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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-24040
PENNFED FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3297339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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 May 7, 1997, there were 4,821,255 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
March 31, June 30,
1997 1996
----------- -----------
(dollars in 000's)
<S> <C> <C>
Assets
Cash and cash equivalents ...................................... $ 6,867 $ 11,629
Investment securities held to maturity, at amortized cost,
market value of $5,375 and $21,502 at March 31, 1997 and
June 30, 1996 ............................................... 5,290 21,288
Mortgage-backed securities held to maturity, at amortized cost,
market value of $300,982 and $344,331 at
March 31, 1997 and June 30, 1996 ............................ 301,448 346,068
Loans held for sale ............................................ -- 88
Loans receivable, net of allowance for loan losses of $2,755 and
$2,630 at March 31, 1997 and June 30, 1996 ................... 883,035 652,483
Premises and equipment, net .................................... 16,457 16,035
Real estate owned, net ......................................... 715 1,083
Federal Home Loan Bank of New York stock, at cost .............. 11,428 8,052
Accrued interest receivable, net ............................... 6,643 6,742
Goodwill and other intangibles ................................. 16,539 18,430
Other assets ................................................... 3,965 4,626
----------- -----------
$ 1,252,387 $ 1,086,524
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ..................................................... $ 887,407 $ 836,416
Federal Home Loan Bank of New York advances .................. 185,465 105,000
Other borrowings ............................................. 70,392 41,700
Mortgage escrow funds ........................................ 7,912 5,930
Due to banks ................................................. 4,472 5,989
Accounts payable and other liabilities ....................... 2,466 925
----------- -----------
Total liabilities ............................................ 1,158,114 995,960
----------- -----------
<PAGE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition (continued)
March 31, June 30,
1997 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 4,821,255 and 4,823,665 shares
outstanding at March 31, 1997 and June 30, 1996 (excluding
shares held in treasury of 1,128,745 and 1,126,335 at
March 31, 1997 and June 30,1996) ........................... 60 60
Additional paid-in capital ................................... 57,387 57,057
Restricted stock - Management Recognition Plan ............... (1,593) (1,316)
Employee Stock Ownership Plan Trust debt ..................... (3,769) (4,061)
Retained earnings, substantially restricted .................. 58,750 55,172
Treasury stock, at cost, 1,128,745 and 1,126,335 shares at
March 31, 1997 and June 30, 1996 ........................... (16,562) (16,348)
----------- -----------
Total stockholders' equity ................................... 94,273 90,564
----------- -----------
$ 1,252,387 $ 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 Nine months ended
March 31, March 31,
1997 1996 1997 1996
(dollars in 000's, except per share amounts)
<S> <C> <C> <C> <C>
Interest and Dividend Income:
Interest and fees on loans ........................ $ 16,312 $ 11,193 $ 44,626 $ 31,231
Interest and dividends on investment securities ... 307 601 1,177 1,779
Interest on mortgage-backed securities ............ 5,382 5,710 16,893 16,475
----------- ----------- ----------- -----------
22,001 17,504 62,696 49,485
----------- ----------- ----------- -----------
Interest Expense:
Deposits .......................................... 10,095 8,441 29,538 24,659
Borrowed funds .................................... 3,602 1,559 8,960 3,586
----------- ----------- ----------- -----------
13,697 10,000 38,498 28,245
----------- ----------- ----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses ................................... 8,304 7,504 24,198 21,240
Provision for Loan Losses ........................... 154 150 481 410
----------- ----------- ----------- -----------
Net Interest and Dividend Income After
Provision for Loan Losses ......................... 8,150 7,354 23,717 20,830
----------- ----------- ----------- -----------
Non-Interest Income:
Service charges ................................... 406 390 1,252 1,209
Net gain (loss) from real estate operations ....... (15) (55) (185) 59
Net gain on sales of investment securities ........ -- 94 -- 94
Other ............................................. 78 78 216 293
----------- ----------- ----------- -----------
469 507 1,283 1,655
----------- ----------- ----------- -----------
Non-Interest Expenses:
Compensation and employee benefits ................ 2,114 1,980 5,943 5,806
Net occupancy expense ............................. 284 319 834 872
Equipment ......................................... 375 401 1,144 1,188
Advertising ....................................... 88 56 266 163
Amortization of intangibles ....................... 625 652 1,891 1,981
Federal deposit insurance premium ................. 137 416 970 1,248
SAIF recapitalization assessment .................. -- -- 4,813 --
