UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-24040
PENNFED FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3297339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO[ ]
As of November 2, 1998, there were issued and outstanding 9,214,859
shares of the Registrant's Common Stock.
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
September 30, June 30,
1998 1998
----------- ----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................................................... $ 12,237 $ 10,960
Investment securities held to maturity, at amortized cost, market value of
$194,944 and $178,743 at September 30, 1998 and June 30, 1998 ............ 193,925 178,310
Mortgage-backed securities held to maturity, at amortized cost, market
value of $185,935 and $208,128 at September 30, 1998 and
June 30, 1998 ............................................................. 181,795 204,452
Loans held for sale ............................................................ 13,881 565
Loans receivable, net of allowance for loan losses of $2,869 and $2,776
at September 30, 1998 and June 30, 1998 ................................... 1,101,078 1,095,287
Premises and equipment, net .................................................... 18,598 18,092
Real estate owned, net ......................................................... 1,307 1,643
Federal Home Loan Bank of New York stock, at cost ............................. 16,298 15,065
Accrued interest receivable, net ............................................... 10,923 8,723
Goodwill and other intangible assets ........................................... 12,883 13,481
Other assets ................................................................... 3,493 5,360
----------- ----------
$ 1,566,418 $1,551,938
=========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................................. $ 1,083,284 $ 1,028,100
Federal Home Loan Bank of New York advances ............................... 279,465 230,465
Other borrowings .......................................................... 47,625 131,500
Mortgage escrow funds ..................................................... 10,898 10,534
Due to banks .............................................................. 5,222 12,069
Accounts payable and other liabilities .................................... 2,886 2,886
----------- ----------
Total liabilities ......................................................... 1,429,380 1,415,554
----------- ----------
Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures ........................................ 34,500 34,500
Unamortized issuance expenses ............................................. (1,803) (1,819)
----------- ----------
Net Trust Preferred Securities ............................................ 32,697 32,681
----------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition (continued)
September 30, June 30,
1998 1998
----------- ----------
(Dollars in thousands)
<S> <C> <C>
Stockholders' Equity:
Serial preferred stock, $.01 par value, 7,000,000 shares
authorized, no shares issued .......................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized,
11,900,000 shares issued, and 9,235,859 and 9,385,988 shares .....
outstanding at September 30, 1998 and June 30, 1998 (excluding shares
held in treasury of 2,664,141 and 2,514,012 at
September 30, 1998 and June 30, 1998) ................................. 60 60
Additional paid-in capital ................................................ 58,589 58,278
Restricted stock - Management Recognition Plan ............................ (531) (531)
Employee Stock Ownership Plan Trust debt .................................. (3,163) (3,253)
Retained earnings, partially restricted ................................... 73,311 70,781
Treasury stock, at cost, 2,664,141 and 2,514,012 shares at
September 30, 1998 and June 30, 1998 .................................. (23,925) (21,632)
----------- ----------
Total stockholders' equity ................................................ 104,341 103,703
----------- ----------
$ 1,566,418 $1,551,938
=========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended September 30,
--------------------------------
1998 1997
----------- -----------
(Dollars in thousands, except
per share amounts)
<S> <C> <C>
Interest and Dividend Income:
Interest and fees on loans ..................... $ 20,199 $ 17,909
Interest on federal funds sold ................. 3 --
Interest and dividends on investment securities 3,788 1,064
Interest on mortgage-backed securities ......... 3,248 4,854
----------- -----------
27,238 23,827
----------- -----------
Interest Expense:
Deposits ....................................... 12,648 11,676
Borrowed funds ................................. 5,513 3,989
Trust Preferred securities ..................... 783 --
----------- -----------
18,944 15,665
----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses ................................ 8,294 8,162
Provision for Loan Losses ........................... 175 150
----------- -----------
Net Interest and Dividend Income After Provision
for Loan Losses ................................ 8,119 8,012
----------- -----------
Non-Interest Income:
Service charges ................................ 541 436
Net gain (loss) from real estate operations .... (37) (39)
Net gain on sales of loans ..................... 417 --
Other .......................................... 94 88
----------- -----------
1,015 485
----------- -----------
Non-Interest Expenses:
Compensation and employee benefits ............. 2,235 2,073
Net occupancy expense .......................... 327 295
Equipment ...................................... 425 358
Advertising .................................... 76 71
Amortization of intangibles .................... 598 616
Federal deposit insurance premium .............. 159 140
Other .......................................... 852 668
----------- -----------
4,672 4,221
----------- -----------
