statements of Income for the three years ended June 30, 1997,
1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for the three
years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiary
West Orange, New Jersey
We have audited the accompanying consolidated statements of financial condition
of PennFed Financial Services, Inc. and Subsidiary (the "Company") as of June
30, 1997 and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PennFed Financial
Services, Inc. and Subsidiary as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for investments in the year ended June 30, 1995
to conform with Statement of Financial Accounting Standards No. 115.
DELOITTE & TOUCHE, LLP
PARSIPPANY, NEW JERSEY
July 31, 1997
F-2
Penned Financial Services, Inc. and Subsidary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
-----------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents............................................................... $ 10,729 $ 11,629
Investment securities held to maturity, at amortized cost,
market value of $35,432 and $21,502 at June 30, 1997 and 1996........................ 35,290 21,288
Mortgage-backed securities held to maturity, at amortized cost, market
value of $291,125 and $344,331 at June 30, 1997 and 1996............................. 288,539 346,068
Loans held for sale..................................................................... --- 88
Loans receivable, net of allowance for loan losses of $2,622 and
$2,630 at June 30, 1997 and 1996...................................................... 931,451 652,483
Premises and equipment, net............................................................. 16,435 16,035
Real estate owned, net.................................................................. 884 1,083
Federal Home Loan Bank of New York stock, at cost....................................... 12,413 8,052
Accrued interest receivable, net........................................................ 7,196 6,742
Goodwill and other intangible assets.................................................... 15,918 18,430
Other assets............................................................................ 2,896 4,626
---------- ----------
$1,321,751 $1,086,524
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits................................................................................ $ 918,160 $ 836,416
Federal Home Loan Bank of New York advances............................................. 205,465 105,000
Other borrowings........................................................................ 82,750 41,700
Mortgage escrow funds................................................................... 8,855 5,930
Due to banks............................................................................ 7,237 5,989
Accounts payable and other liabilities.................................................. 2,014 925
---------- ----------
Total liabilities....................................................................... 1,224,481 995,960
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE O)
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 4,822,124 and 4,823,665 shares
outstanding at June 30, 1997 and 1996 (excluding shares held in
treasury of 1,127,876 and 1,126,335 at June 30, 1997 and 1996)...................... 60 60
Additional paid-in capital.............................................................. 57,441 57,057
Restricted stock - Management Recognition Plan.......................................... (1,062) (1,316)
Employee Stock Ownership Plan Trust debt................................................ (3,671) (4,061)
Retained earnings, partially restricted................................................. 61,051 55,172
Treasury stock, at cost, 1,127,876 and 1,126,335 shares at
June 30, 1997 and 1996................................................................ (16,549) (16,348)
Total stockholders' equity.............................................................. 97,270 90,564
---------- ----------
$1,321,751 $1,086,524
========== ==========
See notes to consolidated financial statements.
F-3
PennFed Financial Services, Inc. and Subsidary
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans................................... $ 61,768 $ 43,275 $ 34,064
Interest on federal funds sold............................... --- 1 632
Interest and dividends on investment securities.............. 1,603 2,298 1,880
Interest on mortgage-backed securities....................... 22,030 22,549 16,143
---------- ---------- ----------
85,401 68,123 52,719
---------- ---------- ----------
INTEREST EXPENSE:
Deposits..................................................... 40,172 33,601 25,631
Borrowed funds............................................... 12,901 5,520 1,522
---------- ---------- ----------
53,073 39,121 27,153
---------- ---------- ----------
Net Interest and Dividend Income Before Provision
for Loan Losses........................................... 32,328 29,002 25,566
Provision for Loan Losses.................................... 635 610 569
---------- ---------- ----------
Net Interest and Dividend Income After Provision
for Loan Losses........................................... 31,693 28,392 24,997
---------- ---------- ----------
NON-INTEREST INCOME:
Service charges.............................................. 1,666 1,602 1,476
Net gain (loss) from real estate operations.................. (181) 104 117
Net gain on sales of investment securities................... --- 94 ---
Other........................................................ 298 402 532
---------- ---------- ----------
1,783 2,202 2,125
---------- ---------- ----------
NON-INTEREST EXPENSES:
Compensation and employee benefits........................... 7,897 7,617 8,605
Net occupancy expense........................................ 1,129 1,129 1,053
Equipment.................................................... 1,580 1,580 1,568
Advertising.................................................. 326 298 273
Amortization of intangibles.................................. 2,512 2,625 1,395
Federal deposit insurance premium............................ 1,112 1,680 1,325
SAIF recapitalization assessment............................. 4,813 --- ---
Other........................................................ 3,016 2,713 3,342
---------- ---------- ----------
22,385 17,642 17,561
---------- ---------- ----------
Income Before Income Taxes................................... 11,091 12,952 9,561
Income Tax Expense........................................... 4,205 5,111 3,921
---------- ---------- ----------
Net Income................................................... $ 6,886 $ 7,841 $ 5,640
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary..................................................... 4,719,928 5,063,218 5,233,497
========== ========== ==========
Fully diluted................................................ 4,786,491 5,078,439 5,326,487
========== ========== ==========
NET INCOME PER COMMON SHARE:
Primary..................................................... $1.46 $1.55 $1.08
========== ========== ==========
Fully diluted............................................... $1.44 $1.55 $1.08
========== ========== ==========
See notes to consolidated financial statements.
F-4
PennFed Financial Services, Inc.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
RESTRICTED EMPLOYEE UNREALIZED
STOCK- STOCK GAIN ON
SERIAL ADDITIONAL MANAGEMENT OWNERSHIP INVESTMENTS
PREFERRED COMMON PAID-IN RECOGNITION PLAN TRUST RETAINED AVAILABLE TREASURY
STOCK STOCK CAPITAL PLAN DEBT EARNINGS FOR SALE STOCK
--------- ------- -------- ----------- --------- -------- ---------- --------
Balance at June 30, 1994......... $ --- $ --- $ --- $ --- $ --- $ 41,985 $ --- $ ---
Net proceeds from 5,950,000
shares of common stock
issued in stock conversion....... 60 56,828
Acquisition of 476,000 shares
of stock by ESOP................ (4,760)
Allocation of ESOP stock......... 337
ESOP adjustment.................. 53
Purchase of 534,000 shares of
treasury stock.................. (6,472)
Issuance of 208,845 shares of
treasury stock for MRP.......... (2,194) (292) 2,486
Amortization of MRP stock........ 440
Increase in unrealized gain on
investments available for sale.. 59
Net income for the year ended
June 30, 1995................... 5,640
---- ------ ------- ------- ------- ------- ----- ------
Balance at June 30, 1995......... --- 60 56,881 (1,754) (4,423) 47,333 59 (3,986)
Allocation of ESOP Stock......... 362
ESOP Adjustment.................. 176
Purchase of 801,860 shares of
treasury stock.................. (12,370)
Issuance of 680 shares of
treasury stock for options
exercised...................... (2) 8
Amortization of MRP stock........ 438
Decrease in unrealized gain on
investments available for sale.. (59)
Net income for the year ended
June 30, 1996................... 7,841
---- ------ ------- ------- ------- ------- ----- ------
Balance at June 30, 1996......... --- 60 57,057 (1,316) (4,061) 55,172 --- (16,348)
Allocation of ESOP stock......... 390
ESOP and MRP adjustment.......... 345
Purchase of 32,500 shares of (651)
treasury stock..................
Issuance of 1,804 shares of
treasury stock for options (20) 27
exercised and DRP..............
Issuance of 29,155 shares of
treasury stock for MRP.......... 39 (462) 423
Amortization of MRP stock........ 716
Cash dividends................... (987)
Net income for the year ended
June 30, 1997................... 6,886
---- ------ ------- ------- ------- ------- ----- ------
Balance at June 30, 1997......... $ --- $ 60 $57,441 $(1,062) $(3,671) $ 61,051 $ --- $(16,549)
==== ====== ======= ======= ======= ======= ===== ======
See notes to consolidated financial statements.