Other ............................................. 780 713 2,158 2,027
----------- ----------- ----------- -----------
4,403 4,537 18,019 13,285
----------- ----------- ----------- -----------
Income Before Income Taxes .......................... 4,216 3,324 6,981 9,200
Income Tax Expense .................................. 1,590 1,304 2,726 3,616
----------- ----------- ----------- -----------
Net Income .......................................... $ 2,626 $ 2,020 $ 4,255 $ 5,584
=========== =========== =========== ===========
<PAGE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Income (continued)
Three months ended Nine months ended
March 31, March 31,
1997 1996 1997 1996
(dollars in 000's, except per share amounts)
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding:
Primary ........................................... 4,742,840 4,991,111 4,703,367 5,150,202
=========== =========== =========== ===========
Fully diluted ..................................... 4,756,414 4,991,111 4,760,970 5,156,359
=========== =========== =========== ===========
Net income per common share:
Primary ........................................... $ 0.55 $ 0.40 $ 0.90 $ 1.08
=========== =========== =========== ===========
Fully diluted ..................................... $ 0.55 $ 0.40 $ 0.89 $ 1.08
=========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Nine months ended March 31,
1997 1996
--------- ---------
(dollars in 000's)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income .................................................. $ 4,255 $ 5,584
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sales of loans available for sale ............. 585 123
Originations of loans available for sale .................... (497) (123)
Gain on sales of investment securities ...................... -- (94)
Gain (loss) on sales of real estate owned ................... 8 (136)
Amortization of investment and mortgage-backed
securities premiums, net .................................. 202 326
Depreciation and amortization ............................... 943 999
Provision for losses on loans and real estate owned ......... 580 418
Amortization of cost of stock plans ......................... 1,075 724
Amortization of intangibles ................................. 1,891 1,981
Amortization of premiums on loans and loan fees ............. 280 232
Increase in accrued interest receivable, net of accrued
interest payable .......................................... (536) (1,216)
Decrease in other assets .................................... 660 737
Increase (decrease) in accounts payable and other liabilities 1,233 (1,087)
Increase in mortgage escrow funds ........................... 1,982 211
Increase (decrease) in due to banks ......................... (1,517) 3,603
Other, net .................................................. 4 (78)
--------- ---------
Net cash provided by operating activities ................... 11,148 12,204
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities ........... 16,000 6,314
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 ....................................... (73,344) (17,873)
Purchases of loans .......................................... (158,842) (100,736)
Proceeds from principal repayments of
mortgage-backed securities ................................ 44,416 48,550
Purchases of mortgage-backed securities ..................... -- (81,298)
Purchases of premises and equipment ......................... (1,365) (500)
Proceeds from sales of real estate owned .................... 1,133 1,313
Purchases of Federal Home Loan Bank of New York stock ....... (3,376) (1,864)
--------- ---------
Net cash used in investing activities ....................... (175,378) (155,588)
--------- ---------
<PAGE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
Nine months ended March 31,
1997 1996
--------- ---------
(dollars in 000's)
<S> <C> <C>
Cash Flows From Financing Activities:
Net increase in deposits .................................... 51,626 80,536
Advances from the Federal Home Loan Bank of
New York and other borrowings ............................. 109,157 73,070
Cash dividends paid ......................................... (664) --
Purchases of treasury stock ................................. (651) (8,311)
--------- ---------
Net cash provided by financing activities ................... 159,468 145,295
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents .......... (4,762) 1,911
Cash and Cash Equivalents, Beginning of Period ................ 11,629 9,736
--------- ---------
Cash and Cash Equivalents, End of Period ...................... $ 6,867 $ 11,647
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest ................................................... $ 38,571 $ 28,666
============ ========
Income taxes ............................................... $ 2,075 $ 3,724
============ ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net ..... $ 782 $ 960
============ ========
Transfer of real estate owned to premises and equipment, net $ -- $ 256
============ ========
Unrealized gain on investment securities available
for sale ................................................. $ -- $ (59)
============ ========
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 nine months ended
March 31, 1997 and 1996. The interim results of operations presented are not
necessarily indicative of the results for the full year.
