UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-24040
PENNFED FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3297339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 669-7366
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO[ ]
As of February 10, 1997, there were 4,820,720 shares of the
Registrant's Common Stock, par value $.01, outstanding.
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition
December 31, June 30,
1996 1996
----------- -----------
(dollars in 000's)
<S> <C> <C>
Assets
Cash and cash equivalents ......................................... $ 9,495 $ 11,629
Investment securities held to maturity, at amortized cost, market
value of $8,428 and $21,502 at December 31, 1996 and
June 30, 1996 .................................................. 8,289 21,288
Mortgage-backed securities held to maturity, at amortized cost,
market value of $319,853 and $344,331 at
December 31, 1996 and June 30, 1996 ............................ 316,796 346,068
Loans held for sale ............................................... 121 88
Loans receivable, net of allowance for loan losses of $2,732 and
$2,630 at December 31, 1996 and June 30, 1996 ................... 824,953 652,483
Premises and equipment, net ....................................... 15,641 16,035
Real estate owned, net ............................................ 795 1,083
Federal Home Loan Bank of New York stock, at cost ................. 9,636 8,052
Accrued interest receivable, net .................................. 6,553 6,742
Goodwill and other intangibles .................................... 17,164 18,430
Other assets ...................................................... 4,236 4,626
----------- -----------
$ 1,213,679 $ 1,086,524
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ........................................................ $ 875,026 $ 836,416
Federal Home Loan Bank of New York advances ..................... 145,465 105,000
Other borrowings ................................................ 86,755 41,700
Mortgage escrow funds ........................................... 7,015 5,930
Due to banks .................................................... 7,106 5,989
Accounts payable and other liabilities .......................... 563 925
----------- -----------
Total liabilities ............................................... 1,121,930 995,960
----------- -----------
<PAGE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition (continued)
December 31, June 30,
1996 1996
----------- -----------
(dollars in 000's)
<S> <C> <C>
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 4,820,720 and 4,823,665
shares outstanding at December 31, 1996 and
June 30, 1996 (excluding shares held in treasury of 1,129,280
and 1,126,335 at December 31, 1996 and June 30,1996) .......... 60 60
Additional paid-in capital ...................................... 57,259 57,057
Restricted stock - Management Recognition Plan .................. (1,593) (1,316)
Employee Stock Ownership Plan Trust debt ........................ (3,866) (4,061)
Retained earnings, substantially restricted ..................... 56,459 55,172
Treasury stock, at cost, 1,129,280 and 1,126,335 shares at
December 31, 1996 and June 30, 1996 ........................... (16,570) (16,348)
----------- -----------
Total stockholders' equity ...................................... 91,749 90,564
----------- -----------
$1,213,679 $1,086,524
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Three months ended Six months ended
December 31, December 31,
---------------------------- ----------------------------
1996 1995 1996 1995
(dollars in 000's, except per share amounts)
<S> <C> <C> <C> <C>
Interest and Dividend Income:
Interest and fees on loans ........................ $ 14,970 $ 10,456 $ 28,314 $ 20,038
Interest and dividends on investment securities ... 369 617 870 1,178
Interest on mortgage-backed securities ............ 5,640 5,539 11,511 10,765
----------- ----------- ----------- -----------
20,979 16,612 40,695 31,981
----------- ----------- ----------- -----------
Interest Expense:
Deposits .......................................... 9,968 8,298 19,443 16,218
Borrowed funds .................................... 3,003 1,179 5,358 2,027
----------- ----------- ----------- -----------
12,971 9,477 24,801 18,245
----------- ----------- ----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses ................................... 8,008 7,135 15,894 13,736
Provision for Loan Losses ........................... 152 150 327 260
----------- ----------- ----------- -----------
Net Interest and Dividend Income After
Provision for Loan Losses ......................... 7,856 6,985 15,567 13,476
----------- ----------- ----------- -----------
Non-Interest Income:
Service charges ................................... 406 396 846 819
Net gain (loss) from real estate operations ....... (55) 34 (170) 114
Other ............................................. 54 154 138 215
----------- ----------- ----------- -----------
405 584 814 1,148
----------- ----------- ----------- -----------
Non-Interest Expenses:
Compensation and employee benefits ................ 1,910 1,924 3,829 3,826
Net occupancy expense ............................. 277 276 550 553
Equipment ......................................... 384 393 769 787
Advertising ....................................... 65 57 178 107
Amortization of intangibles ....................... 630 661 1,266 1,329
Federal deposit insurance premium ................. 375 411 833 832
SAIF recapitalization assessment .................. -- -- 4,813 --
Other ............................................. 740 689 1,378 1,314