Income Before Income Taxes .......................... 4,462 4,276
Income Tax Expense .................................. 1,611 1,590
----------- -----------
Net Income .......................................... $ 2,851 $ 2,686
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income (continued)
Three months ended September 30,
--------------------------------
1998 1997
----------- -----------
(Dollars in thousands, except
per share amounts)
<S> <C> <C>
Weighted average number of common shares outstanding:
Basic .......................................... 8,663,450 8,931,210
=========== ===========
Diluted ........................................ 9,327,443 9,669,702
=========== ===========
Net income per common share:
Basic .......................................... $ 0.33 $ 0.30
=========== ===========
Diluted ........................................ $ 0.31 $ 0.28
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended September 30,
--------------------------------
1998 1997
-------- --------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ............................................................ $ 2,851 $ 2,686
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans ............................................ (417) --
Proceeds from sales of loans held for sale ............................ -- 582
Originations of loans held for sale ................................... -- (1,153)
Net gain on sales of real estate owned ................................ (7) (1)
Amortization of investment and mortgage-backed securities
premium, net ........................................................ 101 69
Depreciation and amortization ......................................... 345 320
Provision for losses on loans and real estate owned ................... 208 185
Amortization of cost of stock plans ................................... 533 421
Amortization of intangibles ........................................... 598 616
Amortization of premiums on loans and loan fees ....................... 483 232
Amortization of Trust Preferred securities issuance costs ............. 16 --
(Increase) decrease in accrued interest receivable, net of accrued
interest payable .................................................... (882) 779
(Increase) decrease in other assets ................................... 1,867 (405)
Increase (decrease) in accounts payable and other liabilities ......... (132) 1,036
Increase in mortgage escrow funds ..................................... 364 303
Decrease in due to banks .............................................. (6,847) (1,044)
-------- --------
Net cash provided by (used in) operating activities ................... (919) 4,626
-------- --------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities ..................... 27,070 125
Purchases of investment securities held to maturity ................... (42,688) (25,000)
Net outflow from loan originations net of principal repayments of loans (36,325) (10,024)
Purchases of loans .................................................... (9,808) (27,554)
Proceeds from principal repayments of mortgage-backed securities ...... 22,559 19,493
Proceeds from sale of loans ........................................... 26,766 --
Purchases of premises and equipment ................................... (851) (1,098)
Proceeds from sale of real estate owned ............................... 329 214
Purchases of Federal Home Loan Bank of New York stock ................. (1,233) (262)
-------- --------
Net cash used in investing activities ................................. (14,181) (44,106)
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Three months ended September 30,
--------------------------------
1998 1997
-------- --------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Financing Activities:
Net increase in deposits .............................................. 53,866 55,324
Decrease in advances from the Federal Home Loan Bank of
New York and other borrowings ....................................... (34,875) (17,700)
Cash dividends paid ................................................... (313) (325)
Purchases of treasury stock, net of reissuance ........................ (2,301) --
-------- --------
Net cash provided by financing activities ............................. 16,377 37,299
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ....................... 1,277 (2,181)
Cash and Cash Equivalents, Beginning of Period ............................. 10,960 10,729
-------- --------
Cash and Cash Equivalents, End of Period ................................... $ 12,237 $ 8,548
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Three months ended September 30,
--------------------------------
1998 1997
-------- -------
(Dollars in thousands)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for:
Interest ............................................. $ 17,143 $13,968
======== =======
Income taxes ......................................... $ -- $ --
======== =======
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net $ 19 $ 899
======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries Penn Federal Savings Bank (the
"Bank") and PennFed Capital Trust I. These interim consolidated financial
statements included herein should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended June 30, 1998. The interim
consolidated financial statements reflect all normal and recurring adjustments
which are, in the opinion of management, considered necessary for a fair
presentation of the financial condition and results of operations for the
periods presented. There were no adjustments of a non-recurring nature recorded
during the three months ended September 30, 1998 and 1997. 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, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The Company is required to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial condition. The adoption of SFAS 130 did not have an effect on the
Company's financial condition or results of operations.