When necessary, reclassifications have been made to conform to current period
presentation.
2. Adoption of Recently Issued Accounting Standards
Effective July 1, 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.
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 that have been
extinguished. The adoption of SFAS 125 did not have an effect on the financial
condition or results of operations of the Company.
<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
March 31, 1997:
<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................................ $ 86,771 6.88% $ 86,771 6.88% $ 86,771 6.88%
Goodwill.................................... (1,538) (1,538) (1,538)
Deposit premium intangible.................. (15,001) (15,001) (15,001)
Qualifying intangible assets................ --- 488 488
Allowances for loan and lease
losses.................................... --- --- 2,269
Equity investments and investments in
real estate required to be deducted....... --- --- (50)
-------- -------- --------
Regulatory capital.......................... 70,232 5.66 70,720 5.70 72,939 12.31
Minimum capital requirement................. 18,602 1.50 49,625 4.00 47,383 8.00
-------- ---- -------- ---- -------- ------
Regulatory capital-excess................... $51,630 4.16% $21,095 1.70% $25,556 4.31%
======= ==== ======= ==== ======= =====
</TABLE>
4. Dividends
On October 25, 1996, the Company declared a quarterly cash dividend of $0.07 per
share payable 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. On April 29, 1997, the Company declared a quarterly cash
dividend of $0.07 per share payable on May 30, 1997 to stockholders of record on
May 16, 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 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 nine months ended March 31, 1997.
Following the recapitalization assessment, beginning January 1, 1997 deposit
insurance premiums have decreased significantly, to approximately 0.065% from
the 0.23% of deposits previously paid by the Bank.
Financial Condition
Total assets increased $165.9 million, or 15.3%, to $1.3 billion at March 31,
1997 from total assets of $1.1 billion at June 30, 1996. The increase was
primarily attributable to a $230.5 million increase in net loans receivable,
particularly in the Company's one- to four-family first mortgage loan portfolio.
At March 31, 1997, net loans receivable were $883.0 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 funds received
on maturities of investment securities and principal payments on mortgage-backed
securities.
Non-performing assets at March 31, 1997 totaled $6.3 million, representing 0.51%
of total assets, compared to $7.3 million, or 0.67% of total assets, at June 30,
1996. Non-performing loans decreased to $5.6 million and the ratio of
non-performing loans to total loans decreased to 0.63% of total loans, at March
31, 1997 as compared to $6.2 million, or 0.94% of total loans, at June 30, 1996.
Real estate owned decreased to $715,000 at March 31, 1997 from $1.1 million at
June 30, 1996.
<PAGE>
Deposits increased $51.0 million to $887.4 million at March 31, 1997 from $836.4
million at June 30, 1996. FHLB of New York advances were $185.5 million at March
31, 1997, an $80.5 million increase from $105.0 million at June 30, 1996. In
addition, at March 31, 1997 the Company had $70.4 million of other borrowings,
consisting of $60.4 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 March 31, 1997 totaled $94.3 million compared to $90.6
million at June 30, 1996. The increase primarily reflects the net income
recorded for the nine months ended March 31, 1997 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 March 31, 1997 net income was $2.6 million,
or $0.55 per share. These results compare to net income of $2.0 million, or
$0.40 per share for the three months ended March 31, 1996. For the nine months
ended March 31, 1997, net income was $4.3 million, or $0.90 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 nine
months ended March 31, 1997, excluding the effects of the SAIF assessment, would
have compared favorably to net income of $5.6 million, or $1.08 per share, for
the nine months ended March 31, 1996.
