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
For the fiscal year ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-24040
PENNFED FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3297339
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
--------------
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
Common Stock Purchase Rights
(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. [_]
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 6, 2002, was $177,591,000. (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 6, 2002, there were issued and outstanding 7,321,678
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for
2002 Annual Meeting of Stockholders.
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 common stock of the
Bank. 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 of the 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. Penn Federal's
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 these deposits, together with borrowings and other funds, to
originate and purchase one- to four-family residential mortgage loans, and, to a
lesser extent, to originate 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 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, 2002, the Company had total assets of approximately $1.9 billion,
deposits of $1.2 billion, borrowings of $528 million and stockholders' equity of
$119 million.
At June 30, 2002, the Company's gross loan portfolio totaled $1.4 billion,
including $1.2 billion of one- to four-family residential first mortgage loans,
$145 million of commercial and multi-family real estate loans and $121 million
of consumer loans. In addition, on that date the Company had $170 million of
mortgage-backed securities and $209 million of other investment securities and
FHLB of New York stock.
At June 30, 2002, nearly all of the Company's first and second mortgage loans
(excluding mortgage-backed securities) were secured by properties located in New
Jersey. See "Originations, Purchases, Sales and Servicing of Loans." The
Company's revenues are derived primarily from interest on loans, mortgage-backed
securities and investments, and income from service charges.
Penn Federal, through its wholly-owned subsidiary, Penn Savings Insurance
Agency, Inc., offers insurance and uninsured 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 an investment portfolio.
PennFed formed PennFed Capital Trust I in fiscal 1998 and PennFed Capital Trust
II in fiscal 2001. These two entities are wholly-owned trust subsidiaries,
established for the purpose of selling cumulative trust preferred securities.
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.
2
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 and demand for loans in the Company's market
area, the relationship of short-term interest rates to long-term interest rates,
competition and terrorist acts 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, as well as other
factors, 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 will 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 area
and selected areas of central/southern New Jersey, which are serviced through 21
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 29% of total Bank deposits at June 30, 2002. 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 area, accounting for approximately 43% of total Bank
deposits at June 30, 2002. 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 28% of total Bank deposits
at June 30, 2002, serve retirement populations and expanding townhouse,
multi-family and single family home developments. The Bank also originates loans
secured by properties throughout 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 loans with maturities between 10 and 30 years.
The Company underwrites mortgage loans generally using Freddie Mac and Fannie
Mae guidelines, although loan amounts may exceed agency limits. A conforming
mortgage loan is defined as a mortgage loan that meets all requirements (size,
type and age) to be eligible for purchase or securitization by federal agencies,
such as Freddie Mac and Fannie Mae. The conforming loan limit is based upon
national housing median sales prices. See "Loan Portfolio Composition" and "One-
to Four-Family Residential Mortgage Lending."
The Company also originates commercial and multi-family (five units or more)
real estate loans and consumer loans. These 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. Commercial and multi-family real estate loan applications
are initially considered and approved by the Senior Vice President of the
Commercial/Business Banking Group. Loans greater than $500,000 but less than
$750,000 require approval of either the Chief Executive Officer ("CEO") or the
Chief Operating Officer ("COO"). Any commercial and multi-
3
family real estate loan or relationship of $750,000 and over must be approved by
the Executive Loan Committee which consists of the CEO, COO and certain
executive and senior officers. The approval of the Company's Board of Directors
is required for all loans or relationships 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 lent to any one borrower is
generally the greater of 15% of unimpaired capital and surplus or $500,000. See
"Regulation-Federal Regulation of Savings Associations by the OTS." At June 30,
2002, the maximum amount which the Company could have lent to any one borrower
and the borrower's related entities was approximately $24.6 million. The
Company's current policy is to limit such loans to a maximum of 50% of the
general regulatory limit or $10.0 million, whichever is less. Any exception to
this policy requires approval of the Board of Directors. At June 30, 2002, the
Company's largest group of loans to one borrower (and any related entities)
totaled $7.9 million and consisted of a $4.6 million commercial real estate loan
and a $3.3 million loan under an Accounts Receivable Financing Program. At June
30, 2002, there were a total of 39 loans or lender relationships in excess of
$1.0 million, for a total amount of $73.9 million. At that date, all of these
loans were performing in accordance with their respective repayment terms.
