UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-24040
PENNFED FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3297339
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock on the Nasdaq National Market as of September 10, 1999, was
$119,150,000. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of September 10, 1999, there were issued and outstanding
8,847,410 shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for 1999
Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Business
General
PennFed Financial Services, Inc. ("PennFed" and with its subsidiaries, the
"Company"), a Delaware corporation, was organized in March 1994 for the purpose
of becoming the savings and loan holding company for Penn Federal Savings Bank
("Penn Federal" or the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion"). PennFed owns all of the outstanding stock of the Bank.
All references to the Company, unless otherwise indicated, prior to July 14,
1994 refer to the Bank and its subsidiaries on a consolidated basis. The
Company's common stock is traded on the Nasdaq National Market Tier of the
Nasdaq Stock Market under the symbol "PFSB."
PennFed and the Bank are subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision, Department of the Treasury
("OTS") and by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
member of the Federal Home Loan Bank ("FHLB") System and its deposits are
insured up to applicable limits by the FDIC.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with borrowings and other funds, to
originate and purchase one- to four-family residential mortgage loans, and, to a
lesser extent, commercial and multi-family real estate and consumer loans. See
"-Originations, Purchases, Sales and Servicing of Loans." The Company also
invests in mortgage-backed securities secured by one- to four-family residential
mortgages, U.S. Government and agency obligations and other permissible
investments.
The Company offers a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings, money market, and a variety of
checking accounts, as well as certificate accounts. The Company generally
solicits deposits in its primary market areas.
At June 30, 1999, the Company had total assets of $1.6 billion, deposits of $1.1
billion, borrowings of $333.2 million and stockholders' equity of $107.5
million.
At June 30, 1999, the Company's gross loan portfolio totaled $1.1 billion,
including $915.2 million of one- to four-family residential first mortgage
loans, $74.6 million of commercial and multi-family real estate loans and $72.6
million of consumer loans. In addition, on that date, the Company had $128.0
million of mortgage-backed securities and $309.9 million of other investment
securities and FHLB of New York stock.
At June 30, 1999, the vast majority of the Company's first and second mortgage
loans (excluding mortgage-backed securities) were secured by properties located
in New Jersey. Of the loans secured by properties outside the State of New
Jersey, the majority are one- to four-family loans and the balance are
commercial and multi-family real estate loans. See "-Originations, Purchases,
Sales and Servicing of Loans." The Company's revenues are derived primarily from
interest on loans, mortgage-backed securities and investments, and income from
service charges.
<PAGE>
Penn Federal, through its wholly-owned subsidiary, Penn Savings Insurance
Agency, Inc., offers insurance and uninsured non-deposit investment products to
its customers. See "-Subsidiary Activities."
In October 1997, Penn Federal formed Ferry Development Holding Company, a
Delaware operating subsidiary, to hold and manage its investment portfolio.
The administrative offices of the Company are located at 622 Eagle Rock Avenue,
West Orange, New Jersey 07052-2989, and the telephone number at that address is
(973) 669-7366.
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake - and specifically declines any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Market Area
The Company's primary market areas are comprised of the Ironbound section of the
City of Newark and surrounding urban communities, the suburban Essex County
areas and selected areas of central/southern New Jersey, which are serviced
through twenty full service offices. Penn Federal was organized in the Ironbound
section of Newark in 1941 and the home office of the Bank remains there. The
Ironbound section of the City of Newark and immediately adjacent communities of
East Newark and Harrison are primarily urban blue collar areas with two or more
family dwellings and some manufacturing and industry. Deposits at Bank branches
in these areas comprise 34% of total Bank deposits. The suburban Essex County
area consists of communities with predominantly single family homes, and a white
collar commuter population. Suburban Essex County is the Bank's largest market
<PAGE>
area, accounting for approximately 39% of total Bank deposits at June 30, 1999.
Penn Federal's central/southern New Jersey branches are located in selected
areas of Middlesex, Monmouth and northern Ocean counties. The central/southern
region branches, with 27% of total Bank deposits, serve retirement populations
and expanding townhouse, multi-family and single family home developments. The
Bank also purchases one- to four-family residential loans secured by properties
located primarily in New Jersey. See "-Originations, Purchases, Sales and
Servicing of Loans."
Lending Activities
General. The Company primarily originates and purchases fixed and adjustable
rate, one- to four-family first mortgage loans. The Company's general policy is
to originate and purchase such mortgages with maturities between 10 and 30
years. Adjustable rate mortgage ("ARM") loans are originated and purchased in
order to increase the percentage of loans with more frequent repricing than
fixed rate, one- to four-family mortgage loans. The Company underwrites mortgage
loans generally using Freddie Mac and Fannie Mae guidelines, although loan
amounts may exceed agency limits. See "-Loan Portfolio Composition" and "-One-
to Four-Family Residential Mortgage Lending."
The Company also originates commercial and multi-family real estate loans and
consumer loans. Such loans generally reprice more frequently, have shorter
maturities, and/or have higher yields than fixed rate, one- to four-family
mortgage loans.
Residential and consumer loan applications may be approved by various officers
up to $1.25 million and $1.0 million, respectively. Commercial and multi-family
real estate loan applications are initially considered and approved at various
levels of authority, depending on the amount of the loan. All commercial and
multi-family real estate loans between $750,000 and $1.25 million must be
approved by the Executive Loan Committee which consists of the President and
certain executive and senior officers. The approval of the Company's Board of
Directors is required for all loans above $1.25 million.
The aggregate amount of loans that the Company is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Company could have invested in any one real
estate project is generally the greater of 15% of unimpaired capital and surplus
or $500,000. See "Regulation-Federal Regulation of Savings Associations." At
June 30, 1999, the maximum amount which the Company could have lent to any one
borrower and the borrower's related entities was approximately $18.8 million.
The Company's current policy is to limit such loans to a maximum of 50% of the
general regulatory limit or $5.0 million, whichever is less. At June 30, 1999,
the Company did not have any loans or series of loans to one borrower with
outstanding balances in excess of $3.0 million. At June 30, 1999, the Company's
largest group of loans to one borrower totaled $3.0 million and consisted of
four commercial real estate loans aggregating $2.7 million and one commercial
real estate loan for $283,000 for which a borrower on the four commercial real
estate loans is also a guarantor on this loan. The four commercial real estate
loans are secured by multi-family properties in Essex County. The $283,000 loan
represents the Company's participation in a construction loan for a senior
assisted-living complex in Morris County. At June 30, 1999, there was a total of
19 loans or lender relationships in excess of $1.0 million, for a total amount
of $30.9 million. At that date, all of these loans were performing in accordance
with their respective repayment terms.
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------
1999 1998 1997
Amount Percent Amount Percent Amount Percent
----------- ------ ----------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family(1) $ 915,244 86.15% $ 971,668 89.01% $831,843 89.55%
Commercial and multi-family 74,613 7.02 65,833 6.03 56,811 6.12
----------- ------ ----------- ------ -------- ------
Total first mortgage loans 989,857 93.17 1,037,501 95.04 888,654 95.67
----------- ------ ----------- ------ -------- ------
Other loans:
Consumer loans:
Second mortgages 37,243 3.50 27,232 2.49 23,665 2.55
Home equity lines of credit 31,754 2.99 23,538 2.16 14,040 1.51
Other 3,575 0.34 3,331 0.31 2,512 0.27
----------- ------ ----------- ------ -------- ------
Total consumer loans 72,572 6.83 54,101 4.96 40,217 4.33
----------- ------ ----------- ------ -------- ------
Total loans 1,062,429 100.00% 1,091,602 100.00% 928,871 100.00%
====== ====== ======
Add/(less):
Loans in process -- -- --
Unamortized premiums, deferred
loan fees, and other, net 7,391 7,026 5,202
Allowance for loan losses (3,209) (2,776) (2,622)
----------- ----------- --------
Total loans receivable, net $1,066,611 $1,095,852 $931,451
========== ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1996 1995
-------------------- -----------------------
Amount Percent Amount Percent
-------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
(Dollars in thousands)
First mortgage loans:
One- to four-family(1) $565,924 86.68% $386,125 82.17%
Commercial and multi-family 52,014 7.97 50,448 10.74
-------- ------ -------- ------
Total first mortgage loans 617,938 94.65 436,573 92.91
-------- ------ -------- ------
Other loans:
Consumer loans:
Second mortgages 23,912 3.66 21,105 4.49
Home equity lines of credit 8,955 1.37 9,792 2.08
Other 2,117 0.32 2,461 0.52
-------- ------ -------- ------
Total consumer loans 34,984 5.35 33,358 7.09
-------- ------ -------- ------
Total loans 652,922 100.00% 469,931 100.00%
====== ======
Add/(less):
Loans in process -- --
Unamortized premiums, deferred
loan fees, and other, net 2,279 606
Allowance for loan losses (2,630) (2,860)
-------- --------
Total loans receivable, net $652,571 $467,677
======== ========
</TABLE>
(1) One-to four-family loans include loans held for sale of $5,180,000,
$565,000 and $88,000 at June 30, 1999, 1998 and 1996, respectively. There
were no loans held for sale at June 30, 1997 and 1995.
Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 1999. Loans that have adjustable rates
are shown as amortizing to final maturity rather than when the interest rates
are next subject to change. Loans with balloon payments are also shown as
amortizing to final maturity (i.e., when the balloon payment is due). All
balances are shown on a gross basis and, thus, include no premium or discount
adjustments. Savings account loans and overdraft checking balances, included in
consumer loans, which have no stated final maturity, are reported as due within
one year. The table does not reflect the effects of possible prepayments or
scheduled principal amortization.
<PAGE>
<TABLE>
<CAPTION>
After One After Three After Five After Ten
One Year Through Through Through Through After
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family ......... $ 321 $ 3,424 $ 7,107 $ 73,867 $ 217,989 $ 612,536 $ 915,244
Commercial and multi-family . 4,313 5,459 2,905 15,930 44,105 1,901 74,613
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total first mortgage loans 4,634 8,883 10,012 89,797 262,094 614,437 989,857
Consumer loans .............. 3,658 1,024 5,962 12,674 48,626 628 72,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans, gross ....... $ 8,292 $ 9,907 $ 15,974 $ 102,471 $ 310,720 $ 615,065 $1,062,429
========== ========== ========== ========== ========== ========== ==========
</TABLE>
Loans due after June 30, 2000, which have fixed interest rates amount to $671.0
million, while those with adjustable rates amount to $383.1 million, detailed as
follows:
<TABLE>
<CAPTION>
Due After June 30, 2000
----------------------------------------
Fixed Adjustable Total
----------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
First mortgage loans:
One- to four-family ............... $ 626,139 $ 288,784 $ 914,923
Commercial and multi-family ....... 7,288 63,012 70,300
---------- ---------- ----------
Total first mortgage loans ... 633,427 351,796 985,223
Consumer loans .................... 37,573 31,341 68,914
---------- ---------- ----------
Total loans, gross ........... $ 671,000 $ 383,137 $1,054,137
========== ========== ==========
</TABLE>
One- to Four-Family Residential Mortgage Lending. At June 30, 1999, the
Company's one- to four-family residential mortgage loans totaled $915.2 million,
or approximately 86.15% of the Company's gross loan portfolio. Residential loan
originations are generated by the Company's in-house originations staff,
marketing efforts, its present customers, walk-in customers and referrals from
real estate agents, mortgage brokers and builders. The Company focuses its
lending efforts primarily on the origination of loans secured by first mortgages
on owner-occupied, one- to four-family residences. During the fiscal year ended
June 30, 1999, the Company originated $257.7 million of fixed rate real estate
loans secured by one- to four-family residential real estate. ARM loans
originated during fiscal 1999 totaled $37.8 million. Substantially all of the
Company's one- to four-family residential mortgage originations are secured by
properties located in the State of New Jersey.
<PAGE>
During fiscal 1999, the Company had one correspondent relationship with another
institution through which it purchased $15.4 million of newly originated fixed
and $15.8 million of newly originated adjustable rate one- to four-family
residential first mortgages, all of which are secured by properties located in
the State of New Jersey. A second correspondent relationship was added in late
fiscal 1999. Actual purchases of loans from this second correspondent did not
begin until July 1999. Loans are underwritten by the correspondent institutions
using the Company's guidelines and a portion of those loans are re-underwritten
by the Bank on a test basis. All loans purchased are supported by customary
representations and warranties provided by the correspondent institutions.
See "-Originations, Purchases, Sales and Servicing of Loans."
The Company currently originates one- to four-family residential mortgage loans
with terms of up to 30 years in amounts up to 95% of the appraised value of the
security property. The Company generally requires that private mortgage
insurance be obtained in an amount sufficient to reduce the Company's exposure
to 80% or less of the loan-to-value level. Interest rates charged on loans are
competitively priced according to market conditions.
In underwriting one- to four-family residential real estate loans, the Company
evaluates the borrower's ability to make monthly payments, past credit history
and the value of the property securing the loan. Properties securing real estate
loans made by the Company are appraised by independent appraisers approved by
the Board of Directors. The Company requires borrowers to obtain title insurance
and fire and property insurance (including flood insurance, if necessary) in the
amount of the loan or the replacement cost, whichever is less. Real estate loans
originated and purchased by the Company contain a "due on sale" clause allowing
the Company to declare the unpaid principal balance due and payable upon the
sale of the security property.
Commercial and Multi-Family Real Estate Lending. The Company engages in
commercial and multi-family real estate lending in its market areas. At June 30,
1999, the Company had $74.6 million of commercial and multi-family real estate
loans which represented 7.02% of the Company's gross loan portfolio. This amount
includes less than $625,000 of lines of credit secured by non-real estate
business assets. At June 30, 1999, the average per loan balance of the Company's
commercial and multi-family real estate loans outstanding was $265,000.
The Company's commercial and multi-family real estate loan portfolio is secured
primarily by apartment buildings, mixed-use buildings, small office buildings,
restaurants, warehouses and strip shopping centers. Commercial and multi-family
real estate loans typically have terms that do not exceed 15 years and have a
variety of rate adjustment features and other terms. Generally, the loans are
made in amounts up to 75% of the appraised value of the security property.
Adjustable rate commercial and multi-family real estate loans normally provide
for a margin over various U.S. Treasury securities adjusted to a constant
maturity, with periodic adjustments, or are tied to the Prime Rate as reported
in the Wall Street Journal. In underwriting these loans, the Company analyzes
the current financial condition of the borrower, the borrower's credit history,
and the reliability and predictability of the cash flow generated by the
property securing the loan. The Company usually requires personal guarantees of
the borrowers. Appraisals on properties securing commercial real estate loans
originated by the Company are performed by independent appraisers approved by
the Board of Directors.
<PAGE>
Commercial and multi-family real estate loans generally present a higher level
of risk than loans secured by one-to four-family residences. This greater risk
is due to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effect of general economic conditions on
income-producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial and multi-family real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (e.g., if leases are not obtained or renewed, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be
impaired.
Consumer Lending. The Company offers a variety of secured consumer loans,
including home equity lines of credit, second mortgages, automobile loans, boat
loans and loans secured by savings deposits. In addition, the Company offers
unsecured overdraft checking protection. At June 30, 1999, the Company's total
consumer loan portfolio was $72.6 million, or 6.83% of its gross loan portfolio,
of which approximately 56% were fixed rate loans and 44% were adjustable rate
loans. The Company currently originates substantially all of its consumer loans
in its primary market areas.
The Company originates adjustable rate home equity lines of credit and fixed
rate second mortgage loans generally up to $250,000. Home equity lines of credit
and second mortgage loans together with loans secured by all prior liens, are
generally limited to 75% or less of the appraised value of the property securing
the loan. Second mortgage loans have a maximum term of up to 20 years. Home
equity lines of credit may have varying terms up to 20 years. These loans are
underwritten utilizing criteria similar to the Company's first mortgage loans.
As of June 30, 1999, second mortgage loans and home equity lines of credit
amounted to $69.0 million or 6.49% of the Company's gross loan portfolio.
Consumer loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. The underwriting standards
employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential first mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles and boats. In such
cases, any repossessed collateral from a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.
<PAGE>
Originations, Purchases, Sales and Servicing of Loans
For the fiscal year ended June 30, 1999, the Company originated $371.0 million
of loans, compared to $340.2 million and $173.5 million in fiscal 1998 and 1997,
respectively. Mortgage loan originations are handled by employees of the
Company.
During the fiscal years ended June 30, 1999, 1998 and 1997, the Company
purchased $31.2 million, $89.9 million and $195.5 million of one- to four-family
first mortgage loans, respectively, through correspondent relationships with
other institutions. The purchased loans represent both fixed and adjustable rate
first mortgages secured by properties primarily located throughout New Jersey.
Prior to fiscal 1999, a limited amount of loans secured by properties located in
the Commonwealth of Pennsylvania and State of Massachusetts were purchased.
During fiscal 1999, PennFed actively employed a strategy of selling one- to
four-family mortgage loans. This strategy served to mitigate the effects of low
interest rates and a flat yield curve. For the year ended June 30, 1999, the
Company sold $150.5 million of low-coupon, longer duration one- to four-family
first mortgage loans to Freddie Mac and other secondary market purchasers.
In prior years, the Company sold one-to four-family first mortgage loans from
time to time, to Freddie Mac and other secondary market purchasers. The Company
sold loans in aggregate amounts of $76.2 million and $585,000 during the years
ended June 30, 1998 and 1997, respectively.
In periods of a higher interest rate and steeper yield curve environment, such
as the beginning of fiscal 2000, loan sale activity is expected to be reduced
from the fiscal 1999 level. The level of such activity will continue to be
evaluated with primary consideration given to interest rate risk and long-term
profitability objectives.
When loans are sold, the Company may retain the responsibility for servicing the
loans or may sub-service the loans for a short term period. The Company receives
a fee for performing these services. The Company serviced for others one- to
four-family mortgage loans with an aggregate outstanding principal balance of
$116.2 million, $110.9 million and $78.8 million at June 30, 1999, 1998 and
1997, respectively.
<PAGE>
The following table sets forth the activity in the Company's loan portfolio for
the years indicated.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Net loans receivable at beginning of year ...... $1,095,852 $ 931,451 $ 652,571
Plus:
Loans originated:
One- to four-family .................... 295,522 283,666 141,736
Commercial and multi-family real estate 22,938 18,901 12,225
Consumer ............................... 52,560 37,595 19,501
---------- ---------- ----------
Total loans originated ............. 371,020 340,162 173,462
---------- ---------- ----------
One- to four-family loans purchased ........ 31,220 89,910 195,514
---------- ---------- ----------
Total loans originated and purchased 402,240 430,072 368,976
Less:
One- to four-family loans sold ............. 150,474 76,196 585
Loan principal payments and other, net ..... 280,575 187,360 87,821
Loans transferred to real estate owned ..... 432 2,115 1,690
---------- ---------- ----------
Net loans receivable at end of year ............ $1,066,611 $1,095,852 $ 931,451
========== ========== ==========
</TABLE>
Non-Performing and Classified Assets
Generally, when a borrower fails to make a required payment on a real estate
secured loan or other secured loan the Company institutes collection procedures
by mailing a delinquency notice. The customer is contacted again, by telephone,
if the delinquency is not promptly cured. In many cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent for more than 60 days, a letter of notice of intention to foreclose
is sent and the customer is requested to make arrangements to bring the loan
current. At 90 days past due, unless satisfactory arrangements have been made,
immediate repossession commences or foreclosure procedures are instituted. For
unsecured loans, the collection procedures are similar; however, at 90 days past
due, a specific reserve or charge-off is recommended and, subsequently, a law
suit is filed, if necessary, to obtain a judgement.
At June 30, 1999, the Company's loans delinquent 60 to 89 days totaled $435,000
of which $425,000 were one- to four-family mortgage loans and $10,000 were
consumer loans.
<PAGE>
The table below sets forth the Company's amounts and categories of
non-performing assets and restructured loans. Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more than
90 days. There are no loans delinquent more than 90 days which are still
accruing. Real estate owned represents assets acquired in settlement of loans
and is shown net of valuation allowances. Restructured loans are all performing
in accordance with modified terms and were, therefore, considered performing.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ................ $2,937 $2,575 $3,567 $4,009 $3,040
Commercial and multi-family ........ 46 414 1,053 913 1,090
Consumer ........................... 687 753 865 1,264 1,435
------ ------ ------ ------ ------
Total non-accruing loans ......... 3,670 3,742 5,485 6,186 5,565
Real estate owned, net .............. 936 1,643 884 1,083 1,177
------ ------ ------ ------ ------
Total non-performing assets ...... 4,606 5,385 6,369 7,269 6,742
Restructured loans .................. _ 1,415 1,451 2,340 2,922
------ ------ ------ ------ ------
Total risk elements .............. $4,606 $6,800 $7,820 $9,609 $9,664
====== ====== ====== ====== ======
Non-accruing loans as a percentage
of total loans ................. 0.34% 0.34% 0.59% 0.95% 1.18%
====== ====== ====== ====== ======
Non-performing assets as a percentage
of total assets ................ 0.30% 0.35% 0.48% 0.67% 0.78%
====== ====== ====== ====== ======
Total risk elements as a percentage
of total assets ................ 0.30% 0.44% 0.59% 0.88% 1.11%
====== ====== ====== ====== ======
</TABLE>
For the year ended June 30, 1999, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $137,000, none of which was included in interest
income during this period.
Non-Performing Assets. Non-accruing loans at June 30, 1999 were comprised of 38
one- to four-family loans aggregating $2.9 million, 20 consumer loans
aggregating $687,000 and one commercial and multi-family real estate loan
totaling $46,000.
Real estate owned at June 30, 1999 included six one- to four-family properties
totaling $357,000, the largest of which had a net book value of $127,000, and
one commercial property with a total net book value of $579,000.
Restructured Loans. In the normal course of business the Company has
restructured the terms of certain loans. No loans have been restructured within
the last three fiscal years. Any loan that has been restructured continues to
perform in accordance with the restructured terms.
<PAGE>
Other Loans of Concern. As of June 30, 1999, there were $1.1 million of other
loans not included in the table or discussed above where known information about
the possible credit problems of borrowers caused management to have doubts as to
the ability of the borrower to comply with present loan repayment terms and
which may result in disclosure of such loans in the future.
Included in other loans of concern at June 30, 1999 are six loans to one
borrower and one loan to an affiliated party totaling $1.0 million acquired in
the 1989 acquisition of First Federal Savings and Loan Association of Montclair.
The six loans consist of one commercial real estate loan of $436,000, four one-
to four-family loans totaling $217,000 and a $79,000 line of credit. The loan to
an affiliated party consists of a commercial real estate loan of $262,000. All
of these loans are secured by properties located in New Jersey. The commercial
real estate loans are secured by mixed-use properties consisting of retail
stores and apartments located in Essex County, New Jersey. All of these loans
were originated from 1985 to 1989 with thirty year terms. At June 30, 1999, a
$16,000 one- to four-family loan and the line of credit, both secured by the
same property, were more than 90 days past due. Foreclosure proceedings have
begun. Another one- to four-family mortgage loan with a balance of $89,000 was
30 days delinquent at June 30, 1999. The borrower has indicated that the
property securing this particular loan is under contract for sale. All of the
remaining loans were performing in accordance with their respective repayment
terms. The Company continues to monitor these loans due to their periodic
delinquencies.
All of the other loans of concern have been considered by management in
conjunction with the analysis of the adequacy of the allowance for loan losses.
Classified Assets. Federal regulations provide for the classification of loans
and other assets such as debt and equity securities considered by the OTS to be
of lesser quality as "substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that the establishment of a specific loss reserve is
warranted.
When a savings institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings institution classifies problem assets
as "loss," it is required to either establish a specific reserve equal to 100%
of that portion of the asset so classified or to charge-off such amount.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the assets in its portfolio to determine whether any assets require
<PAGE>
classification in accordance with applicable regulations. On the basis of
management's review of its assets at June 30, 1999, the Bank's classified
assets, including real estate owned, totaled $5.7 million, with $5.5 million
classified as substandard and $198,000 classified as loss. Total classified
assets represent 5.33% of the Company's stockholders' equity and 0.37% of the
Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, and other
factors that warrant recognition in providing for an adequate loan loss
allowance.
Real estate properties acquired through foreclosure are recorded at the lower of
cost or estimated fair value less costs to dispose of such properties. If fair
value at the date of foreclosure is lower than the balance of the related loan,
the difference will be charged-off to the allowance for loan losses at the time
of transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on real estate owned is established by
a charge to operations.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to record additions to the
allowance level based upon their assessment of the information available to them
at the time of examination.
<PAGE>
The following table sets forth an analysis of the Company's allowance for loan
losses at, and for, the dates indicated.
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ........ $ 2,776 $ 2,622 $ 2,630 $ 2,860 $ 3,060
Charge-offs:
One- to four-family ............... (60) (306) (392) (195) (267)
Commercial and multi-family ....... (165) (44) (147) (508) (223)
Consumer .......................... (171) (96) (146) (238) (279)
------- ------- ------- ------- -------
(396) (446) (685) (941) (769)
------- ------- ------- ------- -------
Recoveries:
One- to four-family ............... -- -- -- -- --
Commercial and multi-family ....... 49 -- -- 101 --
Consumer .......................... -- -- 42 -- --
------- ------- ------- ------- -------
49 -- 42 101 --
------- ------- ------- ------- -------
Net charge-offs ..................... (347) (446) (643) (840) (769)
Additions charged to operations ..... 780 600 635 610 569
------- ------- ------- ------- -------
Balance at end of year .............. $ 3,209 $ 2,776 $ 2,622 $ 2,630 $ 2,860
======= ======= ======= ======= =======
Ratio of net charge-offs during the
year to average loans outstanding
during the year .................. 0.03% 0.04% 0.08% 0.16% 0.19%
======= ======= ======= ======= =======
Ratio of allowance for loan losses
to total loans at end of year .... 0.30% 0.25% 0.28% 0.40% 0.61%
======= ======= ======= ======= =======
Ratio of allowance for loan losses to
non-accruing loans at end of year 87.44% 74.18% 47.80% 42.52% 51.39%
======= ======= ======= ======= =======
</TABLE>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized in the following table. The portion of the allowance
allocated to each loan category does not necessarily represent the total
available for possible future losses within that category since the total
allowance is applicable to the entire loan portfolio.
<PAGE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -----------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $1,797 86.15% $1,502 89.01% $1,463 89.55%
Commercial and
multi-family real estate 855 7.02 740 6.03 654 6.12
Consumer 557 6.83 534 4.96 505 4.33
------ ------ ------ ------ ------ ------
Total $3,209 100.00% $2,776 100.00% $2,622 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
June 30,
------------------------------------------------------
1996 1995
--------------------- ---------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family $1,290 86.68% $ 657 82.17%
Commercial and
multi-family real estate 782 7.97 1,602 10.74
Consumer 558 5.35 601 7.09
------ ------ ------- ------
Total $2,630 100.00% $2,860 100.00%
====== ====== ======= ======
</TABLE>
<PAGE>
Investment Activities
The Bank must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Historically, the Bank has maintained its liquid assets
above the minimum requirements imposed by the OTS regulations and at a level
believed adequate to meet requirements of normal daily activities, repayment of
maturing debt and potential deposit outflows. As of June 30, 1999, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable deposit
accounts and current borrowings) was 21.30%. See "Regulation-Liquidity."
At June 30, 1999, the Company had a securities portfolio consisting principally
of U.S. Government agency securities, including mortgage-backed securities.
These investments carry a low risk weighting for OTS risk-based capital
purposes, generally satisfy OTS liquid-asset requirements and are of relatively
short duration. See "Regulation-Regulatory Capital Requirements" and
"Regulation-Liquidity."
Investment Securities. At June 30, 1999, the Company's investment securities
(including a $16.6 million investment in FHLB of New York stock) totaled $309.9
million, or 19.9 % of its total assets. It is the Company's general policy to
purchase U.S. Government securities and federal agency obligations and other
investment grade securities in accordance with its strategic objectives,
including, but not limited to, liquidity, growth, yield and interest rate risk
management and to provide collateral for borrowings. During fiscal 1998, PennFed
invested in certain non-investment grade Trust preferred securities of other
financial institutions. At June 30, 1999, PennFed held $11.2 million of such
non-investment grade securities. In addition, investment securities at June 30,
1999 included $17.5 million of investment grade Trust preferred securities.
OTS regulations restrict investments in corporate debt and equity securities by
the Bank. See "Regulation-Federal Regulation of Savings Associations" for a
discussion of additional restrictions on the Company's investment activities.