<PAGE>
3. Computation of EPS
The computation of EPS is presented in the following table.
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1998 1997
----------- -----------
(Dollars in thousands, except
per share amounts)
<S> <C> <C>
Net income .............................................. $ 2,851 $ 2,686
=========== ===========
Number of shares outstanding:
Weighted average shares issued ........................ 11,900,000 11,900,000
Less: Weighted average shares held in treasury ....... 2,608,412 2,255,430
Less: Average shares held by the ESOP ................ 952,000 952,000
Plus: ESOP shares released or committed to be released
during the fiscal year ....................... 323,862 238,640
----------- -----------
Average basic shares ........................... 8,663,450 8,931,210
Plus: Average common stock equivalents ............... 663,993 738,492
----------- -----------
Average diluted shares ......................... 9,327,443 9,669,702
=========== ===========
Earnings per common share:
Basic .......................................... $ 0.33 $ 0.30
=========== ===========
Diluted ........................................ $ 0.31 $ 0.28
=========== ===========
</TABLE>
<PAGE>
4. Stockholders' Equity and Regulatory Capital
The Bank's capital amounts and ratios are presented in the following table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998
Tangible capital........................... $112,655 7.28% $23,209 1.50% N/A N/A
Core capital............................... $112,840 7.29% $61,899 4.00% $77,373 5.00%
Risk-based capital......................... $115,410 15.43% $59,824 8.00% $74,781 10.00%
As of June 30, 1998
Tangible capital........................... $108,580 7.09% $22,960 1.50% N/A N/A
Core capital............................... $108,816 7.11% $61,237 4.00% $76,547 5.00%
Risk-based capital......................... $111,262 15.16% $58,705 8.00% $73,381 10.00%
</TABLE>
The above table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB"). The following summarizes
the Company's capital position under the FRB's capital requirements for bank
holding companies.
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Minimum Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------------ --------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity............................. $ 104,341
Add: Qualifying preferred securities........... 30,528
Less: Goodwill.................................. (907)
Deposit premium intangible................ (11,976)
Disallowed servicing assets............... (59)
------------
Tangible capital, and ratio to
adjusted total assets..................... $ 121,927 7.85% $23,308 1.50%
=========== =======
Add: Qualifying intangible asset............... $ 185
-----------
Tier I (core) capital, and ratio to
adjusted total assets..................... $ 122,112 7.86% $46,617 3.00% $77,694 5.00%
=========== ======= =======
Tier I (core) capital, and ratio to
risk-weighted assets...................... $ 122,112 16.44% $29,711 4.00% $44,567 6.00%
=========== ======= =======
Less: Equity investments and
investments in real estate................ $ (50)
Add: Allowance for loan losses................. 2,620
-----------
Total risk-based capital, and ratio
to risk-weighted assets................... $ 124,682 16.79% $59,422 8.00% $74,278 10.00%
=========== ======= =======
Total assets..................................... $ 1,566,418
===========
Adjusted total assets............................ $ 1,553,885
===========
Risk-weighted assets............................. $ 742,777
===========
</TABLE>
<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 operating expenses.
General economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities also
significantly affect the Company's results of operations. Future changes in
applicable law, regulations or government policies may also have a material
impact on the Company.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or stockholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project' or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake -- and specifically declines any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
Total assets increased slightly to $1.566 billion at September 30, 1998 from
total assets of $1.552 billion at June 30, 1998. Increases due to loan
originations and purchases, particularly in the Company's one- to four-family
first mortgage loan portfolio, and purchases of investment securities were
offset by sales of one- to four-family residential loans and principal payments
on loans and mortgage-backed securities. A new strategic initiative was
implemented at the beginning of the fiscal year and focuses on recurring sales
of fixed-rate, low coupon, one- to four-family first mortgage loans into the
secondary market. By restraining asset growth, this strategic initiative is
expected to result in an improvement in the net interest margin and the
Company's interest rate risk position and increase non-interest income.