----------- ----------- ----------- -----------
4,381 4,411 13,616 8,748
----------- ----------- ----------- -----------
<PAGE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Income (continued)
Three months ended Six months ended
December 31, December 31,
---------------------------- ----------------------------
1996 1995 1996 1995
(dollars in 000's, except per share amounts)
<S> <C> <C> <C> <C>
Income Before Income Taxes .......................... 3,880 3,158 2,765 5,876
Income Tax Expense .................................. 1,482 1,242 1,136 2,312
----------- ----------- ----------- -----------
Net Income .......................................... $ 2,398 $ 1,916 $ 1,629 $ 3,564
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Primary ........................................... 4,713,577 5,131,286 4,703,161 5,228,495
=========== =========== =========== ===========
Fully diluted ..................................... 4,720,804 5,133,615 4,710,239 5,236,245
=========== =========== =========== ===========
Net income per common share:
Primary ........................................... $ 0.51 $ 0.37 $ 0.35 $ 0.68
=========== =========== =========== ===========
Fully diluted ..................................... $ 0.51 $ 0.37 $ 0.35 $ 0.68
=========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six months ended December 31,
1996 1995
--------- ---------
(dollars in 000's)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................ $ 1,629 $ 3,564
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sales of loans available for sale ....... 464 --
Originations of loans available for sale .............. (497) --
Gain (loss) on sales of real estate owned ............. 33 (134)
Amortization of investment and mortgage-backed
securities premiums, net ............................ 140 264
Depreciation and amortization ......................... 630 664
Provision for losses on loans and real estate owned ... 412 241
Amortization of cost of stock plans ................... 727 475
Amortization of intangibles ........................... 1,266 1,329
Amortization of premiums on loans and loan fees ....... 143 154
Increase in accrued interest receivable, net of accrued
interest payable .................................... (1,429) (1,986)
Decrease in other assets .............................. 390 192
Decrease in accounts payable and other liabilities .... (547) (638)
Increase (decrease) in mortgage escrow funds .......... 1,085 (441)
Increase in due to banks .............................. 1,117 106
Other, net ............................................ 4 (73)
--------- ---------
Net cash provided by operating activities ............. 5,567 3,717
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities ..... 13,000 200
Purchases of investment securities .................... -- (10,000)
Proceeds from sale of premises and equipment .......... -- 326
Net outflow from loan originations net of principal
repayments of loans ................................. (54,375) (9,711)
Purchases of loans .................................... (119,175) (60,052)
Proceeds from principal repayments of
mortgage-backed securities .......................... 29,131 31,854
Purchases of mortgage-backed securities ............... -- (20,915)
Purchases of premises and equipment ................... (235) (404)
Proceeds from sales of real estate owned .............. 779 1,257
Purchases of Federal Home Loan Bank of New York stock . (1,583) --
--------- ---------
Net cash used in investing activities ................. (132,458) (67,445)
--------- ---------
<PAGE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(continued)
Six months ended December 31,
1996 1995
--------- ---------
(dollars in 000's)
<S> <C> <C>
Cash Flows From Financing Activities:
Net increase in deposits .............................. 40,228 39,923
Advances from the Federal Home Loan Bank of
New York and other borrowings ....................... 85,520 28,470
Cash dividends paid ................................... (340) --
Purchases of treasury stock ........................... (651) (4,166)
--------- ---------
Net cash provided by financing activities ............. 124,757 64,227
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents .... (2,134) 499
Cash and Cash Equivalents, Beginning of Period .......... 11,629 9,736
--------- ---------
Cash and Cash Equivalents, End of Period ................ $ 9,495 $ 10,235
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest............................................... $ 26,384 $ 19,159
========= =========
Income taxes........................................... $ 1,364 $ 2,683
========= =========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net. $ 519 $ 337
========= =========
Unrealized gain on investment securities available
for sale............................................. $ --- $ 29
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiary (with its subsidiary, the "Company") include the
accounts of PennFed and Penn Federal Savings Bank (the "Bank"), its wholly-owned
subsidiary. These interim consolidated financial statements included herein
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended June 30, 1996. The interim consolidated financial statements
reflect all normal and recurring adjustments which are, in the opinion of
management, considered necessary for a fair presentation of the financial
condition and results of operations for the periods presented. There were no
adjustments of a non-recurring nature recorded during the six months ended
December 31, 1996 and 1995. The interim results of operations presented are not
necessarily indicative of the results for the full year.