<PAGE>
The following table indicates the composition of the investment securities
portfolio, excluding FHLB of New York stock, based on the final maturities of
each investment.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------------------------------------
After After
One Year Five Years After Total
Through Through Ten Investment
Five Years Ten Years Years Securities
---------- ---------- ---------- --------------------------
Book Value Book Value Book Value Book Value Market Value
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations ... $ -- $ 10,000 $254,538 $264,538 $254,243
Obligations of states and
political subdivisions 40 -- -- 40 45
Trust preferred
securities ........... -- -- 28,704 28,704 27,592
-------- -------- -------- -------- --------
Total investment
securities ........... $ 40 $ 10,000 $283,242 $293,282 $281,880
======== ======== ======== ======== ========
Weighted average yield at
year end ............. 10.38% 6.77% 7.04% 7.03%
======== ======== ======== ========
</TABLE>
At June 30, 1999, the weighted average life of this portfolio was 3.4 years,
based on the shorter of the remaining maturity or anticipated call date.
The Company's investment securities portfolio at June 30, 1999 did not contain
securities of any issuer or tax-exempt securities with an aggregate book value
in excess of 10% of the Company's retained earnings, excluding those issued by
the U.S. Government or its agencies.
Mortgage-Backed Securities. At June 30, 1999, mortgage-backed securities totaled
$128.0 million, or 8.2% of the Company's total assets, of which approximately
20% consisted of adjustable rate securities. The Company has invested primarily
in federal agency securities, principally those of Ginnie Mae, Freddie Mac and
Fannie Mae.
<PAGE>
The following table indicates the composition of the mortgage-backed securities
portfolio, excluding unamortized premiums, based on the final maturities of each
security.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------------------------------------
After After
One Year Five Years After Total
Through Through Ten Mortgage-backed
Five Years Ten Years Years Securities
---------- ---------- ---------- --------------------------
Book Value Book Value Book Value Book Value Market Value
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Ginnie Mae .............. $ 79 $ 994 $ 998 $ 2,071 $ 2,162
Freddie Mac ............. 25,549 12,526 36,547 74,622 75,119
Fannie Mae .............. 9,162 13,284 28,453 50,899 51,233
CMOs/REMICs ............. -- -- 103 103 103
-------- -------- -------- -------- --------
Total mortgage-backed
securities ......... $ 34,790 $ 26,804 $ 66,101 $127,695 $128,617
======== ======== ======== ======== ========
Weighted average yield at
year end ............. 6.75% 7.07% 7.21% 7.06%
======== ======== ======== ========
</TABLE>
The Ginnie Mae, Freddie Mac and Fannie Mae certificates are modified
pass-through mortgage-backed securities that represent undivided interests in
underlying pools of fixed rate, or certain types of adjustable rate,
single-family residential mortgages issued by these government-sponsored
entities. Ginnie Mae's guarantee to the certificate holder of timely payments of
principal and interest is backed by the full faith and credit of the U.S.
Government. Freddie Mac and Fannie Mae provide the certificate holder a
guarantee of timely payments of interest and scheduled principal payments,
whether or not they have been collected.
The following table sets forth the Company's mortgage-backed securities purchase
and repayment activities for the years indicated.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities, net:
At beginning of year .............. $204,452 $288,539 $346,068
Securities purchased .............. 34 -- --
Less:
Principal repayments .............. 76,207 83,775 57,266
Amortization of premiums .......... 296 312 263
-------- -------- --------
At end of year .................... $127,983 $204,452 $288,539
======== ======== ========
</TABLE>
<PAGE>
The following table sets forth the composition of the Company's investment and
mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
Percent Percent
of Total of Total
Book Market Book Book Market Book
Value Value Value Value Value Value
-------- -------- ------ -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government and
agency obligations .................... $264,538 $254,243 85.36% $166,969 $166,985 86.35%
Obligations of states and
political subdivisions ................ 40 45 0.01 140 147 0.07
Trust preferred securities ................ 28,704 27,592 9.27 11,201 11,611 5.79
-------- -------- ------ -------- -------- ------
Total investment securities ........... 293,282 281,880 94.64 178,310 178,743 92.21
FHLB of New York stock ................ 16,623 16,623 5.36 15,065 15,065 7.79
-------- -------- ------ -------- -------- ------
Total investment securities and
FHLB of New York stock ............. $309,905 $298,503 100.00% $193,375 $193,808 100.00%
======== ======== ====== ======== ======== ======
Weighted average life of investment
securities excluding FHLB of New York stock (1) 3.4 years 0.9 years
Mortgage-backed securities:
Ginnie Mae ................................ $ 2,071 $ 2,162 1.62% $ 3,005 $ 3,195 1.47%
Freddie Mac ............................... 74,622 75,119 58.31 123,444 125,931 60.38
Fannie Mae ................................ 50,899 51,233 39.77 77,019 78,601 37.67
CMOs/REMICs ............................... 103 103 0.08 400 401 0.19
-------- -------- ------ -------- -------- ------
127,695 128,617 99.78 203,868 208,128 99.71
Unamortized premiums, net ................. 288 -- 0.22 584 -- 0.29
-------- -------- ------ -------- -------- ------
Total mortgage-backed securities ...... $127,983 $128,617 100.00% $204,452 $208,128 100.00%
======== ======== ====== ======== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------
1997
---------------------------------
Percent
of Total
Book Market Book
Value Value Value
-------- ------- ------
<S> <C> <C> <C>
Investment securities:
U.S. Government and
agency obligations .................... $ 34,999 $35,125 73.37%
Obligations of states and
political subdivisions ................ 291 307 0.61
Trust preferred securities ................ -- -- --
-------- ------- ------
Total investment securities ........... 35,290 35,432 73.98
FHLB of New York stock ................ 12,413 12,413 26.02
-------- ------- ------
Total investment securities and
and FHLB of New York stock ......... $ 47,703 $47,845 100.00%
======== ======= ======
Weighted average life of investment
securities excluding FHLB of New York stock (1) 1.0 year
Mortgage-backed securities:
Ginnie Mae ................................ $ 3,993 $ 4,205 1.38%
Freddie Mac ............................... 184,028 186,350 63.78
Fannie Mae ................................ 98,684 99,632 34.20
CMOs/REMICs ............................... 938 938 0.33
-------- ------- ----
287,643 291,125 99.69
Unamortized premiums, net ................. 896 -- 0.31
-------- ------- ----
Total mortgage-backed securities ...... $288,539 $291,125 100.00%
======== ======== ======
</TABLE>
(1) The weighted average life of investment securities is based on the shorter
of the remaining maturity or anticipated call date.
<PAGE>
Sources of Funds
General. The Company's sources of funds are deposits, borrowings, payment of
principal and interest on loans and mortgage-backed securities, interest
received on and maturities or calls of other investment securities and funds
provided from operations.
Deposits. The Company offers a variety of deposit accounts having a wide range
of interest rates and terms. The Company's deposits consist of savings, money
market and demand deposit accounts, as well as certificate accounts currently
ranging in terms up to 60 months. The Company solicits deposits primarily from
its market areas and relies primarily on product mix, competitive pricing
policies, advertising, customer service and customer relationships to attract
and retain deposits. The Company also solicits short term deposits from
municipalities in its market areas. As of June 30, 1999, certificates of deposit
from municipalities totaled $57.9 million.
The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management, liquidity and profitability
objectives. In this regard, the Company has from time-to-time paid slightly
higher rates than its competitors to attract certificates of deposit. Based on
its experience, the Company believes that its savings, money market and demand
deposit accounts are relatively stable sources of deposits. However, the ability
of the Company to attract and maintain certificates of deposit and the rates
paid on these deposits has been and will continue to be significantly affected
by market conditions, including general economic conditions, changes in interest
rates and competition. At June 30, 1999 and 1998, the Company had $1.0 million
of brokered deposits. See Item 8 - Financial Statements Note I - Deposits - of
the Notes to Consolidated Financial Statements.
<PAGE>
The following table sets forth the deposit flows of the Company during the
periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Opening balance ............ $ 1,028,100 $ 918,160 $ 836,416
Net deposits (withdrawals) . (5,555) 68,152 47,233
Interest credited .......... 41,055 41,788 34,511
----------- ----------- -----------
Ending balance ............. $ 1,063,600 $ 1,028,100 $ 918,160
=========== =========== ===========
Net increase ............... $ 35,500 $ 109,940 $ 81,744
=========== =========== ===========
Percent increase ........... 3.45% 11.97% 9.77%
=========== =========== ===========
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 1999.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $134,234 $143,702 $207,935 $154,763 $640,634
Certificates of deposit of $100,000 or more 78,081 19,479 33,116 15,840 146,516
-------- -------- -------- -------- --------
Total certificates of deposit ............. $212,315 $163,181 $241,051 $170,603 $787,150
======== ======== ======== ======== ========
</TABLE>
Borrowings. Although deposits are the Company's primary source of funds, the
Company's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread, when the
Company desires additional capacity to fund loan demand or to extend the life of
its liabilities.
The Company's borrowings historically have consisted of advances from the FHLB
of New York, and to a lesser extent, reverse repurchase agreements. FHLB of New
York advances can be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities.
<PAGE>
The following table sets forth the maximum month-end balance, average balance
and weighted average cost of FHLB of New York advances and other borrowings for
the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Maximum balance for the year ended:
FHLB of New York advances ............................... $289,465 $240,465 $205,465
Other borrowings:
Overnight repricing lines of credit .................. $ 54,700 $ 50,000 $ 46,610
FHLB of New York one-month overnight repricing
line of credit .................................... 10,000 35,000 15,000
Reverse repurchase agreements callable or maturing
within one year .................................... 39,925 49,925 30,100
Reverse repurchase agreements maturing after one year 49,275 29,875 10,000
-------- -------- --------
Total other borrowings ............................ $153,900 $164,800 $101,710
======== ======== ========
Average balance for the year ended:
FHLB of New York advances ............................... $266,906 $218,568 $147,945
Other borrowings:
Overnight repricing lines of credit .................. $ 21,254 $ 24,620 $ 29,537
FHLB of New York one-month overnight repricing
line of credit .................................... 1,221 4,401 8,886
Reverse repurchase agreements callable or maturing
within one year .................................... 10,824 23,091 24,244
Reverse repurchase agreements maturing after one year 40,215 21,487 5,417
-------- -------- --------
Total other borrowings ............................. $ 73,514 $ 73,599 $ 68,084
======== ======== ========
Balance at June 30:
FHLB of New York advances ............................... $244,465 $230,465 $205,465
Other borrowings:
Overnight repricing lines of credit .................. $ 29,900 $ 41,700 $ 32,650
FHLB of New York one-month overnight repricing
line of credit .................................... -- 10,000 10,000
Reverse repurchase agreements callable or maturing
within one year .................................... 19,563 49,925 30,100
Reverse repurchase agreements maturing after one year 39,275 29,875 10,000
-------- -------- --------
Total other borrowings ............................. $ 88,738 $131,500 $ 82,750
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Weighted average cost of funds for the year ended:
FHLB of New York advances ............................... 6.01% 6.13% 6.14%
Other borrowings:
Overnight repricing lines of credit .................. 5.20% 5.75% 5.47%
FHLB of New York one-month overnight repricing
line of credit .................................... 5.42% 5.85% 5.48%
Reverse repurchase agreements callable or maturing
within one year ................................... 5.58% 5.59% 5.50%
Reverse repurchase agreements maturing after one year 5.74% 6.06% 6.24%
Weighted average cost of funds at June 30:
FHLB of New York advances ............................... 5.93% 6.06% 6.13%
Other borrowings:
Overnight repricing lines of credit .................. 5.98% 6.25% 6.63%
FHLB of New York one-month overnight repricing
line of credit .................................... -- 6.13% 6.38%
Reverse repurchase agreements callable or maturing
within one year ................................... 5.01% 5.35% 5.74%
Reverse repurchase agreements maturing after one year 5.93% 5.93% 6.24%
</TABLE>
Trust Preferred Securities. During fiscal 1998, the Company formed a
wholly-owned trust subsidiary, PennFed Capital Trust I (the "Trust"). Effective
October 21, 1997, the Trust sold $34.5 million of 8.90% cumulative trust
preferred securities to the public which are reflected on the Consolidated
Statement of Financial Condition as Guaranteed Preferred Beneficial Interest in
the Company's Junior Subordinated Debentures (the "Trust Preferred securities").
The Trust used the proceeds from the sale of the Trust Preferred securities to
purchase 8.90% junior subordinated deferrable interest debentures issued by
PennFed. The Company used the proceeds from the junior subordinated debentures
for general corporate purposes, including a $20 million capital contribution to
the Bank to support future growth.
Subsidiary Activities
As a federally chartered savings association, Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $31.2 million at June 30, 1999,
in the stock of, or loans to, service corporation subsidiaries. As of such date,
the net book value of Penn Federal's investment in its service corporation was
$75,000. In addition to investments in service corporations, federal
associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal association may engage
in directly. As of June 30, 1999, the Bank's investment in its operating
subsidiary was $421.8 million.
<PAGE>
Penn Federal currently has a single service corporation, which is known as Penn
Savings Insurance Agency, Inc. ("PSIA"). PSIA offers insurance and uninsured
non-deposit investment products to the Company's customers and members of the
general public through a program known as Investment Services at Penn Federal.
Securities are offered through Liberty Securities Corp. ("LSC"), a registered
broker dealer, member NASD and SIPC. Annuities and insurance are offered through
IFS Agencies, Inc., a licensed insurance agency. Neither LSC or IFS Agencies,
Inc. is affiliated with the Bank. The Bank's relationship with LSC and IFS
Agencies, Inc., gives customers convenient access to financial
consulting/advisory services and related non-deposit investment products, such
as fixed and variable annuities and mutual funds. In addition, securities
brokerage services are available through Liberty Securities Corp. Beginning
sometime in fiscal 2000, life, health and disability insurance will be available
through IFS Agencies, Inc. To a much lesser extent, PSIA also offers homeowners
insurance to Bank customers.
In October 1997, Penn Federal formed Ferry Development Holding Company, a
Delaware operating subsidiary, to hold and manage its investment portfolio.
Competition
The Company faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks, other savings associations, mortgage
banking companies and credit unions making loans secured by real estate located
in the State of New Jersey. Commercial banks, credit unions and finance
companies provide vigorous competition in consumer lending. The Company competes
for real estate and other loans principally on the basis of the quality of
services it provides to borrowers, interest rates and loan fees it charges, and
the types of products offered.
The Company attracts substantially all of its deposits through its branches,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from commercial banks, savings
associations, credit unions and brokerage houses. The Company competes for these
deposits by offering a variety of deposit accounts at competitive rates, quality
customer service, convenient business hours and branch locations with
interbranch deposit and withdrawal privileges.
<PAGE>
REGULATION
General
Penn Federal is a federally chartered savings bank, the deposits of which are
federally insured up to applicable limits. Accordingly, the Bank is subject to
comprehensive federal regulation and oversight extending to all its operations.
Penn Federal is a member of the FHLB of New York and is subject to certain
limited regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). As the savings and loan holding company of Penn
Federal, PennFed is also subject to federal regulation and oversight. The
purpose of the regulation of PennFed and other savings and loan holding
companies is to protect subsidiary savings associations. The Bank is a member of
the Savings Association Insurance Fund ("SAIF") and the deposits of Penn Federal
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank. For purposes of the "Regulation"
discussion, the terms "savings bank," "savings association" and "savings
institution" would apply to the Bank.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings associations. As
part of this authority, Penn Federal is required to file periodic reports with
the OTS and is subject to periodic examinations by the OTS and the FDIC. The
last regular OTS and FDIC examinations of the Bank were as of September 1998 and
May 1992, respectively.
All savings associations are subject to a semi-annual OTS assessment, based upon
the savings association's total assets and supervisory evaluation. The Bank's
OTS assessment for the fiscal year ended June 30, 1999 was $260,000.
The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including Penn Federal and PennFed. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist and/or removal and prohibition orders
and to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of interim and final enforcement
actions by the OTS is required.
In addition, the investment, lending and branching authority of Penn Federal is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. At June 30, 1999, the Bank was in compliance with each of these
restrictions. Federal savings associations meeting the Qualified Thrift Lender
Test or comparable requirement are also generally authorized to branch
nationwide. See "-- Qualified Thrift Lender Test."
<PAGE>
The OTS, as well as the other federal banking agencies, has developed guidelines
establishing safety and soundness standards on matters such as loan underwriting
and documentation, internal controls and audit systems, asset quality, earning
standards, interest rate risk exposure and compensation and other employee
benefits.
Insurance of Accounts and Regulation by the FDIC
Penn Federal's deposits are insured by the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the deposit
insurance funds. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the institution's deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound practices,
or is in an unsafe or unsound condition.
The FDIC's SAIF deposit premiums are assessed through a risk-based system under
which all insured depository institutions are placed into one of nine categories
and assessed insurance premiums, based upon their level of capital and
supervisory evaluation. The current SAIF premium schedule ranges from 0.00% to
0.27% of deposits. The Bank has been notified by the FDIC that for the
semi-annual assessment period beginning July 1, 1999, it will be assessed
insurance premiums at an annual rate of 0.00% because it is considered
financially sound. In addition to the SAIF assessment, the FDIC is authorized to
collect an assessment against SAIF-assessable deposits to be paid to the
Financing Corporation ("FICO"). The actual FICO assessment rate that is applied
to deposits is not tied to the FDIC risk classification and is determined on a
quarterly basis. For the quarterly period beginning July 1, 1999, the Company's
FICO assessment rate is 0.058% of deposits, on an annualized basis.
Prior to September 30, 1996, financial institutions which were members of the
Bank Insurance Fund ("BIF") were assessed substantially lower deposit insurance
premiums because the BIF had achieved its required level of reserves while the
SAIF had not yet achieved its required reserves. As a result of legislation
signed into law on September 30, 1996, the SAIF recapitalization plan provided
for a one-time assessment of 0.657% of deposits, which was imposed on all
institutions with SAIF-insured deposits, to enable the SAIF to achieve its
required level of reserves. The assessment was based on deposits as of March 31,
1995, and the Bank's special assessment was approximately $4.8 million, or $3.1
million, net of taxes. Following the recapitalization assessment, beginning
January 1, 1997 deposit insurance premiums were decreased significantly from the
0.23% of deposits previously paid by the Bank to 0.00%, plus the FICO assessment
described above.
Regulatory Capital Requirements
Federally insured savings associations, such as Penn Federal, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
<PAGE>
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained earnings, and certain noncumulative
perpetual preferred stock. In addition, all intangible assets, other than
certain amounts of mortgage servicing rights, must be deducted from assets and
capital for calculating compliance with the requirements. At June 30, 1999, Penn
Federal had $11.1 million of intangible assets other than qualifying mortgage
servicing rights.
The OTS regulations establish special capitalization requirements for savings
associations that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are fully
deducted from assets and capital. The Bank has two subsidiaries, Penn Savings
Insurance Agency, Inc. and Ferry Development Holding Co., both of which are
includable subsidiaries.
At June 30, 1999, Penn Federal had tangible capital of $121.9 million, or 7.88%
of adjusted total assets, which was approximately $98.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of adjusted
total assets. Core capital generally consists of tangible capital plus certain
intangible assets up to 25% of adjusted total assets. At June 30, 1999, Penn
Federal did not have any intangibles which were subject to these tests. As a
result of the prompt corrective action provisions discussed below, however, a
savings association must maintain a core capital ratio of at least 4% to be
considered adequately capitalized unless its supervisory condition is such to
allow it to maintain a 3% ratio.
At June 30, 1999, Penn Federal had core capital equal to $121.9 million, or
7.88% of adjusted total assets, which was approximately $60.1 million above the
4% ratio required to be considered adequately capitalized.
The OTS risk-based capital requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of selected items, such as certain permanent and maturing capital
instruments that do not qualify as core capital and allowances for loan and
lease losses up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent of
core capital. At June 30, 1999, the Bank had no capital instruments that qualify
as supplementary capital and had $3.1 million of allowances for loan and lease
losses, all of which was included since it was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments (as
defined by regulation), that portion of land loans and nonresidential
construction loans in excess of an 80% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments. At June 30, 1999, Penn Federal had
$50,000 of such exclusions from capital and assets.
<PAGE>
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, are multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of assets. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by Freddie Mac and Fannie Mae.
On June 30, 1999, Penn Federal had total risk-based capital of $125.0 million
(including $121.9 million in core capital and $3.1 million in allowable
supplementary capital) and risk-weighted assets of $767.2 million (including
$24.3 million in converted off-balance sheet assets) resulting in risk-based
capital of 16.29% of risk-weighted assets. This amount was $63.6 million above
the 8% requirement in effect on that date.
The federal banking agencies, including the OTS, have also adopted regulations
authorizing the agencies to require a depository institution to maintain
additional total capital to account for concentration of credit risk and the
risk of non-traditional activities.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against savings associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and, until such plan is approved by the OTS, may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized associations.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more additional mandated specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
divestiture, merger or acquisition of the association. An association that
becomes "critically undercapitalized" (i.e., a ratio of tangible equity to total
assets of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations.
Any undercapitalized association is also subject to actions by the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver. The OTS is also authorized to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Penn Federal
may have a substantial adverse effect on the Bank's operations and profitability
and the market value of PennFed's common stock. Stockholders do not have
preemptive rights, and therefore, if the Company is directed by the OTS or the
FDIC to issue additional shares of common stock, such issuance may result in the
dilution in the percentage of ownership of existing stockholders.
<PAGE>
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the association's minimum
capital requirements or the amount required to be maintained for the liquidation
account established in connection with the Conversion.
Generally, associations that before and after the proposed distribution meet
their fully phased-in capital requirements may make capital distributions during
any calendar year equal to 100% of net income for the year-to-date plus retained
net income for the two previous years without OTS approval. As a subsidiary of
PennFed, the Bank is required to give the OTS 30 days' notice prior to declaring
any dividend on its stock. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. See "-Regulatory Capital
Requirements."
Liquidity
All savings associations, including Penn Federal, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the minimum liquid asset
ratio is 4%. Penalties may be imposed upon associations for violations of the
liquid asset ratio requirement. At June 30, 1999, Penn Federal was in compliance
with the requirement, with a liquidity ratio of 21.30%.
Accounting
An OTS policy statement applicable to all savings associations clarifies and
re-emphasizes that the investment activities of a savings association must be in
compliance with approved and documented investment policies and strategies, and
must be accounted for in accordance with generally accepted accounting
principles ("GAAP"). Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. Penn Federal is
in compliance with these policy statements.
The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent risk
and that financial reports must incorporate any other accounting regulations or
orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Penn Federal, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended (the "Code"). Under either test, such assets primarily consist of
residential housing related loans and investments. At June 30, 1999, the Bank
met the QTL test and has always met the test since its effective date.
<PAGE>
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB of New York
borrowings and is subject to national bank limits for payment of dividends. If
such association has not requalified or converted to a national bank within
three years after the failure, it must divest itself of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB of New York borrowings, which may result in
prepayment penalties. If any association that fails the QTL test is controlled
by a holding company, then within one year after the failure, the holding
company must register as a bank holding company and become subject to all
restrictions on bank holding companies. See "-Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has
a continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with CRA. The
CRA requires the OTS, in connection with the examination of Penn Federal, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by Penn Federal. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
Due to the heightened attention being given to the CRA in recent years, the Bank
may be required to devote additional funds for investment and lending in its
local community. The Bank was examined for CRA compliance in February 1999 and
received a rating of outstanding.
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries and
its affiliates are required to be on terms as favorable to the association as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to affiliates, are restricted to a percentage of the association's
capital. Affiliates of Penn Federal include PennFed and any company which is
under common control with the Bank. In addition, a savings association may not
lend to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. Penn Federal's
subsidiaries are not deemed affiliates; however, the OTS has the discretion to
treat subsidiaries of savings associations as affiliates on a case-by-case
basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
<PAGE>
Holding Company Regulation
PennFed is a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, PennFed is required to register and file reports
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over PennFed, which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association.
PennFed must obtain approval from the OTS before acquiring control of any other
SAIF-insured association. Such acquisitions are generally prohibited if they
result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal Securities Law
The common stock of PennFed is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). PennFed is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder.
PennFed stock held by persons who are affiliates (generally executive officers,
directors and principal stockholders) of PennFed may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
PennFed meets specified current public information requirements, each affiliate
of PennFed is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking accounts). At June 30, 1999, Penn Federal was in
compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS.
See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Penn Federal is a member of the FHLB of New York, which is one of 12 regional
FHLBs that provides loans and correspondent services to its members. Each FHLB
serves as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors of
the FHLB, which are subject to the oversight of the Federal Housing Finance
Board. All borrowings from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB.
<PAGE>
As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York. At June 30, 1999, the Bank had $16.6 million in FHLB of New York
stock, which was in compliance with this requirement. In past years, Penn
Federal has received substantial dividends on its FHLB of New York stock. Over
the past five fiscal years such dividends have averaged 6.93%.
For the year ended June 30, 1999, dividends paid by the FHLB of New York to Penn
Federal totaled $1,124,000, resulting in a 6.90% yield.
Federal and State Taxation
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Net operating losses can offset no more than
90% of alternative minimum taxable income.
PennFed files consolidated federal income tax returns with the Bank and its
subsidiaries.
To the extent a savings association makes "non-dividend distributions," such
distributions will be considered to have been made from the association's tax
bad debt reserves (including the base year reserve) and then from the
association's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the association's income. Non-dividend
distributions include distributions in excess of the association's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the association's current or accumulated
earnings and profits will not be so included in the association's income.
The amount of additional taxable income created from a non-dividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate tax rate. The Bank does not intend to pay dividends that would result
in a recapture of any portion of its tax bad debt reserves.
The Bank and its consolidated subsidiary have been audited by the Internal
Revenue Service ("IRS") with respect to consolidated federal income tax returns
through December 31, 1991. There were no material adjustments made to taxable
income as originally reported to the IRS. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, PennFed) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Company and its consolidated subsidiaries.
<PAGE>
New Jersey Taxation. The Bank is taxed under the New Jersey Savings Institution
Tax Act. The tax is an annual privilege tax imposed at a rate of 3% on the net
income of the Bank as reported for federal income tax purposes, with certain
modifications. PennFed is taxed under the New Jersey Corporation Business Tax
Act, and if it meets certain tests, will be taxed as an investment company at an
effective annual rate for the taxable year ending June 30, 1999 of 2.3% of New
Jersey Taxable Income (as defined). If it fails to meet such tests, it will be
taxed at an annual rate of 9% of New Jersey Taxable Income. It is anticipated,
based upon representations of PennFed regarding its current and future holdings
and operations, that PennFed will be taxed as an investment company. Penn
Savings Insurance Agency is taxed under the New Jersey Corporation Business Tax
Act and is, therefore, taxed at a rate of 9%.
Delaware Taxation. PennFed, as a Delaware holding company, and Ferry Development
Holding Company ("FDHC"), a Delaware investment company, are exempt from
Delaware corporate income tax, but are required to file an annual report with
and pay an annual fee to the State of Delaware. PennFed and FDHC are also
subject to an annual franchise tax imposed by the State of Delaware. As a
Delaware business trust, PennFed Capital Trust I is not required to pay income
or franchise taxes to the State of Delaware.
EXECUTIVE OFFICERS
The executive officers of PennFed are elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors. The executive officers of
PennFed are as follows: Joseph L. LaMonica, President and Chief Executive
Officer; Lucy T. Tinker, Senior Executive Vice President and Chief Operating
Officer; Patrick D. McTernan, Senior Executive Vice President, General Counsel
and Secretary; and Jeffrey J. Carfora, Executive Vice President and Chief
Financial Officer. Executive Officers of PennFed do not receive any remuneration
in their capacity as PennFed executive officers.
The following table sets forth certain information as of June 30, 1999 regarding
the executive officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
Name Age Positions Held with the Bank
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lucy T. Tinker 59 Senior Executive Vice President and Chief Operating Officer
Jeffrey J. Carfora 41 Executive Vice President and Chief Financial Officer
Barbara A. Flannery 43 Executive Vice President and Retail Banking Group Executive
James M. O'Brien 47 Executive Vice President and Lending Group Executive
</TABLE>
<PAGE>
Officers are elected annually by the Board of Directors of the Bank. The
business experience of each executive officer who is not also a director is set
forth below.
Lucy T. Tinker - Ms. Tinker is responsible for the daily operations of the Bank.