<PAGE>
Deposits increased $55.2 million to $1.083 billion at September 30, 1998 from
$1.028 billion at June 30, 1998. Federal Home Loan Bank advances and other
borrowings totaled $327.1 million at September 30, 1998, a $34.9 million
decrease from $362.0 million at June 30, 1998.
Non-performing assets at September 30, 1998 totaled $5.8 million, representing
0.37% of total assets, compared to $5.4 million, or 0.35% of total assets, at
June 30, 1998. Non-accruing loans totaled $4.5 million, with a ratio of
non-performing loans to total loans of 0.41% at September 30, 1998 as compared
to $3.7 million, or 0.34% of total loans, at June 30, 1998. Real estate owned
decreased to $1.3 million at September 30, 1998 from $1.6 million at June 30,
1998.
Stockholders' equity at September 30, 1998 totaled $104.3 million compared to
$103.7 million at June 30, 1998. The increase primarily reflects the net income
recorded for the three months ended September 30, 1998, partially offset by the
repurchase of 151,000 shares of the Company's outstanding common stock at an
average price of $15.24 per share and the declaration of dividends.
Results of Operations
General. For the three months ended September 30, 1998 net income was $2.9
million, or $0.31 per diluted share, as compared to net income of $2.7 million,
or $0.28 per diluted share for the comparable prior year period.
Interest and Dividend Income. Interest and dividend income for the three months
ended September 30, 1998 increased to $27.2 million from $23.8 million for the
three months ended September 30, 1997. The increase in the current year period
was due to an increase in average interest-earning assets partially offset by a
decrease in the average yield earned on interest-earning assets. Average
interest-earning assets were $1.520 billion for the three months ended September
30, 1998 compared to $1.285 billion for the comparable prior year period. The
average yield earned on interest-earning assets decreased to 7.16% for the three
months ended September 30, 1998 from 7.42% for the three months ended September
30, 1997.
Interest income on residential one- to four-family mortgage loans for the three
months ended September 30, 1998 increased $2.0 million to $17.7 million, or
12.5%, when compared to the prior year period. The increase in interest income
on residential one- to four-family mortgage loans was due to a $146.1 million
increase in the average balance outstanding to $995.7 million for the three
months ended September 30, 1998 compared to $849.6 million for the prior year
period. The increase in the average balance on residential one- to four-family
mortgage loans was partially offset by a decrease of 30 basis points in the
average yield earned on this loan portfolio to 7.12% for the three months ended
September 30, 1998 from the comparable prior year period.
Interest income on the mortgage-backed securities portfolio decreased $1.6
million, or 33.1%, for the three months ended September 30, 1998 as compared to
the prior year period. The decrease in interest income on mortgage-backed
securities primarily reflects an $88.4 million decrease in the average balance
outstanding to $192.0 million for the three months ended September 30, 1998
compared to $280.4 million for the prior year period.
Interest on investment securities and other interest-earning assets increased
$2.7 million for the three months ended September 30, 1998 from the comparable
prior year period due to a $153.2 million increase in the average balance
<PAGE>
outstanding for the current year period. The increase in the average balance on
investment securities and other interest-earning assets was partially offset by
a 14 basis point decrease in the average yield earned on these securities when
compared to the prior year period.
Interest Expense. Interest expense increased $3.3 million to $18.9 million for
the three months ended September 30, 1998 from $15.6 million for the comparable
1997 period. The increase was attributable to an increase in total average
deposits, primarily certificates of deposit, and borrowings. Interest expense
also increased due to the issuance of the Trust Preferred securities. Average
deposits and borrowings increased $201.8 million to $1.419 billion for the three
months ended September 30, 1998 compared to the 1997 period. Trust Preferred
securities had an average balance of $32.7 million for the current period. The
average rate paid on deposits, borrowings and Trust Preferred securities
increased to 5.17% for the three months ended September 30, 1998 from 5.10% for
the comparable prior year period.