Interest and Dividend Income. Interest and dividend income for the three and
nine months ended March 31, 1997 increased to $22.0 million and $62.7 million,
respectively, from $17.5 million and $49.5 million for the three and nine months
ended March 31, 1996, 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 $1.2 billion and
$1.1 billion for the three and nine months ended March 31, 1997, respectively,
compared to $917.6 million and $868.5 million for the comparable prior year
periods. The average yield on interest-earning assets decreased to 7.46% and
7.48% for the three and nine month periods ended March 31, 1997, respectively,
from 7.63% and 7.60% for the three and nine months ended March 31, 1996,
respectively.
Interest income on residential one- to four-family mortgage loans for the three
and nine months ended March 31, 1997 increased $5.2 million, or 56.7%, and $13.4
million, or 53.5%, 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 $289.2 million and $249.4 million in the average balance
outstanding for the three and nine months ended March 31, 1997, 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 0.22%
and 0.20% in the average yield earned on this loan portfolio for the three and
nine months ended March 31, 1997, respectively, from the comparable prior year
periods.
Interest Expense. Interest expense increased to $13.7 million and $38.5 million
for the three and nine months ended March 31, 1997, respectively, from $10.0
million and $28.2 million for the comparable 1996 periods. The increase was
attributable to an increase in total average deposits and borrowings coupled
<PAGE>
with an increase in the Company's cost of funds. Average deposits and borrowings
increased $254.6 million and $242.5 million for the three and nine months ended
March 31, 1997, respectively, compared to the 1996 periods. The average rate
paid on deposits and borrowings increased to 4.94% and 4.83% for the three and
nine months ended March 31, 1997, respectively, from 4.63% and 4.60% for the
comparable prior year periods.
Net Interest and Dividend Income. Net interest and dividend income for the three
and nine months ended March 31, 1997 was $8.3 million and $24.2 million,
respectively, reflecting an increase from $7.5 million and $21.2 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 2.52% and 2.81%, respectively, a decline from 3.00%
and 3.27%, respectively, during the comparable 1996 quarter. The net interest
rate spread and net interest margin were 2.65% and 2.89%, respectively, for the
nine months ended March 31, 1997, compared to 3.00% and 3.26% for the comparable
prior year period. While the interest rate environment of recent years has
proven beneficial to many 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 nine
months ended March 31, 1997 was $154,000 and $481,000, respectively, compared to
$150,000 and $410,000 for the prior year periods. The allowance for loan losses
at March 31, 1997 of $2.8 million reflects a $125,000 increase from the June 30,
1996 level. The allowance for loan losses as a percentage of non-performing
loans was 48.99% at March 31, 1997, compared to 42.52% at June 30, 1996.
Non-Interest Income. For the three and nine months ended March 31, 1997
non-interest income was $469,000 and $1.3 million, respectively, compared to
$507,000 and $1.7 million for the prior year periods. The decrease was partially
due to a $94,000 gain on sale of investments available for sale which was
recorded in the three months ended March 31, 1996. In addition, the decrease in
the nine months ended March 31, 1997 was partially attributable to a net loss
from real estate operations of $185,000 compared to a net gain from real estate
operations of $59,000 for the prior year period. 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 nine
months ended March 31, 1996 included a $62,000 gain on sale of a property, no
longer used in operations.