Ms. Tinker also assists President LaMonica in the development of corporate
policies and goals. Ms. Tinker joined Penn Federal in 1989 as Vice President and
Treasurer. In 1990, she was appointed Senior Vice President and Finance Group
Executive. She was appointed Executive Vice President and Chief Operating
Officer in 1993 and named Senior Executive Vice President in 1999.
Jeffrey J. Carfora - Mr. Carfora is responsible for the financial affairs of the
Bank which include financial and tax accounting and reporting, strategic
planning, budgeting, treasury operations and asset/liability management. Mr.
Carfora joined Penn Federal in 1993 as Senior Vice President and Chief Financial
Officer and was appointed Executive Vice President in 1999.
Barbara A. Flannery - Ms. Flannery is responsible for the retail branch network.
Ms. Flannery has served Penn Federal in various capacities since joining the
Bank in 1980, including the management of product development, marketing and
various aspects of branch activities. She was named Executive Vice President in
1999.
James M. O'Brien - Mr. O'Brien joined the Bank in November 1998. Mr. O'Brien is
responsible for the Bank's lending operations which include commercial,
residential and consumer lending, collections, servicing and quality control. He
was named Executive Vice President in 1999. Prior to joining Penn Federal, Mr.
O'Brien was with Monarch Bank, Fleet Mortgage and Citizen's First National Bank.
Employees
At June 30, 1999, the Company and its subsidiaries had a total of 257 employees,
including 41 part-time employees. The Company's employees are not represented by
any collective bargaining group.
Item 2. Properties
The Company conducts its business at its headquarters, operations center and the
Bank's branch offices located in its primary market areas. The following table
sets forth information relating to each of the Company's properties as of June
30, 1999.
The total net book value of the Company's premises and equipment (including
land, building and leasehold improvements and furniture and equipment) at June
30, 1999 was $19.2 million.
<PAGE>
<TABLE>
<CAPTION>
Lease Total
Owned or Expiration Approximate
Location Acquired Leased Date Square Footage
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Home office:
36 Ferry Street
Newark, New Jersey 1954 Owned -- 3,700
Operations Center:
622 Eagle Rock Avenue
West Orange, New Jersey 1988 Owned -- 48,063(1)
Branch Offices:
59 Main Street
Sayreville, New Jersey (2) 1982 Owned -- 3,400
Pathmark Office
1043 US Highway 9 N
Old Bridge, New Jersey 1992 Leased 11/30/99 500
410 Bergen Street
Harrison, New Jersey 1983 Leased 11/30/03 2,000
77 Main Street
Farmingdale, New Jersey 1984 Owned -- 1,785
471 County Road 520
Marlboro, New Jersey 1978 Owned -- 2,000
1696 Route 88 West
Brick, New Jersey 1975 Owned -- 1,525
155 Central Avenue
East Newark, New Jersey 1973 Owned -- 1,771
37 Wilson Avenue
Newark, New Jersey 1976 Owned -- 7,500
493 Bloomfield Avenue
Montclair, New Jersey 1991 Owned -- 7,395(3)
323 Orange Road
Montclair, New Jersey 1989 Owned -- 1,650
620 Bloomfield Avenue
Verona, New Jersey 1995 Owned -- 5,460(4)
597 Valley Road
Montclair, New Jersey 1989 Owned -- 5,467(5)
265 Bloomfield Avenue
Caldwell, New Jersey 1995 Owned -- 7,140
198 Jefferson Street
Newark, New Jersey (6) 1993 Owned -- 2,070
23 Little Falls Road
Fairfield, New Jersey 1995 Owned -- 4,125
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lease Total
Owned or Expiration Approximate
Location Acquired Leased Date Square Footage
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
340 Atlantic City Boulevard
(U.S. Highway 9 South)
Bayville, New Jersey 1997 Leased 8/31/07 3,600
133 South Livingston Avenue
Livingston, New Jersey 1999 Leased 6/30/09 2,636
916 Fischer Boulevard
Toms River, New Jersey 1999 Leased 9/30/03 2,500
Other Properties:
151 Eagle Rock Avenue (future branch location)
Roseland, New Jersey 1997 Owned -- 8,300
77 Main Street
Sayreville, New Jersey(2) 1997 Owned -- 4,932
White Horse Pike
Winslow, New Jersey 1986 Owned -- 4.01 acres
</TABLE>
- -------------------
(1) Includes 20,332 square feet leased to unaffiliated third parties.
(2) The 59 Main Street branch was relocated to 77 Main Street in Sayreville, NJ
on July 19, 1999. The 59 Main Street property is under contract for sale.
(3) Includes 2,100 square feet leased to unaffiliated third parties.
(4) Land is leased through March 14, 2000 with a 5 year option.
(5) Includes 3,080 square feet leased to unaffiliated third parties.
(6) The property was purchased by the Company at the lease expiration of August
31, 1998.
The Company believes that its current facilities are adequate to meet the
present and foreseeable needs of the Company, subject to possible future
expansion.
Item 3. Legal Proceedings
The Company is involved from time to time as plaintiff or defendant in various
legal actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management at the present time, after consultation with counsel
representing the Company in the proceedings, that the resolution of these
proceedings should not have a material effect on the Company's consolidated
financial position or results of operations.
<PAGE>
In 1987, the New Jersey Department of Environmental Protection ("NJDEP")
conducted an environment contamination investigation of the Orange Road branch
site of First Federal Savings and Loan Association of Montclair ("First
Federal"). Prior to the acquisition by First Federal, the location was used as a
gasoline service station. On August 16, 1989, the NJDEP issued a "no further
action" letter to First Federal with regard to this site. The Bank acquired
First Federal effective September 11, 1989. Notwithstanding the earlier "no
further action" letter, on June 25, 1997, the NJDEP issued a letter demanding
that Penn Federal Savings Bank develop a remedial action work plan for the
Orange Road branch site as a result of an investigation conducted on behalf of
an adjacent property owner. The Bank disputed the NJDEP position that Penn
Federal Savings Bank was a responsible party. On July 1, 1998, the NJDEP issued
a letter determining that Penn Federal Savings Bank, Mobil Oil Corporation and
the former gasoline service station owner were all responsible parties for the
clean up at the subject site. Responsible parties may ultimately have full or
partial obligation for the cost of remediation. As of this date, the
apportionment of the remediation costs to the Bank, if any, is not determinable.
The Bank intends to vigorously contest this determination and to seek
contribution or indemnification from the other named responsible parties.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 1999.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "PFSB." At September 9, 1999, there were
approximately 560 stockholders of record for the Company's common stock (not
including the number of persons or entities holding stock in nominee or street
name through various brokerage firms).
Market Information
The following table sets forth the high and low closing sales prices per common
share for the periods indicated. The closing price of a common share was $15.75
at June 30, 1999 compared to $16.56 at June 30, 1998.
<TABLE>
<CAPTION>
Fiscal 1999 Closing Price Fiscal 1998 Closing Price
------------------------------- --------------------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Quarter Ended:
September 30, 1998 and 1997 $ 16.8750 $ 10.8750 $ 15.7500 $ 13.5625
December 31, 1998 and 1997 14.2500 10.2500 17.3750 14.6875
March 31, 1999 and 1998 16.0000 12.7500 19.0000 15.8750
June 30, 1999 and 1998 15.7500 14.0000 18.3750 16.5000
</TABLE>
For the second quarter of fiscal 1999, the Company increased the quarterly cash
dividend on its common stock to $0.04 per share compared to $0.035 per share for
all prior quarters since divided payments were initiated.
<PAGE>
Item 6. Selected Financial Data
The following selected consolidated financial data of the Company and its
subsidiaries is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements, including notes thereto, included
elsewhere in this document.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ..................................... $1,558,763 $1,551,938 $1,321,751 $1,086,524 $ 868,926
Loans receivable, net ............................ 1,066,611 1,095,852 931,451 652,571 467,677
Investment securities ............................ 293,282 178,310 35,290 21,288 17,558
Mortgage-backed securities ....................... 127,983 204,452 288,539 346,068 319,436
Deposits ......................................... 1,063,600 1,028,100 918,160 836,416 713,524
Total borrowings ................................. 333,203 361,965 288,215 146,700 50,830
Trust Preferred securities, net .................. 32,743 32,681 -- -- --
Stockholders' equity ............................. 107,500 103,703 97,270 90,564 94,170
Book value per common share ...................... 13.03 11.87 10.92 10.25 9.09
Tangible book value per common share ............. 11.68 10.33 9.13 8.17 7.06
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997(1) 1996 1995
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest and dividend income ............... $ 105,557 $ 100,805 $ 85,401 $ 68,123 $ 52,719
Total interest expense ........................... 71,918 68,043 53,073 39,121 27,153
--------- --------- --------- --------- ---------
Net interest and dividend income ................. 33,639 32,762 32,328 29,002 25,566
Provision for loan losses ........................ 780 600 635 610 569
--------- --------- --------- --------- ---------
Net interest income after provision for
loan losses ................................... 32,859 32,162 31,693 28,392 24,997
--------- --------- --------- --------- ---------
Service charges .................................. 2,113 1,974 1,666 1,602 1,476
Net gain (loss) from real estate operations 31 (156) (181) 104 117
Net gain (loss) on sales of loans ................ 860 528 -- -- --
Net gain on sales of investment securities ....... -- -- -- 94 --
Other non-interest income ........................ 542 321 298 402 532
--------- --------- --------- --------- ---------
Total non-interest income ........................ 3,546 2,667 1,783 2,202 2,125
--------- --------- --------- --------- ---------
Total non-interest expenses ...................... 18,644 17,389 22,385(1) 17,642 17,561
--------- --------- --------- --------- ---------
Income before taxes .............................. 17,761 17,440 11,091 12,952 9,561
Income tax expense ............................... 6,304 6,242 4,205 5,111 3,921
--------- --------- --------- --------- ---------
Net income ....................................... $ 11,457 $ 11,198 $ 6,886(1) $ 7,841 $ 5,640
========= ========= =========== ========= =========
Net income per common share:
Basic ............................................ $ 1.36 $ 1.25 $ 0.77(1) $ 0.80 $ 0.54
========= ========= =========== ========= =========
Diluted .......................................... $ 1.29 $ 1.16 $ 0.73(1) $ 0.77 $ 0.54
========= ========= =========== ========= =========
</TABLE>
- -----------------
(1) Fiscal 1997 includes the effect of a one-time SAIF recapitalization
assessment of approximately $4.8 million, or $3.1 million net of taxes.
Excluding this non- recurring assessment, total non-interest expenses would have
been $17.6 million, net income would have been $9.9 million, basic earnings per
share would have been $1.12 and diluted earnings per share would have been
$1.05.
<PAGE>
<TABLE>
<CAPTION>
At and for the year ended June 30,
--------------------------------------------------------------------
Selected Financial Ratios and Other Data: 1999 1998 1997(1) 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (ratio of net income to
average total assets) ................................... 0.74% 0.78% 0.58%(1) 0.82% 0.74%
Return on average stockholders' equity (ratio of
net income to average stockholders' equity) ............. 11.03 10.96 7.42(1) 8.36 5.97
Net interest rate spread during the year ................... 2.01 2.12 2.58 2.96 3.24
Net interest margin (net interest and dividend
income to average interest-earning assets) .............. 2.24 2.38 2.83 3.22 3.58
Ratio of average interest-earning assets to average
deposits, borrowings and Trust Preferred securities .... 104.82 105.20 105.30 105.87 109.05
Ratio of earnings to fixed charges(2):
Excluding interest on deposits .......................... 1.76x 1.88x 1.86x 3.35x 7.28x
Including interest on deposits .......................... 1.25x 1.26x 1.21x 1.33x 1.35x
Ratio of non-interest expense to average total assets ...... 1.20% 1.22% 1.87%(1) 1.84% 2.31%
Efficiency ratio (non-interest expense, excluding
amortization of intangibles, to net interest and
dividend income and non-interest income excluding
gains on sales and real estate operations) .............. 44.86 42.65 57.95(1) 48.53 58.63
Asset Quality Ratios:
Non-accruing loans to total loans at end of year ........... 0.34 0.34 0.59 0.95 1.18
Allowance for loan losses to non-accruing loans
at end of year .......................................... 87.44 74.18 47.80 42.52 51.39
Allowance for loan losses to total loans at end of year .... 0.30 0.25 0.28 0.40 0.61
Non-performing assets to total assets at end of year ....... 0.30 0.35 0.48 0.67 0.78
Ratio of net charge-offs during the year to average
loans outstanding during the year ....................... 0.03 0.04 0.08 0.16 0.19
Capital Ratios:
Stockholders' equity to total assets at end of year ........ 6.90 6.68 7.36 8.34 10.84
Average stockholders' equity to average total assets ....... 6.67 7.14 7.76 9.80 12.44
Tangible capital to tangible assets at end of year(3) ...... 7.88 7.09 5.61 5.92 6.29
Core capital to adjusted tangible assets at end of year(3) . 7.88 7.11 5.64 5.97 6.38
Risk-based capital to risk-weighted assets at end of year(3) 16.29 15.16 12.22 13.47 14.49
Other Data:
Number of branch offices at end of year .................... 20 18 17 17 17
Number of deposit accounts at end of year .................. 88,200 87,500 85,400 81,700 78,800
</TABLE>
(1) Fiscal 1997 results include the effect of a one-time SAIF recapitalization
assessment of approximately $4.8 million, or $3.1 million net of taxes.
Excluding this non-recurring assessment, return on average assets would have
been 0.83%, return on average stockholders' equity would have been 10.70%, the
ratio of non-interest expense to average total assets would have been 1.47% and
the efficiency ratio would have been 43.92%.
<PAGE>
(2) The ratio of earnings to fixed charges excluding interest on deposits is
calculated by dividing income before taxes and extraordinary items before
interest on borrowings by interest on borrowings on a pretax basis. The ratio of
earnings to fixed charges including interest on deposits is calculated by
dividing income before income taxes and extraordinary items before interest on
deposits and borrowings by interest on deposits plus interest on borrowings on a
pretax basis.
(3) Represents regulatory capital ratios for the Bank.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
In July 1994, PennFed became the savings and loan holding company of the Bank.
Currently, the results of operations of the Company are primarily those of the
Bank and its subsidiaries and the Trust.
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.
Management Strategy
Management's primary goal continues to be to improve profitability, while
continuing to manage risks, including interest rate risk, so as to enhance
stockholder value, and to foster and maintain customer confidence. The Company's
current strategies focus on: (i) emphasizing lending secured by one- to
four-family residential first mortgages, (ii) increasing the commercial and
multi-family and consumer loan portfolios, (iii) maintaining asset quality, (iv)
increasing core deposit balances, (v) managing the Company's exposure to
interest rate risk, (vi) improving non-interest income and (vii) controlling
non-interest expenses.
Emphasizing Lending Secured by One- to Four-Family Residential First Mortgages.
The Company will continue to emphasize originating and purchasing traditional
one- to four-family first mortgage loans secured by properties located in New
Jersey. The Company originated or purchased $326.7 million, $373.6 million and
$337.3 million in one- to four-family mortgage loans in fiscal 1999, 1998 and
1997, respectively. The Company's interest income has been derived primarily
from one- to four-family mortgage loans on residential real estate which totaled
$915.2 million or 86.15% of the Company's gross loan portfolio at June 30, 1999.
During fiscal 1999, in an effort to mitigate the effects of low interest rates
and a flat yield curve, the Company sold approximately $150.5 million of
low-coupon, longer duration one- to four-family mortgage loans. In periods of a
higher interest rate and steeper yield curve environment, such as the beginning
of fiscal 2000, loan sale activity is expected to be reduced. The level of such
activity will continue to be evaluated with primary consideration given to
interest rate risk and long-term profitability objectives.
<PAGE>
Increasing the Commercial and Multi-Family and Consumer Loan Portfolios. In
addition to one- to four-family residential first mortgage lending, the Company
plans to continue its emphasis on commercial and multi-family and consumer
lending. Such loans reprice more frequently, have shorter maturities, and/or
have higher yields than one-to four-family first mortgage loans. The Company
originated $75.5 million, $56.5 million and $31.7 million of commercial and
multi-family and consumer loans in fiscal 1999, 1998 and 1997, respectively.
Maintaining Asset Quality. The Company's loan portfolio consists primarily of
one- to four-family mortgages, which are considered to have less risk than
commercial and multi-family real estate or consumer loans.
The Company's non-performing assets consist of non-accruing loans and real
estate owned. The Company focuses on strong underwriting and collection efforts
and aggressive marketing of real estate owned properties. In addition, the
Company has occasionally restructured loans in order to return the loan to a
performing status. As a result, non-performing assets as a percentage of total
assets was 0.30% at June 30, 1999.
Increasing Core Deposit Balances. The Company's primary source of funds is
deposits. The Company will continue to emphasize growth in lower costing core
deposits, primarily checking deposits. Checking deposits increased $16.9
million, or 21.34%, in fiscal 1999 and $12.2 million, or 18.26%, in fiscal 1998.
Managing the Company's Exposure to Interest Rate Risk. The Company has an
asset/liability committee that meets no less than weekly to price loan and
deposit products and monthly to develop, implement and review strategies and
policies to manage interest rate risk. The Company has endeavored to manage its
interest rate risk through the pricing and diversification of its loan and
deposit products, including the focus on the origination and purchase of first
mortgage products with shorter terms to maturity and/or with adjustable rate
features, as well as the origination of commercial and multi-family real estate
and consumer loans which generally have shorter expected average lives or
reprice at shorter intervals than one- to four-family residential first mortgage
products. The Company has also engaged in one- to four-family whole mortgage
loan sales whereby longer-term fixed rate conventional loans have been sold to
reduce the duration of its fixed rate loan portfolios. In addition, the Company
has purchased government agency or callable securities with short to
intermediate average lives or which have adjustable rate features. Furthermore,
as part of its interest rate risk strategy, the Company has emphasized longer
term certificates of deposit and checking products and utilized
intermediate-term borrowings. The Company has also periodically engaged in
intermediate-term interest rate swaps designed to extend the maturities of
short-term certificates of deposit to three to five years. See "-Interest Rate
Sensitivity Analysis" and "-Asset/Liability Strategy."
Improving Non-Interest Income. The Company continues to seek additional ways of
improving non-interest income. Total service charges and other non-interest
income, excluding the net gain on sales of loans and real estate operations,
reflected a $386,000, or 16.8%, increase for fiscal 1999 compared to fiscal
1998, due to growth in checking accounts and earnings from the Bank's Investment
Services at Penn Federal program. The program gives customers convenient access
to financial consulting/advisory services and related uninsured non-deposit
investment and insurance products at local branch offices.
Controlling Non-Interest Expenses. Non-interest expenses are carefully
monitored, which include ongoing reviews of staffing levels, facilities and
operations. The Company's ratio of non-interest expenses to average total assets
was 1.20% for the year ended June 30, 1999.
<PAGE>
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. 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.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Company's exposure to interest rate risk. Management
maintains an asset/liability committee consisting of the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer, the Lending
Group Executive, the Retail Banking Group Executive, the Treasurer and the
Customer Support/Operations Group Executive, which meets regularly and reviews
the Company's interest rate risk position and makes recommendations for
adjusting this position. In addition, the Board reviews on a monthly basis the
Company's asset/liability position, including simulations of the effect on the
Company's capital and earnings of various interest rate scenarios and
operational strategies.
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps. Except for the effects
of prepayments and scheduled principal amortization on mortgage related assets,
the table presents principal cash flows and related weighted average interest
rates by the earlier of term to repricing or contractual term to maturity.
Callable government agency securities are assumed to be called within one year
if their stated interest rates are at or above current market rates. If the
stated interest rate is below current market rates, these callable securities
are assumed to be called at an estimated average life of approximately 3.5
years. For interest rate swaps, the table presents notional amounts and weighted
average interest rates by call date or contractual maturity date.
Residential fixed and adjustable rate loans are assumed to prepay at an
annualized rate between 10% and 18%. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 9% and 38% while
consumer loans are assumed to prepay at a 34% rate. Fixed and adjustable rate
mortgage-backed securities have annual payment assumptions ranging from 21% to
33%. Demand loans and loans which have no repayment schedule or stated final
maturity, are assumed to be due within six months. Loan and mortgage-backed
securities balances are net of non-performing loans and are not adjusted for
unearned discounts, premiums, and deferred loan fees.
<PAGE>
The Company assumes, based on historical information, that $131.9 million or 80%
of savings accounts at June 30, 1999, are core deposits and are, therefore,
expected to roll-off after five years. The remaining savings accounts are
assumed to roll-off over the first eighteen months. Transaction accounts,
excluding money market accounts, are assumed to roll-off after five years. Money
market accounts are assumed to be variable accounts and are reported as
repricing within six months. No roll-off rate is applied to certificates of
deposit. Fixed maturity deposits reprice at maturity.
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------------------
Year ended June 30,
---------------------------------------------------------------
2000 2001 2002 2003
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family ................................ $ 89,735 $ 81,496 $ 73,210 $ 66,737
Average interest rate ........................... 7.22% 7.22% 7.22% 7.22%
Adjustable rate mortgage loans including
one- to four-family and commercial
and multi-family ................................ $ 130,005 $ 69,744 $ 57,769 $ 53,939
Average interest rate ........................... 7.29% 7.35% 7.30% 7.37%
Consumer loans including
demand loans .................................... $ 49,305 $ 9,832 $ 6,663 $ 4,585
Average interest rate ........................... 7.20% 7.78% 7.78% 7.78%
Mortgage-backed securities ......................... $ 52,567 $ 39,241 $ 12,405 $ 10,138
Average interest rate ........................... 7.03% 6.89% 7.03% 7.03%
Investment securities and other .................... $ 66,663 $ -- $ 214,538 $ 2,165
Average interest rate ........................... 7.12% 0.00% 6.69% 8.73%
Total interest-earning assets ................... $ 388,275 $ 200,313 $ 364,585 $ 137,564
=========== =========== =========== ===========
Savings deposits ................................... $ 21,984 $ 10,993 $ -- $ --
Average interest rate ........................... 1.70% 1.70% 0.00% 0.00%
Money market and demand deposits
(transaction accounts) .......................... $ 12,398 $ -- -- $ --
Average interest rate ........................... 2.05% 0.00% 0.00% 0.00%
Certificates of deposit ............................ $ 616,544 $ 99,868 $ 58,054 $ 5,945
Average interest rate ........................... 5.09% 5.44% 5.90% 5.69%
FHLB of New York advances .......................... $ 20,000 $ 20,000 $ 140,000 $ 45,000
Average interest rate ........................... 6.59% 5.80% 6.06% 5.60%
Other borrowings ................................... $ 49,463 $ 19,875 $ 19,400 $ --
Average interest rate ........................... 4.97% 5.77% 6.10% 0.00%
Trust Preferred securities ......................... $ -- $ -- $ -- $ --
Average interest rate ........................... 0.00% 0.00% 0.00% 0.00%
Total deposits, borrowings and
Trust Preferred securities .................... $ 720,389 $ 150,736 $ 217,454 $ 50,945
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------------------
Year ended June 30,
---------------------------------------------------------------
2000 2001 2002 2003
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate swaps
(pay fixed, receive floating) .................... ($ 120,000) $ 90,000 $ 30,000 $ --
Average pay rate ................................ 6.49% 5.88% 5.64%
Average receive rate ............................ 5.06%
Total deposits, borrowings and Trust
Preferred securities including the effects
of interest rate swaps ........................ $ 600,389 $ 240,736 $ 247,454 $ 50,945
=========== =========== =========== ===========
Interest earning assets less deposits,
borrowings and Trust Preferred securities
(interest-rate sensitivity gap) ............... ($ 212,114) ($ 40,423) $ 117,131 $ 86,619
=========== =========== =========== ===========
Cumulative interest-rate sensitivity gap ......... ($ 212,114) ($ 252,537) ($ 135,406) ($ 48,787)
=========== =========== =========== ===========
Cumulative interest-rate sensitivity
gap as a percentage of total assets
at June 30, 1999 ................................. (13.61%) (16.20%) (8.69%) (3.13%)
=========== =========== =========== ===========
Cumulative interest-rate sensitivity gap
as a percentage of total interest-
earning assets at June 30, 1999 .................. (14.18%) (16.88%) (9.05%) (3.26%)
=========== =========== =========== ===========
Cumulative interest-earning assets as a
percentage of cumulative deposits,
borrowings and Trust Preferred securities
at June 30, 1999 ................................. 64.67% 69.98% 87.56% 95.72%
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------------
Year ended June 30,
-----------------------------------------------------------
2004 Thereafter Total Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family ................................ $ 61,508 $ 264,689 $ 637,375 $ 629,313
Average interest rate ........................... 7.23% 7.26% 7.24%
Adjustable rate mortgage loans including
one- to four-family and commercial
and multi-family ................................ $ 20,729 $ 17,313 $ 349,499 $ 345,820
Average interest rate ........................... 6.64% 7.98% 7.31%
Consumer loans including
demand loans .................................... $ 1,500 $ -- $ 71,885 $ 71,930
Average interest rate ........................... 7.78% 0.00% 7.38%
Mortgage-backed securities ......................... $ 8,374 $ 4,970 $ 127,695 $ 128,617
Average interest rate ........................... 7.02% 7.04% 6.99%
Investment securities and other .................... $ -- $ 26,539 $ 309,905 $ 298,503
Average interest rate ........................... 0.00% 8.15% 6.92%
Total interest-earning assets ................... $ 92,111 $ 313,511 $ 1,496,359 $ 1,474,183
=========== =========== =========== ===========
Savings deposits ................................... $ -- $ 131,914 $ 164,893 $ 164,893
Average interest rate ........................... 0.00% 1.70% 1.70%
Money market and demand deposits
(transaction accounts) .......................... $ -- $ 96,001 $ 108,399 $ 108,399
Average interest rate ........................... 0.00% 0.67% 0.83%
Certificates of deposit ............................ $ 6,683 $ 53 $ 787,147 $ 788,093
Average interest rate ........................... 5.33% 4.52% 5.20%
FHLB of New York advances .......................... $ 19,000 $ 465 $ 244,465 $ 245,103
Average interest rate ........................... 5.15% 7.39% 5.93%
Other borrowings ................................... $ -- $ -- $ 88,738 $ 88,810
Average interest rate ........................... 0.00% 0.00% 5.40%
Trust Preferred securities ......................... $ -- $ 32,743 $ 32,743 $ 34,414
Average interest rate ........................... 0.00% 8.90% 8.90%
Total deposits, borrowings and
Trust Preferred securities .................... $ 25,683 $ 261,178 $ 1,426,385 $ 1,429,712
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------------
Year ended June 30,
-----------------------------------------------------------
2004 Thereafter Total Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest rate swaps
(pay fixed, receive floating) .................... $ -- $ -- $ -- ($ 256)
Average pay rate ................................ 5.95%
Average receive rate ............................ 5.06%
Total deposits, borrowings and Trust
Preferred securities including the effects
of interest rate swaps ........................ $ 25,683 $ 261,178 $ 1,426,385 $ 1,429,456
=========== =========== =========== ===========
Interest earning assets less deposits,
borrowings and Trust Preferred securities
(interest-rate sensitivity gap) ............... $ 66,428 $ 52,333 $ 69,974
=========== =========== ===========
Cumulative interest-rate sensitivity gap ......... $ 17,641 $ 69,974
=========== ===========
Cumulative interest-rate sensitivity
gap as a percentage of total assets
at June 30, 1999 ................................. 1.13% 4.49%
=========== ===========
Cumulative interest-rate sensitivity gap
as a percentage of total interest-
earning assets at June 30, 1999 .................. 1.18% 4.68%
=========== ===========
Cumulative interest-earning assets as a
percentage of cumulative deposits,
borrowings and Trust Preferred securities
at June 30, 1999 ................................. 101.51% 104.91%
=========== ===========
</TABLE>
<PAGE>
At June 30, 1999, the Company's total deposits, borrowings and Trust Preferred
securities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing within one year by $212.1 million,
representing a one year negative gap of 13.61% of total assets, compared to a
one year negative gap of 7.28% of total assets at June 30, 1998. See "-
Asset/Liability Strategy." The Company's negative gap position widened from June
30, 1998 as a result of a recent rise in market rates and a steeper Treasury
yield curve than was present at the end of fiscal 1998. Throughout most of
fiscal 1999, a historically flat yield curve and low market rates supported
strong residential lending activity that was primarily focused on long-term,
fixed rate products. High levels of prepayments accompanied the low market rates
and asset cashflows remained robust. To mitigate the negative impact such
lending activity had on interest rate risk, the Company periodically sold newly
originated, low-coupon fixed rate loans into the secondary market. Proceeds from
such sales were partially reinvested in callable government agency securities
with final maturities of 15 years or less, but initially callable within one
year and periodically thereafter, and partially to reduce borrowings. Growth in
short-term certificates of deposit outpaced activity in intermediate-term
products as depositors were generally unwilling to invest in longer-term
products in the flat interest rate environment. At June 30, 1999, market rates
were higher and the Treasury yield curve was steeper than was seen previously in
fiscal 1999. As a result, prepayment expectations have declined and asset cash
flows have lengthened. In addition, the majority of the Company's callable
agency security portfolio, previously assumed to be called within one year, has
been extended to its average life.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgages, have
features which restrict changes in interest rates in the short-term and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase. The
Company considers all of these factors in monitoring its exposure to interest
rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is also regularly
monitored by management through selected interest rate risk ("IRR") measures,
including 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. A 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.