Net Interest and Dividend Income. Net interest and dividend income for the three
months ended September 30, 1998 was $8.3 million, reflecting a slight increase
from $8.2 million recorded in the comparable prior year period. The increase
reflects the Company's growth in assets, primarily in investment securities and
residential one- to four-family mortgage loans. The increase in net interest and
dividend income was partially offset by a decline in the net interest rate
spread. The net interest rate spread and net interest margin for the three
months ended September 30, 1998 were 1.99% and 2.22%, respectively, a decline
from 2.32% and 2.58%, respectively, during the comparable prior year period. For
the three months ended September 30, 1998, the decline in the net interest rate
spread and net interest margin was partially due to the addition of the Trust
Preferred securities. The declines in the net interest rate spread and net
interest margin were also attributable to the flat yield curve environment
recently experienced in which higher yielding loans prepaid at accelerated rates
and were replaced by lower yielding loans. Since the Company's liabilities
generally reprice more quickly than its assets, net interest rate spread and net
interest margin will likely decrease if interest rates rise.
Provision for Loan Losses. The provision for loan losses for the three months
ended September 30, 1998 was $175,000 compared to $150,000 for the prior year
period. The allowance for loan losses at September 30, 1998 of $2.9 million
reflects a $93,000 increase from the June 30, 1998 level. The allowance for loan
losses as a percentage of non-accruing loans was 63.31% at September 30, 1998,
compared to 74.18% at June 30, 1998.
Non-Interest Income. For the three months ended September 30, 1998 non-interest
income was $1.0 million compared to $485,000 for the prior year period. The
increase was primarily attributable to a $417,000 gain on sales of $26 million
of one- to four-family residential mortgage loans in the secondary market during
the three months ended September 30, 1998. These recurring loan sales should
allow the Company to maintain its origination volume profitably, support an
improvement in net interest margin performance, improve its interest rate risk
position and add to non-interest income. In addition to these gains, growth in
non-interest income was partially attributable to an increase in service charges
related to checking accounts.
Non-Interest Expenses. The Company's non-interest expenses were $4.7 million for
the three months ended September 30, 1998 compared to $4.2 million for the prior
year period. Non-interest expenses have increased to support the Company's
<PAGE>
increased lending volumes and the new Bayville branch which opened in October
1997. Nevertheless, the Company's non-interest expenses as a percent of average
assets declined to 1.18% for the three months ended September 30, 1998 from
1.26% for the comparable prior year period.
Income Tax Expense. Income tax expense was $1.6 million for both the three
months ended September 30, 1998 and the three months ended September 30, 1997.
The effective tax rate for the three months ended September 30, 1998 was 36.1%.
The effective tax rate was 37.2% for the three months ended September 30, 1997.
Analysis of Net Interest Income
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and the consolidated statements
of income for the three months ended September 30, 1998 and 1997, 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 September 30,
------------------------------------------------------------------------------------
1998 1997
-------------------------------------- ------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
------- ---- -------- ------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
One- to four-family mortgage
loans ............................. $ 995,729 $ 17,720 7.12% $ 849,647 $ 15,752 7.42%
Commercial and multi-family real
estate loans ...................... 64,804 1,431 8.83 55,892 1,261 9.02
Consumer loans ....................... 56,451 1,048 7.37 40,576 896 8.76
---------- ---------- ---------- ----------
Total loans receivable ............ 1,116,984 20,199 7.23 946,115 17,909 7.57
Mortgage-backed securities ........... 192,032 3,248 6.77 280,449 4,854 6.92
Investment securities and other ...... 211,342 3,791 7.18 58,142 1,064 7.32
---------- ---------- ---------- ----------
Total interest-earning assets ..... 1,520,358 $ 27,238 7.16 1,284,706 $ 23,827 7.42
========== ==========
Non-interest earning assets .......... 58,435 50,931
---------- ----------
Total assets ...................... $1,578,793 $1,335,637
========== ==========
Deposits and borrowings:
Money market and demand
deposits (transaction accounts) ... $ 95,602 $ 312 1.30% $ 81,388 $ 248 1.21%
Savings deposits ..................... 164,804 831 2.00 168,158 928 2.19
Certificates of deposit .............. 792,145 11,505 5.76 709,078 10,500 5.88
---------- ---------- ---------- ----------
Total deposits .................... 1,052,551 12,648 4.77 958,624 11,676 4.83
FHLB of New York advances ............ 262,413 4,006 6.06 205,465 3,190 6.16
Other borrowings ..................... 104,532 1,507 5.64 53,583 799 5.83
---------- ---------- ---------- ----------
Total deposits and borrowings ..... 1,419,496 18,161 5.07 1,217,672 15,665 5.10
Trust Preferred securities ........... 32,689 783 9.58 -- --
---------- ---------- ---------- ----------
Total deposits, borrowings and
Trust Preferred securities .... 1,452,185 $ 18,944 5.17 1,217,672 $ 15,665 5.10
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------------------
1998 1997
-------------------------------------- ------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
------- ---- -------- ------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other liabilities .................... 23,012 20,085
----------- ----------
Total liabilities ................. 1,475,197 1,237,757
Stockholders' equity ................. 103,596 97,880
----------- ----------
Total liabilities and stockholders'
equity ........................ $ 1,578,793 $1,335,637
=========== ==========
Net interest income and net
interest rate spread .............. $ 8,294 1.99% $ 8,162 2.32%
========== ==== ========== ====
Net interest-earning assets and
interest margin ................... $ 68,173 2.22% $ 67,034 2.58%
=========== ==== ========== ====
Ratio of interest-earning assets to
deposits, borrowings and Trust
Preferred securities .............. 104.69% 105.51%
====== ======
</TABLE>
(1) Annualized.