Non-Interest Expenses. The Company's non-interest expenses were $4.4 million for
the three months ended March 31, 1997 compared to total non-interest expenses
for the three months ended March 31, 1996 of $4.5 million. Non-interest expenses
for the nine months ended March 31, 1997 of $18.0 million included $4.8 million
for the one-time SAIF recapitalization assessment. Excluding this SAIF
assessment, non-interest expenses for the nine months ended March 31, 1997 would
have been slightly less than the $13.3 million reported for the nine months
ended March 31, 1996. The Company's non-interest expenses, excluding the SAIF
assessment, as a percent of average assets declined to 1.49% and 1.70% for the
three and nine months ended March 31, 1997, respectively, from 1.86% and 1.92%
for the comparable prior year periods.
<PAGE>
As noted above, beginning January 1, 1997 deposit insurance premiums have
decreased significantly, to approximately 0.065% from the 0.23% of deposits
previously paid by the Bank.
Income Tax Expense. Income tax expense for the three and nine months ended March
31, 1997 was $1.6 million and $2.7 million, respectively, compared to $1.3
million and $3.6 million for the prior year periods. Excluding the effects of
the one-time SAIF recapitalization assessment, income tax expense of $4.5
million was recorded for the 1997 nine month period. The effective tax rate was
37.7% for the three months ended March 31, 1997 compared to 39.2% for the prior
year period. Excluding the effect of the one-time SAIF recapitalization
assessment, the effective tax rate was 38.0% for the nine month period ended
March 31, 1997 compared to 39.3% for the nine months ended March 31, 1996.
Analysis of Net Interest Income
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and the consolidated statements
of income for the three and nine months ended March 31, 1997 and 1996, and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived from average daily
balances. The average balance of loans receivable includes non-accruing loans.
The yields and costs include fees which are considered adjustments to yields.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------------------
1997 1996
-------------------------------------- ----------------------------------------
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 ........ $ 761,867 $ 14,272 7.49% $ 472,649 $ 9,108 7.71%
Commercial and multi-family real
estate loans ............................ 54,342 1,232 9.07 49,296 1,167 9.47
Consumer loans ............................ 35,823 808 9.15 33,512 918 11.02
---------- ---------- ---------- ----------
Total loans receivable .................. 852,032 16,312 7.66 555,457 11,193 8.06
Mortgage-backed securities ................ 310,283 5,382 6.94 329,059 5,710 6.94
Investment securities and other ........... 17,683 307 6.95 33,044 601 7.28
---------- ---------- ---------- ----------
Total interest-earning assets ........... 1,179,998 $ 22,001 7.46 917,560 $ 17,504 7.63
========== ==========
Non-interest earning assets ............... 54,834 58,619
---------- ----------
Total assets ............................ $1,234,832 $ 976,179
========== ==========
Deposits and borrowings:
Money market and demand deposits ........... $ 79,908 $ 245 1.25% $ 78,710 $ 340 1.74%
Savings deposits ........................... 172,560 950 2.23 179,454 1,003 2.25
Certificate of deposit accounts ............ 627,389 8,900 5.75 501,441 7,098 5.69
---------- ---------- ---------- ----------
Total deposits ........................... 879,857 10,095 4.65 759,605 8,441 4.47
FHLB of New York advances .................. 169,305 2,566 6.15 78,166 1,126 5.79
Other borrowings ........................... 74,523 1,037 5.56 31,297 433 5.48
---------- ---------- ---------- ----------
Total deposits and borrowings ............ 1,123,685 $ 13,698 4.94 869,068 $ 10,000 4.63
========== ==========
Other liabilities .......................... 18,194 13,452
---------- ----------
Total liabilities ........................ 1,141,879 882,520
Stockholders' equity ....................... 92,953 93,659
---------- ----------
Total liabilities and stockholders' equity $1,234,832 $ 976,179
========== ==========
Net interest income and net interest rate
spread .................................. $ 8,302 2.52% $ 7,504 3.00%
========== ==== ========== =====
Net interest-earning assets and interest
margin .................................. $ 56,313 2.81% $ 48,492 3.27%
========== ==== ========== =====
Ratio of interest-earning assets to
deposits and borrowings ................. 105.01% 105.58%
====== ======
(1) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months Ended March 31,