<PAGE>
As of June 30, 1999, the Bank's internally generated initial NPV ratio was
9.81%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 7.30%. The change in the NPV ratio, or the Bank's Sensitivity Measure
was 2.51%. Though NPV is "measured" on an unconsolidated basis for regulatory
purposes, it is managed on a consolidated basis. As of June 30, 1999, the
Company's initial NPV ratio was 10.22%, the Post-Shock ratio was 7.65%, and the
Sensitivity Measure was 2.57%. Variances between the Bank's and the Company's
NPV ratios are attributable to balance sheet items which are adjusted during
consolidation, such as investments, intercompany borrowings and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions and, as such, generally result in lower levels
of presumed interest rate risk (i.e., higher Post-Shock NPV ratio and lower
Sensitivity Measure) than OTS measurements indicate.
The OTS measures the Bank's (unconsolidated) IRR on a quarterly basis using data
from the quarterly Thrift Financial Reports, coupled with non-institution
specific assumptions which are based on national averages. As of June 30, 1999,
the Bank's initial NPV ratio, as measured by the OTS, was 8.01%, the Bank's
Post-Shock ratio was 4.96% and the Sensitivity Measure was 3.05%. At June 30,
1998, the Bank's initial NPV ratio, as measured by the OTS, was 8.03%, the
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 June 30, 1999, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 8.8% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates.
Asset/Liability Strategy
The primary elements of the Company's asset/liability strategy include the
following:
1. The Company has focused on shortening the average life and duration of its
portfolio of one- to four-family mortgage loans by promoting one year adjustable
rate products, with initial fixed rate terms of 1, 3 and 5 years, 15 and 30 year
bi-weekly mortgages and fixed rate products with terms of 10, 15 and 20 years.
2. The Company has emphasized the origination of variable rate home equity lines
and fixed rate second mortgage loans as well as variable and fixed rate
commercial and multi-family real estate loans having maturities or terms to
repricing significantly shorter than one- to four-family residential mortgage
loans.
3. The Company has periodically and, during fiscal 1999 more routinely, sold a
portion of its one- to four-family whole mortgage loan portfolio in an effort to
shorten the average life and duration, as well as to mitigate prepayment risk
and reduce borrowings. $150 million of such loans were sold in fiscal 1999. The
level of such activity will continue to be evaluated with primary consideration
given to interest rate risk and long-term profitability objectives. In periods
of a higher interest rate and steeper yield curve environment, loan sale
activity is expected to be reduced.
<PAGE>
4. The Company has purchased government agency guaranteed investments with final
maturities within 15 years which are initially callable within one year and
periodically thereafter. Such investments are expected to be called prior to
their final maturities. The Company may continue to purchase such investments,
as well as government agency guaranteed mortgage-backed securities when yield
and duration analysis point to such purchases as favarable vehicles in managing
interest rate risk.
5. The Company has emphasized the lengthening of maturities of its liabilities
through its pricing of longer-term certificates of deposit and by utilizing
intermediate- and longer-term borrowings and interest rate swaps, subject to
market conditions.
6.The Company has also emphasized growth in core deposit accounts as such funds
are lower cost alternatives, are relatively stable and, thus, have a longer
duration and assist in strengthening customer relationships.
During fiscal 1999, each of the strategies noted above was employed to reduce
the Company's sensitivity to changes in interest rates. Periodic one- to
four-family loan sales coupled with lower market rates, increased prepayments
and a flat Treasury yield curve resulted in a 5.8% decline in one- to
four-family first mortgage loans between June 30, 1998 and June 30, 1999.
Despite the sale of $137.7 million of fixed rate one- to four-family first
mortgage loans, such balances increased $30.2 million in fiscal 1999. Adjustable
rate one- to four-family first mortgage loan balances declined $86.6 million in
fiscal 1999, despite the origination and purchase of $53.6 million of adjustable
rate loans. Commercial and multi-family real estate loans increased $8.8 million
from June 30, 1998; fixed rate loans declined 30.3%, while adjustable rate loans
increased 29.3%. Consumer loan balances increased $18.5 million or 34.1% in
fiscal 1999. Approximately 50% of the growth in consumer loans occurred in
prime-based home equity lines of credit, while the remainder occurred in
products of significantly shorter duration than one- to four-family residential
mortgages.
Additionally, medium and long-term funds increased $52 million from June 30,
1998, while short-term funds decreased $46.3 million. This shift was supported
through the use of interest rate swaps, designed to synthetically lengthen the
maturities of short-term deposits, as well as growth in demand deposit accounts,
FHLB of New York advances and other borrowings.
Generally, the investment policy of the Company is to invest funds not utilized
in its lending activities or required for other corporate purposes among various
categories of investments and maturities based upon the Company's
asset/liability management policies. Investments generally include U.S. Treasury
and government agency securities and mortgage-backed securities.
The Company's cost of funds responds more rapidly to changes in interest rates
than its yield on earning assets due to the shorter terms of its funding
portfolios. Consequently, the results of operations are influenced by the levels
of short-term interest rates. The Company offers a range of maturities on its
deposit products at competitive rates and monitors the maturities on an ongoing
basis.
<PAGE>
Additionally, the Company emphasizes and promotes its savings, money market and
demand deposit accounts, and certificates of deposit with varying maturities
through five years, principally within its primary market areas. The balances of
savings, money market and demand deposit accounts, which represented
approximately 26.0% of total deposits at June 30, 1999, tend to be less
susceptible to rapid changes in interest rates than certificates of deposit
balances.
Management will continue to monitor and employ such strategies, as necessary, in
conjunction with its overall strategic objectives.
Analysis of Net Interest Income. The following table sets forth certain
information relating to the Company's consolidated statements of financial
condition and the consolidated statements of income for the years ended June 30,
1999, 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>
Year ended June 30,
------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
---------- ---------- ---- ---------- ---------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
One- to four-family mortgage loans ............. $ 970,924 $ 67,785 6.98% $ 889,169 $ 64,852 7.29%
Commercial and multi-family real
estate loans ................................ 68,528 5,922 8.64 58,196 5,235 9.00
Consumer loans ................................. 63,627 4,581 7.20 45,794 3,735 8.16
---------- ---------- ---------- ----------
Total loans receivable ..................... 1,103,079 78,288 7.10 993,159 73,822 7.43
Federal funds sold ............................. 1,379 68 4.93 346 18 5.20
Investment securities and other ................ 234,576 16,318 6.96 134,239 9,814 7.31
Mortgage-backed securities ..................... 161,702 10,883 6.73 248,812 17,151 6.89
---------- ---------- ---------- ----------
Total interest-earning assets .............. 1,500,736 $ 105,557 7.03 1,376,556 $ 100,805 7.32
========== ==========
Non-interest earning assets ....................... 57,450 54,614
---------- ----------
Total assets ............................... $1,558,186 $1,431,170
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
---------- ---------- ---- ---------- ---------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits, borrowings and Trust Preferred securities:
Money market and demand deposits................ $ 102,425 $ 1,188 1.16% $ 84,958 $ 1,049 1.23%
Savings deposits ............................... 163,636 2,879 1.76 166,243 3,638 2.19
Certificates of deposit ........................ 792,507 44,581 5.63 742,341 43,513 5.86
---------- ---------- ---------- ----------
Total deposits ............................. 1,058,568 48,648 4.60 993,542 48,200 4.85
FHLB of New York advances ...................... 266,906 16,052 6.01 218,568 13,403 6.13
Other borrowings ............................... 73,514 4,086 5.56 73,599 4,266 5.80
---------- ---------- ---------- ----------
Total deposits and borrowings .............. 1,398,988 68,786 4.92 1,285,709 65,869 5.12
Trust Preferred securities ..................... 32,712 3,132 9.57 22,748 2,174 9.56
---------- ---------- ---------- ----------
Total deposits, borrowings
and Trust Preferred securities ........... 1,431,700 $ 71,918 5.02 1,308,457 $ 68,043 5.20
========== ==========
Other liabilities .............................. 22,619 20,576
---------- ----------
Total liabilities .......................... 1,454,319 1,329,033
Stockholders' equity ........................... 103,867 102,137
---------- ----------
Total liabilities and
stockholders' equity .................... $1,558,186 $1,431,170
========== ==========
Net interest income and net interest
rate spread ................................ $ 33,639 2.01% $ 32,762 2.12%
========== ==== ========== ====
Net interest-earning assets and
interest margin ............................ $ 69,036 2.24% $ 68,099 2.38%
========== ==== ========== ====
Ratio of interest-earning assets to
deposits, borrowings and
Trust Preferred securities ................. 104.82% 105.20%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1997
----------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- ----------- -------
<S> <C> <C> <C>
Interest-earning assets:
One- to four-family mortgage loans ............. $ 713,260 $ 53,554 7.51%
Commercial and multi-family real
estate loans ................................ 54,396 4,912 9.03
Consumer loans ................................. 35,977 3,302 9.18
----------- ----------
Total loans receivable ..................... 803,633 61,768 7.69
Federal funds sold ............................. -- -- --
Investment securities and other ................ 22,611 1,603 7.09
Mortgage-backed securities ..................... 317,394 22,030 6.94
----------- ----------
Total interest-earning assets .............. 1,143,638 $ 85,401 7.47
==========
Non-interest earning assets ....................... 53,664
-----------
Total assets ............................... $ 1,197,302
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1997
----------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- ----------- -------
<S> <C> <C> <C>
Deposits, borrowings and Trust Preferred securities:
Money market and demand deposits................ $ 80,099 $ 977 1.22%
Savings deposits ............................... 174,114 3,876 2.23
Certificates of deposit ........................ 615,870 35,319 5.73
----------- -----------
Total deposits ............................. 870,083 40,172 4.62
FHLB of New York advances ...................... 147,945 9,078 6.14
Other borrowings ............................... 68,084 3,823 5.62
----------- -----------
Total deposits and borrowings .............. 1,086,112 53,073 4.89
Trust Preferred securities ..................... -- -- --
----------- -----------
Total deposits, borrowings
and Trust Preferred securities ........... 1,086,112 $ 53,073 4.89
==========
Other liabilities .............................. 18,337
-----------
Total liabilities .......................... 1,104,449
Stockholders' equity ........................... 92,853
-----------
Total liabilities and
stockholders' equity .................... $ 1,197,302
===========
Net interest income and net interest
rate spread ................................ $ 32,328 2.58%
========== ====
Net interest-earning assets and
interest margin ............................ $ 57,526 2.83%
=========== ====
Ratio of interest-earning assets to
deposits, borrowings and
Trust Preferred securities ................. 105.30%
======
</TABLE>
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (1) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (2) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (3) changes attributable to
changes in rate/volume (changes in rate multiplied by changes in volume) and (4)
the net change.
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1999 vs. 1998
---------------------------------------------------
Increase (Decrease)
Due to
------------------------------------- Total
Rate/ Increase
Volume Rate Volume (Decrease)
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
One- to four-family
mortgage loans ............................... $ 5,963 $ (2,775) $ (255) $ 2,933
Commercial and multi-family
real estate loans ............................ 929 (206) (36) 687
Consumer loans .................................. 1,455 (438) (171) 846
-------- -------- -------- --------
Total loans receivable ....................... 8,347 (3,419) (462) 4,466
Federal funds sold .............................. 54 (1) (3) 50
Investment securities and other ................. 7,336 (476) (356) 6,504
Mortgage-backed securities ...................... (6,005) (405) 142 (6,268)
-------- -------- -------- --------
Total interest-earning assets ................ $ 9,732 $ (4,301) $ (679) $ 4,752
======== ======== ======== ========
Deposits, borrowings and Trust Preferred securities:
Money market and demand deposits................. $ 216 $ (64) $ (13) $ 139
Savings deposits ................................ (57) (713) 11 (759)
Certificates of deposit ......................... 2,941 (1,754) (119) 1,068
-------- -------- -------- --------
Total deposits ............................... 3,100 (2,531) (121) 448
FHLB of New York advances ....................... 2,964 (258) (57) 2,649
Other borrowings ................................ (5) (175) -- (180)
-------- -------- -------- --------
Total deposits and borrowings ................ 6,059 (2,964) (178) 2,917
Trust Preferred securities ...................... 952 4 2 958
-------- -------- -------- --------
Total deposits, borrowings
and Trust Preferred securities ............. $ 7,011 $ (2,960) $ (176) $3,875
======== ======== ======== ======
Net change in net interest income ............... $ 2,721 $ (1,341) $ (503) $ 877
======== ======== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 vs. 1997
------------------------------------
Increase (Decrease)
Due to
------------------------------------ Total
Rate/ Increase
Volume Rate Volume (Decrease)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest-earning assets:
One- to four-family
mortgage loans ............................... $ 13,208 $ (1,532) $ (378) $ 11,298
Commercial and multi-family
real estate loans ............................ 343 (19) (1) 323
Consumer loans .................................. 901 (368) (100) 433
-------- -------- -------- --------
Total loans receivable ....................... 14,452 (1,919) (479) 12,054
Federal funds sold .............................. -- -- 18 18
Investment securities and other ................. 7,914 50 247 8,211
Mortgage-backed securities ...................... (4,760) (152) 33 (4,879)
-------- -------- -------- --------
Total interest-earning assets ................ $ 17,606 $ (2,021) $ (181) $ 15,404
======== ======== ======== ========
Deposits, borrowings and Trust Preferred securities:
Money market and demand deposits ................ $ 59 $ 12 $ 1 $ 72
Savings deposits ................................ (175) (66) 3 (238)
Certificates of deposit ......................... 7,253 781 160 8,194
-------- -------- -------- --------
Total deposits ............................... 7,137 727 164 8,028
FHLB of New York advances ....................... 4,334 (6) (3) 4,325
Other borrowings ................................ 310 123 10 443
-------- -------- -------- --------
Total deposits and borrowings ................ 11,781 844 171 12,796
Trust Preferred securities ...................... -- -- 2,174 2,174
-------- -------- -------- --------
Total deposits, borrowings
and Trust Preferred securities ............. $ 11,781 $ 844 $ 2,345 $ 14,970
======== ======== ======== ========
Net change in net interest income ............... $ 5,825 $ (2,865) $ (2,526) $ 434
======== ======== ======== ========
</TABLE>
<PAGE>
Financial Condition
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
Total assets at June 30, 1999 of $1.6 billion were relatively unchanged from
June 30, 1998. Loan originations and purchases were more than offset by
principal repayments and sales of one- to four-family first mortgage loans. The
Company actively employed a loan sale strategy during fiscal 1999 to mitigate
the effects of low interest rates and a flat yield curve. A $115.0 million
increase in investment securities was partially offset by a $76.5 million
decrease in mortgage-backed securities.
Deposits increased $35.5 million to $1.064 billion at June 30, 1999 from $1.028
billion at June 30, 1998. The Company's focus on lower costing deposits resulted
in a $16.6 million, or 6.5%, increase in core deposits (i.e. demand, money
market and savings). The remaining increase in deposits was modest and reflected
the Company's reduced funding needs due to the fiscal 1999 loan sale strategy.
FHLB of New York advances and other borrowings totaled $333.2 million at June
30, 1999, a $28.8 million decrease from $362.0 million at June 30,1998.
Non-performing assets at June 30, 1999 totaled $4.6 million, representing 0.30%
of total assets, compared to $5.4 million, or 0.35% of total assets, at June 30,
1998. Non-accruing loans were $3.7 million with a ratio of non-performing loans
to total loans of 0.34% at June 30, 1999 and June 30, 1998. Real estate owned
decreased to $936,000 at June 30, 1999 from $1.6 million at June 30, 1998.
Stockholders' equity at June 30, 1999 totaled $107.5 million compared to $103.7
million at June 30, 1998. The increase primarily reflects the net income
recorded for the year ended June 30, 1999, partially offset by the repurchase of
618,000 shares of the Company's outstanding stock at an average market price of
$14.12 per share and the declaration of dividends.
Results of Operations
Comparison of Operating Results for the Years Ended June 30, 1999 and June 30,
1998
General. For the year ended June 30, 1999, net income was $11.5 million, or
$1.29 per diluted share, compared to net income of $11.2 million, or $1.16 per
diluted share, for the year ended June 30, 1998.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 1999 increased to $105.6 million from $100.8 million for the year ended
June 30, 1998. The increase in the year ended June 30, 1999 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 $1.5 billion for the year ended June 30, 1999 compared to $1.4
billion for the prior fiscal year. The average yield on interest-earning assets
decreased to 7.03% for the year ended June 30, 1999 from 7.32% for the year
ended June 30, 1998.
<PAGE>
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 1999 increased $2.9 million when compared to the prior fiscal
year. The increase in interest income on residential one- to four-family
mortgage loans was due to an increase of $81.8 million in the average balance
outstanding for the year ended June 30, 1999 over the prior fiscal year. The
increase in the average balance on residential one- to four-family mortgage
loans was partially offset by a decrease of 31 basis points in the average yield
earned on this loan portfolio to 6.98% for the year ended June 30, 1999 from
7.29% for the prior fiscal year.
Interest income on investment securities increased $6.5 million for the year
ended June 30, 1999 from the prior fiscal year. The increase was primarily due
to a $100.3 million increase in the average balance outstanding for fiscal 1999
compared to fiscal 1998. The increase in the average balance on investment
securities was partially offset by a 35 basis point decrease in the average
yield earned on these securities for the year ended June 30, 1999 when compared
to the prior year.
Interest income on the mortgage-backed securities portfolio for the year ended
June 30, 1999 decreased $6.3 million when compared to the prior year. The
decrease in interest income on mortgage-backed securities primarily reflects an
$87.1 million decrease in the average balance outstanding for fiscal 1999
compared to the prior year.
Interest Expense. Interest expense increased $3.9 million for the year ended
June 30, 1999 from $68.0 million for fiscal 1998. The increase was attributable
to an increase in total average deposits, borrowings and Trust Preferred
securities, partially offset by a decrease in the Company's cost of funds.
Average deposits, borrowings and Trust Preferred securities increased $123.2
million for the year ended June 30, 1999 compared to the 1998 period. The
average rate paid on deposits, borrowings and Trust Preferred securities
decreased to 5.02% for the year ended June 30, 1999 from 5.20% for the prior
fiscal year. The average balance and interest expense for the year ended June
30, 1998 only included the Trust Preferred securities since their issuance date
in October 1997. Trust Preferred securities had an average balance of $32.7
million for the year ended June 30, 1999 compared to $22.7 million for the prior
year.
Net Interest and Dividend Income. Net interest and dividend income for the year
ended June 30, 1999 was $33.6 million, reflecting an increase from $32.8 million
recorded in the prior fiscal year. The increase reflects the Company's growth in
average assets, primarily in investment securities and loans receivable. 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 year ended June 30, 1999 were 2.01% and 2.24%, respectively, a
decline from 2.12% and 2.38%, respectively, for the year ended June 30, 1998.
For the year ended June 30, 1999, the declines in the net interest rate spread
and net interest margin were partially due to the issuance of the Trust
Preferred securities. The declines in the net interest rate spread and net
interest margin were also attributable to the relatively flat yield curve
environment experienced during fiscal 1999 in which higher yielding assets
pre-paid at accelerated rates and were replaced by lower yielding assets. Since
the Company's liabilities generally reprice more quickly than its assets,
interest margins will likely decrease if interest rates rise.
<PAGE>
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 1999 was $780,000 compared to $600,000 for the prior fiscal year. The
allowance for loan losses at June 30, 1999 of $3.2 million reflects a $433,000
increase from the June 30, 1998 level. The allowance for loan losses as a
percentage of non-performing loans was 87.44% at June 30, 1999, compared to
74.18% at June 30, 1998. The increase is principally attributable to a decline
in the Company's non-performing loans. The allowance for loan losses as a
percentage of total loans at June 30, 1999 was 0.30%.
Non-Interest Income. For the year ended June 30, 1999, non-interest income was
$3.5 million compared to $2.7 million for the prior fiscal year. Service charge
income increased to $2.1 million for the year ended June 30, 1999 versus $2.0
million for the comparable prior year. The net gain from real estate operations
was $31,000 for the year ended June 30, 1999. This compares to a net loss of
$156,000 for the year ended June 30, 1998. A net gain on sales of loans of
$860,000 was recorded for the year ended June 30,1999. Low-coupon, longer
duration one- to four-family residential mortgage loans totaling $150.5 million
were sold in the secondary market during the year ended June 30, 1999. Gains of
approximately $494,000 on sales of $70 million of one- to four-family mortgage
loans were reflected in the year ended June 30, 1998. The prior year loan sales
were undertaken to manage prepayment risk as part of the Company's
asset/liability management strategy. Recurring loan sales in the current fiscal
year were undertaken to mitigate the effects of low interest rates and a flat
yield curve. Future gains are expected to fluctuate depending on the level of
loan sale activity. A $221,000 improvement in other non-interest income
reflected increases due to earnings from the Investment Services at Penn Federal
Savings Bank program. Through this program, customers have convenient access to
financial consulting/advisory services and related non-deposit investment
products at local branch offices.
Non-Interest Expenses. The Company's non-interest expenses were $18.6 million
for the year ended June 30, 1999 compared to $17.4 million for the prior year.
Non-interest expenses have increased to support the Company's increased lending
volumes and the new Bayville, Toms River and Livingston branches which opened in
October 1997, February 1999 and June 1999, respectively. Nevertheless, the
Company's non-interest expenses as a percent of average assets declined slightly
to 1.20% for the year ended June 30, 1999 compared to 1.22% for the prior year.
Income Tax Expense. Income tax expense for the year ended June 30, 1999 was $6.3
million compared to $6.2 million for the prior fiscal year. The effective tax
rate was 35.5% for the year ended June 30, 1999 compared to 35.8% for the year
ended June 30, 1998.
Comparison of Operating Results for the Years Ended June 30, 1998 and June 30,
1997
General. For the year ended June 30, 1998 net income was $11.2 million, or $1.16
per diluted share, as compared to net income of $6.9 million, or $0.73 per
diluted share for the prior year. The year ended June 30, 1997 included the
effects of the one-time SAIF recapitalization assessment which totaled $4.8
million ($3.1 million after-tax), or $0.33 per share on a diluted basis.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 1998 increased to $100.8 million from $85.4 million for the year ended
June 30, 1997. The increase in fiscal 1998 was due to an increase in average
interest-earning assets, primarily residential loans, partially offset by a
decrease in the average yield earned on interest-earning assets. Average
interest-earning assets were $1.377 billion for the year ended June 30, 1998
compared to $1.144 billion for the prior year. The average yield earned on
interest-earning assets decreased to 7.32% for the year ended June 30, 1998 from
7.47% for the year ended June 30, 1997.
<PAGE>
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 1998 increased $11.3 million, or 21.1%, when compared to the
prior year. The increase in interest income on residential one- to four-family
mortgage loans was due to a $175.9 million increase in the average balance
outstanding to $889.2 million for the year ended June 30, 1998 compared to
$713.3 million for the prior year. The increase in the average balance on
residential one- to four-family mortgage loans was partially offset by a
decrease of 0.22% in the average yield earned on this loan portfolio to 7.29%
for the year ended June 30, 1998 from 7.51% for the prior year.
Interest on investment securities increased $8.2 million for the year ended June
30, 1998 from the prior year. The increase was primarily due to a $112.0 million
increase in the average balance outstanding and a 0.22% increase in the average
yield earned on these assets for the year ended June 30, 1998.
Interest income on the mortgage-backed securities portfolio decreased $4.9
million, or 22.1%, for the year ended June 30, 1998 as compared to the prior
year. The decrease in interest income on mortgage-backed securities primarily
reflects a $68.6 million decrease in the average balance outstanding to $248.8
million for the year ended June 30, 1998 compared to $317.4 million for the
prior year.
Interest Expense. Interest expense increased $15.0 million for the year ended
June 30, 1998 from $53.1 million for the year ended June 30, 1997. The increase
was primarily attributable to an increase in total average deposits, primarily
certificates of deposit, and FHLB of New York advances coupled with an increase
in the Company's cost of funds. Interest expense also increased due to the
issuance of the Trust Preferred securities. Average deposits and borrowings
increased $199.6 million for the year ended June 30, 1998 compared to fiscal
1997. The average rate paid on deposits, borrowings and Trust Preferred
securities increased to 5.20% for the year ended June 30, 1998 from 4.89% for
the prior year.
Net Interest and Dividend Income. Net interest and dividend income for the year
ended June 30, 1998 was $32.8 million, reflecting a slight increase from $32.3
million recorded in the prior year. 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 as well as timing
differences between the receipt of the proceeds from the Trust Preferred
securities offering and full implementation of the Company's investment
strategy. The net interest rate spread and net interest margin for the year
ended June 30, 1998 were 2.12% and 2.38%, respectively, a decline from 2.58% and
2.83%, respectively, during the prior year. For the year ended June 30, 1998,
the declines in net interest rate spread and net interest margin were 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 experienced in which higher yielding loans pre-paid at
accelerated rates and were replaced by lower yielding loans.
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 1998 was $600,000 compared to $635,000 for the prior year. The allowance for
loan losses at June 30, 1998 of $2.8 million showed an increase from the $2.6
million at June 30, 1997. The allowance for loan losses as a percentage of
non-performing loans was 74.18% at June 30, 1998, compared to 47.80% at June 30,
1997.
<PAGE>
Non-Interest Income. For the year ended June 30, 1998, non-interest income was
$2.7 million compared to $1.8 million for the prior year. Gains of approximately
$494,000 on sales of $70 million of one- to four-family mortgage loans,
primarily 30 year fixed rate loans, were reflected in the year ended June 30,
1998. These loan sales were undertaken to manage prepayment risk as part of the
Company's asset/liability management strategy. In addition to these gains,
growth in non-interest income was primarily attained through the introduction of
charging non-customers for ATM transactions, fees recorded for the origination
of loans provided to other investors and an increase in service charges related
to checking accounts. Furthermore, for the year ended June 30, 1998, the
increase was partially attributable to a decrease in the net loss from real
estate operations. The net loss from real estate operations was $156,000 for the
year ended June 30, 1998 compared to a net loss from real estate operations of
$181,000 for the prior year.
Non-Interest Expenses. Non-interest expenses were $17.4 million for the year
ended June 30, 1998 compared to $22.4 million for the prior year. The year ended
June 30, 1997 included $4.8 million for the one-time SAIF recapitalization
assessment. Excluding the effects of the SAIF assessment, non-interest expenses
for the year ended June 30, 1998 were slightly lower than fiscal 1997. Due to
expense control measures, the Company's non-interest expenses as a percent of
average assets declined to 1.22% for the year ended June 30, 1998 from 1.47% for
the prior year, excluding the SAIF assessment.
Income Tax Expense. Income tax expense for the year ended June 30, 1998 was $6.2
million compared to $4.2 million for the year ended June 30, 1997. Excluding the
effects of the one-time SAIF recapitalization assessment, income tax expense of
$6.0 million was recorded for the prior year. The effective tax rate for the
year ended June 30, 1998 was 35.8%. Excluding the effects of the one-time SAIF
recapitalization assessment, the effective tax rate was 37.5% for the year ended
June 30, 1997.
Year 2000
The concern comprising the Year 2000 issue has its basis in the fact that many
existing computer programs have traditionally used only two digits in many date
fields to identify the year. The century representation has been largely
assumed. As a century change rapidly approaches, any misinterpretation of the
proper meaning could cause logic and other software errors in various
applications. Year 2000 readiness means being able to clearly discern and
traverse the century boundary in all applications.
It is not, however, just a computer issue. Building, communications and
environmental systems are also involved. The issue is further compounded by the
degree to which other entities, such as bank customers and suppliers, are
successful in addressing this same issue. The Year 2000 issue affects virtually
all organizations globally. Penn Federal has been taking, as have most banking
institutions, a proactive stance on this issue for several years.