<PAGE>
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets and restructured loans. Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more than
90 days. There are no loans delinquent more than 90 days which are still
accruing. Real estate owned represents assets acquired in settlement of loans
and is shown net of valuation allowances. Restructured loans are performing in
accordance with modified terms and are, therefore, considered performing.
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------ ------
<S> <C> <C>
Non-accruing loans:
One- to four-family ............................... $3,120 $2,575
Commercial and multi-family ....................... 734 414
Consumer .......................................... 678 753
------ ------
Total non-accruing loans ...................... 4,532 3,742
Real estate owned, net ................................. 1,307 1,643
------ ------
Total non-performing assets ................... 5,839 5,385
Restructured loans ..................................... 1,406 1,415
------ ------
Total risk elements ........................... $7,245 $6,800
====== ======
Non-accruing loans as a percentage of total loans ...... 0.41% 0.34%
====== ======
Non-performing assets as a percentage of total assets .. 0.37% 0.35%
====== ======
Total risk elements as a percentage of total assets .... 0.46% 0.44%
====== ======
</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 assessment of the information available to them
at the time of their examination. At September 30, 1998, the Company had a total
allowance for loan losses of $2.9 million representing 63.31% of total
non-accruing loans.
Interest Rate Sensitivity
Interest Rate Gap. The interest rate risk inherent in assets and liabilities may
be determined by analyzing the extent to which such assets and liabilities are
"interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest-earning assets maturing or
repricing within a defined period and the amount of interest-bearing liabilities
maturing or repricing within the same period is defined as the interest rate
sensitivity gap. An institution is considered to have a negative gap if the
amount of interest-bearing liabilities maturing or repricing within a specified
time period exceeds the amount of interest-earning assets maturing or repricing
within the same period. If more interest-earning assets than interest-bearing
liabilities mature or reprice within a specified period, then the institution is
considered to have a positive gap. Accordingly, in a rising interest rate
environment, in an institution with a negative gap, the cost of its rate
sensitive liabilities would theoretically rise at a faster pace than the yield
on its rate sensitive assets, thereby diminishing future net interest income. In
a falling interest rate environment, a negative gap would indicate that the cost
of rate sensitive liabilities would decline at a faster pace than the yield on
rate sensitive assets and improve net interest income. For an institution with a
positive gap, the reverse would be expected.