When necessary, reclassifications have been made to conform to current period
presentation.
2. Adoption of Recently Issued Accounting Standards
Effective July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS
122 amends Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities," to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. The adoption of
SFAS 122 did not have an effect on the financial condition or results of
operations of the Company.
Also effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires companies to measure employee stock compensation plans
based on the fair value method of accounting or continue to apply Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB25")
and provide pro forma footnote disclosures under the fair value method in SFAS
123. The Company will continue to account for employee stock compensation under
APB 25, and, therefore, the adoption of SFAS 123 did not have an effect on the
Company's financial condition or results of operations.
<PAGE>
3. Stockholders' Equity and Regulatory Capital
The following is a reconciliation of the Bank's capital under generally accepted
accounting principles ("GAAP") and its tangible, core and risk-based capital at
December 31, 1996:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Percentage Capital Percentage Capital Percentage
------- ---------- ------- ---------- ------- ----------
(dollars in 000's)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital................................ $ 84,079 6.90% $ 84,079 6.90% $ 84,079 6.90%
Goodwill.................................... (1,659) (1,659) (1,659)
Deposit premium intangible.................. (15,505) (15,505) (15,505)
Qualifying intangible assets................ --- 538 538
Allowances for loan and lease
losses.................................... --- --- 2,353
Equity investments and investments in
real estate required to be deducted....... --- --- (50)
--------- ---------- ----------
Regulatory capital.......................... 66,915 5.57 67,453 5.61 69,756 12.35
Minimum capital requirement................. 18,019 1.50 48,073 4.00 45,199 8.00
------- ---- ------- ---- ---------- -----
Regulatory capital-excess................... $ 48,896 4.07% $ 19,380 1.61% $ 24,557 4.35%
======== ==== ========= ==== ========== =====
</TABLE>
4. Dividends
On October 25, 1996, the Company announced that a quarterly cash dividend of
$0.07 per share would be paid on November 29, 1996 to stockholders of record on
November 14, 1996. On January 27, 1997, the Company declared a quarterly cash
dividend of $0.07 per share payable on February 28, 1997 to stockholders of
record on February 14, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Company's provision for loan losses and the net gain (loss) from
real estate operations. 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.
The deposits of savings associations, such as the Bank, are presently insured by
the Savings Association Insurance Fund (the "SAIF"), which, along with the Bank
Insurance Fund (the "BIF"), are the two insurance funds administered by the
Federal Deposit Insurance Corporation ("FDIC"). Financial institutions which are
members of the BIF have been experiencing substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves while the
SAIF has not yet achieved its required reserves. As a result of legislation
signed into law on September 30, 1996, the SAIF recapitalization plan provides
for a one-time assessment of 0.657% of deposits to be 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 amounts to 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 six months ended December 31, 1996.
Following the recapitalization assessment, future deposit insurance premiums
have been decreased significantly, to 0.0648% from the 0.23% of deposits
previously paid by the Bank, and will have the effect of reducing non-interest
expenses for future periods.
Financial Condition
Total assets increased $127.2 million, or 11.7%, to $1.214 billion at December
31, 1996 from total assets of $1.087 billion at June 30, 1996. The increase was
primarily attributable to a $172.5 million increase in net loans receivable,
particularly in the Company's one- to four-family first mortgage loan portfolio.
At December 31, 1996, net loans receivable were $825.0 million compared to
$652.5 million at June 30, 1996. The increase in loans receivable was funded by
retail deposit growth, additional medium-term Federal Home Loan Bank of New York
("FHLB of New York") advances and increased other borrowings as well as
maturities on investment securities and principal payments on mortgage-backed
securities.