A formal Year 2000 Project Plan (the "Year 2000 Plan") was prepared and approved
by the Company's Board of Directors. The Year 2000 Plan identified different
phases: awareness, assessment, renovation, testing and contingency planning. 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. The OTS is also reviewing all of its regulated institutions for
Year 2000 preparedness.
<PAGE>
A task force, with representatives from all divisions within the Bank, was
assembled to implement the Year 2000 Plan, under the direction of an executive
vice president and a senior vice president. The task force engaged in a wide
range of associated tasks. These included informing bank personnel about the
complexity of the issue, assessing its impact upon Penn Federal systems and
applications and arranging for the remediation of affected items. As the Bank
primarily runs software purchased from a few key vendors, the task force met and
worked closely with those vendors and suppliers to ensure a smooth transition
into the next millennium.
By following a carefully prescribed Year 2000 Plan, as of June 30, 1999 all
mission-critical systems, including interfaces to the main systems, have been
completely renovated and tested. Significant progress is being made to inform
customers of the Company's Year 2000 preparedness. The Company intends to
continue to test systems and plans throughout the remainder of 1999, as well as
sponsor regional seminars for customers.
Due to variables outside the direct control of the Company, contingency planning
is an ongoing process. Members of the task force have responsibility for
identifying a contingency plan for the different areas of software tested. This
type of contingency planning is critical because, regardless of the validation
of systems, the potential still exists that the systems will not operate as
expected. If software for certain critical systems does not operate and the
current vendor is unable to supply Year 2000 compliant software upgrades, the
use of an alternative vendor could be required to be pursued, at additional cost
to the Company.
Contingency planning also includes other factors, such as potential disruptions
in vital utility services, which could negatively impact the Company's ability
to service its customers. The Company has developed, and the Board of Directors
has reviewed and approved, a business resumption contingency plan. This plan
focuses on and attempts to anticipate potential problems that may arise, and
provides alternative contingency planning strategies to mitigate risk. The
business resumption contingency plan identifies actions that could help reduce
the likelihood or lessen the impact of a Year 2000 problem, as well as
identifies the appropriate response actions to be taken in the event that a
problem does occur.
The Company is continuing to review and assess the Year 2000 status of its
larger borrowers. All commercial and multi-family loans have been evaluated for
Year 2000 exposure through an independent review process. As part of the current
credit approval process, all new and renewed commercial and multi-family loans
are evaluated for Year 2000 risk. The Company has requested that each of its
larger borrowers provide information regarding the nature of steps being taken
by the borrowers to address their own Year 2000 issues.
The cost for the Year 2000 effort incurred in fiscal 1999 was $45,000.
Additional future costs are not expected to have a material effect on the
results of operations and are estimated to be $25,000. No additional
expenditures are currently anticipated for hardware or software upgrades. The
estimated remaining costs are expected to cover any ongoing testing and
contingency planning. The actual and estimated expenditures do not include
manpower costs of Company personnel associated with the task force, who retain
their individual operational responsibilities in addition to Year 2000 duties.
The costs are based upon management's analysis of the information currently
available to it. No assurance can be given that issues relating to the Year 2000
will not have a material adverse effect on the Company's financial condition or
results of operations.
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows. The current required percentage is 4% of net
withdrawable deposits payable on demand or in one year or less and borrowings
payable on demand or in one year or less, both as of the end of the preceding
calendar quarter. Liquid assets for purposes of this ratio include cash, accrued
interest receivable, certain time deposits, U.S. Treasury and government
agencies and other securities and obligations generally having remaining
maturities of less than five years. All mortgage-backed securities are
includable in liquid assets, as well. The Company's most liquid assets are cash
and cash equivalents, short-term investments and mortgage-backed securities. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At June 30, 1999 and 1998, the
Bank's liquidity ratios were 21.30% and 24.50%, respectively.
In the event that the Company should require funds beyond its ability to
generate them internally, additional sources of funds are available through the
use of FHLB of New York advances and reverse repurchase agreements. In addition,
the Company may access funds, if necessary, through the use of $57.0 million of
overnight repricing lines of credit and a $50.0 million one-month overnight
repricing line of credit from the FHLB of New York. The Company uses its liquid
resources principally to fund maturing certificates of deposit and deposit
withdrawals, to purchase loans and securities, to fund existing and future
commitments, and to meet operating expenses. At June 30, 1999, the Company had
outstanding commitments to extend credit which amounted to $70.6 million
(including $46.4 million in available lines of credit) and commitments to
purchase loans of $25.1 million. Management believes that loan repayments and
other sources of funds will be adequate to meet the Company's foreseeable
liquidity needs.
During fiscal 1999, the Company's cash needs were provided by operating
activities, primarily from proceeds from the sales of loans. During fiscal 1999,
the cash provided was principally used for investing activities, which included
the purchase of investment securities and the origination and purchase of loans.
In addition to cash provided by operating activities, the Company's fiscal 1998
and 1997 cash needs were provided by increased deposits, an increase in advances
from the FHLB of New York and other borrowings and principal repayments of
mortgage-backed securities. Furthermore, during fiscal 1998, proceeds from the
Trust Preferred securities offering, maturities of investment securities and
sales of loans contributed to meeting the Company's cash needs. During fiscal
1998 and 1997, the cash provided was used for investing activities, which
included the origination and purchase of loans and the purchase of investment
securities.
<PAGE>
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk- adjusted assets;
a leverage ratio of core capital to total adjusted assets; and a tangible
capital ratio expressed as a percentage of total adjusted assets. As of June 30,
1999, the Bank exceeded all regulatory capital requirements and qualified as a
"well-capitalized" institution. See "Regulation" and Note P --Stockholders'
Equity and Regulatory Capital, in the Notes to Consolidated Financial
Statements.
The Company initiated a quarterly cash dividend on its common stock of $0.035
per share in the second quarter of fiscal 1997. The quarterly cash dividend was
increased to $0.04 per share in the second quarter of fiscal 1999. Total
dividends paid for the years ended June 30, 1999, 1998 and 1997 were $0.155 per
share, $0.14 per share and $0.105 per share, respectively. The declaration and
payment of dividends are subject to, among other things, PennFed's financial
condition and results of operations, regulatory capital requirements, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries
West Orange, New Jersey
We have audited the accompanying consolidated statements of financial condition
of PennFed Financial Services, Inc. and Subsidiaries (the "Company") as of June
30, 1999 and 1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PennFed Financial
Services, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Parsippany, New Jersey
July 28, 1999
<PAGE>
<TABLE>
<CAPTION>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents .................................................. $ 9,900 $ 10,960
Investment securities held to maturity, at amortized cost, market value
of $281,880 and $178,743 at June 30, 1999 and 1998 .................... 293,282 178,310
Mortgage-backed securities held to maturity, at amortized cost, market value
of $128,617 and $208,128 at June 30, 1999 and 1998 .................... 127,983 204,452
Loans held for sale ........................................................ 5,180 565
Loans receivable, net of allowance for loan losses of $3,209 and $2,776
at June 30, 1999 and 1998 ............................................. 1,061,431 1,095,287
Premises and equipment, net ................................................ 19,240 18,092
Real estate owned, net ..................................................... 936 1,643
Federal Home Loan Bank of New York stock, at cost .......................... 16,623 15,065
Accrued interest receivable, net ........................................... 9,680 8,723
Goodwill and other intangible assets ....................................... 11,118 13,481
Other assets ............................................................... 3,390 5,360
----------- -----------
$ 1,558,763 $ 1,551,938
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits .............................................................. $ 1,063,600 $ 1,028,100
Federal Home Loan Bank of New York advances ........................... 244,465 230,465
Other borrowings ...................................................... 88,738 131,500
Mortgage escrow funds ................................................. 10,102 10,534
Due to banks .......................................................... 7,385 12,069
Accounts payable and other liabilities ................................ 4,230 2,886
----------- -----------
Total liabilities ..................................................... 1,418,520 1,415,554
----------- -----------
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures ............................ 34,500 34,500
Unamortized issuance expenses ......................................... (1,757) (1,819)
----------- -----------
Net Trust Preferred securities ........................................ 32,743 32,681
----------- -----------
Commitments and Contingencies (Note O)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(CONTINUED)
June 30,
----------------------------
1999 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, 15,000,000 shares authorized,
11,897,858 and 11,900,000 shares issued and 8,813,416 and
9,385,988 shares outstanding at June 30, 1999
and 1998 (excluding shares held in treasury of
3,084,442 and 2,514,012 at June 30, 1999 and 1998) ................ 59 60
Additional paid-in capital ............................................ 59,488 58,278
Restricted stock - Management Recognition Plan ........................ -- (531)
Employee Stock Ownership Plan Trust debt .............................. (2,804) (3,253)
Retained earnings, partially restricted ............................... 80,673 70,781
Treasury stock, at cost, 3,084,442 and 2,514,012 shares at
June 30, 1999 and 1998 ............................................ (29,916) (21,632)
----------- -----------
Total stockholders' equity ............................................ 107,500 103,703
----------- -----------
$ 1,558,763 $ 1,551,938
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended June 30,
---------------------------------------------
1999 1998 1997
----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest and Dividend Income:
Interest and fees on loans ........................ $ 78,288 $ 73,822 $ 61,768
Interest on federal funds sold .................... 68 18 --
Interest and dividends on investment securities ... 16,318 9,814 1,603
Interest on mortgage-backed securities ............ 10,883 17,151 22,030
----------- ----------- -----------
105,557 100,805 85,401
----------- ----------- -----------
Interest Expense:
Deposits .......................................... 48,648 48,200 40,172
Borrowed funds .................................... 20,138 17,669 12,901
Trust Preferred securities ........................ 3,132 2,174 --
----------- ----------- -----------
71,918 68,043 53,073
----------- ----------- -----------
Net Interest and Dividend Income Before
Provision for Loan Losses ......................... 33,639 32,762 32,328
Provision for Loan Losses ........................... 780 600 635
----------- ----------- -----------
Net Interest and Dividend Income After
Provision for Loan Losses ......................... 32,859 32,162 31,693
----------- ----------- -----------
Non-Interest Income:
Service charges ................................... 2,113 1,974 1,666
Net gain (loss) from real estate operations ....... 31 (156) (181)
Net gain on sales of loans ........................ 860 528 --
Other ............................................. 542 321 298
----------- ----------- -----------
3,546 2,667 1,783
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Consolidated Statements of Income
(CONTINUED)
For the years ended June 30,
---------------------------------------------
1999 1998 1997
----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Non-Interest Expenses:
Compensation and employee benefits ................ 8,961 8,109 7,897
Net occupancy expense ............................. 1,333 1,275 1,129
Equipment ......................................... 1,642 1,542 1,580
Advertising ....................................... 359 380 326
Amortization of intangibles ....................... 2,363 2,437 2,512
Federal deposit insurance premium ................. 627 591 1,112
SAIF recapitalization assessment .................. -- -- 4,813
Other ............................................. 3,359 3,055 3,016
----------- ----------- -----------
18,644 17,389 22,385
----------- ----------- -----------
Income Before Income Taxes .......................... 17,761 17,440 11,091
Income Tax Expense .................................. 6,304 6,242 4,205
----------- ----------- -----------
Net Income .......................................... $ 11,457 $ 11,198 $ 6,886
=========== =========== ===========
Weighted average number of common shares outstanding:
Basic ............................................. 8,408,175 8,949,357 8,902,644
=========== =========== ===========
Diluted ........................................... 8,878,491 9,689,655 9,439,856
=========== =========== ===========
Net income per common share:
Basic ............................................. $ 1.36 $ 1.25 $ 0.77
=========== =========== ===========
Diluted ........................................... $ 1.29 $ 1.16 $ 0.73
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Consolidated Statements of
Changes in Stockholders' Equity
For the Years Ended June 30, 1999, 1998 and 1997
Restricted Employee
Stock - Stock
Serial Additional Management Ownership
Preferred Common Paid-In Recognition Plan Trust Retained Treasury
Stock Stock Capital Plan Debt Earnings Stock
------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 .................. $-- $ 60 $ 57,057 $ (1,316) $ (4,061) $ 55,172 $(16,348)
Allocation of ESOP stock .................. 390
ESOP and MRP adjustment ................... 345
Purchase of 32,500 shares of treasury stock (651)
Issuance of 1,804 shares of treasury stock
for options exercised and Dividend
Reinvestment Plan (DRP) ............... (20) 27
Issuance of 29,155 shares of treasury
stock for MRP ......................... 39 (462) 423
Amortization of MRP stock ................. 716
Cash dividends ............................ (987)
Net income for the year ended June 30, 1997 6,886
--- -------- -------- -------- -------- -------- --------
Balance at June 30, 1997 .................. -- 60 57,441 (1,062) (3,671) 61,051 (16,549)
Allocation of ESOP stock .................. 418
ESOP and MRP adjustment ................... 837
Purchase of 325,000 shares
of treasury stock ..................... (5,581)
Issuance of 66,740 shares of treasury stock
for options exercised and DRP ......... (166) 498
Amortization of MRP stock ................. 531
Cash dividends ............................ (1,302)
Net income for the year ended June 30, 1998 11,198
--- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 .................. -- 60 58,278 (531) (3,253) 70,781 (21,632)
Allocation of ESOP stock .................. 449
ESOP and MRP adjustment ................... 1,221
Purchase of 618,000 shares of
treasury stock ........................ (8,729)
Issuance of 47,570 shares of treasury stock
for options exercised and DRP ......... (212) 445
Cancellation of 2,142 shares .............. (1) (11)
Amortization of MRP Stock ................. 531
Cash dividends ............................ (1,353)
Net income for the year ended June 30, 1999 11,457
--- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 .................. $-- $ 59 $ 59,488 $ -- $ (2,804) $ 80,673 $(29,916)
=== ======== ======== ========= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended June 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ............................................................. $ 11,457 $ 11,198 $ 6,886
Adjustments to reconcile net income to net cash provided by operating
activities:
Net gain on sales of loans ............................................. (860) (528) --
Proceeds from sales of loans held for sale ............................. 151,468 1,616 585
Originations of loans held for sale .................................... -- (2,181) (497)
Net gain on sales of real estate owned ................................. (110) (95) (29)
Amortization of investment and mortgage-backed securities premium, net . 351 319 260
Depreciation and amortization .......................................... 1,364 1,297 1,301
Provision for losses on loans and real estate owned .................... 825 751 747
Amortization of cost of stock plans .................................... 2,101 1,786 1,466
Amortization of intangibles ............................................ 2,363 2,437 2,512
Amortization of premiums on loans and loan fees ........................ 2,338 1,565 414
Amortization of Trust Preferred securities issuance costs .............. 62 42 --
Increase in accrued interest receivable, net of accrued interest payable (509) (974) (113)
(Increase) decrease in other assets .................................... 1,970 (2,464) 1,731
Increase in deferred income tax liability .............................. 288 642 185
Increase in accounts payable and other liabilities ..................... 1,144 230 891
Increase (decrease) in mortgage escrow funds ........................... (432) 1,679 2,925
Increase (decrease) in due to banks .................................... (4,684) 4,832 1,248
Other, net ............................................................. 30 -- (2)
--------- --------- ---------
Net cash provided by operating activities .............................. 169,166 22,152 20,510
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities ...................... 147,070 70,141 16,000
Purchases of investment securities held to maturity .................... (262,096) (213,168) (30,000)
Net outflow from loan originations net of principal repayments of loans (93,695) (152,786) (86,193)
Purchases of loans ..................................................... (31,220) (89,910) (195,514)
Proceeds from principal repayments of mortgage-backed securities ....... 76,206 83,775 57,266
Purchases of mortgage-backed securities ................................ (34) -- --
Proceeds from sale of loans ............................................ -- 75,108 --
Purchases of premises and equipment .................................... (2,542) (2,954) (1,701)
Proceeds from sales of real estate owned ............................... 1,202 1,300 1,806
Purchases of Federal Home Loan Bank of New York stock .................. (1,558) (2,652) (4,361)
--------- --------- ---------
Net cash used in investing activities .................................. (166,667) (231,146) (242,697)
--------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(CONTINUED)
For the years ended June 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net increase in deposits ............................................... 35,052 109,387 81,403
Increase (decrease) in advances from the Federal Home Loan Bank of New
York and other borrowings ........................................... (28,762) 73,750 141,515
Net proceeds from issuance of Trust Preferred securities ............... -- 32,639 --
Cash dividends paid .................................................... (1,353) (1,302) (987)
Purchases of treasury stock, net of reissuance ......................... (8,496) (5,249) (644)
--------- --------- ---------
Net cash provided by (used in) financing activities .................... (3,559) 209,225 221,287
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ...................... (1,060) 231 (900)
Cash and Cash Equivalents, Beginning of Year .............................. 10,960 10,729 11,629
--------- --------- ---------
Cash and Cash Equivalents, End of Year .................................... $ 9,900 $ 10,960 $ 10,729
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ............................................................... $ 70,684 $ 66,821 $ 52,054
========= ========= =========
Income taxes ........................................................... $ 4,700 $ 6,707 $ 3,504
========= ========= =========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net ................. $ 432 $ 2,115 $ 1,690
========= ========= =========
Transfer of loans receivable to loans held for sale, at market ......... $ 155,223 $ -- $ --
========= ========= =========
Issuance of treasury stock for Management Recognition Plan ............. $ -- $ -- $ 423
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
A. Summary of Significant Accounting Policies
PennFed Financial Services, Inc. ("PennFed") was organized in March 1994 for the
purpose of becoming the savings and loan holding company for Penn Federal
Savings Bank (the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion").
Principles of Consolidation -- The consolidated financial statements of PennFed
and subsidiaries (with its subsidiaries the "Company") include the accounts of
PennFed and its subsidiaries (the Bank and PennFed Capital Trust I). PennFed
owns all of the outstanding stock of the Bank issued on July 14, 1994 (see Note
B - Stock Conversion). All references to the Company, unless otherwise
indicated, prior to July 14, 1994, refer to the Bank and its subsidiaries on a
consolidated basis. All intercompany accounts and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant area in
the accompanying financial statements where estimates have an impact is in the
allowance for loan losses.
Cash and Cash Equivalents -- For purposes of reporting cash flows, cash and cash
equivalents include cash and amounts due from depository institutions.
Investment Securities and Mortgage-Backed Securities -- In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), debt securities
classified as held to maturity are carried at amortized cost only if the
reporting entity has a positive intent and ability to hold those securities to
maturity.
The Company classifies investment securities and mortgage-backed securities as
either held to maturity or available for sale. Investment securities and
mortgage-backed securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, since the Company has both
the ability and intent to hold the securities to maturity. Investments available
for sale are carried at market value with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity.
Loans Held for Sale -- Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Aggregate net unrealized losses are recorded as a valuation
allowance and recognized as charges to income.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Loans Receivable -- Interest income is not accrued on loans where management has
determined that the borrowers may be unable to meet contractual principal or
interest obligations or where interest and/or principal is 90 days or more past
due. When a loan is placed on nonaccrual status, accrual of interest ceases and,
in general, uncollected past due interest (including interest applicable to
prior years, if any) is reversed and charged against current income. Therefore,
interest income is not recognized unless the financial condition and payment
record of the borrower warrant the recognition of interest income. Interest on
loans that have been restructured is generally accrued according to the
renegotiated terms.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" ("SFAS 118"), the Company
accounts for impaired loans, except those loans that are accounted for at fair
value or at the lower of cost or fair value, at the present value of the
estimated future cash flows of the loan discounted at the loan's effective
interest rate or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable that all principal and interest amounts will not be collected according
to the loan contract. Delinquent, smaller balance, homogeneous loans that are
evaluated collectively on a portfolio basis are not considered impaired under
SFAS 114. The Company generally evaluates the collectibility of consumer and
one- to four-family loans on a total portfolio basis.
Allowance for Loan Losses -- The allowance for loan losses is established
through charges to earnings. Loan losses are charged against the allowance for
loan losses when management believes that the recovery of principal is unlikely.
If, as a result of loans charged off or increases in the size or risk
characteristics of the loan portfolio, the allowance is below the level
considered by management to be adequate to absorb future loan losses on existing
loans, the provision for loan losses is increased to the level considered
necessary to provide an adequate allowance. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the collectibility of the
loans. The evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may affect the
borrowers' ability to pay. Economic conditions may result in the necessity to
change the allowance quickly in order to react to deteriorating financial
conditions of the Company's borrowers. As a result, additional provisions on
existing loans may be required in the future if borrowers' financial conditions
deteriorate or if real estate values decline.
Premises and Equipment -- Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation of
premises and equipment are computed on the straight-line method over three to
ten years for furniture and equipment and twenty-five to forty years for
buildings. Amortization of leasehold improvements is provided using the
straight-line method over the terms of the respective lease or estimated useful
life of the improvement, whichever is shorter.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Real Estate Owned -- Real estate properties acquired by foreclosure are recorded
at the lower of cost or estimated fair value less costs to dispose with any
write down charged against the allowance for loan losses. Subsequent valuations
are periodically performed by management and the carrying value is adjusted by a
charge to expense to reflect any subsequent declines in the estimated fair
value. Further declines in real estate values may result in increased foreclosed
real estate expense in the future. Routine holding costs are charged to expense
as incurred and improvements to real estate owned that increase the fair value
of the real estate are capitalized. Gains on sale of real estate owned are
generally recognized upon disposition of the property. Losses are charged to
operations as incurred.
Goodwill -- The excess of cost over fair value of assets acquired ("goodwill")
arising from the acquisitions discussed in Note C is amortized to expense by an
accelerated method over the estimated remaining lives of long-term,
interest-bearing assets acquired (14 years) in accordance with Statement of
Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions."
Core Deposit Premium -- The premium resulting from the valuation of core
deposits arising from the aforementioned acquisitions is being amortized to
expense over the estimated average remaining life of the existing customer
deposit base acquired (10 years).
Due to Banks -- This item represents a book overdraft relating to outstanding
checks written on the Company's Federal Home Loan Bank of New York operating
account.
Income Taxes -- Federal and state income taxes are based upon earnings reported
after permanent differences. Deferred income taxes are provided for temporary
differences in the basis of assets and liabilities between financial statement
and income tax amounts.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), the Company uses an asset and
liability method for financial accounting and reporting for income taxes.
Earnings Per Common Share -- Basic earnings per common share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period, less the weighted average
unallocated ESOP shares of common stock. The computation of diluted earnings per
share is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued.
Loan Origination Fees and Discounts and Premiums -- Nonrefundable loan
origination fees net of certain direct loan origination costs are deferred. Net
deferred fees on loans held for investment are amortized into income over the
life of the related loans by use of the level-yield method. Net deferred fees on
loans originated for sale are deferred and recognized as part of the gain or
loss on sale of loans.
Discounts and premiums on investment and mortgage-backed securities and loans
purchased are recognized as income/expense over the estimated life of the asset
purchased using the level-yield method.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Interest Rate Swaps -- The Company has utilized interest rate swaps as a
component of managing interest rate risk. Swap agreements are held for purposes
other than trading. The Company's swaps are considered to be matched swaps, as
they are specifically linked with a liability. Periodic net cash settlements
under swap agreements are accrued as an adjustment to interest expense over the
life of the agreements. In the event of the termination of an interest rate swap
agreement, the gain or loss would be deferred and amortized as an adjustment to
interest expense over the shorter of the remaining life of the hedged item or
the remaining contract period. In the event of liquidation of the liability to
which the interest rate swap is linked, the interest rate swap would be recorded
at its fair market value with any change in such fair market value recorded in
the period it occurs.
Recently Adopted Accounting Standards -- Effective July 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards to reporting
and display of comprehensive income and its components. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
will be required to classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial condition. The
adoption of SFAS 130 did not have an effect on the Company's financial condition
or results of operations.
Stock Split-- All share information has been adjusted to reflect a two-for-one
stock split in the form of a 100% stock dividend paid on February 10, 1998. For
further information refer to Note P- Stockholders' Equity and Regulatory
Capital.
Reclassifications -- Certain reclassifications have been made to prior years'
financial statements to conform with current year's presentation.
B. Stock Conversion
On July 14, 1994, the Bank completed the Conversion and became a wholly owned
subsidiary of PennFed, a newly formed holding company. In connection with an
initial public offering, PennFed issued 11,900,000 shares of common stock at $5
per share ($.01 par value), increasing consolidated equity by $52.1 million,
which was net of conversion expenses of approximately $2.7 million and shares
issued to the ESOP representing 8% of the shares of common stock issued. The
Bank received proceeds of $28.0 million from PennFed in exchange for all of its
common stock.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
As part of the Conversion, in order to grant a priority to eligible account
holders in the event of future liquidation in accordance with Office of Thrift
Supervision ("OTS") regulations, the Bank established a liquidation account in
an amount equal to $40.9 million (the retained earnings of the Bank as of March
31, 1994). The total amount of the liquidation account will be decreased as the
balances of eligible account holders are reduced subsequent to the Conversion.
In the event of a complete liquidation of the Bank, and only in such event,
eligible account holders who continue to maintain their deposit accounts shall
be entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
C. Branch Acquisitions
In 1995, the Bank acquired from the Resolution Trust Corporation ("RTC") the
deposit liabilities and certain of the assets and other liabilities of four
branch offices of Carteret Federal Savings Bank, Madison, New Jersey
("Carteret"). The four Carteret branch offices were located in Caldwell, Verona,
Fairfield and Wayne, New Jersey. Immediately following the purchase, under a
pre-arranged "consortium" agreement, Atlantic Stewardship Bank of Midland Park,
New Jersey acquired from the Bank the deposit liabilities and certain of the
assets and other liabilities of the Wayne, New Jersey branch office. In
connection with this transaction, no gain or loss was recorded by the Bank.
The Bank submitted an $18,739,000 deposit premium bid, of which $18,000,000
related to the Caldwell, Verona and Fairfield branches. In addition to the
$18,000,000 deposit premium, the Bank also capitalized $141,000 of expenses
reflecting a total deposit premium intangible asset of $18,141,000. For the
years ended June 30, 1999, 1998 and 1997, amortization of the deposit premium
intangible of $1,814,000 was recorded each year.
The Company acquired Sayreville Savings and Loan Association effective September
1982 and First Federal Savings and Loan Association of Montclair effective
September 1989. The acquisitions have been accounted for as purchases and,
accordingly, the purchase prices have been allocated to assets and liabilities
acquired based on their fair value at their date of acquisition. For each of the
years ended June 30, 1999, 1998 and 1997, the effect of the amortization of
goodwill was to reduce income before income taxes by approximately $347,000,
$421,000 and $496,000, respectively.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
D. Investment Securities
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
--------------------- ----------------------
Carrying Market Carrying Market
Value Value Value Value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and Government Agencies:
Maturing:
After five years but within ten years ........................... $ 10,000 $ 9,628 $ 95,000 $ 95,342
After ten years ................................................. 254,538 244,615 71,969 71,643
-------- -------- -------- --------
264,538 254,243 166,969 166,985
Obligations of states and political subdivisions:
Maturing:
Within one year ................................................. -- -- 100 101
After one year but within five years ............................ 40 45 40 46
-------- -------- -------- --------
40 45 140 147
Trust preferred securities:
Maturing:
After ten years ................................................. 28,704 27,592 11,201 11,611
-------- -------- -------- --------
$293,282 $281,880 $178,310 $178,743
======== ======== ======== ========
</TABLE>
At June 30, 1999 and 1998, investment securities with a carrying value of
$82,500,000 and $85,969,000, respectively, were pledged to secure Federal Home
Loan Bank of New York advances and other borrowings.
Gross unrealized gains and losses of investment securities at June 30, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
- -------------------------------------------------------------------------------- ----------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and Government Agencies .......... $ -- $10,295 $ 353 $ 337
Obligations of states and political subdivisions 5 -- 7 --
Trust preferred securities ..................... 41 1,153 410 --
------- ------- ------- -------
$ 46 $11,448 $ 770 $ 337
======= ======= ======= =======
</TABLE>
There were no sales of investment securities for the years ended June 30, 1999,
1998 and 1997.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
E. Mortgage-Backed Securities
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Ginnie Mae ....................................... $ 2,071 $ 3,005
Freddie Mac ...................................... 74,622 123,444
Fannie Mae ....................................... 50,899 77,019
Collateralized Mortgage Obligations/REMICs ....... 103 400
-------- --------
127,695 203,868
Unamortized premiums, net ........................ 288 584
-------- --------
$127,983 $204,452
======== ========
</TABLE>
The estimated market values of mortgage-backed securities were $128,617,000 and
$208,128,000 at June 30, 1999 and 1998, respectively. There were no sales of
mortgage-backed securities in the years ended June 30, 1999, 1998 and 1997.