-------------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------
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............. $ 682,337 $38,475 7.52% $432,910 $25,061 7.72%
Commercial and multi-family real
estate loans................................. 53,405 3,679 9.19 48,924 3,608 9.83
Consumer loans................................. 35,088 2,472 9.38 33,100 2,562 10.30
---------- ------- -------- -------
Total loans receivable....................... 770,830 44,626 7.72 514,934 31,231 8.09
Mortgage-backed securities..................... 324,573 16,893 6.94 321,714 16,475 6.83
Investment securities and other................ 22,021 1,177 7.13 31,883 1,779 7.44
---------- ------- --------- -------
Total interest-earning assets................ 1,117,424 $62,696 7.48 868,531 $49,485 7.60
======= =======
Non-interest earning assets.................... 54,172 56,445
---------- --------
Total assets................................. $1,171,596 $924,976
========== ========
Deposits and borrowings:
Money market and demand deposits................ $ 79,763 $ 732 1.22% $ 79,308 $ 1,050 1.76%
Savings deposits................................ 175,424 2,947 2.24 182,860 3,116 2.27
Certificate of deposit accounts................. 604,761 25,859 5.70 474,835 20,493 5.74
---------- ------- --------- --------
Total deposits................................ 859,948 29,538 4.58 737,003 24,659 4.45
FHLB of New York advances....................... 133,697 6,136 6.11 56,611 2,487 5.84
Other borrowings................................ 67,797 2,824 5.47 25,288 1,099 5.69
---------- -------- --------- -------
Total deposits and borrowings................. 1,061,442 $38,498 4.83 818,902 $28,245 4.60
======= =======
Other liabilities............................... 18,376 11,829
---------- ----------
Total liabilities............................. 1,079,818 830,731
Stockholders' equity............................ 91,778 94,245
---------- ----------
Total liabilities and stockholders' equity.... $1,171,596 $924,976
========== ========
Net interest income and net interest rate
spread....................................... $24,198 2.65% $21,240 3.00%
======= ==== ======= ====
Net interest-earning assets and interest
margin....................................... $ 55,982 2.89% $ 49,629 3.26%
========= ==== ========= ====
Ratio of interest-earning assets to
deposits and borrowings...................... 105.27% 106.06%
========== =========
(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>
March 31, June 30,
1997 1996
(dollars in 000's)
<S> <C> <C>
Non-performing loans:
One- to four-family .................................... $3,423 $4,009
Commercial and multi-family real estate ................ 1,329 913
Consumer ............................................... 872 1,264
------ ------
Total non-performing loans ........................... 5,624 6,186
------ ------
Real estate owned, net ................................... 715 1,083
------ ------
Total non-performing assets .......................... 6,339 7,269
Troubled debt restructured loans ......................... 2,317 2,340
------ ------
Total risk elements .................................. $8,656 $9,609
====== ======
Non-performing loans as a percentage of total loans ...... 0.63% 0.94%
====== ======
Non-performing assets as a percentage of total assets .... 0.51% 0.67%
====== ======
Total risk elements as a percentage of total assets ...... 0.69% 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 March 31, 1997, the Company had a total
allowance for loan losses of $2.8 million representing 48.99% 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 March 31, 1997, the Company's total deposits and borrowings maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing within one year by $102.2 million, representing a one year negative
gap of 8.16% 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 Bank's interest rate sensitivity is also monitored by
management through the review of selected interest rate risk ("IRR") measures
produced by the Office of Thrift Supervision ("OTS"). Using data from the Bank's
quarterly Thrift Financial Reports, coupled with non-institution specific
assumptions which are based on national averages, the OTS measures the Bank'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 December 31, 1996 (the latest date for which information is available),
the Bank's initial NPV ratio, as measured by the OTS, was 6.96%. Following a 2%
increase in interest rates, the Bank's "Post-Shock" NPV ratio was 3.26%. The
change in the NPV ratio or the Bank's Sensitivity Measure was 3.70%.