Non-performing assets at December 31, 1996 totaled $7.2 million, representing
0.59% of total assets, compared to $7.3 million, or 0.67% of total assets, at
June 30, 1996. Non-performing loans increased to $6.4 million, however, the
ratio of non-performing loans to total loans decreased to 0.77% of total loans,
at December 31, 1996 as compared to $6.2 million, or 0.94% of total loans, at
June 30, 1996. Real estate owned decreased to $795,000 at December 31, 1996 from
$1.1 million at June 30, 1996.
Deposits increased $38.6 million to $875.0 million at December 31, 1996 from
$836.4 million at June 30, 1996. FHLB of New York advances were $145.5 million
<PAGE>
at December 31, 1996, a $40.5 million increase from $105.0 million at June 30,
1996. In addition, at December 31, 1996 the Company had $86.8 million of other
borrowings, consisting of $76.8 million of short-term and overnight borrowings
and $10.0 million of a 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 December 31, 1996 totaled $91.7 million compared to
$90.6 million at June 30, 1996. The increase primarily reflects the net income
recorded for the six months ended December 31, 1996, including the effect of the
one-time SAIF recapitalization assessment, 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
General. For the three months ended December 31, 1996 net income was $2.4
million, or $0.51 per share. These results compare to net income of $1.9
million, or $0.37 per share for the three months ended December 31, 1995. For
the six months ended December 31, 1996, net income was $1.6 million, or $0.35
per 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 $0.66 per share. The results
for the six months ended December 31, 1996, excluding the effects of the SAIF
assessment, would have compared favorably to net income of $3.5 million, or
$0.68 per share, for the six months ended December 31, 1995.
Interest and Dividend Income. Interest and dividend income for the three and six
months ended December 31, 1996 increased to $21.0 million and $40.7 million,
respectively, from $16.6 million and $32.0 million for the three and six months
ended December 31, 1995, respectively. The increases in the current year periods
were due to an increase in average interest-earning assets, primarily
residential loans, partially offset by a decrease in the average yield earned on
interest-earning assets. Average interest-earning assets were $1.12 billion and
$1.09 billion for the three and six months ended December 31, 1996,
respectively, versus $863.2 million and $844.0 million for the comparable prior
year periods. The average yield on interest-earning assets decreased to 7.49%
for both the three and six month periods ended December 31, 1996 from 7.70% and
7.58% for the three and six months ended December 31, 1995, respectively.
Interest income on residential one- to four-family mortgage loans for the three
and six months ended December 31, 1996 increased $4.5 million, or 53.3%, and
$8.3 million, or 51.7%, respectively, when compared to the prior year periods.
The increase in interest income on residential one- to four-family mortgage
loans was due to increases of $253.7 million and $229.5 million in the average
balance outstanding for the three and six months ended December 31, 1996,
respectively, over the prior year periods. The increase in the average balance
on residential one- to four-family mortgage loans was partially offset by
decreases of 0.26% and 0.19% in the average yield earned on this loan portfolio
for the three and six months ended December 31, 1996, respectively, from the
comparable prior year periods.
Interest income on the mortgage-backed securities portfolio increased $0.1
million, or 1.9%, for the three months ended December 31, 1996 and increased
$0.7 million, or 6.9%, for the six months ended December 31, 1996, as compared
to the prior year periods. The increase in interest income on mortgage-backed
securities primarily reflects increases in the average balance outstanding of
$9.2 million and $13.7 million for the three and six months ended December 31,
1996, respectively, over the comparable prior year periods.
<PAGE>
Interest Expense. Interest expense increased to $13.0 million and $24.8 million
for the three and six months ended December 31, 1996, respectively, from $9.5
million and $18.2 million for the comparable 1995 periods. 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 $247.6 million and $236.5 million for the three and six months ended
December 31, 1996, respectively, compared to the 1995 periods. The average rate
paid on deposits and borrowings increased to 4.84% and 4.77% for the three and
six months ended December 31, 1996, respectively, from 4.62% and 4.56% for the
comparable prior year periods.