F-5
Pennfed Financial Services, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------
1997 1996 1995
------------ -------------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 6,886 $ 7,841 $ 5,640
Adjustments to reconcile net income to net cash provided by operating
activities:
Proceeds from sales of loans held for sale............................ 585 273 1,362
Originations of loans held for sale................................... (497) (361) (826)
Gain on sales of investment securities................................ --- (94) ---
Gain on sales of real estate owned.................................... (29) ( 236) (597)
Amortization of investment and mortgage-backed securities premium, net 260 415 1,268
Depreciation and amortization......................................... 1,301 1,315 1,297
Provision for losses on loans and real estate owned................... 747 618 650
Amortization of cost of stock plans................................... 1,466 978 900
Amortization of intangibles........................................... 2,512 2,625 1,395
Amortization of premiums on loans and loan fees....................... 414 371 87
Increase in accrued interest receivable, net of accrued interest
payable............................................................ (113) (835) (1,512)
(Increase) decrease in other assets................................... 1,731 (1,294) (43)
(Increase) decrease in deferred income tax asset...................... 185 (174) (261)
Increase (decrease) in accounts payable and other liabilities......... 891 (894) 866
Increase in mortgage escrow funds..................................... 2,925 1,160 946
Increase in due to banks.............................................. 1,248 2,348 468
Other, net............................................................ (2) (83) (98)
--------- --------- ---------
Net cash provided by operating activities............................. 20,510 13,973 11,542
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities..................... 16,000 6,210 13,605
Proceeds from sales of investment securities available for sale....... --- 104 ---
Purchases of investment securities held to maturity................... (30,000) (10,000) (19,746)
Net (outflow) proceeds from principal repayments of loans and loan
originations........................................................ (86,193) (55,090) (1,479)
Purchases of loans.................................................... (195,514) (132,238) (87,874)
Proceeds from principal repayments of mortgage-backed securities...... 57,266 72,028 32,013
Purchases of mortgage-backed securities............................... --- (99,085) (148,036)
Proceeds from sale of premises and equipment.......................... --- 326 ---
Purchases of premises and equipment................................... (1,701) (529) (2,159)
Proceeds from sales of real estate owned.............................. 1,806 1,868 5,008
Purchases of Federal Home Loan Bank of New York stock................. (4,361) (1,684) (1,322)
--------- --------- ---------
Net cash used in investing activities................................. (242,697) (218,090) (209,990)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of deposits, net of sale of deposits...................... --- --- 136,811
Deposit premium....................................................... --- --- (18,141)
Decrease in deposits due to conversion deposits....................... --- --- (53,780)
Net increase in deposits.............................................. 81,403 122,502 15,284
Advances from the Federal Home Loan Bank of New York and other
borrowings........................................................ 141,515 95,870 35,830
Cash dividends paid................................................... (987) --- ---
Purchases of treasury stock, net of reissuance........................ (644) (12,362) (6,472)
Net proceeds from issuance of common stock............................ --- --- 52,128
--------- --------- ---------
Net cash provided by financing activities............................. 221,287 206,010 161,660
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents.................. (900) 1,893 (36,788)
Cash and Cash Equivalents, Beginning of Year.......................... 11,629 9,736 46,524
--------- --------- ---------
Cash and Cash Equivalents, End of Year................................ $ 10,729 $ 11,629 $ 9,736
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................................. $ 52,054 $ 38,731 $ 26,804
========= ========= =========
Income taxes......................................................... $ 3,504 $ 5,133 $ 4,451
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON--CASH ACTIVITIES:
Transfer of loans receivable to real estate owned, net................ $ 1,690 $ 1,540 $ 2,694
========= ========= =========
Unrealized gain on investments available for sale..................... $ --- $ (59) $ 59
========= ========= =========
Issuance of treasury stock for Management Recognition Plan............ $ 423 $ --- $ 2,486
========= ========= =========
See notes to consolidated financial statements.
F-6
Pennfed Financial Services, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PennFed Financial Services, Inc. ("PennFed") was organized in March 1994 for the
purpose of becoming the savings and loan holding company for Penn Federal
Savings Bank (the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion").
PRINCIPLES OF CONSOLIDATION --- The consolidated financial statements of PennFed
and subsidiary (together the "Company") include the accounts of PennFed and the
Bank. PennFed owns all of the outstanding stock of the Bank issued on July 14,
1994 (see Note B - Stock Conversion). All references to the Company, unless
otherwise indicated, prior to July 14, 1994, refer to the Bank and its
subsidiary on a consolidated basis. All intercompany accounts and transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant area in
the accompanying financial statements where estimates have an impact is in the
allowance for loan losses.
CASH AND CASH EQUIVALENTS --- For purposes of reporting cash flows, cash and
cash equivalents include cash and amounts due from depository institutions.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES --- In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), debt securities
classified as held to maturity are carried at amortized cost only if the
reporting entity has a positive intent and ability to hold those securities to
maturity.
The Company classifies investment securities and mortgage-backed securities as
either held to maturity or available for sale. Investment securities and
mortgage-backed securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, since the Company has both
the ability and intent to hold the securities to maturity. Investments available
for sale are carried at market value with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity.
LOANS HELD FOR SALE --- Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Aggregate net unrealized losses are recognized in a valuation
allowance by charges to income.
LOANS RECEIVABLE --- Interest income is not accrued on loans where management
has determined that the borrowers may be unable to meet contractual principal or
interest obligations or where interest and/or principal is 90 days or more past
due. When a loan is placed on nonaccrual status, accrual of interest ceases and,
in general, uncollected past due interest (including interest applicable to
prior years, if any) is reversed and charged against current income. Therefore,
interest income is not recognized unless the financial condition and payment
record of the borrower warrant the recognition of interest income. Interest on
loans that have been restructured is generally accrued according to the
renegotiated terms.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" ("SFAS 118"). The Company
accounts for impaired
F-7
Pennfed Financial Services, Inc. and Subsidiary
loans, except those loans that are accounted for at fair value or at the lower
of cost or fair value, at the present value of the estimated future cash flows
of the loan discounted at the loan's effective interest rate or at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when it is probable that all principal
and interest amounts will not be collected according to the loan contract.
Delinquent, smaller balance, homogeneous loans that are evaluated collectively
on a portfolio basis are not considered impaired under SFAS 114. The Company
generally evaluates the collectibility of consumer and one-to four-family loans
on a total portfolio basis.
ALLOWANCE FOR LOAN LOSSES --- The allowance for loan losses is established
through charges to earnings. Loan losses are charged against the allowance for
loan losses when management believes that the recovery of principal is unlikely.
If, as a result of loans charged off or increases in the size or risk
characteristics of the loan portfolio, the allowance is below the level
considered by management to be adequate to absorb future loan losses on existing
loans, the provision for loan losses is increased to the level considered
necessary to provide an adequate allowance. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the collectibility of the
loans. The evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may affect the
borrowers' ability to pay. Economic conditions may result in the necessity to
change the allowance quickly in order to react to deteriorating financial
conditions of the Company's borrowers. As a result, additional provisions on
existing loans may be required in the future if borrowers' financial conditions
deteriorate or if real estate values decline.
PREMISES AND EQUIPMENT --- Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation of
premises and equipment are computed on the straight-line method over three to
ten years for furniture and equipment and twenty-five to forty years for
buildings. Amortization of leasehold improvements is provided using the
straight-line method over the terms of the respective lease or estimated useful
life of the improvement, whichever is shorter.
REAL ESTATE OWNED --- Real estate properties acquired by foreclosure are
recorded at the lower of cost or estimated fair value less costs to dispose with
any write down charged against the allowance for loan losses. Subsequent
valuations are periodically performed by management and the carrying value is
adjusted by a charge to expense to reflect any subsequent declines in the
estimated fair value. Further declines in real estate values may result in
increased foreclosed real estate expense in the future. Routine holding costs
are charged to expense as incurred and improvements to real estate owned that
increase the fair value of the real estate are capitalized. Gains on sale of
real estate owned are generally recognized upon disposition of the property.
Losses are charged to operations as incurred.
GOODWILL --- The excess of cost over fair value of assets acquired ("goodwill")
arising from the acquisitions discussed in Note C is amortized to expense by an
accelerated method over the estimated remaining lives of long-term, interest-
bearing assets acquired (14 years) in accordance with Statement of Financial
Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions."
CORE DEPOSIT PREMIUM --- The premium resulting from the valuation of core
deposits arising from the aforementioned acquisitions is being amortized to
expense over the estimated average remaining life of the existing customer
deposit base acquired (10 years).
DUE TO BANKS --- This item represents a book overdraft relating to outstanding
checks written on the Company's Federal Home Loan Bank of New York operating
account.
INCOME TAXES --- Federal and state income taxes are based upon earnings reported
after permanent differences have been deducted. Deferred income taxes are
provided for temporary differences in the basis of assets and liabilities
between financial statement and income tax amounts.
F-8
Pennfed Financial Services, Inc. and Subsidiary
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") the Company uses an asset and
liability method for financial accounting and reporting for income taxes. The
statement also requires that a deferred tax liability be recognized for any
increase in the tax bad debt reserve in excess of the reserve balance at
December 31, 1987.
EARNINGS PER SHARE --- The earnings per share computations for the years ended
June 30, 1997, 1996 and 1995 were determined by dividing net income for the
periods by the weighted average number of shares of common stock outstanding and
common stock equivalents. Stock options are regarded as common stock
equivalents and are, therefore, considered in earnings per share calculations if
dilutive. Common stock equivalents are computed using the treasury stock
method. Because earnings per share were based upon the weighted average number
of days outstanding during the period, the weighted average number of shares for
the year ended June 30, 1995 only includes shares outstanding since July 14,
1994 (the date of Conversion). The weighted average number of shares
outstanding does not include shares which are unallocated by the Employee Stock
Ownership Plan ("ESOP"). Additionally, treasury shares are not included in the
calculation.
LOAN ORIGINATION FEES AND DISCOUNTS AND PREMIUMS --- Nonrefundable loan
origination fees net of certain direct loan origination costs are deferred. Net
deferred fees on loans held for investment are amortized into income over the
life of the related loans by use of the level-yield method. Net deferred fees on
loans originated for sale are deferred and recognized as part of the gain or
loss on sale of loans.
Discounts and premiums on investment and mortgage-backed securities and loans
purchased are recognized as income/expense over the estimated life of the asset
purchased using the level-yield method.
INTEREST RATE SWAPS --- The Company has utilized interest rate swaps as a
component of managing interest rate risk. Swap agreements are held for purposes
other than trading. The Company's swaps are considered to be matched swaps, as
they are specifically linked with a liability. Periodic net cash settlements
under swap agreements are accrued as an adjustment to interest expense over the
life of the agreements. In the event of the termination of an interest rate
swap agreement, the gain or loss would be deferred and amortized as an
adjustment to interest expense over the shorter of the remaining life of the
hedged item or the remaining contract period. In the event of liquidation of
the liability to which the interest rate swap is linked, the interest rate swap
would be recorded at its fair market value with any change in such fair market
value recorded in the period it occurs.
RECENTLY ADOPTED ACCOUNTING STANDARDS --- Effective July 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Refer to Note M - Stock Plans for a further
discussion.
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 supersedes Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights". Under SFAS 125, after the transfer of a financial asset, the Company
recognizes the financial and servicing assets it controls and the liabilities it
has incurred. Furthermore, the Company no longer recognizes the financial
assets for which control has been surrendered and liabilities have been
extinguished. The adoption of SFAS 125 did not have an effect on the financial
condition or results of operations of the Company.
RECLASSIFICATIONS --- Certain reclassifications have been made to prior years'
financial statements to conform with current year's presentation.