Management reviews the quarterly OTS measurements and compares them to
evaluations produced through internally generated simulation models, which
utilize institution specific assumptions. Generally, the internally generated
simulation results reflect lower levels of interest rate risk (i.e., higher post
shock NPV ratio and lower sensitivity measure) than the OTS results.
In addition to monitoring NPV and interest rate 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 March 31, 1997, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 13.0% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer term or less expensive
alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 5% of net withdrawable deposits
and borrowings payable on demand or in one year or less during the preceding
calendar month. Liquid assets for purposes of this ratio include cash, accrued
interest receivable, certain time deposits, U.S. Treasury and Government
agencies and other securities and obligations generally having remaining
<PAGE>
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 March 31, 1997 and June 30,
1996, the Bank's liquidity ratios were 10.71% 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 nine months ended March 31, 1997 and 1996 were principally provided by
increased deposits and an increase in advances from the FHLB of New York and
other borrowings. For the nine months ended March 31, 1997 and 1996, 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 March 31, 1997,
the Bank substantially exceeded all regulatory capital standards and was
considered a well capitalized institution (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
None.
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: May 14, 1997 By:/s/ Joseph L. LaMonica
----------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: May 14, 1997 By:/s/ Lucy T. Tinker
------------------
Lucy T. Tinker
Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: May 14, 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 Nine Months Ended March 31, 1997 and 1996
(dollars in thousands, except per share amounts)
Three months ended Nine months ended
March 31, March 31,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income............................................................... $ 2,626 $ 2,020 $ 4,255 $ 5,584
========== ========== ========== ==========
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......................... 1,129,090 699,590 1,113,063 520,310
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............................. 99,130 60,880 89,328 51,790
Plus: Average common stock equivalents - primary....................... 298,800 155,821 253,102 144,722
---------- ---------- ---------- ----------
Average primary shares........................................... 4,742,840 4,991,111 4,703,367 5,150,202
Plus: Average common stock equivalents - fully diluted................. 13,574 --- 57,603 6,157
-------------------------- ---------- ------------
Average fully diluted shares..................................... 4,756,414 4,991,111 4,760,970 5,156,359
========= ========= ========= =========
Earnings per common share
Primary.......................................................... $ 0.55 $ 0.40 $ 0.90 $ 1.08
=========== =========== =========== ===========
Fully diluted.................................................... $ 0.55 $ 0.40 $ 0.89 $ 1.08
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,867
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 306,738
<INVESTMENTS-MARKET> 306,357
<LOANS> 885,790
<ALLOWANCE> 2,755
<TOTAL-ASSETS> 1,252,387
<DEPOSITS> 887,407
<SHORT-TERM> 60,392
<LIABILITIES-OTHER> 14,850
<LONG-TERM> 195,465
0
0
<COMMON> 60
<OTHER-SE> 94,213
<TOTAL-LIABILITIES-AND-EQUITY> 1,252,387
<INTEREST-LOAN> 44,626
<INTEREST-INVEST> 18,070
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 62,696
<INTEREST-DEPOSIT> 29,538
<INTEREST-EXPENSE> 38,498
<INTEREST-INCOME-NET> 24,198
<LOAN-LOSSES> 481
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,019
<INCOME-PRETAX> 6,981
<INCOME-PRE-EXTRAORDINARY> 4,255
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,255
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 2.89
<LOANS-NON> 5,624
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,317
<LOANS-PROBLEM> 3,310
<ALLOWANCE-OPEN> 2,630
<CHARGE-OFFS> 398
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 2,755
<ALLOWANCE-DOMESTIC> 2,755
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