Net Interest and Dividend Income. Net interest and dividend income for the three
and six months ended December 31, 1996 was $8.0 million and $15.9 million,
respectively, reflecting an increase from $7.1 million and $13.7 million
recorded in the comparable prior year periods. The increase reflects the
Company's growth in assets, primarily in residential one- to four-family
mortgage loans. The net interest rate spread and net interest margin for the
current three months were 2.65% and 2.86%, respectively, a decline from 3.08%
and 3.31%, respectively, during the comparable 1995 quarter. Net interest rate
spread and net interest margin were 2.72% and 2.93%, respectively, for the six
months ended December 31, 1996, compared to 3.02% and 3.26% for the comparable
prior year period. While the interest rate environment of recent years has
proven beneficial to most financial institutions, including the Company,
increases in market rates of interest generally adversely affect the net
interest income of most financial institutions. Since the Company's liabilities
generally reprice more quickly than its assets, interest margins will likely
decrease if interest rates rise.
Provision for Loan Losses. The provision for loan losses for the three and six
months ended December 31, 1996 was $152,000 and $327,000, respectively, compared
to $150,000 and $260,000 for the prior year periods. The allowance for loan
losses at December 31, 1996 of $2.7 million reflects a $102,000 increase from
the June 30, 1996 level. The allowance for loan losses as a percentage of
non-performing loans was 42.66% at December 31, 1996, compared to 42.52% at June
30, 1996.
Non-Interest Income. For the three and six months ended December 31, 1996
non-interest income was $405,000 and $814,000, respectively, compared to
$584,000 and $1.1 million for the prior year periods. The decreases were
primarily due to a net loss from real estate operations of $55,000 and $170,000
for the three and six months ended December 31, 1996 compared to net gains from
real estate operations of $34,000 and $114,000 for the prior year periods. 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.
Non-interest income for the three and six months ended December 31, 1995
included a $62,000 gain on sale of a property, no longer used in operations.
Non-Interest Expenses. The Company's non-interest expenses of $4.4 million for
the three months ended December 31, 1996 were comparable to total non-interest
expenses for the three months ended December 31, 1995. Non-interest expenses for
the six months ended December 31, 1996 of $13.6 million included $4.8 million
for the one-time SAIF recapitalization assessment. Excluding this SAIF
assessment, non-interest expenses for the six months ended December 31, 1996
would have been relatively unchanged from the $8.7 million reported for the six
months ended December 31, 1995. The Company's non-interest expenses, excluding
the SAIF assessment, as a percent of average assets declined to 1.49% and 1.54%
for the three and six months ended December 31, 1996, respectively, from 1.92%
and 1.95% for the comparable prior year periods.
<PAGE>
As noted above, beginning January 1, 1997 deposit insurance premiums have
decreased significantly, to 0.0648% from the 0.23% of deposits previously paid
by the Bank, which will have the effect of reducing non-interest expenses for
future periods.
Income Tax Expense. Income tax expense for the three and six months ended
December 31, 1996 was $1.5 million and $1.1 million, respectively, compared to
$1.2 million and $2.3 million for the prior year periods. Excluding the effects
of the one-time SAIF recapitalization assessment, income tax expense of $2.9
million was recorded for the 1996 six month period. The effective tax rate was
38.2% for the three months ended December 31, 1996 compared to 39.8% for the
prior year period. Excluding the effect of the one-time SAIF recapitalization
assessment, the effective tax rate was 38.2% for the six month period ended
December 31, 1996 and 39.9% for the six months ended December 31, 1995.