Loan Portfolio Composition. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
June 30,
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2002 2001 2000 1999
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Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in thousands)
First mortgage loans:
One- to four-family(1) ........... $ 1,172,145 81.53% $ 1,065,819 82.61% $ 1,070,048 85.34% $ 915,244 86.15%
Commercial and multi-family(2).... 144,585 10.06 108,625 8.42 86,257 6.88 74,613 7.02
---------------------------------------------------------------------------------------------
Total first mortgage loans ... 1,316,730 91.59 1,174,444 91.03 1,156,305 92.22 989,857 93.17
---------------------------------------------------------------------------------------------
Other loans:
Consumer loans:
Second mortgages ............... 58,671 4.08 48,133 3.73 45,659 3.64 37,243 3.50
Home equity lines of credit .... 55,247 3.85 60,412 4.68 46,394 3.70 31,754 2.99
Other .......................... 6,948 0.48 7,140 0.56 5,534 0.44 3,575 0.34
---------------------------------------------------------------------------------------------
Total consumer loans ......... 120,866 8.41 115,685 8.97 97,587 7.78 72,572 6.83
---------------------------------------------------------------------------------------------
Total loans .................. 1,437,596 100.00% 1,290,129 100.00% 1,253,892 100.00% 1,062,429 100.00%
====== ====== ====== ======
Add/(less):
Unamortized premiums,
deferred loan fees, and
other, net ..................... 9,485 9,611 9,339 7,391
Allowance for loan losses ........ (5,821) (4,248) (3,983) (3,209)
---------------------------------------------------------------------------------------------
Total loans receivable, net .. $ 1,441,260 $ 1,295,492 $ 1,259,248 $ 1,066,611
=============================================================================================
June 30,
-------------------------
1998
-------------------------
Amount Percent
-------------------------
(Dollars in thousands)
First mortgage loans:
One- to four-family(1) ........... $ 971,668 89.01%
Commercial and multi-family(2).... 65,833 6.03
-------------------------
Total first mortgage loans ... 1,037,501 95.04
-------------------------
Other loans:
Consumer loans:
Second mortgages ............... 27,232 2.49
Home equity lines of credit .... 23,538 2.16
Other .......................... 3,331 0.31
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Total consumer loans ......... 54,101 4.96
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Total loans .................. 1,091,602 100.00%
======
Add/(less):
Unamortized premiums,
deferred loan fees, and
other, net ..................... 7,026
Allowance for loan losses ........ (2,776)
-------------------------
Total loans receivable, net .. $ 1,095,852
========================
(1) One-to four-family loans include loans held for sale of $1.6 million,
$83,000, $5.2 million and $565,000 at June 30, 2002, 2001, 1999 and 1998,
respectively. There were no loans held for sale at June 30, 2000.
(2) Commercial and multi-family loans include loans under an Accounts
Receivable Financing Program for small and mid-sized businesses and
business lines of credit secured by non-real estate business assets
totaling $9.1 million, $3.1 million and $814,000 at June 30, 2002, 2001 and
2000, respectively. Business lines of credit included in commercial and
multi-family loans totaled $605,000 and $475,000 at June 30, 1999 and 1998,
respectively.
Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 2002. 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.
4
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.