B. STOCK CONVERSION
On July 14, 1994, the Bank completed the Conversion and became a wholly owned
subsidiary of PennFed, a newly formed holding company. In connection with an
initial public offering, PennFed issued 5,950,000 shares of common
F-9
Penned Financial Services, Inc. and Subsidiary
stock at $10 per share ($.01 par value), increasing consolidated equity by $52.1
million, which was net of conversion expenses of approximately $2.7 million and
shares issued to the ESOP representing 8% of the shares of common stock issued.
The Bank received proceeds of $28.0 million from PennFed in exchange for all of
its common stock.
As part of the Conversion, in order to grant a priority to eligible account
holders in the event of future liquidation in accordance with Office of Thrift
Supervision ("OTS") regulations, the Company established a liquidation account
in an amount equal to $40.9 million (the retained earnings of the Bank as of
March 31, 1994). The total amount of the liquidation account will be decreased
as the balances of eligible account holders are reduced subsequent to the
Conversion. In the event of a complete liquidation of the Company, and only in
such event, eligible account holders who continue to maintain their deposit
accounts shall be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
C. BRANCH ACQUISITIONS
On March 10, 1995, the Bank acquired from the Resolution Trust Corporation
("RTC") the deposit liabilities and certain of the assets and other liabilities
of four branch offices of Carteret Federal Savings Bank, Madison, New Jersey
("Carteret"). The four Carteret branch offices were located in Caldwell,
Verona, Fairfield and Wayne, New Jersey. Immediately following the purchase,
under a pre-arranged "consortium" agreement, Atlantic Stewardship Bank of
Midland Park, New Jersey acquired from the Bank the deposit liabilities and
certain of the assets and other liabilities of the Wayne, New Jersey branch
office. In connection with this transaction, no gain or loss was recorded by
the Bank.
The Bank submitted an $18,739,000 deposit premium bid, of which $18,000,000
related to the Caldwell, Verona and Fairfield branches. In addition to the
$18,000,000 deposit premium, the Bank also capitalized $141,000 of expenses
reflecting a total deposit premium intangible asset of $18,141,000.
The Company acquired Sayreville Savings and Loan Association effective September
1982 and First Federal Savings and Loan Association of Montclair effective
September 1989. The acquisitions have been accounted for as purchases and,
accordingly, the purchase prices have been allocated to assets and liabilities
acquired based on their fair value at their date of acquisition. For each of the
years ended June 30, 1997, 1996 and 1995, the effect of the amortization of
goodwill was to reduce income before income taxes by approximately $496,000,
$609,000 and $739,000, respectively.
F-10
PennFed Finanacial Services, Inc. and Subsidiary
D. INVESTMENT SECURITIES
JUNE 30, 1997 JUNE 30, 1996
------------------------- -------------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
----------- ---------- ------------ ----------
(IN THOUSANDS)
U.S. Treasury and Government Agencies:
Maturing:
Within one year..................................... $ 4,999 $ 5,055 $ 5,999 $ 6,054
After one year but within five years................ --- --- 14,998 15,129
After five years but within ten years............... 30,000 30,070 --- ---
------- ------- ------- -------
34,999 35,125 20,997 21,183
Obligations of states and political subdivisions:
Maturing:
After one year but within five years................ 101 102 101 103
After five years but within ten years............... 190 205 190 216
------- ------- ------- -------
291 307 291 319
------- ------- ------- -------
$35,290 $35,432 $21,288 $21,502
======= ======= ======= =======
Gross unrealized gains of investment securities at June 30, 1997 and 1996 were
as follows:
JUNE 30,
-------------------------------
1997 1996
------------- ------------
(IN THOUSANDS)
U.S. Treasury and Government Agencies............................................. $ 125 $ 186
Obligations of states and political subdivisions.................................. 17 28
----- -----
$ 142 $ 214
===== =====
There were no gross unrealized losses of investment securities at June 30, 1997
or 1996.
For the year ended June 30, 1996, sales of investment securities with a cost
basis of $10,000 generated gross gains of $94,000. There were no sales of
investment securities for the years ended June 30, 1997 and 1995.
E. MORTGAGE-BACKED SECURITIES
JUNE 30,
-------------------------------------
1997 1996
--------------- ----------------
(IN THOUSANDS)
Government National Mortgage Association.................................... $ 3,993 $ 4,904
Federal Home Loan Mortgage Corporation...................................... 184,028 221,777
Federal National Mortgage Association....................................... 98,684 115,896
Collateralized Mortgage Obligations/REMICs.................................. 938 1,348
Private Pass-through Securities............................................. --- 984
-------- --------
287,643 344,909
Unamortized premiums, net................................................... 896 1,159
-------- --------
$288,539 $346,068
======== ========
F-11
PennFed Financial Services, Inc. and Subsidiary
The estimated market values of mortgage-backed securities were $291,125,000 and
$344,331,000 at June 30, 1997 and 1996, respectively. There were no sales of
mortgage-backed securities in the years ended June 30, 1997, 1996 and 1995.
The carrying value of mortgage-backed securities pledged were as follows:
JUNE 30,
------------------------------------
1997 1996
---------------- -------------
(IN THOUSANDS)
Pledged to secure:
Federal Home Loan Bank of New York Advances................................... $ 72,004 $ ---
Other borrowings.............................................................. 41,566 ---
Interest rate swap agreements................................................. 1,789 401
Public funds on deposit....................................................... 384 482
-------- -----
$115,743 $ 883
======== =====
Collateralized mortgage obligations consist primarily of fixed and adjustable
rate sequentially paying securities with short durations.
The gross unrealized gains and losses of mortgage-backed securities held at June
30, 1997 and 1996 were as follows:
JUNE 30, 1997 JUNE 30, 1996
---------------------- ------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
------------ ----------- ---------- ------------
(IN THOUSANDS)
Government National Mortgage Association............... $ 214 $ --- $ 189 $ 1
Federal Home Loan Mortgage Corporation................. 2,604 965 1,401 2,846
Federal National Mortgage Association.................. 1,225 492 967 1,513
Collateralized Mortgage Obligations/REMICs............. 3 3 3 9
Private Pass-through Securities........................ --- --- 72 ---
------ ------ ------ ------
$4,046 $1,460 $2,632 $4,369
====== ====== ====== ======
F-12
Pennfed Financial Services, Inc. And Subsidiary
F. LOANS RECEIVABLE, NET
JUNE 30,
----------------------------------------
1997 1996
------------------ ----------------
(IN THOUSANDS)
First Mortgage Loans:
Conventional............................................................. $824,100 $561,526
FHA insured.............................................................. 6,046 2,226
VA guaranteed............................................................ 1,697 2,172
-------- --------
Total one- to four-family................................................. 831,843 565,924
Commercial and multi-family............................................... 56,811 52,014
-------- --------
Total first mortgage loans............................................... 888,654 617,938
-------- --------
Consumer:
Second mortgages........................................................ 23,665 23,912
Home equity lines of credit............................................. 14,040 8,955
Other................................................................... 2,512 2,117
-------- --------
Total consumer loans...................................................... 40,217 34,984
-------- --------
Total loans............................................................... 928,871 652,922
-------- --------
Add (Less):
Allowance for loan losses................................................. (2,622) (2,630)
Unamortized premium....................................................... 3,610 2,036
Unearned income on consumer loans......................................... (36) (249)
Net deferred loan fees.................................................... 1,628 492
-------- --------
2,580 (351)
-------- --------
$931,451 $652,571
======== ========
At June 30, 1997, there were no loans classified as held for sale. Conventional
one- to four-family mortgage loans at June 30, 1996 included $88,000 of
mortgages held for sale. At June 30, 1996, the Company had a commitment to sell
these loans.
Non-accruing loans at June 30, 1997 and 1996 were $5,485,000 and $6,186,000,
respectively, which represents 0.59% and 0.95%, respectively, of total loans
outstanding. The total interest income that would have been recorded for the
years ended June 30, 1997 and 1996, had these loans been current in accordance
with their original terms, or since the date of origination if outstanding for
only part of the year, was approximately $139,000 and $229,000, respectively.
At June 30, 1997 and 1996, impaired loans totaled $1,687,000 and $2,381,000,
respectively. The average balance of impaired loans for the years ended June
30, 1997 and 1996 was $2,255,000 and $3,755,000, respectively. All impaired
loans have a related allowance for losses, which totaled $460,000 and $617,000
at June 30, 1997 and 1996, respectively. Interest income related to impaired
loans is recognized under the cash-basis method. Interest income recognized on
impaired loans for the years ended June 30, 1997 and 1996 was $120,000 and
$190,000, respectively. Total interest income that would have been recorded for
the years ended June 30, 1997 and 1996, had these loans been current in
accordance with their loan terms, was approximately $303,000 and $315,000,
respectively.
The Company has restructured the terms of certain loans. Those loans, considered
to be troubled debt restructurings, had a balance of $1,451,000 and $2,340,000
at June 30, 1997 and 1996, respectively. The interest earned on restructured
loans that are performing in accordance with their modified terms amounted to
$210,000 and $214,000 for the years ended June 30, 1997 and 1996, respectively.
These loans would have earned $263,000 and $399,000 for the years ended June 30,
1997 and 1996, respectively, had they performed in accordance with their
original terms.
F-13
Pennfed Financial Services, Inc. and Subsidiary
The following is an analysis of the allowance for loan losses:
JUNE 30,
-----------------------------------------------
1997 1996 1995
----------------- ------------- -----------
(IN THOUSANDS)
Balance, beginning of year........................................ $2,630 $2,860 $3,060
Provisions for losses on loans.................................... 635 610 569
Recoveries........................................................ 42 101 ---
Losses charged to allowance....................................... (685) (941) (769)
------ ------ ------
Balance, end of year.............................................. $2,622 $2,630 $2,860
====== ====== ======
The Company's loan portfolio consists primarily of loans secured by residential
and commercial real estate located in its market areas. Therefore, the
collectibility of these loans is dependent to a large degree on the overall
strength of the New Jersey economy, as well as the specific strength of the real
estate sector.