Analysis of Net Interest Income
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and the consolidated statements
of income for the three and six months ended December 31, 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.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------------------------------------------------
1996 1995
----------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1)
------- ---- ------- ------- ---- -------
(dollars in 000's)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
One- to four-family mortgage loans................. $ 686,203 $12,887 7.51% $432,481 $ 8,405 7.77%
Commercial and multi-family real
estate loans..................................... 53,569 1,235 9.22 48,528 1,233 10.16
Consumer loans..................................... 35,241 848 9.55 33,006 818 9.82
---------- ------- -------- -------
Total loans receivable........................... 775,013 14,970 7.73 514,015 10,456 8.14
Mortgage-backed securities......................... 324,664 5,640 6.95 315,428 5,539 7.02
Investment securities and other.................... 20,382 369 7.24 33,739 617 7.31
---------- ------- -------- -------
Total interest-earning assets.................... 1,120,059 $20,979 7.49 863,182 $16,612 7.70
======= =======
Non-interest earning assets........................ 53,730 56,725
---------- --------
Total assets..................................... $1,173,789 $919,907
========== ========
Deposits and borrowings:
Money market and demand deposits.................... $ 80,445 $ 250 1.23% $ 78,739 $ 345 1.74%
Savings deposits.................................... 176,918 999 2.24 182,225 1,041 2.27
Certificate of deposit accounts..................... 603,071 8,719 5.74 474,324 6,912 5.78
---------- ------- -------- -------
Total deposits.................................... 860,434 9,968 4.60 735,288 8,298 4.48
FHLB of New York advances........................... 125,393 1,941 6.14 54,111 807 5.91
Other borrowings.................................... 76,372 1,062 5.44 25,179 372 5.79
---------- ------- -------- -------
Total deposits and borrowings..................... 1,062,199 $12,971 4.84 814,578 $ 9,477 4.62
======= =======
Other liabilities................................... 20,354 11,320
---------- ---------
Total liabilities................................. 1,082,553 825,898
Stockholders' equity................................ 91,236 94,009
---------- ---------
Total liabilities and stockholders' equity........ $1,173,789 $919,907
========== ========
Net interest income and net interest rate
spread........................................... $ 8,008 2.65% $ 7,135 3.08%
======= ==== ======= ====
Net interest-earning assets and interest
margin........................................... $ 57,860 2.86% $ 48,604 3.31%
========= ==== ========= ====
Ratio of interest-earning assets to
deposits and borrowings.......................... 105.45% 105.97%
========== ==========
(1) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
--------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1)
------- ---- ------- ------- ---- -------
(dollars in 000's)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
One- to four-family mortgage loans................. $ 642,572 $24,204 7.53% $413,041 $15,953 7.72%
Commercial and multi-family real
estate loans..................................... 52,937 2,447 9.24 48,738 2,442 10.02
Consumer loans..................................... 34,720 1,663 9.50 32,893 1,643 9.91
---------- ------- -------- -------
Total loans receivable........................... 730,229 28,314 7.75 494,672 20,038 8.10
Mortgage-backed securities......................... 331,718 11,511 6.94 318,042 10,765 6.77
Investment securities and other.................... 24,190 870 7.19 31,303 1,178 7.53
---------- ------- -------- -------
Total interest-earning assets.................... 1,086,137 $40,695 7.49 844,017 $31,981 7.58
======= =======
Non-interest earning assets........................ 53,841 55,358
---------- --------
Total assets..................................... $1,139,978 $899,375
========== ========
Deposits and borrowings:
Money market and demand deposits.................... $ 79,690 $ 486 1.21% $ 79,608 $ 710 1.77%
Savings deposits.................................... 176,856 1,997 2.24 184,563 2,113 2.27
Certificate of deposit accounts..................... 593,447 16,960 5.67 461,532 13,395 5.76
---------- ------- -------- -------
Total deposits.................................... 849,993 19,443 4.54 725,703 16,218 4.43
FHLB of New York advances........................... 115,893 3,570 6.11 45,833 1,361 5.89
Other borrowings.................................... 64,434 1,788 5.43 22,284 666 5.85
---------- ------- -------- -------
Total deposits and borrowings..................... 1,030,320 $24,801 4.77 793,820 $18,245 4.56
======= =======
Other liabilities................................... 18,021 11,017
---------- --------
Total liabilities................................. 1,048,341 804,837
Stockholders' equity................................ 91,637 94,538
---------- --------
Total liabilities and stockholders' equity........ $1,139,978 $899,375
========== ========
Net interest income and net interest rate
spread........................................... $15,894 2.72% $13,736 3.02%
======= ==== ======= ====
Net interest-earning assets and interest
margin........................................... $ 55,817 2.93% $ 50,197 3.26%
========== ==== ======== ====
Ratio of interest-earning assets to
deposits and borrowings.......................... 105.42% 106.32%
========== ========
(1) Annualized.
</TABLE>
<PAGE>
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets and troubled debt restructured loans. Loans are placed on
non-accrual status when the collection of principal and/or interest become
delinquent more than 90 days. Foreclosed assets include assets acquired in
settlement of loans and are shown net of valuation allowances. All of the
Company's troubled debt restructured loans are performing according to their
modified terms.