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)
First mortgage loans:
One- to four-family ............. $ 293 $ 1,853 $ 5,184 $ 88,544 $ 279,019 $ 797,252 $1,172,145
Commercial and multi-family ..... 9,637 1,486 7,580 27,727 95,130 3,025 144,585
-----------------------------------------------------------------------------------------------
Total first mortgage loans ...... 9,930 3,339 12,764 116,271 374,149 800,277 1,316,730
Other loans:
Consumer loans .................. 3,579 2,768 9,998 22,279 55,112 27,130 120,866
-----------------------------------------------------------------------------------------------
Total loans, gross .............. $ 13,509 $ 6,107 $ 22,762 $ 138,550 $ 429,261 $ 827,407 $1,437,596
===============================================================================================
Loans due after June 30, 2003, which have fixed interest rates amount to $968.5
million, while those with adjustable rates amount to $455.5 million, detailed as
follows:
Due After June 30, 2003
----------------------------------------------
Fixed Adjustable Total
----------------------------------------------
(In thousands)
First mortgage loans:
One- to four-family ....... $ 886,629 $ 285,223 $1,171,852
Commercial and multi-family 19,756 115,192 134,948
----------------------------------------------
Total first mortgage loans 906,385 400,415 1,306,800
Other loans:
Consumer loans ............ 62,161 55,126 117,287
----------------------------------------------
Total loans, gross ........ $ 968,546 $ 455,541 $1,424,087
===============================================
One- to Four-Family Residential Mortgage Lending. At June 30, 2002, the
Company's one- to four-family residential mortgage loans totaled $1.2 billion,
or approximately 81.5% of the Company's gross loan portfolio. Residential loan
originations are generated by the Company's in-house originations staff through
marketing efforts, 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, 2002, the Company originated $497.5 million of real estate loans
secured by one- to four-family residential real estate. Substantially all of the
Company's one- to four-family residential mortgage originations are secured by
properties located in the State of New Jersey.
During fiscal 2002, the Company had one correspondent relationship with another
institution through which it purchased $11.0 million of newly originated
adjustable rate and $20.9 million of newly originated fixed rate one- to
four-family residential first mortgages. Purchased loans are secured by
properties primarily located in New Jersey. Loans are underwritten by the
correspondent institutions using the Bank'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 institution. 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
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
5
loans made by the Company are appraised by licensed in-house appraisers and
independent appraisers, all of whom are approved by the Board of Directors. The
Company requires borrowers to obtain title insurance in the amount of the loan.
In addition, the Company requires borrowers to obtain fire and property
insurance (including flood insurance, if necessary) in the amount of the loan or
the replacement cost. 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 property.
Commercial and Multi-Family Real Estate Lending. The Company engages in
commercial and multi-family real estate lending primarily in its market areas.
At June 30, 2002, the Company had $144.6 million of commercial and multi-family
real estate loans which represented 10.1% of the Company's gross loan portfolio.
This amount includes $1.8 million of lines of credit secured by non-real estate
business assets and $7.3 million of loans under an Accounts Receivable Financing
Program for small and mid-sized businesses. At June 30, 2002, the average per
loan balance of the Company's commercial and multi-family real estate loans
outstanding was $304,000. As of June 30, 2002 approximately 81% of the loans in
the commercial and multi-family real estate loan portfolio were adjustable rate
loans.
The Company's commercial and multi-family real estate loan portfolio is secured
primarily by first mortgage liens on 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
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, the value of the property securing the loan, and the reliability and
predictability of the cash flow generated by the property securing the loan. The
Company usually requires personal guarantees of individuals who are principals
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.
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 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 if a
major tenant is unable to fulfill its lease obligations), the borrower's ability
to repay the loan may be impaired.
Under the Accounts Receivable Financing Program, credit is extended to the
customer based upon the amount of receivables purchased by the Company. The
Company has actual ownership of the receivables. Remittances from the account
debtors of the customer are made directly to the Company's lockbox account. Risk
under this type of lending is further limited by the establishment of a cash
collateral reserve account used to offset any receivables that do not pay
timely. Furthermore, accounts receivable default and fraud insurance is obtained
as additional protection. The facility can be terminated at the Company's option
upon 60 days notice to the customer. Accounts Receivable Financing is done with
full recourse to the customer and is generally guaranteed by the principals of
the customer. In addition to the accounts receivables as collateral, the Company
typically obtains additional collateral in the form of a lien on the customer's
business assets and/or real estate.
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, 2002, the Company's total
consumer loan portfolio was $120.9 million, or 8.4% of its gross loan portfolio,
of which approximately 53% were fixed rate loans and 47% were adjustable rate
loans. The Company currently originates all of its consumer loans throughout the
State of New Jersey.