At June 30, 1997 and 1996, commercial and multi-family real estate loans totaled
$56,811,000 and $52,014,000, respectively. These loans are considered by
management to be of somewhat greater risk of collectibility due to their
dependency on income production. Commercial and multi-family real estate loans
collateralized by multi-family mixed use properties were $25,114,000 and
$19,639,000 at June 30, 1997 and 1996, respectively. The remaining commercial
real estate loans were collateralized by commercial properties. Additionally,
the majority of the Company's commercial and multi-family real estate loans were
collateralized by real estate in the State of New Jersey.
Loans serviced for others totaled approximately $78,781,000 and $89,170,000 at
June 30, 1997 and 1996, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees from
investors and certain charges assessed to borrowers, such as late payment fees.
In connection with these loans serviced for others, the Company held borrowers
escrow balances of $926,000 and $976,000 at June 30, 1997 and 1996,
respectively.
G. PREMISES AND EQUIPMENT, NET
JUNE 30,
------------------------------------
1997 1996
----------------- --------------
(IN THOUSANDS)
Land......................................................................... $ 3,709 $ 3,340
Buildings and improvements................................................... 13,510 12,715
Leasehold improvements....................................................... 1,219 1,218
Furniture and equipment...................................................... 8,194 7,660
------- -------
26,632 24,933
Less: accumulated depreciation and amortization.............................. 10,197 8,898
------- -------
$16,435 $16,035
======= =======
H. REAL ESTATE OWNED
JUNE 30,
------------------------------------
1997 1996
----------------- --------------
(IN THOUSANDS)
Acquired by foreclosure or deed in lieu of foreclosure....................... $ 986 $ 1,144
Allowance for losses on real estate owned.................................... (102) (61)
------- -------
$ 884 $ 1,083
======= =======
F-14
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
Results of real estate operations were as follows:
JUNE 30,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
(IN THOUSANDS)
Net gain on sales of real estate owned................................ $ 29 $ 236 $ 597
Holding costs......................................................... (98) (124) (399)
Provision for losses on real estate owned............................. (112) (8) (81)
----- ---- ----
Net gain (loss) from real estate operations........................... $( 181) $ 104 $ 117
===== ==== ====
Activity in the allowance for losses on real estate owned was as follows:
JUNE 30,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
(IN THOUSANDS)
Balance, beginning of year............................................ $ 61 $ 177 $ 220
Provisions charged to operations...................................... 112 8 81
Losses charged to allowance........................................... (71) (124) (124)
--- ---- ====
Balance, end of year.................................................. $102 $ 61 $ 177
=== ==== ====
I. DEPOSITS
JUNE 30, 1997 JUNE 30, 1996
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
------------ ------------ ----------- -------------
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand.................................. $ 31,203 $ 35,485
Interest-bearing demand...................................... 51,159 1.88% 46,645 1.93%
Savings accounts............................................. 169,823 2.22 178,035 2.28
Certificates with remaining maturities of :
One year or less............................................. 395,101 5.50 389,366 5.22
Over one to three years...................................... 214,792 6.17 99,087 5.76
Over three years to five years............................... 53,831 6.16 85,923 6.53
Over five years.............................................. 94 6.90 59 4.43
-------- --------
Total certificates........................................... 663,818 5.77 574,435 5.65
Accrued interest payable..................................... 2,157 1,816
-------- --------
$918,160 4.68% $836,416 4.48%
======== ==== ======== ====
The aggregate amount of accounts with a denomination of $100,000 or more was
approximately $96,822,000 and $51,107,000 at June 30, 1997 and 1996,
respectively.
F-15
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
J. FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank of New York ("FHLB of New York") advances are scheduled
to mature as follows:
JUNE 30, 1997 JUNE 30, 1996
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
One to two years................ $ 85,000 5.99% $ 40,000 5.53%
Three to four years............. 90,000 6.17 65,000 6.17
Four to five years.............. 30,000 6.42 --- ---
Over five years................. 465 7.39 --- ---
-------- --------
$205,465 $105,000
======== ========
The FHLB of New York advances are all fixed rate borrowings collateralized
either under a blanket pledge agreement by one- to four-family mortgage loans or
with mortgage-backed securities.
At June 30, 1997, the Company had available from the FHLB of New York a line of
credit for $50,000,000 which expires on May 1, 1998. The line of credit has a
variable interest rate. At June 30, 1997 and 1996, the Company had $32,650,000
and $36,700,000 of overnight borrowings under this credit line with an interest
rate of 6.63% and 5.69%, respectively. Also at June 30, 1997, the Company had
available from the FHLB of New York a one-month overnight repricing line of
credit for $50,000,000 which expires on May 1, 1998. This line of credit has a
variable interest rate. At June 30, 1997, the Company had $10,000,000 drawn
under this line of credit with an interest rate of 6.38%.
From time to time, the Company enters into sales of securities under agreements
to repurchase ("reverse repurchase agreements"). These agreements are accounted
for as financing arrangements and the obligations to repurchase securities sold
are reflected as other borrowings in the accompanying consolidated statements of
financial condition. The reverse repurchase agreements are collateralized by
mortgage-backed securities which continue to be carried as assets by the
Company, with a carrying value of $41,566,000 and a market value of $41,762,000.
At June 30, 1996, there were no reverse repurchase agreements outstanding. At
June 30, 1997, reverse repurchase agreements are scheduled to mature as follows:
WEIGHTED
AVERAGE
INTEREST
AMOUNT RATE
------------- ------------
Within one year............................... $30,100,000 5.74%
After one year but within five years.......... 10,000,000 6.24%
-----------
$40,100,000 5.86%
===========
The average balance of reverse repurchase agreements for the years ended June
30, 1997 and 1996 was $29,661,000 and $2,604,000, respectively.
F-16
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
K. PENSION PLAN
The Company previously had a noncontributory defined benefit pension plan (the
"Pension Plan") covering substantially all of its employees. Effective July 3,
1995, the Company terminated its Pension Plan. Service benefits ceased on May
19, 1995. In addition to the net pension expense in fiscal 1995, the Company
recognized a loss in fiscal 1995 of approximately $470,000 reflecting the
termination of the Pension Plan in accordance with Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
Pension expense for the year ended June 30, 1995 was $243,000, and consisted of
the following components:
JUNE 30, 1995
----------------
(IN THOUSANDS)
Service cost benefits earned during the period............... $161
Interest cost on projected benefit obligations............... 101
Actual return on Pension Plan assets......................... (82)
Net amortization and deferral of unrecognized net gain....... 63
----
Net periodic pension cost.................................... $243
====
L. INCENTIVE SAVINGS PLAN
The Company's employee benefits include a 401(k) Plan (the "Plan"). All
employees of the Company who work at least 1,000 hours per year and are at least
20 1/2 years old are eligible to participate in the Plan. The Plan provides for
a discretionary Company match of employee contributions. For the years ended
June 30, 1997, 1996 and 1995, expense related to the Plan was $78,000, $70,000,
and $120,000, respectively.
M. STOCK PLANS
Employee Stock Ownership Plan ("ESOP")
In connection with the Conversion, the Company established an ESOP for eligible
employees. All full-time employees are eligible to participate in the ESOP
after they attain age 21 and complete one year of service during which they work
at least 1,000 hours. Employees were credited for years of service to the
Company prior to the adoption of the ESOP for participation and vesting
purposes. The Bank's contribution is allocated among participants on the basis
of compensation. Each participant's account will be credited with cash or
shares of the Company's common stock based upon compensation earned during the
year with respect to which the contribution is made. After completing seven
years of service, a participant will be 100% vested in his/her ESOP account.
ESOP participants are entitled to receive distributions from the ESOP account
only upon termination of service, which includes retirement and death.
The ESOP borrowed $4,760,000 from PennFed and purchased 476,000 shares of common
stock issued in the Conversion. This loan is to be repaid from discretionary
contributions by the Bank to the ESOP trust. The Bank intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt, assuming a ten year term and an interest rate
of 7.46%. Annual contributions to the ESOP, which are used to fund principal
and interest payments on the ESOP debt, total $692,000. At June 30, 1997 and
1996, the loan had an outstanding balance of $3,671,000 and $4,061,000 and the
ESOP had unallocated shares of 367,138 and 406,065, respectively. Based upon a
$27.25 closing price per share of common stock on June 30, 1997, the unallocated
shares had a fair value of $10,005,000. The unamortized balance of the ESOP
debt is reflected as a reduction of stockholders' equity.
For the years ended June 30, 1997 and 1996, the Bank recorded compensation
expense related to the ESOP of $740,000 and $544,000, respectively. The
compensation expense related to the ESOP includes $433,000 and $175,000,
respectively, for a valuation adjustment to reflect the increase in the average
fair value of allocated shares for the period from the time of purchase to the
allocation date. The ESOP allocated 38,927 and 36,225 shares for the years
ended June 30, 1997 and 1996, respectively, to participants in the plan.
F-17
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
Management Recognition Plan
In connection with the Conversion, the Company established a Management
Recognition Plan ("MRP") as a means of enhancing and encouraging the recruitment
and retention of directors and officers. A maximum amount of an additional 4%,
or 238,000 shares, of the shares outstanding upon Conversion may be awarded
under the plan. As of June 30, 1997, 238,000 shares of restricted stock have
been awarded under the MRP. The shares vest in equal installments generally
over a five-year period, with the final installment vesting on April 28, 1999.
For the years ended June 30, 1997 and 1996, the Company recorded expense of
$732,000 and $440,000, respectively, related to the MRP.