The carrying value of mortgage-backed securities pledged were as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Pledged to secure:
Federal Home Loan Bank of New York advances ..... $ 78,467 $ 91,213
Other borrowings ................................ 19,461 19,485
Interest rate swap agreements ................... 4,825 2,618
Public funds on deposit ......................... 3,304 3,865
-------- --------
$106,057 $117,181
======== ========
</TABLE>
Collateralized mortgage obligations consist primarily of fixed and adjustable
rate sequentially paying securities with short durations.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The gross unrealized gains and losses of mortgage-backed securities held at June
30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------- -------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
------ ---- ------ ----
(In thousands)
<S> <C> <C> <C> <C>
Ginnie Mae ............................... $ 92 $ -- $ 192 $ --
Freddie Mac .............................. 570 288 2,064 19
Fannie Mae ............................... 459 198 1,443 5
Collateralized Mortgage Obligations/REMICs -- 1 1 --
------ ------ ------ ------
$1,121 $ 487 $3,700 $ 24
====== ====== ====== ======
</TABLE>
F. Loans Receivable, Net
<TABLE>
<CAPTION>
June 30,
-------------------------------
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
First Mortgage Loans:
Conventional ........................... $ 909,576 $ 966,073
FHA insured ............................ 4,585 4,180
VA guaranteed .......................... 1,083 1,415
----------- -----------
Total one- to four-family .............. 915,244 971,668
Commercial and multi-family ............ 74,613 65,833
----------- -----------
Total first mortgage loans ............... 989,857 1,037,501
----------- -----------
Consumer:
Second mortgages ....................... 37,243 27,232
Home equity lines of credit ............ 31,754 23,538
Other .................................. 3,575 3,331
----------- -----------
Total consumer loans ..................... 72,572 54,101
----------- -----------
Total loans .............................. 1,062,429 1,091,602
----------- -----------
Add (Less):
Allowance for loan losses .............. (3,209) (2,776)
Unamortized premium .................... 2,112 2,903
Unearned income on consumer loans ...... (20) (31)
Net deferred loan fees ................. 5,299 4,154
----------- -----------
4,182 4,250
----------- -----------
$ 1,066,611 $ 1,095,852
=========== ===========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Conventional one- to four-family mortgage loans at June 30, 1999 and 1998
included $5,180,000 and $565,000, respectively, of mortgages held for sale. At
June 30, 1999, there was no commitment to sell these loans. At June 30, 1998,
the Company had a commitment to sell these loans.
Non-accruing loans at June 30, 1999 and 1998 were $3,670,000 and $3,742,000,
respectively, which represents 0.34% of total loans outstanding at each date.
The total interest income that would have been recorded for the years ended June
30, 1999 and 1998, had these loans been current in accordance with their
original terms, or since the date of origination if outstanding for only part of
the year, was approximately $137,000 and $167,000, respectively.
At June 30, 1999 and 1998, impaired loans totaled $48,000 and $457,000,
respectively. The average balance of impaired loans for the years ended June 30,
1999 and 1998 was $339,000 and $724,000, respectively. All impaired loans have a
related allowance for losses, which totaled $48,000 and $185,000 at June 30,
1999 and 1998, respectively. Interest income related to impaired loans is
recognized under the cash-basis method. Interest income recognized on impaired
loans for the years ended June 30, 1999 and 1998 was $10,000 and $30,000,
respectively. Total interest income that would have been recorded for the years
ended June 30, 1999 and 1998, had these loans been current in accordance with
their loan terms, was approximately $36,000 and $60,000, respectively.
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year ........... $ 2,776 $ 2,622 $ 2,630
Provisions for losses on loans ....... 780 600 635
Recoveries ........................... 49 -- 42
Losses charged to allowance .......... (396) (446) (685)
------- ------- -------
Balance, end of year ................. $ 3,209 $ 2,776 $ 2,622
======= ======= =======
</TABLE>
The Company's loan portfolio consists primarily of loans secured by residential
and commercial real estate located in its market areas. Therefore, the
collectibility of these loans is dependent to a large degree on the overall
strength of the New Jersey economy, as well as the specific strength of the real
estate sector.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
At June 30, 1999 and 1998, commercial and multi-family real estate loans totaled
$74,613,000 and $65,833,000, respectively. These loans are considered by
management to be of somewhat greater risk of collectibility due to their
dependency on income production. Commercial and multi-family real estate loans
collateralized by multi-family mixed use properties were $31,288,000 and
$33,033,000 at June 30, 1999 and 1998, respectively. The remaining commercial
real estate loans were collateralized by commercial properties. The majority of
the Company's commercial and multi-family real estate loans were collateralized
by real estate in the State of New Jersey.
Loans serviced for others totaled approximately $116,180,000 and $110,916,000 at
June 30, 1999 and 1998, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees from
investors and certain charges assessed to borrowers, such as late payment fees.
In connection with these loans serviced for others, the Company held borrowers
escrow balances of $1,354,000 and $1,216,000 at June 30, 1999 and 1998,
respectively.
G. Premises and Equipment, Net
<TABLE>
<CAPTION>
June 30,
---------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Land ............................................... $ 4,004 $ 3,959
Buildings and improvements ......................... 14,923 14,143
Leasehold improvements ............................. 1,521 1,309
Furniture and equipment ............................ 10,587 10,174
------- -------
31,035 29,585
Less: accumulated depreciation and amortization .... 11,795 11,493
------- -------
$19,240 $18,092
======= =======
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
H. Real Estate Owned
<TABLE>
<CAPTION>
June 30,
---------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Acquired by foreclosure or deed in lieu of foreclosure $ 1,018 $ 1,850
Allowance for losses on real estate owned ............ (82) (207)
------- -------
$ 936 $ 1,643
======= =======
</TABLE>
Results of real estate operations were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1999 1998 1997
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Net gain on sales of real estate owned ............ $ 110 $ 95 $ 29
Holding costs ..................................... (34) (100) (98)
Provision for losses on real estate owned ......... (45) (151) (112)
----- ----- -----
Net gain (loss) from real estate operations ....... $ 31 $(156) $(181)
===== ===== =====
</TABLE>
Activity in the allowance for losses on real estate owned was as follows:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------
1999 1998 1997
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year .............. $ 207 $ 102 $ 61
Provisions charged to operations ........ 45 151 112
Losses charged to allowance ............. (170) (46) (71)
----- ----- -----
Balance, end of year .................... $ 82 $ 207 $ 102
===== ===== =====
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
I. Deposits
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
--------------------------------- -----------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest-bearing demand .............. $ 37,738 $ 33,153
Interest-bearing demand .................. 58,255 1.56% 45,961 2.12%
Money market accounts .................... 12,406 2.02 13,435 2.02
Savings accounts ......................... 164,893 1.67 164,192 2.12
Certificates with remaining maturities of:
One year or less ....................... 616,600 5.08 574,747 5.51
Over one year to three years ........... 157,922 5.61 151,344 6.27
Over three years to five years ......... 12,628 5.50 42,558 6.23
---------- ----------
Total certificates ....................... 787,150 5.20 768,649 5.70
Accrued interest payable ................. 3,158 2,710
---------- ----------
$1,063,600 4.21% $1,028,100 4.72%
========== ==========
</TABLE>
The aggregate amount of accounts with a denomination of $100,000 or more was
approximately $168,613,000 and $168,656,000 at June 30, 1999 and 1998,
respectively.
J. Federal Home Loan Bank of New York Advances and Other Borrowings
The following table presents Federal Home Loan Bank of New York ("FHLB of New
York") advances at the earlier of the callable date or maturity date:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
-------------------------- -------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year ....................... $ 90,000 6.17% $ 55,000 6.09%
After one year but within two years ... 20,000 5.80 90,000 6.17
After two years but within three years 70,000 6.06 10,000 5.91
After three years but within four years 45,000 5.60 30,000 6.42
After four years but within five years 19,000 5.15 45,000 5.60
After five years ...................... 465 7.39 465 7.39
-------- --------
$244,465 5.93% $230,465 6.06%
======== ========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The FHLB of New York advances are all fixed rate borrowings collateralized
either under a blanket pledge agreement by one- to four-family mortgage loans or
with investment and mortgage-backed securities.
At June 30, 1999, the Company had available from the FHLB of New York an
overnight repricing line of credit for $50,000,000 which expires on May 1, 2000.
The line of credit has a variable interest rate. At June 30, 1999 and 1998, the
Company had $29,900,000 and $41,700,000 of overnight borrowings under this
credit line with an interest rate of 5.98% and 6.25%, respectively. In addition,
the Company had available overnight variable repricing lines of credit with
other correspondent banks totaling $7,000,000. There were no borrowings under
these lines at June 30, 1999 or 1998. Also, the Company had available from the
FHLB of New York a one-month overnight repricing line of credit for $50,000,000
which expires on May 1, 2000. This line of credit has a variable interest rate.
There were no borrowings under this line at June 30, 1999. At June 30, 1998, the
Company had $10,000,000 drawn under this line of credit with an interest rate of
6.13% .
From time to time, the Company enters into sales of securities under agreements
to repurchase ("reverse repurchase agreements"). These agreements are accounted
for as financing arrangements and the obligations to repurchase securities sold
are reflected as other borrowings in the accompanying consolidated statements of
financial condition. The reverse repurchase agreements are collateralized by
investment and mortgage-backed securities which continue to be carried as assets
by the Company, with a carrying value of $59,461,000 and $79,454,000 and a
market value of $57,601,000 and $79,977,000 at June 30, 1999 and 1998,
respectively.
The following table presents reverse repurchase agreements at the earlier of the
callable date or the maturity date:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------ --------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year .................... $19,563 5.01% $49,925 5.44%
After one year but within five years 39,275 5.93 29,875 5.93
------- -------
$58,838 5.63% $79,800 5.62%
======= =======
</TABLE>
The average balance of reverse repurchase agreements for the years ended June
30, 1999 and 1998 was $51,039,000 and $44,578,000, respectively.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
K. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
The Company formed a wholly-owned trust subsidiary, PennFed Capital Trust I (the
"Trust"). Effective October 21, 1997, the Trust sold $34.5 million of 8.90%
cumulative trust preferred securities to the public which are reflected on the
Consolidated Statement of Financial Condition as Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Debentures (the "Trust Preferred
securities"). The Trust used the proceeds from the sale of the Trust Preferred
securities to purchase 8.90% junior subordinated deferrable interest debentures
issued by PennFed. The sole assets of the Trust are $35.6 million of junior
subordinated debentures which mature on October 31, 2027 and are redeemable at
any time after five years. The obligations of the Company related to the Trust
constitute a full and unconditional guarantee by the Company of the Trust
Issuer's obligations under the Trust Preferred securities. The Company used the
proceeds from the junior subordinated debentures for general corporate purposes,
including a $20 million capital contribution to the Bank to support future
growth.
L. Incentive Savings Plan
The Company's employee benefits include the Penn Federal Savings Bank 401(k)
Plan (the "Plan"). All employees of the Company who work at least 1,000 hours
per year and are at least 20 1/2 years old are eligible to participate in the
Plan. The Plan provides for a discretionary Company match of employee
contributions. For the years ended June 30, 1999, 1998 and 1997, expense related
to the Plan was $107,000, $101,000 and $78,000, respectively. At June 30, 1999
and 1998, the Plan assets included common stock of the Company with a market
value of $282,000 and $144,000, respectively.
M. Stock Plans
Employee Stock Ownership Plan ("ESOP")
In connection with the Conversion, the Company established an ESOP for eligible
employees. All full-time employees are eligible to participate in the ESOP after
they attain age 21 and complete one year of service during which they work at
least 1,000 hours. Employees were credited for years of service to the Company
prior to the adoption of the ESOP for participation and vesting purposes. The
Bank's contribution is allocated among participants on the basis of
compensation. Each participant's account is credited with cash or shares of the
Company's common stock based upon compensation earned during the year with
respect to which the contribution is made. After completing seven years of
service, a participant will be 100% vested in his/her ESOP account. ESOP
participants are entitled to receive distributions from the ESOP account only
upon termination of service, which includes retirement and death.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The ESOP borrowed $4,760,000 from PennFed and purchased 952,000 shares of common
stock issued in the Conversion. This loan is to be repaid from discretionary
contributions by the Bank to the ESOP trust. The Bank has and intends to
continue to make contributions to the ESOP in amounts at least equal to the
principal and interest requirement of the debt, assuming a ten year term and an
interest rate of 7.46%. Annual contributions to the ESOP, which are used to fund
principal and interest payments on the ESOP debt, total $692,000. At June 30,
1999 and 1998, the loan had an outstanding balance of $2,804,000 and $3,253,000
and the ESOP had unallocated shares of 560,710 and 650,614, respectively. Based
upon a $15.75 closing price per share of common stock on June 30, 1999, the
unallocated shares had a fair value of $8,831,000. The unamortized balance of
the ESOP debt is reflected as a reduction of stockholders' equity.
For the years ended June 30, 1999 and 1998, the Bank recorded compensation
expense related to the ESOP of $1,173,000 and $1,273,000, respectively. The
compensation expense related to the ESOP includes $826,000 and $959,000,
respectively, for a valuation adjustment to reflect the increase in the average
fair value of allocated shares for the period from the time of purchase to the
allocation date. The ESOP allocated 89,904 and 83,662 shares for the years ended
June 30, 1999 and 1998, respectively, to participants in the plan.
Management Recognition Plan
In connection with the Conversion, the Company established a Management
Recognition Plan ("MRP") as a means of enhancing and encouraging the recruitment
and retention of directors and officers. A maximum amount of an additional 4%,
or 476,000 shares, of the shares outstanding upon Conversion may be awarded
under the plan. As of June 30, 1999, 476,000 shares of restricted stock have
been awarded under the MRP. The shares vested in equal installments generally
over a five-year period, with the final installment vesting on April 28, 1999.
Of the total awarded, 2,142 shares did not vest and were cancelled. For the
years ended June 30, 1999 and 1998, the Company recorded expense of $431,000 and
$531,000, respectively, related to the MRP.
Stock Option Plan
In connection with the Conversion, the Company established the 1994 Stock Option
and Incentive Plan ("Option Plan"). The exercise price for the options granted
under the Option Plan cannot be less than the fair market value of the Company's
common stock on the date of the grant. The options are granted, and the terms of
the options are established, by the Compensation Committee of the Board of
Directors. Transactions during the years ended June 30, 1999, 1998 and 1997
relating to the Option Plan are as follows:
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
--------- ---------
<S> <C> <C>
Balance, June 30, 1996 .................. 1,011,450 $ 5.25
Granted ............................ 124,950 7.94
Exercised .......................... (1,400) 5.25
Expired ............................ -- --
Forfeited .......................... (600) 5.25
--------- ---------
Balance, June 30, 1997 ................. 1,134,400 5.55
Granted ............................ 486,700 16.92
Exercised .......................... (63,800) 5.25
Expired ............................ -- --
Forfeited .......................... -- --
--------- ---------
Balance, June 30, 1998 .................. 1,557,300 9.11
Granted ............................ -- --
Exercised .......................... (44,400) 5.25
Expired ............................ (7,000) 17.19
Forfeited .......................... (19,950) 13.63
--------- ---------
Balance, June 30, 1999 .................. 1,485,950 $ 9.13
========= =========
</TABLE>
At June 30, 1999, 1998 and 1997, 1,343,583 options, 1,023,527 options and
679,760 options were exercisable, respectively, with exercise prices ranging
from $5.25 to $17.19.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), if fully adopted, requires companies to measure
employee stock compensation plans based on the fair value method of accounting.
The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly,
the Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its plans. In accordance with APB 25, no
compensation expense has been recognized for its stock-based compensation plans
other than for restricted stock. Pro forma disclosures as if the Company fully
adopted the cost recognition requirements under SFAS 123 are presented below.
The estimated weighted average fair value of each stock option granted during
fiscal 1998 was estimated as $8.08 on the date of grant. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions: stock volatility of 18.78%; risk-free
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
interest rate of 5.93%; and an expected life of 10 years. Had compensation cost
for the grants been determined based upon the fair value at the grant date
consistent with the methodology prescribed under SFAS 123, the Company's fiscal
1998 pro forma net income and diluted earnings per share would have been
approximately $9.6 million and $0.99, respectively. As the SFAS 123 method of
accounting has not been applied to stock options granted prior to July 1, 1996,
the resulting pro forma effects on net income is not representative of the pro
forma effect on net income in future years.
N. Income Taxes
The income tax provision is comprised of the following components:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Current provision $6,016 $5,600 $4,020
Deferred provision 288 642 185
------ ------ ------
Total income tax provision $6,304 $6,242 $4,205
====== ====== ======
</TABLE>
Income taxes payable is included in accounts payable and other liabilities in
the Consolidated Statements of Financial Condition at June 30, 1999 and 1998.
The financial statements also include a net deferred tax liability of $833,000
that has been recorded for the temporary differences between the tax basis and
the financial statement carrying amounts of assets and liabilities. The source
of these temporary differences and their deferred tax effect at June 30, 1999
and 1998 is as follows:
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ................ $ 657 $ 330
Litigation reserves ...................... 4 22
Deposit premium intangible ............... 950 726
MRP expense .............................. 192 229
Depreciation ............................. 503 503
------- -------
Total deferred tax assets .................. 2,306 1,810
------- -------
Deferred tax liabilities:
Deferred loan fees ....................... 2,650 2,106
Loan sale premiums ....................... 13 15
Purchase accounting ...................... 158 234
Servicing asset .......................... 318 --
------- -------
Total deferred tax liabilities ............. 3,139 2,355
------- -------
Net deferred tax liability ................. $ (833) $ (545)
======= =======
</TABLE>
A reconciliation of the statutory income tax provision to the effective income
tax provision is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Income tax provision at statutory rate .. $ 6,216 $ 6,104 $ 3,882
Amortization of intangibles ............. 121 147 174
State and local tax provision ........... -- -- 214
Other, net .............................. (33) (9) (65)
------- ------- -------
Total income tax provision .............. $ 6,304 $ 6,242 $ 4,205
======= ======= =======
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Pursuant to SFAS 109, the Company is not required to provide deferred taxes on
its tax loan loss reserve as of December 31, 1987. The amount of this reserve on
which no deferred taxes have been provided is approximately $16,300,000. This
reserve could be recognized as taxable income and create a current and/or
deferred tax liability using the income tax rates then in effect if one of the
following occur: (1) the Company's retained earnings represented by this reserve
are used for dividends or distributions in liquidation or for any other purpose
other than to absorb losses from bad debts, (2) the Company fails to qualify as
a Bank, as provided by the Internal Revenue Code, or (3) there is a change in
federal tax law.
O. Commitments and Contingencies
Lease Commitments -- At June 30, 1999, minimum rental commitments under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:
<TABLE>
<CAPTION>
Year ending June 30, (In thousands)
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 285
2001 206
2002 210
2003 217
2004 174
2005 and later 596
------
$1,688
======
</TABLE>
Rentals under long-term operating leases for certain branch offices amounted to
$263,000, $234,000 and $169,000 for the years ended June 30, 1999, 1998 and
1997, respectively. Rental income of $454,000, $444,000 and $452,000 for the
years ended June 30, 1999, 1998 and 1997, respectively, is netted against
occupancy expense in the Consolidated Statements of Income.
Financial Instruments With Off-Balance Sheet Risk -- The Company is a party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments are not recorded on the balance sheet when either the exchange of
the underlying asset or liability has not yet occurred or the notional amounts
are used solely as a means to determine the cash flows to be exchanged. These
financial instruments are commitments to extend credit, unused lines of credit,
commitments to purchase loans and interest rate swaps. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the Consolidated Statements of Financial Condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following summarizes the notional amount of off-balance sheet financial
instruments:
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Commitments to extend credit ............... $ 24,122 $ 6,850
Unused lines of credit ..................... 46,441 30,402
Commitments to purchase loans .............. 25,094 11,666
Interest rate swaps ........................ 150,000 150,000
</TABLE>
Commitments to extend credit and unused lines of credit are legally binding
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments and lines of credit generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained by the Company upon
extension of credit is based on management's credit evaluation of the borrower.
Collateral held varies but may include mortgages on commercial and residential
real estate and other tangible properties.
Commitments to purchase loans represent agreements to purchase loans through
correspondent relationships established by the Company with other institutions.
The Company currently purchases newly originated one- to four-family residential
mortgages secured by properties located in the State of New Jersey. Prior to
fiscal 1999, a limited amount of loans secured by properties located in the
Commonwealth of Pennsylvania and the State of Massachusetts were purchased.
Prior to purchase, the Company applies the same underwriting criteria used in
its own originations.
The Company periodically enters into interest rate swap agreements to help
reduce certain interest rate exposure on a portion of the short-term deposits.
Interest rate swaps are contractual agreements between two parties to exchange
interest payments at particular intervals, computed on different terms, on a
specified notional amount. The notional amounts represent the base on which
interest due each counter party is calculated and do not represent the potential
for gains or losses associated with the market risk or credit risk of such
transactions. At both June 30, 1999 and 1998, the Company had $150 million in
notional amount interest rate swap agreements outstanding on which the Company
pays a fixed interest rate and receives a floating interest rate based on
three-month LIBOR from the counter parties, which are nationally recognized
investment firms. At June 30, 1999, the fixed interest rates payable by the
Company ranged from 4.99% to 6.63% and three-month LIBOR was 5.37%. The average
balance of notional amount interest rate swap agreements in fiscal 1999 and 1998
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
was $165,753,000 and $100,548,000, respectively. Included in interest expense
for the year ended June 30, 1999 and 1998 was $1,116,000 and $507,000,
respectively, of expense related to interest rate swap agreements.
Mortgage-backed securities with a carrying value of $4,824,000 and $2,617,000 at
June 30, 1999 and 1998, respectively, were pledged to secure these agreements.
The interest rate swap agreements mature or are callable between September 16,
1999 and November 8, 2001.
Other Contingencies -- In 1987, the New Jersey Department of Environmental
Protection ("NJDEP") conducted an environment contamination investigation of the
Orange Road branch site of First Federal Savings and Loan Association of
Montclair ("First Federal"). Prior to the acquisition by First Federal, the
location was used as a gasoline service station. On August 16, 1989, the NJDEP
issued a "no further action" letter to First Federal with regard to this site.
The Bank acquired First Federal effective September 11, 1989. Notwithstanding
the earlier "no further action" letter, on June 25, 1997, the NJDEP issued a
letter demanding that Penn Federal Savings Bank develop a remedial action work
plan for the Orange Road branch site as a result of an investigation conducted
on behalf of an adjacent property owner. The Bank disputed the NJDEP position
that Penn Federal Savings Bank was a responsible party. On July 1, 1998, the
NJDEP issued a letter determining that Penn Federal Savings Bank, Mobil Oil
Corporation and the former gasoline service station owner were all responsible
parties for the clean up at the subject site. Responsible parties may ultimately
have full or partial obligation for the cost of remediation. As of this date,
the apportionment of the remediation costs to the Bank, if any, is not
determinable. The Bank intends to vigorously contest this determination and to
seek contribution or indemnification from the other named responsible parties.
The Company is a defendant in certain claims and legal actions arising in the
ordinary course of business. At the present time, management does not anticipate
losses on any of these claims or actions which would have a material adverse
effect on the accompanying consolidated financial statements.
P. Stockholders' Equity and Regulatory Capital
On January 13, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend, payable on February 10, 1998
to common stockholders of record as of January 27, 1998.
During the year ended June 30, 1999, the Company repurchased 618,000 shares of
its outstanding common stock at prices ranging from $11.50 to $16.63 per share,
for a total cost of $8,729,000. During the year ended June 30, 1998, the Company
repurchased 325,000 shares of its outstanding common stock at prices ranging
from $16.63 to $17.88 per share for a total cost of $5,581,000. During the year
ended June 30, 1997, the Company repurchased 65,000 shares of its outstanding
common stock. The prices paid for the repurchased shares ranged from $10.00 to
$10.09 per share, for a total cost of $651,000.
On March 21, 1996, the Board of Directors of the Company (the "Board") initially
adopted a Stockholder Protection Rights Plan ("Rights Plan") and declared a
dividend of one common share purchase right ("Right") for each share of common
stock of the Company outstanding on April 1, 1996. Until it is announced that a
person or group has acquired 15% or more of the outstanding common stock of the
Company ("Acquiring Person") or has commenced a tender offer that could result
in such person or group owning 15% or more of such common stock, the Rights will
initially be redeemable for $0.01 each, will be evidenced solely by the
Company's common stock certificates, will automatically trade with the Company's
common stock and will not be exercisable.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Upon announcement that any person or group has become an Acquiring Person and
unless the Board acts to redeem the Rights, then ten business days after such
announcement (the "Flip-in Date"), each Right (other than Rights beneficially
owned by any Acquiring Person or transferee thereof, which Rights become void)
will entitle the holder to purchase, for the $33.75 exercise price, a number of
shares of the Company's common stock having an aggregate market value of $67.50.
In addition, if, after the Acquiring Person gains control of the Board, the
Company is involved in a merger with any person or sells more than 50% of its
assets or earning power to any person (or has entered into an agreement to do
either of the foregoing), and, in the case of a merger, an Acquiring Person will
receive different treatment than other stockholders, each Right will entitle its
holder to purchase, for the $33.75 exercise price, a number of shares of common
stock of such other person having an aggregate market value of $67.50. If any
person or group acquires between 15% and 50% of the Company's common stock, the
Board may, at its option, require the Rights to be exchanged for common stock of
the Company. The Rights generally may be redeemed by the Board for $0.01 per
Right prior to the Flip-in Date.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements could result in certain mandatory and possible discretionary
actions by the OTS that, if undertaken, could have a direct material effect on
the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
quantitative capital guidelines.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of tangible capital of
not less than 1.5% of tangible assets, core capital of not less than 4% of
adjusted tangible assets and risk-based capital of not less than 8% of
risk-weighted assets. As of June 30, 1999, the Bank meets all capital adequacy
requirements to which it is subject.
As of its last regulatory examination the Bank was categorized as
"well-capitalized" under the prompt corrective action framework. To be
considered as "well-capitalized", the Bank must maintain a core capital ratio of
not less than 5% and a risk-based capital ratio of not less than 10%. There are
no conditions or events since that notification that management believes have
changed the Bank's category.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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>
As of June 30, 1999
Tangible capital . $121,910 7.88% $ 23,207 1.50% N/A N/A
Core capital ..... $121,943 7.88% $ 61,888 4.00% $ 77,360 5.00%
Risk-based capital $124,976 16.29% $ 61,374 8.00% $ 76,717 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>
In August 1993, the OTS adopted a regulation requiring that an amount be added
to an institution's risk-based capital requirement equal to 50% of the decline
in market value of portfolio equity ("MVPE") that exceeds 2% of the
institution's assets, under a hypothetical 200 basis points shock in interest
rates. MVPE is defined as the market value of assets, less the market value of
liabilities, plus or minus the market value of off-balance sheet items. At the
present time, the OTS has indefinitely postponed the effective date of the rule.
However, if the regulation had been in effect at June 30, 1999, the Bank would
still have exceeded its risk-based capital requirement.
The Bank's management believes that, with respect to regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
However, events beyond the control of the Bank, such as increased interest rates
or a further downturn in the economy in areas where the Bank has most of its
loans, could adversely affect future earnings and, consequently, the ability of
the Bank to meet its future minimum capital requirements.