6
The Company originates adjustable rate home equity lines of credit and fixed
rate second mortgage loans. Home equity lines of credit and second mortgage
loans together with loans secured by all prior liens, are generally limited to
75% of the appraised value of the property securing the loan. The Company also
offers 100% equity financing up to $100,000, with these loans re-underwritten
and insured through a mortgage insurance company. Second mortgage loans have a
maximum term of up to 20 years. Home equity lines of credit may have draw
periods up to 10 years with repayment terms up to 15 years beyond the draw
period. As of June 30, 2002, second mortgage loans and home equity lines of
credit amounted to $113.9 million or 94.3% of the Company's consumer 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 applicant'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 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 or eliminate the amount which can be
recovered on such loans.
Originations, Purchases, Sales and Servicing of Loans
For the fiscal year ended June 30, 2002, the Company originated $648.0 million
of loans, compared to $380.3 million and $267.9 million in fiscal 2001 and 2000,
respectively. The higher amount in fiscal 2002 was due principally to increased
refinancing activity. Mortgage loan originations are handled by employees of the
Company.
During the fiscal years ended June 30, 2002, 2001 and 2000, the Company
purchased $31.9 million, $36.3 million and $106.0 million of one- to four-family
first mortgage loans, respectively, through correspondent relationships with
other institutions. The purchased loans represent adjustable rate and fixed rate
first mortgages secured by properties primarily located throughout New Jersey. A
limited amount of loans secured by properties located in Pennsylvania,
Massachusetts and Connecticut have been purchased.
From time to time, the Company has engaged in loan sale strategies -- selling
loans to Freddie Mac, Fannie Mae and other secondary market purchasers. In April
2002, the Company re-instituted a strategy of selling conforming, fixed rate
one- to four-family residential mortgage loans in an effort to improve
liquidity, interest rate risk and net interest margin. Prior to this point in
fiscal year 2002, loan production was retained in portfolio as a partial
replacement of the investment securities called and as a means of leveraging the
March 2001 proceeds from the $12 million issuance of Trust Preferred securities.
During the majority of fiscal 2001, the Company's strategy included the sale of
conforming, fixed rate one- to four-family residential loan production. Loans
sold under this strategy totaled approximately $29 million for the fiscal year.
In addition, the Company sold approximately $65 million of longer duration, one-
to four-family residential mortgage loans in an effort to improve liquidity,
interest rate risk and net interest margin. As noted above, in March 2001,
PennFed issued $12 million of Trust Preferred securities. See - "Sources of
Funds - Trust Preferred Securities." Effective with the issuance of the $12
million of Trust Preferred securities, a determination was made whereby
conforming, fixed rate one- to four-family mortgage loan production would not be
sold for a period of time to leverage the proceeds of such issuance. Due to the
majority of one- to four-family residential mortgage loan production being
adjustable rate and due to the higher interest rate environment during the year
ended June 30, 2000, loan sale activity was minimal, as the majority of
production was retained in portfolio. For the year ended June 30, 2000, the
Company sold loans totaling $5.5 million.
The level of loan sale activity continues to be evaluated with primary
consideration given to interest rate risk, long-term profitability and liquidity
objectives.
7
During the year ended June 30, 2002, the Company securitized approximately $66
million of one- to four-family mortgage loans as Freddie Mac mortgage-backed
securities. During the year ended June 30, 2001, approximately $48 million of
one- to four-family mortgage loans were securitized with Fannie Mae. All of
these securities are held in the Company's securities portfolio for collateral
purposes.
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
$167.8 million, $141.5 million and $108.5 million at June 30, 2002, 2001 and
2000, respectively.
The following table sets forth the activity in the Company's loan portfolio for
the years indicated.