Stock Option Plan
In connection with the Conversion, the Company established the 1994 Stock Option
and Incentive Plan ("Option Plan"). The exercise price for the options granted
under the Option Plan cannot be less than the fair market value of the Company's
common stock on the date of the grant. The options vest in equal installments
generally over a five-year period, with the final installment vesting on April
28, 1999. Transactions during the years ended June 30, 1997, 1996 and 1995
relating to the Option Plan are as follows:
EXERCISE
OPTIONS PRICE
----------- -------------
Balance, June 30, 1994.............................. ---
Granted........................................... 513,225 $10.50
Exercised......................................... ---
Expired........................................... ---
Forfeited......................................... ---
-------
Balance, June 30, 1995.............................. 513,225 10.50
Granted........................................... ---
Exercised......................................... (680) 10.50
Expired........................................... (1,300) 10.50
Forfeited......................................... (5,520) 10.50
-------
Balance, June 30, 1996.............................. 505,725 10.50
Granted........................................... 62,475 15.88
Exercised......................................... (700) 10.50
Expired........................................... ---
Forfeited......................................... (300) 10.50
-------
Balance, June 30, 1997.............................. 567,200 $10.50 to $15.88
At June 30, 1997, 1996 and 1995, 339,880 options, 201,930 options and 102,645
options were exercisable, respectively.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), if fully adopted, requires companies to measure
employee stock compensation plans based on the fair value method of accounting.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, the Company continues to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its plans. In accordance with APB 25, no
compensation expense has been recognized for its stock-based compensation plans
other than for restricted stock. Proforma disclosures as if the Company fully
adopted the cost recognition requirements under SFAS 123 are presented below.
The estimated fair value of each stock option granted during fiscal 1997 is
estimated as $2.28 on the date of grant using the simple Black-Scholes option-
pricing model with the following assumptions: stock volatility of 15.91%, risk-
free interest rate of 6.50%, and an expected life of 8 years. Had compensation
cost for the fiscal 1997 grants been determined based upon the fair value at the
grant date been determined consistent with the methodology prescribed under SFAS
123, the Company's pro forma net income and primary earnings per share would
have been approximately $6.8 million and $1.44, respectively. As the SFAS 123
method of accounting has not been applied to stock options granted prior to July
1, 1996, the resulting proforma effect on net income for fiscal 1997 is not
representative of the proforma effect on net income in future years.
F-18
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
N. INCOME TAXES
Savings banks that meet certain definitions, tests and other conditions
prescribed by the Internal Revenue Code are allowed to deduct, with limitations,
a bad debt deduction. This deduction is computed as a percentage of taxable
income before such deduction or based upon actual loss experience. During fiscal
1997, the Company's bad debt deduction was based upon actual loss experience.
During the fiscal years 1996 and 1995, the Company employed the percentage of
taxable income method.
On August 20, 1996 legislation was signed into law which repealed the percentage
of taxable income method for tax bad debt deduction. This repeal is effective
for the Company's taxable year beginning July 1, 1996. In addition, the
legislation requires the Company to include in taxable income its tax bad debt
reserves in excess of its base year reserves over a six, seven, or eight year
period, depending upon the attainment of certain loan origination levels. Since
the percentage of taxable income method for tax bad debt deduction and the
corresponding increase in the tax bad debt reserve in excess of the base year
have been recorded as temporary differences pursuant to SFAS 109, this change in
the tax law had no effect on the Company's statement of operations.
The income tax provision is comprised of the following components:
YEAR ENDED JUNE 30,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Current provision.................... $4,020 $5,285 $4,183
Deferred provision (benefit)......... 185 (174) (262)
------- ------- -------
Total income tax provision........... $4,205 $5,111 $3,921
======= ======= =======
Income taxes payable is included in accounts payable and other liabilities in
the consolidated statements of financial condition at June 30, 1997. The
financial statements also include a net deferred tax asset of $97,000 that has
been recorded for the temporary differences between the tax basis and the
financial statement carrying amounts of assets and liabilities. The source of
these temporary differences and their deferred tax effect at June 30, 1997 and
1996 is as follows:
JUNE 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses......................... $ 182 $ 214
Litigation reserves............................... 47 89
Deposit premium intangible........................ 503 279
MRP expense....................................... 229 189
Depreciation...................................... 363 245
------ ------
Total deferred tax assets.......................... 1,324 1,016
------ ------
Deferred tax liabilities:
Deferred loan fees................................ 882 271
Loan sale premiums................................ 18 21
Purchase accounting............................... 327 442
------ ------
Total deferred tax liabilities..................... 1,227 734
------ ------
Net deferred tax asset............................. $ 97 $ 282
====== ======
F-19
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
A reconciliation of the statutory income tax provision to the effective income
tax provision is as follows:
YEAR ENDED JUNE 30,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Income tax provision at statutory rate (35% for 1997
and 1996 and 34% for 1995)................................. $3,882 $4,533 $3,346
Amortization of intangibles................................. 174 213 259
State and local tax provision............................... 214 262 200
Tax bracket rate differential............................... --- (24) (80)
Other, net.................................................. (65) 127 196
------ ------ ------
Total income tax provision $4,205 $5,111 $3,921
====== ====== ======
Pursuant to SFAS 109, the Company is not required to provide deferred taxes on
its tax loan loss reserve as of December 31, 1987. The amount of this reserve on
which no deferred taxes have been provided is approximately $16,300,000. This
reserve could be recognized as taxable income and create a current and/or
deferred tax liability using the income tax rates then in effect if one of the
following occur: (1) the Company's retained earnings represented by this reserve
are used for dividends or distributions in liquidation or for any other purpose
other than to absorb losses from bad debts, (2) the Company fails to qualify as
a Bank, as provided by the Internal Revenue Code, or (3) there is a change in
federal tax law.
O. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS --- At June 30, 1997, minimum rental commitments under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:
YEAR ENDING JUNE 30, MINIMUM RENT
------------------------------- ----------------
(IN THOUSANDS)
1998........................... $157
1999........................... 137
2000........................... 71
2001........................... 38
2002........................... 40
2003 and later................. 57
----
$500
====
Rentals under long-term operating leases for certain branch offices amounted to
$169,000, $176,000 and $189,000 for the years ended June 30, 1997, 1996 and
1995, respectively. Rental income of $452,000, $481,000 and $420,000 for the
years ended June 30, 1997, 1996 and 1995, respectively, is netted against
occupancy expense in the consolidated statements of income.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK --- The Company is a party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments are not recorded on the balance sheet when either the exchange of
the underlying asset or liability has not yet occurred or the notional amounts
are used solely as a means to determine the cash flows to be exchanged. These
financial instruments are commitments to extend credit, unused lines of credit,
commitments to purchase loans and interest rate swaps. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
F-20
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
The following summarizes the notional amount of off-balance sheet financial
instruments:
JUNE 30,
-----------------------
1997 1996
-------- --------
(IN THOUSANDS)
Commitments to extend credit.............. $ 9,692 $28,834
Unused lines of credit.................... 17,366 10,813
Commitments to purchase loans............. 32,660 59,046
Interest rate swaps....................... 70,000 20,000
Commitments to extend credit and unused lines of credit are legally binding
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments and lines of credit generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained by the Company upon
extension of credit is based on management's credit evaluation of the borrower.
Collateral held varies but may include mortgages on commercial and residential
real estate and other tangible properties.
Commitments to purchase loans represent agreements to purchase loans through
correspondent relationships established by the Company with other institutions.
The Company purchased newly originated one- to four-family residential mortgages
secured by properties located in the State of New Jersey and, to a lesser
extent, the Commonwealth of Pennsylvania. Prior to purchase, the Company
underwrites these loans in the same manner used in its own originations.
The Company periodically enters into interest rate swap agreements to help
reduce certain interest rate exposure on a portion of the short-term deposits.
Interest rate swaps are contractual agreements between two parties to exchange
interest payments at particular intervals, computed on different terms, on a
specified notional amount. The notional amounts represent the base on which
interest due each counter party is calculated and do not represent the potential
for gains or losses associated with the market risk or credit risk of such
transactions. At June 30, 1997, the Company had $70 million in notional amount
interest rate swap agreements outstanding on which the Company pays a fixed
interest rate ranging from 6.25% to 6.71% and receives a floating interest rate,
based on three-month LIBOR, from the counter parties, which are nationally
recognized investment firms. At June 30, 1997, three-month LIBOR was 5.78%.
The average balance of notional amount interest rate swap agreements in fiscal
1997 and 1996 was $52,356,000 and $658,000, respectively. Included in interest
expense for the year ended June 30, 1997 and 1996 was $459,000 and $8,000,
respectively, of expense related to interest rate swap agreements. Mortgage-
backed securities with a carrying value of $1,789,000 and $401,000 at June 30,
1997 and 1996, respectively, were pledged to secure these agreements. The
interest rate swap agreements mature between June 18, 1999 and March 21, 2002.
OTHER CONTINGENCIES --- The Company is a defendant in certain claims and legal
actions arising in the ordinary course of business. Management does not
anticipate losses on any of these claims or actions which would have a material
adverse effect on the accompanying consolidated financial statements.
P. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
During the year ended June 30, 1997, the Company repurchased 32,500 shares of
its outstanding common stock. The prices paid for the repurchased shares ranged
from $20.00 to $20.19 per share, for a total cost of $651,000. During the year
ended June 30, 1996, the Company repurchased 801,860 shares of its outstanding
common stock at prices ranging from $14.63 to $16.00 per share, for a total cost
of $12,370,000. During the year ended June 30, 1995, the Company repurchased
534,000 shares of its outstanding common stock at prices ranging from $11.63 to
$12.31 per share for a total cost of $6,472,000. On April 28, 1995, 208,845
shares were reissued to the participants of the Company's Management Recognition
Plan.