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------ ------
(dollars in 000's)
<S> <C> <C>
Non-performing loans:
One- to four-family .................................. $4,230 $4,009
Commercial and multi-family real estate .............. 1,254 913
Consumer ............................................. 920 1,264
------ ------
Total non-performing loans ......................... 6,404 6,186
------ ------
Real estate owned, net ................................. 795 1,083
------ ------
Total non-performing assets ........................ 7,199 7,269
Troubled debt restructured loans ....................... 2,325 2,340
------ ------
Total risk elements ................................ $9,524 $9,609
====== ======
Non-performing loans as a percentage of total loans ... 0.77% 0.94%
====== ======
Non-performing assets as a percentage of total assets . 0.59% 0.67%
====== ======
Total risk elements as a percentage of total assets ... 0.78% 0.88%
====== ======
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based upon management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters,
loan classifications, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the lower of
cost or estimated fair value less costs to dispose of such properties. If fair
value at the date of foreclosure is lower than the balance of the related loan,
the difference will be charged-off to the allowance for loan losses at the time
of transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on real estate owned is established by
a charge to operations.
<PAGE>
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to record additions to the
allowance level based upon their judgement of the information available to them
at the time of their examination. At December 31, 1996, the Company had a total
allowance for loan losses of $2.7 million representing 42.66% of total
non-performing loans.
Interest Rate Sensitivity Analysis
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. In an attempt to manage its exposure to changes in interest
rates, management closely monitors the Company's exposure to interest rate risk.
At December 31, 1996, 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 $134.6 million, representing a one year negative
gap of 11.09% of total assets. At June 30, 1996, the one year negative gap was
13.97% of total assets. As a result of having a negative gap, the yield on the
Company's interest-earning assets may adjust to changes in interest rates at a
slower rate than the cost of its deposits and borrowings. During a period of
rising interest rates, a negative gap would tend to result in a decrease in net
interest income. The opposite tendency would be expected during a period of
declining interest rates.
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis must be considered. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market interest rates. Additionally,
certain assets, such as adjustable rate mortgages, have features which restrict
changes in interest rates in the short-term and over the life of the asset.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the gap position. Finally, the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase. The Company considers
all of these factors in monitoring its exposure to interest rate risk.
<PAGE>
Net Portfolio Value. The Company's interest rate sensitivity is also monitored
by management through selected interest rate risk ("IRR") measures produced by
the Office of Thrift Supervision ("OTS"). Using data from the Bank's quarterly
Thrift Financial Reports, the OTS measures the Company's IRR by modeling 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.
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.
As of September 30, 1996 (the latest date for which information is available),
the Company's initial NPV ratio, as measured by the OTS, was 6.81%. Following a
2% increase in interest rates, the Company's "Post-Shock" NPV ratio was 2.56%.
The change in the NPV ratio or the Company's Sensitivity Measure was 4.25%. Had
the OTS final rule with respect to interest rate risk exposure been effective,
the increased capital requirement necessary to compensate for the greater than
2% change in the NPV would have had no effect on the Bank's ability to comply
with its risk-based capital requirement.
Management reviews the quarterly OTS measurements and compares them to
evaluations produced on a quarterly basis through internally generated
simulation models. In addition to monitoring selected measures on NPV,
management also monitors effects on net interest income resulting from parallel
and non-parallel increases or decreases in rates. These measures are used in
conjunction with NPV measures to identify excessive IRR.
At December 31, 1996, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward
decreased $5.0 million or 14.2% from the base case, or current market, as a
result of an immediate and sustained 2% increase in interest rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer term or less expensive
alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 5% of net withdrawable deposits
and borrowings payable on demand or in one year or less during the preceding
calendar month. Liquid assets for purposes of this ratio include cash, accrued
interest receivable, certain time deposits, U.S. Treasury and Government
<PAGE>
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 December 31, 1996 and June
30, 1996, the Bank's liquidity ratios were 9.09% and 15.17%, respectively, both
in excess of the 5% minimum regulatory requirement.
The Company uses its liquid resources principally to meet ongoing commitments,
to fund maturing certificates of deposit and deposit withdrawals, to purchase
loans and securities, to fund existing and future loan commitments, and to meet
operating expenses. Management believes that loan repayments and other sources
of funds will be adequate to meet the Company's foreseeable liquidity needs.