At September 30, 1998, the Company's total deposits, borrowings and Trust
Preferred securities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing within one year by $15.7 million,
representing a one year negative gap of 1.00% of total assets. At June 30, 1998,
the one year negative gap was 7.28% of total assets. In addition to the newly
adopted strategy of selling fixed-rate, one- to four-family first mortgage loan
production into the secondary market, improvement in the negative gap position
from June 30, 1998 reflects the Company's efforts to take advantage of
opportunities to increase medium-term borrowings at costs at or less than
short-term funding levels.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of analysis must be considered. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
<PAGE>
assets, such as adjustable rate mortgages, have features which restrict changes
in interest rates in the short-term and over the life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
may deviate significantly from those assumed in calculating the gap position.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase. The Company considers all of these factors
in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through selected interest rate risk ("IRR") measures set
forth by the Office of Thrift Supervision ("OTS"). The IRR measures used by the
OTS include an IRR "Exposure Measure" or "Post-Shock" NPV ratio and a
"Sensitivity Measure." A low Post-Shock NPV ratio indicates greater exposure to
IRR. Greater exposure can result from a low initial NPV ratio or high
sensitivity to changes in interest rates. The Sensitivity Measure is the change
in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates,
whichever produces a larger decline. At least quarterly, and generally monthly,
management models the change in net portfolio value ("NPV") over a variety of
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. An NPV ratio, in any
interest rate scenario, is defined as the NPV in that rate scenario divided by
the market value of assets in the same scenario.
As of September 30, 1998, the Bank's internally generated initial NPV ratio was
10.10%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 8.69%. The change in the NPV ratio, or the Bank's Sensitivity Measure
was 1.41%. NPV is also measured internally on a consolidated basis. As of
September 30, 1998, the Company's initial NPV ratio was 10.52%, the Post-Shock
ratio was 8.92%, and the Sensitivity Measure was 1.60%. Variances between the
Bank's and the Company's NPV ratios are attributable to balance sheet items
which are adjusted during consolidation, such as investments, intercompany
borrowings and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions and, as such, generally result in lower levels
of presumed interest rate risk (i.e., higher Post-Shock NPV ratio and lower
Sensitivity Measure) than OTS measurements indicate.
The OTS measures the Bank's (unconsolidated) IRR on a quarterly basis using data
from the quarterly Thrift Financial Reports, coupled with non-institution
specific assumptions which are based on national averages. As of June 30, 1998
(the latest date for which information is available), the Bank's initial NPV
ratio, as measured by the OTS, was 8.03%, the Bank's Post-Shock ratio was 6.02%
and the Sensitivity Measure was 2.01%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At September 30, 1998, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 3.9% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates.
<PAGE>
Year 2000
A formal Year 2000 Project Plan (the "Year 2000 Plan") was previously approved
by the Company's Board of Directors. The Board of Directors continues to be
updated on a monthly basis as to the status of all phases, with an independent
verification of progress completed on a quarterly basis. By following the
detailed plan, substantial progress has been made and the Company remains on
target for meeting its commitment to achieving Year 2000 compliance for its
mission-critical systems.
The task force, with representatives from all divisions within the Bank, has
completed both the awareness and assessment phases of the Year 2000 Plan.
Certain steps within the renovation and validation phases are completed with the
remainder of the tasks currently on schedule for completion in accordance with
the Year 2000 Plan. As the Company primarily runs software purchased from a few
key vendors, the task force continues to meet and work closely with those
vendors and suppliers. Systems critical to the operation of the Company are
receiving top priority, with certain of the mission-critical software elements
now compliant. Management expects to have renovated and tested all necessary
systems by no later than June 30, 1999 and believes that its level of
preparedness for the project is appropriate.
Although certain aspects of the contingency planning process have been
completed, contingency planning is an ongoing process. Members of the task force
have responsibility for identifying a contingency plan for the different areas
of software being tested in the event the Year 2000 Plan is not timely or
successfully implemented. For example, if vendors for certain critical systems
are unable to supply Year 2000 compliant software upgrades, the use of an
alternative vendor would be required to be pursued, at an additional cost to the
Company.
The estimated cost for the Year 2000 effort of $75,000 is unchanged from June
30, 1998. This estimate includes approximately $44,000 of hardware and software
upgrades. The remaining $31,000 is estimated for software program consulting and
remediation. Approximately $5,000 of costs have been incurred to date. This
estimate does not include manpower costs of Company personnel associated with
the task force, who retain their individual operation responsibilities in
addition to Year 2000 duties. The completion date and cost are based upon
management's analysis of the information currently available to it. No assurance
can be given that issues relating to the Year 2000 will not have a material
adverse effect on the Company's financial condition or results of operations.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
<PAGE>
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows. The current required percentage is 4% of net
withdrawable deposits payable on demand or in one year or less and borrowings
payable on demand or in one year or less, both as of the end of the preceding
calendar quarter. Liquid assets for purposes of this ratio include cash, accrued
interest receivable, certain time deposits, U.S. Treasury and Government
agencies and other securities and obligations generally having remaining
maturities of less than five years. All mortgage-backed securities are
includable in liquid assets, as well. The Company's most liquid assets are cash
and cash equivalents, short-term investments and mortgage-backed securities. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At September 30, 1998 and June
30, 1998, the Bank's liquidity ratios were 18.28% and 24.50%, respectively.