On March 21, 1996, the Board of Directors of the Company (the "Board") adopted a
Stockholder Protection Rights Plan and declared a dividend of one common share
purchase right ("Right") for each share of common stock of the Company
outstanding on April 1, 1996. Until it is announced that a person or group has
acquired 10% or more of the outstanding common stock of the Company ("Acquiring
Person") or has commenced a tender offer that could result in such person
F-21
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
or group owning 10% or more of such common stock, the Rights will initially be
redeemable for $0.01 each, will be evidenced solely by the Company's common
stock certificates, will automatically trade with the Company's common stock and
will not be exercisable. Following any such announcement, separate Rights
certificates would be distributed, with each Right entitling its holder to
purchase one share of the Company's common stock for an exercise price of $60.
Upon announcement that any person or group has become an Acquiring Person and
unless the Board acts to redeem the Rights, then ten business days after such
announcement (the "Flip-in Date"), each Right (other than Rights beneficially
owned by any Acquiring Person or transferee thereof, which Rights become void)
will entitle the holder to purchase, for the $60 exercise price, a number of
shares of the Company's common stock having an aggregate market value of $120.
In addition, if, after the Acquiring Person gains control of the Board, the
Company is involved in a merger with any person or sells more than 50% of its
assets or earning power to any person (or has entered into an agreement to do
either of the foregoing), and, in the case of a merger, an Acquiring Person will
receive different treatment than other stockholders, each Right will entitle its
holder to purchase, for the $60 exercise price, a number of shares of common
stock of such other person having an aggregate market value of $120. If any
person or group acquires between 10% and 50% of the Company's common stock, the
Board may, at its option, require the Rights to be exchanged for common stock
of the Company. The Rights generally may be redeemed by the Board for $0.01 per
Right prior to the Flip-in Date.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements could result in certain mandatory and possible discretionary
actions by the OTS that, if undertaken, could have a direct material effect on
the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
quantitative capital guidelines.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of tangible capital of
not less than 1.5% of tangible assets, core capital of not less than 3% of
adjusted tangible assets and risk-based capital of not less than 8% of risk-
weighted assets. As of June 30, 1997, the Bank meets all capital adequacy
requirements to which it is subject.
As of its last regulatory examination the Bank was categorized as "well
capitalized" under the prompt corrective action framework. To be considered as
"well capitalized", the Bank must maintain a core capital ratio of not less than
5% and a risk-based capital ratio of not less than 10%. There are no conditions
or events since that notification that management believes have changed the
Bank's category.
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 THOUSANDS)
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%
As of June 30, 1996
Tangible capital.......................... $63,980 5.92% $16,216 1.50% N/A N/A
Core capital.............................. $64,619 5.97% $32,451 3.00% $54,086 5.00%
Risk-based capital........................ $66,730 13.47% $39,622 8.00% $49,528 10.00%
In August 1993, the OTS adopted a regulation requiring that an amount be added
to an institution's risk-based capital requirement equal to 50% of the decline
in market value of portfolio equity ("MVPE") that exceeds 2% of the
institution's assets, under a hypothetical 200 basis points shock in interest
rates. MVPE is defined as the market value of assets, less the market value of
liabilities, plus or minus the market value of off-balance sheet items. At the
present time, the OTS has indefinitely postponed the effective date of the rule.
However, if the regulation had been in effect at June 30, 1997, the Bank would
still have exceeded its risk-based capital requirement.
F-22
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
The Bank's management believes that, with respect to regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
However, events beyond the control of the Bank, such as increased interest rates
or a further downturn in the economy in areas where the Bank has most of its
loans, could adversely affect future earnings and, consequently, the ability of
the Bank to meet its future minimum capital requirements.
The previous table reflects information for the Bank. Savings and loan holding
companies, such as the Company, are not subject to capital requirements for
capital adequacy purposes or for prompt corrective action requirements. Bank
holding companies, however, are subject to such capital requirements. The
following summarizes the Company's regulatory capital position under Bank
holding company requirements.
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Stockholders' equity.............................. $ 97,270
Less: Goodwill.................................... (1,421)
Deposit premium intangible.................. (14,497)
----------
Tangible capital, and ratio to adjusted
total assets.................................... $ 81,352 6.23% $19,826 1.50%
========== ======
Add: Qualifying intangible assets................. $ 438
----------
Tier 1(core) capital, and ratio to
adjusted total assets........................... $ 81,790 6.26% $39,175 3.00% $66,088 5.00%
========== ====== ======
Tier 1 (core) capital, and ratio to risk-
weighted assets.................................. $ 81,790 13.26% $24,673 4.00% $37,010 6.00%
========== ====== ======
Less: Equity investments and
investments in real estate...................... $ (50)
Add: Allowance for loan losses.................... 2,073
----------
Total risk-based capital, and ratio to
risk-weighted assets........................... $ 83,813 13.59% $49,346 8.00% $61,683 10.00%
========== ====== ======
Total assets...................................... $1,321,751
==========
Adjusted total assets............................. $1,305,833
==========
Risk-weighted assets.............................. $ 616,827
==========
Federal regulations impose certain limitations on the payment of dividends and
other capital distributions by the Bank. Under current regulations, savings
institutions, such as the Bank, that meet the fully phased-in capital
requirements, as defined, subsequent to a capital distribution are generally
permitted to make such capital distribution without OTS approval, so long as
they have not been notified of the need from more than normal supervision by the
OTS. The Bank has not been so notified and, therefore, may make capital
distributions during a calendar year equal to 100% of net income plus 50% of the
amount by which the lesser of the association's tangible, core or risk-based
capital exceeds its fully phased-in capital requirement for such capital
component, as measured at the beginning of the calendar year. At June 30, 1997,
the Bank could have paid dividends totaling approximately $16.6 million.
F-23
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
Q. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 1997 and 1996 were as follows:
JUNE 30, 1997 JUNE 30, 1996
------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ---------- ------------
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents.................................... $ 10,729 $ 10,729 $ 11,629 $ 11,629
Investment securities........................................ 35,290 35,432 21,288 21,502
Mortgage-backed securities................................... 288,539 291,125 346,068 344,331
FHLB of New York stock....................................... 12,413 12,413 8,052 8,052
---------- ---------- ---------- ----------
Total cash and investments................................... 346,971 349,699 387,037 385,514
Loans held for sale.......................................... --- --- 88 88
Loans receivable, less allowance for loan losses............. 931,451 923,822 652,483 643,560
---------- ---------- ---------- ----------
Total loans.................................................. 931,451 923,822 652,571 643,648
Accrued interest receivable, net............................. 7,196 7,196 6,742 6,742
---------- ---------- ---------- ----------
Total financial assets....................................... $1,285,618 $1,280,717 $1,046,350 $1,035,904
========== ========== ========== ==========
Financial liabilities:
Deposits..................................................... $ 918,160 $ 919,385 $ 836,416 $ 837,587
FHLB of New York advances.................................... 205,465 205,919 105,000 103,856
Other borrowings............................................. 82,750 82,671 41,700 41,700
Mortgage escrow funds........................................ 8,855 8,855 5,930 5,930
Due to banks................................................. 7,237 7,237 5,989 5,989
---------- ---------- ---------- ----------
Total financial liabilities.................................. $1,222,467 $1,224,067 $ 995,035 $ 995,062
========== ========== ========== ==========
JUNE 30, 1997 JUNE 30, 1996
------------------------- -------------------------
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS)
Off-balance sheet financial instruments:
Commitments to extend credit.................................. $ 9,692 $ --- $ 28,834 $ ---
Unused lines of credit........................................ 17,366 --- 10,813 ---
Commitments to purchase loans................................. 32,660 --- 59,046 ---
Interest rate swaps........................................... 70,000 169 20,000 138
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate fair
value:
CASH AND CASH EQUIVALENTS --- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES --- For these securities,
fair values are based on quoted market prices.
FEDERAL HOME LOAN BANK OF NEW YORK STOCK ---For this security, the carrying
amount, which is par, is a reasonable estimate of fair value. All transactions
in the capital stock of the FHLB of New York are executed at par.
LOANS HELD FOR SALE --- Fair value is based on the contractual sales price.
LOANS RECEIVABLE --- Fair values are estimated for portfolios of loans with
similar financial characteristics. The total loan portfolio is first divided
into performing, held for sale and non-performing categories. Performing loans
are then segregated into adjustable and fixed-rate interest terms. Fixed rate
loans are segmented by type, such as residential real estate mortgage, non-
residential, commercial real estate and consumer loans. Residential loans are
further segmented by maturity.
For loans, fair value is calculated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the rate at which
the Company would currently make loans which are similar with regard to
collateral, maturity and type of borrower. The discounted value of the cash
flows is reduced by a credit risk adjustment based on internal loan
classifications. Based on the current
F-24
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
composition of the Company's loan portfolio, as well as both past experience and
current economic conditions and trends, future cash flows are adjusted by
prepayment assumptions which shorten the estimated remaining time to maturity
and, therefore, impact the fair market valuation.
ACCRUED INTEREST RECEIVABLE, NET --- For these short-term assets, the carrying
amount is a reasonable estimate of fair value.
DEPOSITS --- The fair value of deposits with no stated maturity, such as
savings, money market and other demand accounts, is equal to the amount payable
on demand as of June 30, 1997 and 1996. Time deposits are segregated by type and
original term. The fair value of time deposits is based on the discounted value
of contractual cash flows. The discount rate is equivalent to the rate currently
offered by the Company for deposits of similar type and maturity.
FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES --- The fair value of FHLB of New
York advances is based on the discounted value of contractual cash flows. The
discount rate is equivalent to the rate currently offered by the FHLB of New
York on borrowings of similar type and maturity.
OTHER BORROWINGS --- For these short-term borrowings, the carrying amount is a
reasonable estimate of fair value.