In addition to cash provided by operating activities, the Company's cash needs
for the six months ended December 31, 1996 and 1995 were principally provided by
increased deposits and an increase in advances from the FHLB of New York and
other borrowings. For the six months ended December 31, 1996 and 1995, the cash
provided was principally used for investing activities, which included the
origination and purchase of loans.
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk adjusted assets; a
leverage ratio of core capital to total adjusted assets; and a tangible capital
ratio expressed as a percentage of total adjusted assets. As of December 31,
1996, the Bank substantially exceeded all regulatory capital standards (see Note
3. - Stockholders' Equity and Regulatory Capital, in the Notes to Consolidated
Financial Statements).
<PAGE>
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders (Annual Meeting) was held on
October 25, 1996.
(b) Directors elected:
Patrick D. McTernan
Marvin D. Schoonover
(c) At the Annual Meeting the stockholders considered the (i)
election of two directors and (ii) ratification of the appointment
of Deloitte & Touche LLP as auditors for the Company for the fiscal
year ending June 30, 1997.
The vote on the election of two directors was as follows:
FOR WITHHELD
--- --------
Patrick D. McTernan 4,169,987 45,407
Marvin D. Schoonover 4,169,035 46,359
There were no broker non-votes with respect to the proposal.
The vote on the ratification of the appointment of Deloitte
& Touche LLP as auditors for the Company for the fiscal year
ending June 30, 1997 was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
4,185,787 4,500 25,107
There were no broker non-votes with respect to the proposal.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: February 13, 1997 By:/s/ Joseph L. LaMonica
----------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: February 13, 1997 By:/s/ Lucy T. Tinker
------------------
Lucy T. Tinker
Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: February 13, 1997 By:/s/ Jeffrey J. Carfora
----------------------
Jeffrey J. Carfora
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
<TABLE>
<CAPTION>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
Three and Six Months Ended December 31, 1996 and 1995
(dollars in thousands, except per share amounts)
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income ............................................. $ 2,398 $ 1,916 $ 1,629 $ 3,564
========== ========== ========== ==========
Number of shares outstanding
Weighted average shares issued ....................... 5,950,000 5,950,000 5,950,000 5,950,000
Less: Weighted average shares held in treasury ....... 1,101,255 538,133 1,105,222 431,644
Less: Average shares held by the ESOP ................ 476,000 476,000 476,000 476,000
Plus: ESOP shares released or committed to be
released during the fiscal year ........... 89,399 51,822 84,533 47,294
Plus: Average common stock equivalents - primary ..... 251,433 143,597 249,850 138,845
---------- ---------- ---------- ----------
Average primary shares ......................... 4,713,577 5,131,286 4,703,161 5,228,495
Plus: Average common stock equivalents - fully diluted 7,227 2,328 7,078 7,750
---------- ---------- ---------- ----------
Average fully diluted shares ................... 4,720,804 5,133,614 4,710,239 5,236,245
========== ========== ========== ==========
Earnings per common share
Primary ........................................ $ 0.51 $ 0.37 $ 0.35 $ 0.68
========== ========== ========== ==========
Fully diluted .................................. $ 0.51 $ 0.37 $ 0.35 $ 0.68
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-30-1996
<CASH> 9,495
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 325,085
<INVESTMENTS-MARKET> 328,281
<LOANS> 827,685
<ALLOWANCE> 2,732
<TOTAL-ASSETS> 1,213,679
<DEPOSITS> 875,026
<SHORT-TERM> 76,755
<LIABILITIES-OTHER> 14,684
<LONG-TERM> 155,465
0
0
<COMMON> 60
<OTHER-SE> 91,689
<TOTAL-LIABILITIES-AND-EQUITY> 1,213,679
<INTEREST-LOAN> 28,314
<INTEREST-INVEST> 12,381
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 40,695
<INTEREST-DEPOSIT> 19,443
<INTEREST-EXPENSE> 24,801
<INTEREST-INCOME-NET> 15,894
<LOAN-LOSSES> 327
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,616
<INCOME-PRETAX> 2,765
<INCOME-PRE-EXTRAORDINARY> 1,629
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,629
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 2.93
<LOANS-NON> 6,404
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,325
<LOANS-PROBLEM> 4,966
<ALLOWANCE-OPEN> 2,630
<CHARGE-OFFS> 267
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 2,732
<ALLOWANCE-DOMESTIC> 2,732
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