The Company uses its liquid resources principally to fund maturing certificates
of deposit and deposit withdrawals, to purchase loans and securities, to fund
existing and future loan commitments, and to meet operating expenses. Management
believes that loan repayments and other sources of funds will be adequate to
meet the Company's foreseeable liquidity needs.
The Company's cash needs for the three months ended September 30, 1998 were
principally provided by increased deposits, proceeds from maturities of
investment securities, principal repayments on mortgage-backed securities and
sales of loans. During this period, the cash provided was used for investing
activities, which included the origination and purchase of loans and the
purchase of investment securities, as well as to reduce borrowings. In addition
to cash provided by operating activities, during the three months ended
September 30, 1997 the cash needs of the Company were principally provided by
increased deposits. The cash was principally utilized for investing activities,
which included the origination and purchase of loans and the purchase of
investment securities, as well as to reduce borrowings.
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk adjusted assets; a
leverage ratio of core capital to total adjusted assets; and a tangible capital
ratio expressed as a percentage of total adjusted assets. As of September 30,
1998, the Bank exceeded all regulatory capital requirements and qualified as a
"well-capitalized" institution (see Note 4. - 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
(a) Exhibit 11: Statement Regarding Computation of Per Share
Earnings.
Exhibit 27: Financial Data Schedule.
(b) There were no reports filed on Form 8-K for the three month
period ended September 30, 1998.
<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: November 13, 1998 By: /s/Joseph L. LaMonica
---------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: November 13, 1998 By: /s/Lucy T. Tinker
-----------------
Lucy T. Tinker
Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
Date: November 13, 1998 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 Months Ended September 30, 1998 and 1997
(Dollars in thousands, except per share amounts)
Three months ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
Net income .............................................. $ 2,851 $ 2,686
=========== ===========
Number of shares outstanding:
Weighted average shares issued ........................ 11,900,000 11,900,000
Less: Weighted average shares held in treasury ....... 2,608,412 2,255,430
Less: Average shares held by the ESOP ................ 952,000 952,000
Plus: ESOP shares released or committed to be released
during the fiscal year ....................... 323,862 238,640
----------- -----------
Average basic shares ........................... 8,663,450 8,931,210
Plus: Average common stock equivalents ............... 663,993 738,492
----------- -----------
Average diluted shares ......................... 9,327,443 9,669,702
=========== ===========
Earnings per common share:
Basic .......................................... $ 0.33 $ 0.30
=========== ===========
Diluted ........................................ $ 0.31 $ 0.28
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 12,237
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 375,720
<INVESTMENTS-MARKET> 380,879
<LOANS> 1,117,828
<ALLOWANCE> 2,869
<TOTAL-ASSETS> 1,566,418
<DEPOSITS> 1,083,284
<SHORT-TERM> 62,750
<LIABILITIES-OTHER> 19,006
<LONG-TERM> 297,037
0
0
<COMMON> 60
<OTHER-SE> 104,281
<TOTAL-LIABILITIES-AND-EQUITY> 1,566,418
<INTEREST-LOAN> 20,199
<INTEREST-INVEST> 7,036
<INTEREST-OTHER> 3
<INTEREST-TOTAL> 27,238
<INTEREST-DEPOSIT> 12,648
<INTEREST-EXPENSE> 18,944
<INTEREST-INCOME-NET> 8,294
<LOAN-LOSSES> 175
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,672
<INCOME-PRETAX> 4,462
<INCOME-PRE-EXTRAORDINARY> 2,851
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,851
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 7.16
<LOANS-NON> 4,532
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,406
<LOANS-PROBLEM> 5,938
<ALLOWANCE-OPEN> 2,776
<CHARGE-OFFS> 82
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,869
<ALLOWANCE-DOMESTIC> 2,869
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