MORTGAGE ESCROW FUNDS AND DUE TO BANKS --- For these short-term liabilities, the
carrying amount is a reasonable estimate of fair value.
COMMITMENTS TO EXTEND CREDIT --- No fair value is estimated for commitments to
extend credit since the fees collected on these commitments approximates the
amount of costs incurred.
UNUSED LINES OF CREDIT --- No estimated fair value is presented for unused lines
of credit because the rates associated with these lines are market rates.
COMMITMENTS TO PURCHASE LOANS --- No fair value is estimated due to the short-
term nature of these commitments.
INTEREST RATE SWAPS --- For this off-balance sheet financial instrument, fair
value represents the amount the Company would have to pay to terminate the
agreements based upon quoted market prices as provided by financial institutions
which are counter parties to the agreements.
R. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company at times has made loans to and
engaged in other financial transactions with its directors, officers and
employees. Such transactions are generally made on substantially the same terms
as those prevailing at the time for comparable transactions with others and do
not involve more than normal risk of collectibility.
The following sets forth an analysis of loans, all of which are current, to
directors, officers and employees:
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
Balance, beginning of year............. $3,260 $3,193
New loans granted...................... 1,178 789
Repayments/reductions.................. (568) (722)
------ ------
Balance, end of year................... $3,870 $3,260
====== ======
In addition to the above amount of loans, at June 30, 1997 and 1996, there was
$33,000 and $720 of outstandings on overdraft checking lines for directors,
officers and employees, respectively.
S. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement 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 current presentation of primary EPS is replaced
with a presentation of basic EPS. Dual presentation of basic and diluted EPS
will be 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. SFAS
128 is effective for financial statements issued for
F-25
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
periods ending after December 15, 1997, including interim periods. The adoption
of SFAS 128 is not expected to have a material effect on the Company's financial
condition or results of operations.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards to reporting and display
of comprehensive income and its components. SFAS 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will be required
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial condition. SFAS 130 is effective for
fiscal years beginning after December 15, 1997, with reclassification of earlier
periods. The adoption of SFAS 130 is not expected to have a material effect on
the Company's financial condition or results of operations.
T. CONDENSED FINANCIAL INFORMATION OF PENNFED FINANCIAL SERVICES, INC. (PARENT
COMPANY ONLY)
The following are the condensed financial statements for PennFed, parent company
only, as of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996
and 1995 and should be read in conjunction with the Notes to Consolidated
Financial Statements. PennFed had no results of operations prior to the
Conversion on July 14, 1994 (See Note B).
CONDENSED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS
Cash...................................... $ 27 $ 26
Intercompany overnight investment......... 8,628 8,729
------- -------
Total cash and cash equivalents......... 8,655 8,755
Investment in subsidiary bank............. 89,388 82,418
Intercompany receivable................... --- 2
------- -------
$98,043 $91,175
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities.... $ 776 $ 611
Stockholders' equity...................... 97,267 90,564
------- -------
$98,043 $91,175
======= =======
F-26
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
INCOME:
Interest income on intercompany balances............................. $ 755 $ 1,210 $ 1,305
Interest income on investment securities............................. --- --- 246
------- ------- -------
755 1,210 1,551
EXPENSES:
Other................................................................ 346 374 386
------- ------- -------
Income before undistributed net income of subsidiary bank............ 409 836 1,165
Equity in undistributed net income of subsidiary bank................ 6,625 7,310 4,894
------- ------- -------
Income before income taxes........................................... 7,034 8,146 6,059
Income tax expense................................................... 148 305 419
------- ------- -------
NET INCOME........................................................... $ 6,886 $ 7,841 $ 5,640
======= ======= =======
F-27
Pennfed Financial Services, Inc. And Subsidiary
Condensed Statements of Cash Flows
YEAR ENDED JUNE 30,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 6,886 $ 7,841 $ 5,640
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiary bank................. (6,625) (7,310) (4,894)
Amortization of investment securities discount........................ --- --- (246)
Amortization of cost of stock plans................................... 716 438 440
(Increase) decrease in other assets................................... (1) 142 (144)
Increase in other liabilities......................................... 165 212 397
------- -------- --------
Net cash provided by operating activities........................... 1,141 1,323 1,193
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiary bank.......................................... --- --- (28,000)
Proceeds from maturities of investment securities....................... --- --- 10,000
Purchase of investment securities....................................... --- --- (9,754)
ESOP loan............................................................... --- --- (4,760)
Proceeds from principal repayment on ESOP loan.......................... 390 362 337
------- -------- --------
Net cash provided by (used in) investing activities................. 390 362 (32,177)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock.......................... --- --- 56,888
Purchases of treasury stock, net of re-issuance......................... (644) (12,362) (6,472)
Payment of cash dividends............................................... (987) --- ---
------- -------- --------
Net cash provided by (used in) financing activities................. (1,631) (12,362) 50,416
------- -------- --------
Net increase (decrease) in cash and cash equivalents.................... (100) (10,677) 19,432
Cash and cash equivalents, beginning of year............................ 8,755 19,432 ---
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR.................................. $ 8,655 $ 8,755 $ 19,432
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes........................................................ $ 131 $ 363 $ 229
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of treasury stock for MRP.................................... $ 423 $ --- $ 2,486
======= ======== ========
F-28
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
U. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------------------
1996 1997
--------------------------------- ---------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
---------------- --------------- ---------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income............................. $19,716 $20,979 $22,001 $22,705
Total interest expense............................ 11,830 12,971 13,697 14,575
------- ------- ------- -------
Net interest income............................... 7,886 8,008 8,304 8,130
Provision for loan losses......................... 175 152 154 154
Non-interest income............................... 409 405 469 500
Non-interest expenses............................. 9,235 4,381 4,403 4,366
Income tax expense (benefit)...................... (346) 1,482 1,590 1,479
------- ------- ------- -------
Net income (loss).............................. $ (769) $ 2,398 $ 2,626 $ 2,631
======= ======= ======= =======
Net income (loss) per common share:
Primary......................................... $ (0.17) $ 0.51 $ 0.55 $ 0.57
======= ======= ======= =======
Fully diluted................................... $ (0.17) $ 0.51 $ 0.55 $ 0.55
======= ======= ======= =======
QUARTER ENDED
-----------------------------------------------------------------------
1996 1997
--------------------------------- ---------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
---------------- --------------- ---------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income............................. $15,369 $16,612 $17,504 $18,638
Total interest expense............................ 8,768 9,477 10,000 10,876
------- ------- ------- -------
Net interest income............................... 6,601 7,135 7,504 7,762
Provision for loan losses......................... 110 150 150 200
Non-interest income............................... 564 584 507 547
Non-interest expenses............................. 4,337 4,411 4,537 4,357
Income tax expense................................ 1,070 1,242 1,304 1,495
------- ------- ------- -------
Net income..................................... $ 1,648 $ 1,916 $ 2,020 $ 2,257
======= ======= ======= =======
Net income per common share:
Primary......................................... $ 0.31 $ 0.37 $ 0.40 $ 0.47
======= ======= ======= =======
Fully diluted................................... $ 0.31 $ 0.37 $ 0.40 $ 0.47
======= ======= ======= =======
F-29
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company, the Trust Issuer or
the Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the registered securities to which
it relates. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy such securities in any circumstances in which
such offer or solicitation is unlawful.
Table of Contents
Page
----
Summary............................................ 1
PennFed Financial Services, Inc.................... 1
Summary Consolidated Financial Information
and Other Data................................... 10
Risk Factors....................................... 12
Use of Proceeds.................................... 23
Market for the Preferred Securities................ 23
Accounting Treatment............................... 23
Capitalization..................................... 24
Management's Discussion and Analysis of
June 30, 1997 Operating Results and
Financial Information........................... 25
Business........................................... 41
Regulation......................................... 64
Management......................................... 76
Description of the Preferred Securities............ 78
Description of the Junior Subordinated
Debentures...................................... 93
Description of the Guarantee....................... 105
Relationship Among the Preferred Securities,
the Junior Subordinated Debentures, the Expense
Agreement and the Guarantee...................... 108
Certain Federal Income Tax Consequences............ 110
ERISA Considerations............................... 114
Underwriting....................................... 114
Validity of Securities............................. 116
Experts............................................ 116
Available Information.............................. 116
Index to Financial Statements and Schedule......... F-1
Logo
$30,000,000
PENNFED CAPITAL TRUST I
__% Trust Preferred Securities
(Liquidation Amount
$25 per Preferred Security)
Guaranteed, as Described Herein, by
PENNFED FINANCIAL SERVICES, INC.
PROSPECTUS
__________, 1997
RYAN, BECK & CO.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
Item 14. Other Expenses of Issuance and Distribution.
-------------------------------------------
The expenses in connection with the offering of the securities to which
this Registration Statement relates which will be borne by PennFed Financial
Services, Inc., are as set forth below. With the exception of the Securities and
Exchange Commission ("SEC") and National Association of Securities Dealers, Inc.
filing fees, all amounts shown are estimates.
Amount
------
SEC registration fee............ $ 10,455
NASD filing fee................. $ 3,950
Nasdaq listing fee.............. $ 11,900
Trustee fees and expenses....... $ 10,000
Legal fees and expenses......... $250,000
Accounting fees and expenses.... $ 50,000
Printing and mailing expenses... $ 75,000
Blue Sky fees and expenses...... $ 10,000
Miscellaneous................... $ 10,000
TOTAL........................ $431,305
========
Item 15. Indemnification of Directors and Officers.
-----------------------------------------
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including attorneys' fees.