The previous table reflects information for the Bank. Savings and loan holding
companies, such as 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>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Minimum Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ----------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Stockholders' equity .................. $ 107,500
Add: Qualifying preferred securities .. 32,105
Less: Goodwill ........................ (653)
Deposit premium intangible ... (10,465)
Disallowed servicing assets .. (102)
-----------
Tangible capital, and ratio to adjusted
total assets ..................... $ 128,385 8.29% $ 23,217 1.50%
=========== ===========
Add: Qualifying intangible assets ..... $ 34
-----------
Tier I (core) capital, and ratio to
adjusted total assets ............ $ 128,419 8.30% $ 46,434 3.00% $ 77,391 5.00%
=========== =========== ===========
Tier I (core) capital, and ratio to
risk- weighted assets ............ $ 128,419 16.98% $ 30,253 4.00% $ 45,380 6.00%
=========== =========== ===========
Less: Equity investments and
investments in real estate ....... $ (50)
Add: Allowance for loan losses ........ 3,083
-----------
Total risk-based capital, and ratio to
risk-weighted assets ............. $ 131,452 17.38% $ 60,507 8.00% $ 75,633 10.00%
=========== =========== ===========
Total assets .......................... $ 1,558,763
===========
Adjusted total assets ................. $ 1,547,815
===========
Risk-weighted assets .................. $ 756,332
===========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Federal regulations impose certain limitations on the payment of dividends and
other capital distributions by the Bank. Under current regulations, savings
institutions, such as the Bank, that meet the fully phased-in capital
requirements, as defined, subsequent to a capital distribution are generally
permitted to make such capital distribution without OTS approval, so long as
they have not been notified of the need for more than normal supervision by the
OTS. The Bank has not been so notified and, therefore, may make capital
distributions during a calendar year equal to 100% of year-to-date net income
plus retained net income for the two previous years. At June 30, 1999, the Bank
could have paid dividends totaling approximately $26.8 million.
Q. Computation of EPS
The computation of EPS is presented in the following table.
<TABLE>
<CAPTION>
For the year ended June 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Net income .................................... $ 11,457 $ 11,198 $ 6,886
=========== =========== ===========
Number of shares outstanding:
Weighted average shares issued ................ 11,899,349 11,900,000 11,900,000
Less: Weighted average shares held in treasury 2,896,595 2,268,513 2,233,752
Less: Average shares held by the ESOP ........ 952,000 952,000 952,000
Plus: ESOP shares released or committed to be
released during the fiscal year .. 357,421 269,870 188,396
----------- ----------- -----------
Average basic shares ................... 8,408,175 8,949,357 8,902,644
Plus: Average common stock equivalents ....... 470,316 740,298 537,212
----------- ----------- -----------
Average diluted shares ........................ 8,878,491 9,689,655 9,439,856
=========== =========== ===========
Earnings per common share:
Basic ..................................... $ 1.36 $ 1.25 $ 0.77
=========== =========== ===========
Diluted ................................... $ 1.29 $ 1.16 $ 0.73
=========== =========== ===========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
R. Disclosure About Fair Value of Financial Instruments
The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ...................... $ 9,900 $ 9,900 $ 10,960 $ 10,960
Investment securities .......................... 293,282 281,880 178,310 178,743
Mortgage-backed securities ..................... 127,983 128,617 204,452 208,128
FHLB of New York stock ......................... 16,623 16,623 15,065 15,065
---------- ---------- ---------- ----------
Total cash and investments ..................... 447,788 437,020 408,787 412,896
Loans held for sale ............................ 5,180 5,180 565 565
Loans receivable, less allowance for loan losses 1,061,431 1,049,735 1,095,287 1,097,701
---------- ---------- ---------- ----------
Total loans .................................... 1,066,611 1,054,915 1,095,852 1,098,266
Accrued interest receivable, net ............... 9,680 9,680 8,723 8,723
---------- ---------- ---------- ----------
Total financial assets ......................... $1,524,079 $1,501,615 $1,513,362 $1,519,885
========== ========== ========== ==========
Financial liabilities:
Deposits ....................................... $1,063,600 $1,064,543 $1,028,100 $1,032,071
FHLB of New York advances ...................... 244,465 245,103 230,465 231,217
Other borrowings ............................... 88,738 88,810 131,500 131,510
Mortgage escrow funds .......................... 10,102 10,102 10,534 10,534
Due to banks ................................... 7,385 7,385 12,069 12,069
Net Trust Preferred securities ................. 32,743 34,414 32,681 35,104
---------- ---------- ---------- ----------
Total financial liabilities .................... $1,447,033 $1,450,357 $1,445,349 $1,452,505
========== ========== ========== ==========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
---------------------- -----------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
(In thousands)
Off-balance sheet financial instruments:
Commitments to extend credit ........... $ 24,122 $ -- $ 6,850 $ --
Unused lines of credit ................. 46,441 -- 30,402 --
Commitments to purchase loans .......... 25,094 -- 11,666 --
Interest rate swaps .................... 150,000 (256) 150,000 (1,173)
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate fair
value:
Cash and Cash Equivalents -- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities and Mortgage-Backed Securities -- For these securities,
fair values are based on quoted market prices.
Federal Home Loan Bank of New York Stock--For this security, the carrying
amount, which is par, is a reasonable estimate of fair value. All transactions
in the capital stock of the FHLB of New York are executed at par.
Loans Held for Sale -- Fair value is based on the market price.
Loans Receivable -- Fair values are estimated for portfolios of loans with
similar financial characteristics. The total loan portfolio is first divided
into performing, held for sale and non-performing categories. Performing loans
are then segregated into adjustable and fixed rate interest terms. Fixed rate
loans are segmented by type, such as residential real estate mortgage,
non-residential, commercial real estate and consumer loans. Adjustable rate
loans are segmented by repricing characteristics. Residential loans are further
segmented by maturity.
For loans, fair value is calculated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the rate at which
the Company would currently make loans which are similar with regard to
collateral, maturity and type of borrower. The discounted value of the cash
flows is reduced by a credit risk adjustment based on internal loan
classifications. Based on the current composition of the Company's loan
portfolio, as well as both past experience and current economic conditions and
trends, future cash flows are adjusted by prepayment assumptions which shorten
the estimated remaining time to maturity and, therefore, impact the fair market
valuation.
Accrued Interest Receivable, Net -- For these short-term assets, the carrying
amount is a reasonable estimate of fair value.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Deposits -- The fair value of deposits with no stated maturity, such as savings,
money market and other demand accounts, is equal to the amount payable on demand
as of June 30, 1999 and 1998. Time deposits are segregated by type and original
term. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is equivalent to the rate currently
offered by the Company for deposits of similar type and maturity.
Federal Home Loan Bank of New York Advances -- The fair value of FHLB of New
York advances is based on the discounted value of contractual cash flows. The
discount rate is equivalent to the rate currently offered by the FHLB of New
York on borrowings of similar type and maturity.
Other Borrowings-- For these short-term borrowings, the fair value is based on
the discounted value of contractual cash flows. The discount rate is equivalent
to the rate currently offered for borrowings of similar type and maturity.
Mortgage Escrow Funds and Due to Banks -- For these short-term liabilities, the
carrying amount is a reasonable estimate of fair value.
Trust Preferred Securities -- For these securities, fair value is based on a
quoted market price.
Commitments to Extend Credit and Unused Lines of Credit -- The fair value of
commitments is estimated to be zero since the fees collected on commitments to
extend credit approximates the amount of costs incurred. No estimated fair value
is presented for unused lines of credit because the rates associated with these
lines are market rates.
Commitments to Purchase Loans -- No fair value is estimated due to the
short-term nature of these commitments.
Interest Rate Swaps-- For this off-balance sheet financial instrument, fair
value represents the amount the Company would have to pay to terminate the
agreements based upon quoted market prices as provided by financial institutions
which are counter parties to the agreements.
S. Related Party Transactions
In the ordinary course of business, the Company at times has made loans to and
engaged in other financial transactions with its directors, officers and
employees. Such transactions are generally made on substantially the same terms
as those prevailing at the time for comparable transactions with others and do
not involve more than normal risk of collectibility.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following sets forth an analysis of loans, all of which are current, to
directors, officers and employees:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Balance, beginning of year ............... $ 3,963 $ 3,870
New loans granted ........................ 728 961
Repayments/reductions .................... (1,083) (868)
------- -------
Balance, end of year ..................... $ 3,608 $ 3,963
======= =======
</TABLE>
In addition to the above amount of loans, at June 30, 1999 and 1998, there was
$46,000 and $38,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.
T. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging purposes. SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative. In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays the original effective
date of SFAS 133. In accordance with SFAS 137, SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Although
management has not yet fully evaluated the effects, the impact of SFAS 133 on
the Company's financial condition or results of operations is directly related
to the size and composition of the Company's portfolio of derivatives and market
conditions both at the time of adoption and each reporting period thereafter.
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
U. Condensed Financial Information of PennFed Financial Services, Inc. (Parent
Company Only)
The following are the condensed financial statements for PennFed, parent company
only, as of June 30, 1999 and 1998 and for the years ended June 30, 1999, 1998
and 1997 and should be read in conjunction with the Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
June 30,
-----------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Assets
Cash ............................................. $ 25 $ 26
Intercompany overnight investment ................ 2,674 3,748
-------- --------
Total cash and cash equivalents ................ 2,699 3,774
Investment securities held to
maturity, at amortized cost .................... 11,186 11,201
Investment in subsidiaries ....................... 134,359 123,216
Prepaid Trust Preferred securities expenses ...... 1,757 1,819
Accrued interest receivable ...................... 271 271
Other assets ..................................... 1,560 39
-------- --------
$151,832 $140,320
======== ========
Liabilities and Stockholders' Equity
Junior subordinated debentures ................... $ 35,568 $ 35,568
Intercompany loan payable ........................ 7,100 --
Accrued interest payable ......................... 528 528
Other accrued expenses and other liabilities ..... 1,136 521
Stockholders' equity ............................. 107,500 103,703
-------- --------
$151,832 $140,320
======== ========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
Condensed Statements of Operations
Year ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Income:
Interest income on intercompany balances .................... $ 318 $ 860 $ 755
Interest income on investment securities .................... 1,006 582 --
Other income ................................................ 3 4 --
-------- -------- --------
1,327 1,446 755
Expenses:
Interest expense on Junior subordinated debentures .......... 3,166 2,198 --
Interest on intercompany loan ............................... 379 -- --
Other expenses .............................................. 365 328 346
-------- -------- --------
3,910 2,526 346
-------- -------- --------
Income (loss) before undistributed net income of subsidiaries (2,583) (1,080) 409
Equity in undistributed net income of subsidiaries .......... 13,169 11,923 6,625
-------- -------- --------
Income before income taxes .................................. 10,586 10,843 7,034
Income tax expense (benefit) ................................ (871) (355) 148
-------- -------- --------
Net income .................................................. $ 11,457 $ 11,198 $ 6,886
======== ======== ========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income ..................................................................... $ 11,457 $ 11,198 $ 6,886
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed net income of subsidiaries ..................... (13,169) (11,923) (6,625)
Amortization of investment securities discount ......................... 15 8 --
Amortization of cost of stock plans .................................... 520 534 716
Increase in accrued interest payable, net of accrued interest receivable -- 257 --
Increase in other assets ............................................... (1,459) (1,819) (1)
Increase (decrease) in other liabilities ............................... 615 (294) 165
-------- -------- --------
Net cash provided by (used in) operating activities ................. (2,021) (2,039) 1,141
-------- -------- --------
Cash Flows From Investing Activities:
Investments in subsidiary bank ................................................. -- (20,000) --
Investment in the Trust ........................................................ -- (1,068) --
Purchase of investment securities .............................................. -- (11,209) --
Dividends received from subsidiary bank ........................................ 3,246 -- --
Proceeds from principal repayment on ESOP loan ................................. 449 418 390
-------- -------- --------
Net cash provided by (used in) investing activities .................... 3,695 (31,859) 390
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of junior subordinated debentures ....................... -- 35,568 --
Proceeds from intercompany loan ................................................ 7,100 -- --
Purchases of treasury stock, net of re-issuance ................................ (8,496) (5,249) (644)
Payment of cash dividends ...................................................... (1,353) (1,302) (987)
-------- -------- --------
Net cash provided by (used in) financing activities .................... (2,749) 29,017 (1,631)
-------- -------- --------
Net decrease in cash and cash equivalents ...................................... (1,075) (4,881) (100)
Cash and cash equivalents, beginning of year ................................... 3,774 8,655 8,755
-------- -------- --------
Cash and cash equivalents, end of year ......................................... $ 2,699 $ 3,774 $ 8,655
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes ........................................................... $ -- $ 85 $ 131
======== ======== ========
Supplemental Schedule of Non-Cash Activities:
Issuance of treasury stock for MRP ......................................... $ -- $ -- $ 423
======== ======== ========
</TABLE>
<PAGE>
PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
V. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------
1998 1999
---------------------------- -----------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest income ...... $27,238 $26,552 $26,072 $25,695
Total interest expense ..... 18,944 18,361 17,533 17,080
------- ------- ------- -------
Net Interest income ........ 8,294 8,191 8,539 8,615
Provision for loan losses .. 175 185 210 210
Non-interest income ........ 1,015 912 995 624
Non-interest expenses ...... 4,672 4,544 4,790 4,638
Income tax expense ......... 1,611 1,556 1,626 1,511
------- ------- ------- -------
Net income ............... $ 2,851 $ 2,818 $ 2,908 $ 2,880
======= ======= ======= =======
Net income per common share:
Basic .................... $ 0.33 $ 0.33 $ 0.35 $ 0.35
======= ======= ======= =======
Diluted .................. $ 0.31 $ 0.31 $ 0.33 $ 0.33
======= ======= ======= =======
<CAPTION>
Quarter ended
--------------------------------------------------------
1998 1999
---------------------------- -----------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest income ...... $23,827 $25,034 $25,925 $26,019
Total interest expense ..... 15,665 16,942 17,511 17,925
------- ------- ------- -------
Net interest income ........ 8,162 8,092 8,414 8,094
Provision for loan losses .. 150 150 150 150
Non-interest income ........ 485 604 949 629
Non-interest expenses ...... 4,221 4,265 4,503 4,400
Income tax expense ......... 1,590 1,539 1,662 1,451
------- ------- ------- -------
Net income ............... $ 2,686 $ 2,742 $ 3,048 $ 2,722
======= ======= ======= =======
Net income per common share:
Basic .................... $ 0.30 $ 0.31 $ 0.34 $ 0.30
======= ======= ======= =======
Diluted .................. $ 0.28 $ 0.28 $ 0.31 $ 0.28
======= ======= ======= =======
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information Concerning Directors and Executive Officers
Information concerning Directors of the Registrant is incorporated herein by
reference from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 27, 1999, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation," a copy of which
will be filed not later than 120 days after the close of the fiscal year. For
information concerning Executive Officers of the Registrant who are not also
Directors, see "Executive Officers" in Part I of this Annual Report on Form
10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Information concerning compliance with the reporting requirements of Section
16(a) of the Securities Exchange Act of 1934 by Directors, Officers and ten
percent beneficial owners of the Registrant is incorporated herein by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on October 27, 1999.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 27, 1999, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation," a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Registrant's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
October 27, 1999, except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation," a copy of which will be filed not later than 120 days after the
close of the fiscal year.
<PAGE>
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Registrant's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
27, 1999, except for information contained under the headings "Compensation
Committee Report on Executive Compensation" and "Stock Performance
Presentation," a copy of which will be filed not later than 120 days after the
close of the fiscal year.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in Part I, Item 8 of this Form 10-K
is incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 1999 and
1998
Consolidated Statements of Income for the Years Ended June 30, 1999,
1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended June 30,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is not applicable.
<PAGE>
(a) (3) Exhibits:
<TABLE>
<CAPTION>
Regulation Reference to
S-K Prior Filing
Exhibit or Exhibit
Number Document Number
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3 (i) Certificate of Incorporation *
3 (ii) Bylaws 3.2
4 Instruments defining the rights of security holders, including indentures *
4 (i) Stockholder Protection Rights Agreement ***
9 Voting trust agreement None
10 Material contracts:
(a) Employee Stock Ownership Plan *
(b) 1994 Stock Option and Incentive Plan ****
(c) Management Recognition Plan *
(d) Employment Agreement with Joseph L. LaMonica **
(e) Employment Agreement with Patrick D. McTernan **
(f) Employment Agreement with Lucy T. Tinker **
(g) Amendment to Employment Agreement with Joseph L. LaMonica 10.7
(h) Amendment to Employment Agreement with Lucy T. Tinker 10.8
(i) Amendment to Employment Agreement with Patrick D. McTernan 10.9
(j) Employment Agreement with Jeffrey J. Carfora 10.10
(k) Employment Agreement with Barbara A. Flannery 10.11
11 Statement re: computation of per share earnings 11
12 Statements re: computation of ratios 12
13 Annual Report to security holders Not required
16 Letter re: change in certifying accountant Not required
18 Letter re: change in accounting principles None
19 Previously unfiled documents None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to vote of security holders None
23 Consents of independent auditors and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance regulatory authorities Not required
99 Additional Exhibits Not applicable
</TABLE>
*Filed as exhibits to the Company's Registration Statement on Form S-1 under the
Securities Act of 1933, filed with the Securities and Exchange Commission on
March 25, 1994 (Registration No. 33-76854). All of such previously filed
documents are hereby incorporated herein by reference in accordance with Item
601 of Regulation S-K.
**Filed as exhibits to the Company's Form 10-K under the Securities Act of 1934,
filed with Securities and Exchange Commission on September 27, 1994. All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
<PAGE>
***Filed as an exhibit to the Company's Registration Statement on Form 8-A under
the Securities Act of 1934, filed with the Securities and Exchange Commission on
March 28, 1996 as amended on Form 8-A/A (the "Form 8-A/A") filed with the
Securities and Exchange Commission on February 11, 1998 and as further amended
on Form 8-A/A-2 (the "Form 8-A/A-2") filed with the Securities and Exchange
Commission on October 14, 1998. The First Amendment to the Stockholders
Protection Rights Agreement is filed as an exhibit to the Form 8-A/A and the
Second Amendment to the Stockholders Protection Rights Agreement is filed as an
exhibit to the Form 8-A/A-2. These documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
****Filed as an appendix to the Company's definitive proxy statement filed with
the Securities and Exchange Commission on September 26, 1997.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three month period ended June
30, 1999.
AMENDED AND RESTATED BYLAWS
OF
PENNFED FINANCIAL SERVICES, INC.
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of at least one-third
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law. Where
a separate vote by a class or classes is required, a majority of the shares of
such class or
1
<PAGE>
classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, shall call to order any
meeting of the stockholders and act as chairman of the meeting. In the absence
of the Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to him
or her in order.
(b) At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting (i) by
or at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than sixty (60)
days prior to the anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than twenty days, or delayed by more than sixty days from such anniversary
date, notice by the stockholder to be timely must be so delivered not later than
the close of business on the later of the sixtieth day prior to such annual
meeting or the tenth day following the day on which notice of the date of the
annual meeting was mailed or public announcement of the date of such meeting is
first made. A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the Corporation's books, of the stockholder who
proposed such business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder and
(iv) any material interest of such stockholder in such business. Notwithstanding
anything in
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these By-laws to the contrary, no business shall be brought before or conducted
at an annual meeting except in accordance with the provisions of this Section
6(b). The officer of the Corporation or other person presiding over the annual
meeting shall, if the facts so warrant, determine and declare to the meeting
that business was not properly brought before the meeting in accordance with the
provisions of this Section 6(b) and, if he should so determine, he shall so
declare to the meeting and any such business so determined to be not properly
brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these By-laws shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are to
be elected only (i) by or at the direction of the Board of Directors or (ii) by
any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered or mailed to and received at the principal executive offices of the
Corporation not less than 60 days prior to the date of the meeting; provided,
however, that in the event that less than 70 days' notice of the date of the
meeting is first given or made to stockholders by public announcement or mail,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the meeting was mailed or public announcement was first made. Such
stockholder's notice shall set forth (i) as to each person whom such stockholder
proposes to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (ii) as to the
stockholder giving the notice: (x) the name and address, as they appear on the
Corporation's books, of such stockholder and (y) the class and number of shares
of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed
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by the stockholder or in the absence of such direction, as determined by a
majority of the Board of Directors. No proxy shall be valid after eleven months
from the date of its execution except for a proxy coupled with an interest.
Each stockholder shall have one (1) vote for every share of stock
entitled to vote which is registered in his or her name on the record date for
the meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
The officer who has charge of the stock transfer books of the
Corporation shall prepare and make, in the time and manner required by
applicable law, a list of stockholders entitled to vote and shall make such list
available for such purposes, at such places, at such times and to such persons
as required by applicable law. The stock transfer books shall be the only
evidence as to the identity of the stockholders entitled to examine the stock
transfer books or to vote in person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. Inspectors of Election
The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more persons as inspectors of election, to act at
the meeting or any adjournment thereof and make a written report thereof, in
accordance with applicable law.
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ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors shall be
as provided for in the Certificate of Incorporation. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
The directors, other than those who may be elected by the holders of
any class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election, with each director to hold office until his or her
successor shall have been duly elected and qualified.
No person 70 years of age or older shall be eligible for election,
re-election, appointment, or re-appointment to the Board of Directors. No
director shall serve as such beyond the annual meeting of the Corporation
immediately following the director's attaining age 70. However, directors
serving on July 14, 1994, shall be exempt from provisions of this paragraph.
This age limitation does not apply to an advisory director or to a director
emeritus.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of
preferred stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires,
and until such director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
Section 3. Regular Meetings.
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Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the President and shall be held at such place, on such date, and at such
time as they or he or she shall fix. Notice of the place, date, and time of each
such special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five (5) days before the meeting or by
telegraphing or telexing or by facsimile transmission of the same not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
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(4) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent
with these By-laws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designated the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
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Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors may appoint a Nominating Committee of the Board,
consisting of not less than three (3) members, one of which shall be the
President if, and only so long as, the President remains in office as a member
of the Board of Directors. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these By-laws in order to determine compliance with such By-law and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those directors whose terms expire at the annual meeting of stockholders
next ensuing.
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a President, a Secretary and a
Treasurer and from time to time may choose such other officers as it may deem
proper. The President shall be chosen from among the directors. Any number of
offices may be held by the same person.
(b) The term of office of all officers shall be until the next
annual election of officers and until their respective successors are chosen,
but any officer may be removed from office at any time by the affirmative vote
of a majority of the authorized number of directors then constituting the Board
of Directors.
(c) All officers chosen by the Board of Directors shall each
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article IV. Such officers shall also
have such powers and duties as from time to time may be conferred by the Board
of Directors or by any committee thereof.
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Section 2. President.
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. He
shall see that all orders and resolutions of the Board of Directors and of any
committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by such officer as has been designated by the Board of Directors
or, in his absence, by such officer or other person as is chosen at the meeting.
The Secretary or, in his absence, the General Counsel of the Corporation or such
officer as has been designated by the Board of Directors or, in his absence,
such officer or other person as is chosen by the person presiding, shall act as
secretary of each such meeting.
Section 3. Vice President.
The Vice President or Vice Presidents, if any, shall perform the duties
of the President in his absence or during his disability to act. In addition,
the Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
Chairman of the Board or the President.
Section 4. Secretary.
The Secretary or an Assistant Secretary shall issue notices of
meetings, shall keep their minutes, shall have charge of the seal and the
corporate books, shall perform such other duties and exercise such other powers
as are usually incident to such offices and/or such other duties and powers as
are properly assigned thereto by the Board of Directors, the Chairman of the
Board or the President.
Section 5. Treasurer.
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies or other entities as the Board of Directors from time to time
shall designate. He shall sign or countersign such instruments as require his
signature, shall perform all such duties and have all such powers as are usually
incident to such office and/or such other duties and powers as are properly
assigned to him by the Board of Directors, the Chairman of the Board or the
President, and may be required to give bond, payable by the Corporation, for the
faithful performance of his duties in such sum and with such surety as may be
required by the Board of Directors.
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Section 6. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more assistant secretaries
and one or more assistants to the Treasurer, or one appointee to both such
positions, which officers shall have such powers and shall perform such duties
as are provided in these By-laws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 7. Action with Respect to Securities of Other Corporations
Unless otherwise directed by the Board of Directors, the President or
any officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other Corporation.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting
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of stockholders shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held, and, for
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of rights or to exercise any rights of change,
conversion or exchange of stock or for any other purpose, the record date shall
be at the close of business on the day on which the Board of Directors adopts a
resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, director, officer, employee
or agent shall be in writing and may in every instance be effectively given by
hand delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
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ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these By-laws which requires that an act
be done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
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AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
Subsection (b) of Section 8 of the Employment Agreement made and
entered into as of July 14, 1994 by and between Penn Federal Savings Bank and
Joseph L. LaMonica is hereby amended to read as follows:
(b) Definitions. For purposes of Sections 8, 9 and 11 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon
which the Bank gives notice to the Employee of the termination of his
employment with the Bank or (ii) the date upon which the Employee
ceases to serve as an Employee of the Bank, and "change in control" is
defined solely as any acquisition of contro (other than pursuant to the
Conversion or by a trustee or other fiduciary holding securities under
an employee benefit plan of the Holding Compnay or a subsidiary of the
Holding Company), as defined in 12 C.F.R. SS. 574.4, or any successor
regulation, of the Bank or Holding Company which would require the
filing of an application for acquisition of control or notice of change
in control in a manner as set forth in 12 C.F.R. SS. 574.3, or any
successor regulation.
IN WITNESS WHEREOF, the parties have executied this Amendment as of
this 13th day of October, 1998.
PENN FEDERAL SAVINGS BANK
By: /s/William C. Anderson
----------------------
William C. Anderson
Chairman of the Board
EMPLOYEE
By: /s/Joseph L. LaMonica
---------------------
Joseph L. LaMonica
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
Subsection (b) of Section 8 of the Employment Agreement made and
entered into as of July 14, 1994 by and between Penn Federal Savings Bank and
Lucy T. Tinker is hereby amended to read as follows:
(b) Definitions. For purposes of Sections 8, 9 and 11 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon
which the Bank gives notice to the Employee of the termination of his
employment with the Bank or (ii) the date upon which the Employee
ceases to serve as an Employee of the Bank, and "change in control" is
defined solely as any acquisition of contro (other than pursuant to the
Conversion or by a trustee or other fiduciary holding securities under
an employee benefit plan of the Holding Compnay or a subsidiary of the
Holding Company), as defined in 12 C.F.R. SS. 574.4, or any successor
regulation, of the Bank or Holding Company which would require the
filing of an application for acquisition of control or notice of change
in control in a manner as set forth in 12 C.F.R. SS. 574.3, or any
successor regulation.
IN WITNESS WHEREOF, the parties have executied this Amendment as of
this 13th day of October, 1998.
PENN FEDERAL SAVINGS BANK
By: /s/William C. Anderson
----------------------
William C. Anderson
Chairman of the Board
EMPLOYEE
By: /s/Lucy T. Tinker
---------------------
Lucy T. Tinker
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
Subsection (b) of Section 8 of the Employment Agreement made and
entered into as of July 14, 1994 by and between Penn Federal Savings Bank and
Patrick D. McTernan is hereby amended to read as follows:
(b) Definitions. For purposes of Sections 8, 9 and 11 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon
which the Bank gives notice to the Employee of the termination of his
employment with the Bank or (ii) the date upon which the Employee
ceases to serve as an Employee of the Bank, and "change in control" is
defined solely as any acquisition of contro (other than pursuant to the
Conversion or by a trustee or other fiduciary holding securities under
an employee benefit plan of the Holding Compnay or a subsidiary of the
Holding Company), as defined in 12 C.F.R. SS. 574.4, or any successor
regulation, of the Bank or Holding Company which would require the
filing of an application for acquisition of control or notice of change
in control in a manner as set forth in 12 C.F.R. SS. 574.3, or any
successor regulation.
IN WITNESS WHEREOF, the parties have executied this Amendment as of
this 13th day of October, 1998.
PENN FEDERAL SAVINGS BANK
By: /s/William C. Anderson
----------------------
William C. Anderson
Chairman of the Board
EMPLOYEE
By: /s/Patrick D. McTernan
---------------------
Patrick D. McTernan
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 14th day of July, 1998, by and between PENN FEDERAL SAVINGS BANK, 622 Eagle
Rock Avenue, West Orange, New Jersey, a federally chartered savings bank (which,
together with any successor thereto which executes and delivers the assumption
agreement provided for in Section 11(a) hereof or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of law, is
hereinafter referred to as the "Bank"), and Jeffrey J. Carfora (the "Employee")
whose residence address is ____________________________________, New Jersey.
WHEREAS, the Employee is currently serving as the Senior Vice President
and Chief Financial Officer of the Bank and of PennFed Financial Services, Inc.
(the "Holding Company"); and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the
case with publicly held corporations generally, the possibility of a change in
control of the Holding Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Bank, the Holding Company and its stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances
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arising from the possibility of a change in control of the Holding Company,
although no such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee is employed as the Senior Vice President
and Chief Financial Officer of the Bank. As such, the Employee shall render
administrative and management services as are customarily performed by persons
serving in similar capacities, and shall have such other powers and duties as
may from time to time be prescribed by the Board of Directors of the Bank,
provided that such duties are consistent under the Employee's position as Senior
Vice President and Chief Financial Officer. The Employee shall continue to
devote his best efforts and substantially all his business time and attention to
the business and affairs of the Bank and its subsidiaries and affiliated
companies.
2. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement a salary established by the Board of Directors. The
salary hereunder as of the Commencement Date (as defined in Section 4 hereof)
shall be equal to the Employee's salary as in effect immediately prior to such
date. The Employee's salary shall be payable not less frequently than monthly
and not later than the tenth day following the expiration of the month in
question. The amount of the Employee's salary shall be reviewed by
2
<PAGE>
the Board of Directors not less often than annually, beginning not later than
the date one year after the Commencement Date (as defined in Section 4 hereof).
Any adjustments in salary or other compensation shall in no way limit or reduce
any other obligation of the Bank hereunder. The Employee's salary in effect
hereunder from time to time shall not thereafter be reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors of
the Bank to its executive employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such bonuses when and as declared by the Board of Directors.
(c) Expenses. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the executive
officers of the Bank) in performing services hereunder, provided that the
Employee properly accounts therefor in accordance with Bank policy.
3. Benefits.
(a) Participation in Retirement and Employee Benefit
Plans. The Employee shall be entitled while employed hereunder to
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<PAGE>
participate in, and receive benefits under, all plans relating to pension,
thrift, profit-sharing, group life insurance, medical coverage, education, cash
bonuses, and other retirement or employee benefits or combinations thereof, that
are maintained for the benefit of the Bank's executive employees or for its
employees generally.
(b) Fringe Benefits. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefits which are or may become applicable to the Bank's executive
employees or to its employees generally.
(c) Plans Applicable to the Employee. The Employee shall be
the beneficiary of such compensation plans and benefits as may be designed
specifically for the Employee in the discretion of the Board of Directors of the
Bank.
4. Term. The term of employment under this Agreement shall be a period
of three years commencing on the date hereof (the "Commencement Date"), subject
to earlier termination as provided herein. Beginning on the first anniversary of
the Commencement Date, and on each anniversary thereafter, the term of
employment under this Agreement shall be extended for a period of one year in
addition to the then-remaining term of employment under this Agreement, unless
either the Bank or the Employee gives contrary written notice to the other not
less than 90 days in advance of the date on which the term of employment under
this Agreement would otherwise be extended.
Notwithstanding any other statement or provision in this Agreement to
the contrary, this Agreement will not be automatically extended unless, prior
thereto, the Board of Directors of the Bank
4
<PAGE>
reviews a formal performance evaluation of the Employee performed by
disinterested members of the Board of Directors of the Bank, which is reflected
in the minutes of the Board of Directors, and affirmatively approves the
extension. Reference herein to the term of employment under this Agreement shall
refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) During the term of employment under this Agreement, the
Employee shall be entitled to paid vacation in accordance with the most
favorable plans, policies, programs or practices of the Bank and its affiliated
companies as in effect for the Employee at any time during the six-month period
immediately preceding the Commencement Date or, if more favorable to the
Employee, as in effect generally at any time thereafter with respect to other
executives of the Bank and its affiliated companies; and
(b) The timing of vacations shall be scheduled in a
reasonable manner by the Employee.
6. Termination of Employment; Death.
(a) The Bank's Board of Directors may terminate the Employee's
employment at any time, but any termination by the Bank's Board of Directors
other than termination for cause, shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. If the employment of the
Employee is involuntarily terminated, other than for "cause" as provided in this
Section 6(a) or by reason of death or disability as provided
5
<PAGE>
in Sections 6(c) or 7, the Bank shall pay the Employee his salary and provide to
the Employee the same insurance benefits as he was receiving before the date of
termination through the remaining term of this Agreement.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent. In addition, a material diminution of or interference with the
Employee's duties, responsibilities and benefits as Senior Vice President and
Chief Financial Officer of the Bank shall be deemed and shall constitute an
involuntary termination of employment to the same extent as express notice of
such involuntary termination. Any of the following actions shall constitute such
diminution or interference unless consented to in writing by the Employee: (1) a
change in the principal workplace of the Employee to a location outside of a 35
mile radius from the Bank's headquarters office as of the date hereof; (2) a
material demotion of the Employee, a material reduction in the number or
seniority of other Bank personnel reporting to the Employee, or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Employee, other than as
part of a Bank- or Holding Company-wide reduction in staff; (3) a reduction or
adverse change in the salary, perquisites, benefits, contingent benefits or
vacation time which had theretofore been provided to the Employee, other than as
part of an overall program applied uniformly and with equitable effect to all
members of the senior management of the Bank or the Holding Company; and (4) a
material
6
<PAGE>
increase in the required hours of work or the workload of the Employee.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. For
purposes of this Agreement, termination for "cause" shall include termination
for personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease- and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a disinterested majority of the entire
membership of the Board of Directors of the Bank at a meeting of the Board
called and held for such purpose (after reasonable notice to the Employee and an
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board), stating that in the good faith opinion of the Board the
Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Bank. In the event of
7
<PAGE>
such voluntary termination, the Bank shall be obligated to continue to pay the
Employee his salary and benefits only through the date of termination, at the
time such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12
U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(e) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all
obligations of the Bank under
8
<PAGE>
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(f) If the Bank is in default (as defined in Section 3(x)(1)
of the FDIA, all obligations under this Agreement shall terminate as of the date
of default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA; or (ii) by the Director or his or her designee, at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
action.
(h) In the event the Bank purports to terminate the Employee
for cause, but it is determined by a court of competent jurisdiction or by an
arbitrator pursuant to Section 17 that cause did not exist for such termination,
or if in any event it is determined by any such court or arbitrator that the
Bank has failed to make timely payment of any amounts owed to the Employee under
this Agreement, the Employee shall be entitled to reimbursement for
9
<PAGE>
all reasonable costs, including attorneys' fees, incurred in challenging such
termination or collecting such amounts. Such reimbursement shall be in addition
to all rights to which the Employee is otherwise entitled under this Agreement.
7. Disability. If the Employee shall become disabled as defined in the
Bank's then current disability plan or if the Employee shall be otherwise unable
to serve as Senior Vice President and Chief Financial Officer, the Employee
shall be entitled to receive group and other disability income benefits of the
type then provided by the Bank for other executive employees. In the event of
such disability, this Agreement shall not be suspended. However, the Bank shall
be obligated to pay the Employee compensation pursuant to Sections 2(a) and (b)
hereof only to the extent of the difference between the Employee's salary and
the disability income benefits received pursuant to this paragraph. In addition,
the Bank shall have the right, upon resolution of the majority of the
disinterested members of the Board of Directors, to discontinue paying cash
compensation pursuant to Sections 2(a) and (b) beginning six months following a
determination that Employee qualifies for the foregoing disability income
benefits.
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
12 months after a change in control which occurs at any time during the term of
employment under this Agreement, the Employee shall be entitled to the benefits
provided below:
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<PAGE>
(i) The Bank shall pay the Employee his salary in accordance
with Section 2 for the remaining term of employment under this
Agreement; plus
(ii) The Bank shall pay to the Employee in a lump sum in cash
within 25 business days after the Date of Termination (as hereinafter
defined) of employment an amount equal to 299 percent of the Employee's
"base amount" of compensation, as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended ("Code"); plus
(iii) The Bank shall continue to provide the Employee with
health benefits in accordance with Section 6 for the remaining term of
employment under this Agreement.
Notwithstanding any other provision or statement herein to the contrary, the
amounts payable to the Employee pursuant to subsec tions (i), (ii) and (iii)
above shall be limited, such that these amounts will not exceed three times the
Employee's average annual compensation over the most recent five year period or
be nondeductible by the Bank for Federal income tax purposes pursuant to Section
280G of the Code.
(b) Definitions. For purposes of Section 8, 9 and 11 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank or (ii) the date upon which the Employee ceases to serve as an Employee
of the Bank, and "change in control" is defined solely as any acquisition of
control (other than by a trustee or other fiduciary holding securities under an
employee benefit plan of the Holding Company or a subsidiary of the Holding
Company), as defined in 12 C.F.R.
11
<PAGE>
ss. 574.4, or any successor regulation, of the Bank or Holding Company which
would require the filing of an application for acquisition of control or notice
of change in control in a manner as set forth in 12 C.F.R. ss. 574.3, or any
successor regulation.
9. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 9, present value shall be
determined in accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section
9 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall
12
<PAGE>
within ten business days of the Date of Termination, or at such earlier time as
is requested by the Bank, provide to both the Bank and the Employee an opinion
(and detailed supporting calculations) that the Bank has substantial authority
to deduct for federal income tax purposes the full amount of the Agreement
Payments and that the Employee has substantial authority not to report on his
federal income tax return any excise tax imposed by Section 4999 of the Code
with respect to the Agreement Payments. Any such determination and opinion by
the Advisory Firm shall be binding upon the Bank and the Employee. The Employee
shall determine which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 9,
provided that, if the Employee does not make such determination within ten
business days of the receipt of the calculations made by the Advisory Firm, the
Bank shall elect which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 9 and
shall notify the Employee promptly of such election. Within five business days
of the earlier of (i) the Bank's receipt of the Employee's determination
pursuant to the immediately preceding sentence of this Agreement or (ii) the
Bank's election in lieu of such determination, the Bank shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Bank and the Employee shall cooperate
fully with the Advisory Firm, including without limitation providing to the
Advisory Firm all information and materials reasonably requested by it, in
connection with the making of the determinations required under this Section 9.
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<PAGE>
(c) As a result of uncertainty in application of Section 280G
of the Code at the time of the initial determination by the Advisory Firm
hereunder, it is possible that Agreement Payments will have been made by the
Bank which should not have been made ("Overpayment") or that additional
Agreement Payments will not have been made by the Bank which should have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made hereunder. In the event that the Advisory Firm, based upon the
assertion by the Internal Revenue Service against the Employee of a deficiency
which the Advisory Firm believes has a high probability of success determines
that an Overpayment has been made, any such Overpayment paid or distributed by
the Bank to or for the benefit of Employee shall be treated for all purposes as
a loan ab initio which the Employee shall repay to the Bank together with
interest at the applicable federal rate provided for in Section 7872(f)(2) of
the Code; provided, however, that no such loan shall be deemed to have been made
and no amount shall be payable by the Employee to the Bank if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Advisory Firm, based upon
controlling precedent or other substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Bank to or for the benefit of the Employee together with interest at the
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<PAGE>
applicable federal rate provided for in Section 7872(f)(2) of the
Code.
10. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
11. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 8(a) hereof. For purposes of implementing the
provisions of this Section 11(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
15
<PAGE>
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the Secretary of the Bank), or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided. The parties hereto agree to amend this Agreement to comply with any
required provisions of 12 C.F.R. ss. 563.39(b), as the same may be amended.
14. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect,
16
<PAGE>
or be used in connection with, the interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New Jersey.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
18. Regulatory Compliance. Any payments made to the Employee pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. ss. 1828(k) and any regulations promulgated
thereunder. Notwithstanding anything in this Agreement to the contrary, no
payments may be made pursuant to this Agreement without the prior approval of
the OTS if the Bank is not in compliance with its regulatory capital
requirements, or if such payment would cause the Bank to fail its regulatory
capital requirements.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
PENN FEDERAL SAVINGS BANK
By: /s/Joseph L. LaMonica
---------------------
Joseph L. LaMonica
President and Chief
Executive Officer
EMPLOYEE
/s/Jeffrey J. Carfora
---------------------
Jeffrey J. Carfora
18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 14th day of July, 1998, by and between PENN FEDERAL SAVINGS BANK, 622 Eagle
Rock Avenue, West Orange, New Jersey, a federally chartered savings bank (which,
together with any successor thereto which executes and delivers the assumption
agreement provided for in Section 11(a) hereof or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of law, is
hereinafter referred to as the "Bank"), and Barbara A. Flannery (the "Employee")
whose residence address is ____________________________________, New Jersey.
WHEREAS, the Employee is currently serving as the Senior Vice
President-Retail Banking of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the
case with publicly held corporations generally, the possibility of a change in
control of PennFed Financial Services, Inc. (the "Holding Company") may exist
and that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of key management
personnel to the detriment of the Bank, the Holding Company and its
stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to her assigned duties
without distraction in the face of potentially disruptive circumstances
1
<PAGE>
arising from the possibility of a change in control of the Holding Company,
although no such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee is employed as the Senior Vice
President-Retail Banking of the Bank. As such, the Employee shall render
administrative and management services as are customarily performed by persons
serving in similar capacities, and shall have such other powers and duties as
may from time to time be prescribed by the Board of Directors of the Bank,
provided that such duties are consistent under the Employee's position as Senior
Vice President-Retail Banking. The Employee shall continue to devote her best
efforts and substantially all her business time and attention to the business
and affairs of the Bank and its subsidiaries and affiliated companies.
2. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement a salary established by the Board of Directors. The
salary hereunder as of the Commencement Date (as defined in Section 4 hereof)
shall be equal to the Employee's salary as in effect immediately prior to such
date. The Employee's salary shall be payable not less frequently than monthly
and not later than the tenth day following the expiration of the month in
question. The amount of the Employee's salary shall be reviewed by
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<PAGE>
the Board of Directors not less often than annually, beginning not later than
the date one year after the Commencement Date (as defined in Section 4 hereof).
Any adjustments in salary or other compensation shall in no way limit or reduce
any other obligation of the Bank hereunder. The Employee's salary in effect
hereunder from time to time shall not thereafter be reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors of
the Bank to its executive employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such bonuses when and as declared by the Board of Directors.
(c) Expenses. During the term of her employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by her (in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the executive
officers of the Bank) in performing services hereunder, provided that the
Employee properly accounts therefor in accordance with Bank policy.
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled while employed hereunder to
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<PAGE>
participate in, and receive benefits under, all plans relating to pension,
thrift, profit-sharing, group life insurance, medical coverage, education, cash
bonuses, and other retirement or employee benefits or combinations thereof, that
are maintained for the benefit of the Bank's executive employees or for its
employees generally.
(b) Fringe Benefits. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefits which are or may become applicable to the Bank's executive
employees or to its employees generally.
(c) Plans Applicable to the Employee. The Employee shall be
the beneficiary of such compensation plans and benefits as may be designed
specifically for the Employee in the discretion of the Board of Directors of the
Bank.
4. Term. The term of employment under this Agreement shall be a period
of three years commencing on the date hereof (the "Commencement Date"), subject
to earlier termination as provided herein. Beginning on the first anniversary of
the Commencement Date, and on each anniversary thereafter, the term of
employment under this Agreement shall be extended for a period of one year in
addition to the then-remaining term of employment under this Agreement, unless
either the Bank or the Employee gives contrary written notice to the other not
less than 90 days in advance of the date on which the term of employment under
this Agreement would otherwise be extended.
Notwithstanding any other statement or provision in this Agreement to
the contrary, this Agreement will not be automatically extended unless, prior
thereto, the Board of Directors of the Bank
4
<PAGE>
reviews a formal performance evaluation of the Employee performed by
disinterested members of the Board of Directors of the Bank, which is reflected
in the minutes of the Board of Directors, and affirmatively approves the
extension. Reference herein to the term of employment under this Agreement shall
refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
absent herself voluntarily from the performance of her employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) During the term of employment under this Agreement, the
Employee shall be entitled to paid vacation in accordance with the most
favorable plans, policies, programs or practices of the Bank and its affiliated
companies as in effect for the Employee at any time during the six-month period
immediately preceding the Commencement Date or, if more favorable to the
Employee, as in effect generally at any time thereafter with respect to other
executives of the Bank and its affiliated companies; and
(b) The timing of vacations shall be scheduled in a reasonable
manner by the Employee.
6. Termination of Employment; Death.
(a) The Bank's Board of Directors may terminate the Employee's
employment at any time, but any termination by the Bank's Board of Directors
other than termination for cause, shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. If the employment of the
Employee is involuntarily terminated, other than for "cause" as provided in this
Section 6(a) or by reason of death or disability as provided
5
<PAGE>
in Sections 6(c) or 7, the Bank shall pay the Employee her salary and provide to
the Employee the same insurance benefits as she was receiving before the date of
termination through the remaining term of this Agreement.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without her express
written consent. In addition, a material diminution of or interference with the
Employee's duties, responsibilities and benefits as Senior Vice President-Retail
Banking of the Bank shall be deemed and shall constitute an involuntary
termination of employment to the same extent as express notice of such
involuntary termination. Any of the following actions shall constitute such
diminution or interference unless consented to in writing by the Employee: (1) a
change in the principal workplace of the Employee to a location outside of a 35
mile radius from the Bank's headquarters office as of the date hereof; (2) a
material demotion of the Employee, a material reduction in the number or
seniority of other Bank personnel reporting to the Employee, or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Employee, other than as
part of a Bank- or Holding Company-wide reduction in staff; (3) a reduction or
adverse change in the salary, perquisites, benefits, contingent benefits or
vacation time which had theretofore been provided to the Employee, other than as
part of an overall program applied uniformly and with equitable effect to all
members of the senior management of the Bank or the Holding Company; and (4) a
material
6
<PAGE>
increase in the required hours of work or the workload of the Employee.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee her salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. For
purposes of this Agreement, termination for "cause" shall include termination
for personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease- and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a disinterested majority of the entire
membership of the Board of Directors of the Bank at a meeting of the Board
called and held for such purpose (after reasonable notice to the Employee and an
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board), stating that in the good faith opinion of the Board the
Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Bank. In the event of
7
<PAGE>
such voluntary termination, the Bank shall be obligated to continue to pay the
Employee her salary and benefits only through the date of termination, at the
time such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which her death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12
U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(e) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all
obligations of the Bank under
8
<PAGE>
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(f) If the Bank is in default (as defined in Section 3(x)(1)
of the FDIA, all obligations under this Agreement shall terminate as of the date
of default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA; or (ii) by the Director or his or her designee, at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
action.
(h) In the event the Bank purports to terminate the Employee
for cause, but it is determined by a court of competent jurisdiction or by an
arbitrator pursuant to Section 17 that cause did not exist for such termination,
or if in any event it is determined by any such court or arbitrator that the
Bank has failed to make timely payment of any amounts owed to the Employee under
this Agreement, the Employee shall be entitled to reimbursement for
9
<PAGE>
all reasonable costs, including attorneys' fees, incurred in challenging such
termination or collecting such amounts. Such reimbursement shall be in addition
to all rights to which the Employee is otherwise entitled under this Agreement.
7. Disability. If the Employee shall become disabled as defined in the
Bank's then current disability plan or if the Employee shall be otherwise unable
to serve as Senior Vice President-Retail Banking, the Employee shall be entitled
to receive group and other disability income benefits of the type then provided
by the Bank for other executive employees. In the event of such disability, this
Agreement shall not be suspended. However, the Bank shall be obligated to pay
the Employee compensation pursuant to Sections 2(a) and (b) hereof only to the
extent of the difference between the Employee's salary and the disability income
benefits received pursuant to this paragraph. In addition, the Bank shall have
the right, upon resolution of the majority of the disinterested members of the
Board of Directors, to discontinue paying cash compensation pursuant to Sections
2(a) and (b) beginning six months following a determination that Employee
qualifies for the foregoing disability income benefits.
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
12 months after a change in control which occurs at any time during the term of
employment under this Agreement, the Employee shall be entitled to the benefits
provided below:
10
<PAGE>
(i) The Bank shall pay the Employee her salary in accordance
with Section 2 for the remaining term of employment under this
Agreement; plus
(ii) The Bank shall pay to the Employee in a lump sum in cash
within 25 business days after the Date of Termination (as hereinafter
defined) of employment an amount equal to 299 percent of the Employee's
"base amount" of compensation, as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended ("Code"); plus
(iii) The Bank shall continue to provide the Employee with
health benefits in accordance with Section 6 for the remaining term of
employment under this Agreement.
Notwithstanding any other provision or statement herein to the contrary, the
amounts payable to the Employee pursuant to subsec tions (i), (ii) and (iii)
above shall be limited, such that these amounts will not exceed three times the
Employee's average annual compensation over the most recent five year period or
be nondeductible by the Bank for Federal income tax purposes pursuant to Section
280G of the Code.
(b) Definitions. For purposes of Section 8, 9 and 11 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of her employment with
the Bank or (ii) the date upon which the Employee ceases to serve as an Employee
of the Bank, and "change in control" is defined solely as any acquisition of
control (other than by a trustee or other fiduciary holding securities under an
employee benefit plan of the Holding Company or a subsidiary of the Holding
Company), as defined in 12 C.F.R.
11
<PAGE>
ss. 574.4, or any successor regulation, of the Bank or Holding Company which
would require the filing of an application for acquisition of control or notice
of change in control in a manner as set forth in 12 C.F.R. ss. 574.3, or any
successor regulation.
9. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 9, present value shall be
determined in accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section
9 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall
12
<PAGE>
within ten business days of the Date of Termination, or at such earlier time as
is requested by the Bank, provide to both the Bank and the Employee an opinion
(and detailed supporting calculations) that the Bank has substantial authority
to deduct for federal income tax purposes the full amount of the Agreement
Payments and that the Employee has substantial authority not to report on her
federal income tax return any excise tax imposed by Section 4999 of the Code
with respect to the Agreement Payments. Any such determination and opinion by
the Advisory Firm shall be binding upon the Bank and the Employee. The Employee
shall determine which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 9,
provided that, if the Employee does not make such determination within ten
business days of the receipt of the calculations made by the Advisory Firm, the
Bank shall elect which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 9 and
shall notify the Employee promptly of such election. Within five business days
of the earlier of (i) the Bank's receipt of the Employee's determination
pursuant to the immediately preceding sentence of this Agreement or (ii) the
Bank's election in lieu of such determination, the Bank shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Bank and the Employee shall cooperate
fully with the Advisory Firm, including without limitation providing to the
Advisory Firm all information and materials reasonably requested by it, in
connection with the making of the determinations required under this Section 9.
13
<PAGE>
(c) As a result of uncertainty in application of Section 280G
of the Code at the time of the initial determination by the Advisory Firm
hereunder, it is possible that Agreement Payments will have been made by the
Bank which should not have been made ("Overpayment") or that additional
Agreement Payments will not have been made by the Bank which should have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made hereunder. In the event that the Advisory Firm, based upon the
assertion by the Internal Revenue Service against the Employee of a deficiency
which the Advisory Firm believes has a high probability of success determines
that an Overpayment has been made, any such Overpayment paid or distributed by
the Bank to or for the benefit of Employee shall be treated for all purposes as
a loan ab initio which the Employee shall repay to the Bank together with
interest at the applicable federal rate provided for in Section 7872(f)(2) of
the Code; provided, however, that no such loan shall be deemed to have been made
and no amount shall be payable by the Employee to the Bank if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Advisory Firm, based upon
controlling precedent or other substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Bank to or for the benefit of the Employee together with interest at the
14
<PAGE>
applicable federal rate provided for in Section 7872(f)(2) of the Code.
10. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
11. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 8(a) hereof. For purposes of implementing the
provisions of this Section 11(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
15
<PAGE>
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the Secretary of the Bank), or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided. The parties hereto agree to amend this Agreement to comply with any
required provisions of 12 C.F.R. ss. 563.39(b), as the same may be amended.
14. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect,
16
<PAGE>
or be used in connection with, the interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New Jersey.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
18. Regulatory Compliance. Any payments made to the Employee pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. ss. 1828(k) and any regulations promulgated
thereunder. Notwithstanding anything in this Agreement to the contrary, no
payments may be made pursuant to this Agreement without the prior approval of
the OTS if the Bank is not in compliance with its regulatory capital
requirements, or if such payment would cause the Bank to fail its regulatory
capital requirements.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
PENN FEDERAL SAVINGS BANK
By: /s/Joseph L. LaMonica
---------------------
Joseph L. LaMonica
President and Chief
Executive Officer
EMPLOYEE
/s/Barbara A. Flannery
----------------------
Barbara A. Flannery
18
<TABLE>
<CAPTION>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
For the Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
For the Year Ended June 30,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income ...................................... $ 11,457 $ 11,198 $ 6,886
=========== =========== ===========
Number of shares outstanding:
Weighted average shares issued ................ 11,899,349 11,900,000 11,900,000
Less: Weighted average shares held in treasury 2,896,595 2,268,513 2,233,752
Less: Average shares held by the ESOP ........ 952,000 952,000 952,000
Plus: ESOP shares released or committed to be
released during the fiscal year ... 357,421 269,870 188,396
----------- ----------- -----------
Average basic shares ................... 8,408,175 8,949,357 8,902,644
Plus: Average common stock equivalents ....... 470,316 740,298 537,212
----------- ----------- -----------
Average diluted shares ................. 8,878,491 9,689,655 9,439,856
=========== =========== ===========
Earnings per common share:
Basic .................................. $ 1.36 $ 1.25 $ 0.77
=========== =========== ===========
Diluted ................................ $ 1.29 $ 1.16 $ 0.73
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12
PennFed Financial Services, Inc.
Computation of Ratios of Earnings to Fixed Charges
Year ended June 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings before income tax expense .... $17,761 $17,440 $11,091 $12,952 $ 9,561
Add: interest on borrowed funds ....... 23,270 19,843 12,901 5,520 1,522
------- ------- ------- ------- -------
Earnings before fixed charges excluding
interest on deposits ........... 41,031 37,283 23,992 18,472 11,083
Interest on deposits .................. 48,648 48,200 40,172 33,601 25,631
------- ------- ------- ------- -------
Earnings before fixed charges ......... $89,679 $85,483 $64,164 $52,073 $36,714
======= ======= ======= ======= =======
Fixed charges:
Interest on borrowed funds ............ $23,270 $19,843 $12,901 $ 5,520 $ 1,522
======= ======= ======= ======= =======
Fixed charges excluding interest on
deposits ....................... $23,270 $19,843 $12,901 $ 5,520 $ 1,522
Interest on deposits .................. 48,648 48,200 40,172 33,601 25,631
------- ------- ------- ------- -------
Total fixed charges ................... $71,918 $68,043 $53,073 $39,121 $27,153
======= ======= ======= ======= =======
Ratio of earnings to fixed charges
excluding interest on deposits . 1.76 x 1.88 x 1.86 x 3.35 x 7.28 x
======= ======= ======= ======= =======
Ratio of earnings to fixed charges
including interest on deposits . 1.25 x 1.26 x 1.21 x 1.33 x 1.35 x
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Percentage State
of Of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
PennFed Financial Services, Inc. Penn Federal Savings Bank 100% United States
PennFed Financial Services, Inc. PennFed Capital Trust I 100% Delaware
Penn Federal Savings Bank Penn Savings Insurance Agency 100% New Jersey
Penn Federal Savings Bank Ferry Development Holding Co. 100% Delaware
</TABLE>
The financial statements of the Registrant are consolidated with those of its
subsidiaries.
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-90820, 33-90822, 333-42685 and 333-47591 of PennFed Financial Services,
Inc. on Forms S-8, Registration Statement No. 333-20499 of PennFed Financial
Services, Inc. on Form S-3 and Registration Statement No. 333-36031 of PennFed
Capital Trust I on Form S-2 of our report dated July 28, 1999, appearing in this
Annual Report on Form 10-K of PennFed Financial Services, Inc. for the year
ended June 30, 1999.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Parsippany, New Jersey
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,900
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 421,265
<INVESTMENTS-MARKET> 410,497
<LOANS> 1,069,820
<ALLOWANCE> 3,209
<TOTAL-ASSETS> 1,558,763
<DEPOSITS> 1,063,600
<SHORT-TERM> 69,463
<LIABILITIES-OTHER> 21,717
<LONG-TERM> 296,483
0
0
<COMMON> 59
<OTHER-SE> 107,441
<TOTAL-LIABILITIES-AND-EQUITY> 1,558,763
<INTEREST-LOAN> 78,288
<INTEREST-INVEST> 27,201
<INTEREST-OTHER> 68
<INTEREST-TOTAL> 105,557
<INTEREST-DEPOSIT> 48,648
<INTEREST-EXPENSE> 71,918
<INTEREST-INCOME-NET> 33,639
<LOAN-LOSSES> 780
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,644
<INCOME-PRETAX> 17,761
<INCOME-PRE-EXTRAORDINARY> 11,457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,457
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 7.03
<LOANS-NON> 3,670
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,106
<ALLOWANCE-OPEN> 2,776
<CHARGE-OFFS> 396
<RECOVERIES> 49
<ALLOWANCE-CLOSE> 3,209
<ALLOWANCE-DOMESTIC> 3,209
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