In addition, under certain circumstances such persons may be indemnified against
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such
persons are made, or threatened to be made, parties to certain proceedings by
reason of such status, against judgments, fines, settlements and expenses,
including attorneys' fees; and under certain circumstances, such persons may be
indemnified against expenses actually and reasonably incurred in connection with
the defense or settlement of a proceeding by or in the right of such other
corporation or enterprise. Indemnification is permitted where such person (i)
was acting in good faith; (ii) was acting in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation or other
corporation or enterprise, as appropriate; (iii) with respect to a criminal
proceeding, has no reasonable cause to believe his conduct was unlawful; and
(iv) was not adjudged to be liable to the corporation or other corporation or
enterprise (unless the court where the proceeding was brought determines that
such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may
be made (i) by the Board of Directors of the Holding Company by a majority vote
of a quorum consisting of directors not at the time parties to such proceeding;
or (ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
PennFed Financial Services, Inc. has purchased director and officer
liability insurance that insures directors and officers against liabilities in
connection with the performance of their duties.
Under the Trust Agreement of the Trust Issuer, PennFed Financial Services,
Inc. will agree to indemnify each of the Trustees of the Trust Issuer or any
predecessor trustee for the Trust Issuer, and to hold harmless against, any
loss, damage, claim, liability or expense incurred without negligence or bad
faith on its part, arising out of or in connection with the acceptance or
administration of the Trust Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties under the Trust Agreement.
Item 16. Exhibits.
--------
The following is a list of Exhibits to this Registration Statement:
REFERENCE TO
REGULATION PRIOR FILING
S-K OR EXHIBIT
EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
- ---------- ------------------------------------------------ -----------------
1 Form of Underwriting Agreement. 1
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession.
3.1 Certificate of Incorporation of PennFed Financial *
Services, Inc.
3.2 Bylaws of PennFed Financial Services, Inc. *
4.1 Stockholder Protection Rights Agreement. ***
4.2 Form of Indenture with respect to PennFed Financial 4.2
Services, Inc.'s ____% Junior Subordinated Debentures.
4.3 Form of Specimen __% Junior Subordinated Deferrable 4.3
Interest Debenture (included as an exhibit to the Form
of Indenture filed as Exhibit 4.2).
4.4 Certificate of Trust of PennFed Capital Trust I 4.4
(included
as an exhibit to the Form of Amended and Restated Trust
Agreement filed as Exhibit 4.6).
4.5 Trust Agreement of PennFed Capital Trust I. 4.5
4.6 Form of Amended and Restated Trust Agreement 4.6
of PennFed Capital Trust I.
4.7 Form of Certificate for ___% Trust Preferred Security 4.7
of PennFed Capital Trust I (included as an exhibit to
Exhibit 4.6).
REFERENCE TO
REGULATION PRIOR FILING
S-K OR EXHIBIT
EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
- ---------- ------------------------------------------------ -----------------
4.8 Form of Guarantee Agreement for PennFed Capital 4.8
Trust I.
4.9 Form of Agreement as to Expenses and Liabilities 4.9
(included as an exhibit to Exhibit 4.6)
5.1 Opinion of Silver, Freedman & Taff, L.L.P. as to the *****
validity of the Guarantee and the issuance of the __%
Junior Subordinated Deferrable Interest Debentures to be
issued by PennFed Capital Trust I.
5.2 Opinion of Richards, Layton & Finger, special Delaware *****
counsel, as to the enforceability of the Trust Agreement
and Trust Preferred Securities to be issued by PennFed
Capital Trust I.
8.1 Tax Opinion of Silver, Freedman & Taff, L.L.P. *****
10 Material contracts:
(a) Employee Stock Ownership Plan *
(b) 1995 Stock Option and Incentive Plan *
(c) Management Recognition Plan *
(d) Employment Agreement with Joseph L. LaMonica **
(e) Employment Agreement with Patrick D. McTernan **
(f) Employment Agreement with Lucy T. Tinker **
11 Statement re: computation of per share earnings ****
12.1 Statements re: calculation of ratios 12.1
13 Annual Report to security holders Not applicable
15 Letter re: unaudited interim financial information Not applicable
16 Letter re: change in certifying accountant Not applicable
23.1 Consent of Deloitte & Touche, LLP 23.1
REFERENCE TO
REGULATION PRIOR FILING
S-K OR EXHIBIT
EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
- ---------- ------------------------------------------------ -----------------
23.2 Consent of Silver, Freedman & Taff, L.L.P. (set forth in 23.2
Exhibit 5.1 to this Registration Statement).
23.3 Consent of Richards, Layton & Finger (included in 23.3
Exhibit 5.2 to this Registration Statement).
24.1 Power of attorney (set forth on the signature page in Not applicable
Part II of this Registration Statement).
25.1 Form T-1: Statement of Eligibility of The Bank of New 25.1
York to act as trustee under the Indenture.
25.2 Form T-1: Statement of Eligibility of The Bank of New 25.2
York to act as trustee under the Amended and Restated
Trust Agreement.
25.3 Form T-1: Statement of Eligibility of The Bank of New 25.3
York to act as trustee under the Guarantee Agreement for
PennFed Capital Trust I.
26 Invitation for competitive bids. Not applicable
27 Financial Data Schedule ****
99 Additional Exhibits. Not applicable
__________________
* Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on March 25, 1995 (Registration No. 33-76854). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Form 10-K under the Securities Act of
1934, filed with Securities and Exchange Commission on September 27, 1995.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
*** Filed as an exhibit to the Company's Registration Statement on Form 8-A
under the Securities Act of 1934, filed with the Securities and Exchange
Commission on March 28, 1996. This document is hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
**** Filed as an exhibit to the Company's Form 10-K under the Security Act of
1934, filed with the Securities and Exchange Commission on September __,
1997. All of such previously filed documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
***** To be filed by amendment.
Item 17. Undertakings.
------------
Each of the undersigned Registrants hereby undertakes:
(a) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of Penn Federal's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to Item 15 of this Registration Statement,
or otherwise, the Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrants of expenses incurred or paid by a director, officer or
controlling person of the Registrants in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrants will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c)(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424 (b) (1) or (4) or 497
(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, PennFed
Financial Services, Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-2 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of West Orange, State of New Jersey on
September 18, 1997.
PENNFED FINANCIAL SERVICES, INC.
By: /s/ Joseph L. LaMonica
--------------------------------------
Joseph L. LaMonica
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, PennFed Capital
Trust I certifies that it has reasonable grounds to believe it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be filed on its behalf by the undersigned, thereunto duly
authorized, in the City of West Orange, State of New Jersey on September 18,
1997.
PENNFED CAPITAL TRUST I
By: PENNFED FINANCIAL SERVICES, INC.,
as Depositor
By:/s/ Joseph L. LaMonica
------------------------------------
Joseph L. LaMonica
President, Chief Executive Officer
and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph L. LaMonica and Patrick D. McTernan his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on September 18, 1997 by the following
persons in the capacities indicated.
By: /s/ Joseph L. LaMonica By: /s/ William C. Anderson
----------------------------------------------- -------------------------------
Joseph L. LaMonica William C. Anderson
President, Chief Executive Officer and Director Chairman of the Board
(Principal Executive Officer)
Date: September 18, 1997 Date: September 18, 1997
By: /s/ Patrick D. McTernan By: /s/ Amadeu L. Carvallo
----------------------------------------------- -------------------------------
Patrick D. McTernan Amadeu L. Carvallo
Executive Vice President, General Counsel, Director
Secretary and Director
Date: September 18, 1997 Date: September 18, 1997
By: /s/ Marvin D. Schoonover By: /s/ Mario Teixeira, Jr.
----------------------------------------------- -------------------------------
Marvin D. Schoonover Mario Teixeira, Jr.
Director Director
Date: September 18, 1997 Date: September 18, 1997
By: /s/ Lucy T. Tinker By: /s/ Jeffrey J. Carfora
----------------------------------------------- -------------------------------
Lucy T. Tinker Jeffrey J. Carfora
Executive Vice President and Senior Vice President and
Chief Operating Officer Chief Financial Officer
(Principal Financial Officer) (Principal Accounting Officer)
Date: September 18, 1997 Date: September 18, 1997
PENN FED FINANCIAL SERVICE, INC.
INDEX TO EXHIBITS
REFERENCE TO
PRIOR FILING
OR EXHIBIT
EXHIBIT NO. DOCUMENT NUMBER
- --------------- ------------------------------------------------------- ----------------
1 Form of Underwriting Agreement. 1
4.2 Form of Indenture with respect to PennFed Financial 4.2
Services, Inc.'s ____% Junior Subordinated Debentures.
4.3 Form of Specimen __% Junior Subordinated Deferrable
Interest Debenture (included as an exhibit to the Form
of Indenture filed as Exhibit 4.2).
4.4 Certificate of Trust of PennFed Capital Trust I
(included as an exhibit to the Form of Amended
and Restated Trust Agreement filed as Exhibit 4.6).
4.5 Trust Agreement of PennFed Capital Trust I. 4.5
4.6 Form of Amended and Restated Trust Agreement 4.6
of PennFed Capital Trust I.
4.7 Form of Certificate for ___% Trust Preferred Security of
PennFed Capital Trust I (included as an exhibit to
Exhibit 4.6)
4.8 Form of Guarantee Agreement for PennFed Capital Trust 4.8
I.
4.9 Form of Agreement as to Expenses and Liabilities
(included as an exhibit to Exhibit 4.6)
12.1 Statements re: calculation of ratios. 12.1
REFERENCE TO
PRIOR FILING
OR EXHIBIT
EXHIBIT NO. DOCUMENT NUMBER
- --------------- ------------------------------------------------------- ----------------
23.1 Consent of Deloitte & Touche, LLP. 23.1
25.1 Form T-1: Statement of Eligibility of The Bank of New 25.1
York to act as trustee under the Indenture.
25.2 Form T-1: Statement of Eligibility of The Bank of New 25.2
York to act as trustee under the Amended and Restated
Trust Agreement.
25.3 Form T-1: Statement of Eligibility of The Bank of New 25.3
York to act as trustee under the Guarantee Agreement for
PennFed Capital Trust I.