Year ended June 30,
--------------------------------------------
2002 2001 2000
--------------------------------------------
(In thousands)
Net loans receivable at beginning of year .......... $1,295,492 $1,259,248 $1,066,611
Plus:
Loans originated:
One- to four-family ................................ 497,450 269,607 172,201
Commercial and multi-family real estate ............ 64,131 40,020 30,364
Consumer ........................................... 86,370 70,626 65,325
------------------------------------------
Total loans originated ............................. 647,951 380,253 267,890
------------------------------------------
One- to four-family loans purchased ................ 31,861 36,319 106,049
------------------------------------------
Total loans originated and purchased ............... 679,812 416,572 373,939
Less: ------------------------------------------
One- to four-family loans sold ..................... 16,652 94,099 5,532
Loans securitized .................................. 65,923 47,661 --
Loan principal payments and other, net ............. 451,463 237,876 175,388
Loans transferred to real estate owned ............. 6 692 382
------------------------------------------
Net loans receivable at end of year ................ $1,441,260 $1,295,492 $1,259,248
==========================================
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
lawsuit is filed, if necessary, to obtain a judgement.
At June 30, 2002, the Company's loans delinquent 60 to 89 days totaled $68,000,
of which $63,000 represented two one- to four-family mortgage loans and $5,000
represented two consumer loans.
8
The table below sets forth the Company's amounts and categories of
non-performing assets and restructured loans. Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more than
90 days. There are no loans delinquent more than 90 days which are still
accruing. Real estate owned represents assets acquired in settlement of loans
and is shown net of valuation allowances. Restructured loans are all performing
in accordance with modified terms and are, therefore, considered performing.
At June 30,
----------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ............................. $2,905 $1,219 $2,152 $2,937 $2,575
Commercial and multi-family ..................... -- 49 95 46 414
Consumer ........................................ 370 369 468 687 753
----------------------------------------------------------
Total non-accruing loans ........................ 3,275 1,637 2,715 3,670 3,742
Real estate owned, net .......................... 28 500 334 936 1,643
----------------------------------------------------------
Total non-performing assets ..................... 3,303 2,137 3,049 4,606 5,385
Restructured loans .............................. -- -- -- -- 1,415
----------------------------------------------------------
Total risk elements ............................. $3,303 $2,137 $3,049 $4,606 $6,800
==========================================================
Non-accruing loans as a percentage
of total loans .................................. 0.23% 0.13% 0.21% 0.34% 0.34%
==========================================================
Non-performing assets as a percentage
of total assets ................................. 0.17% 0.12% 0.18% 0.30% 0.35%
==========================================================
Total risk elements as a percentage
of total assets ................................. 0.17% 0.12% 0.18% 0.30% 0.44%
==========================================================
For the year ended June 30, 2002, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $121,000, none of which was included in interest
income during this period.
Non-Performing Assets. Non-accruing loans at June 30, 2002 were comprised of 18
one- to four-family loans aggregating $2,905,000 and 19 consumer loans
aggregating $370,000.
Real estate owned at June 30, 2002 totaled $28,000 representing a one- to
four-family property.
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 five fiscal years. Any loan that has been restructured continues to
perform in accordance with the restructured terms.
Other Loans of Concern. As of June 30, 2002, there were $842,000 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, 2002 are four loans to one
borrower and one loan to a related party totaling $804,000. The four loans
consist of one commercial real estate loan of $405,000, two one- to four-family
loans totaling $97,000 and a $59,000 line of credit. The loan to a related party
consists of a commercial real estate loan of $243,000. All of these loans are
secured by real estate properties located in New Jersey. As of June 30, 2002 all
of the loans were performing in accordance with their respective repayment
terms. The Company continues to monitor these loans due to their past 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.
9
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. When a savings institution classifies problem assets as "loss," it
is required to either establish a specific reserve equal to 100% of that portion
of the asset so classified or to charge-off such amount.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the assets in its portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets at June 30, 2002, the Bank's classified assets
totaled $4.2 million, of which $4.1 million is classified as substandard. At
June 30, 2002 total classified assets represented 3.6% of the Company's
stockholders' equity and 0.22% 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. This 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.
10
The following table sets forth an analysis of the Company's allowance for loan
losses at, and for, the dates indicated.
Year ended June 30,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year .............. $ 4,248 $ 3,983 $ 3,209 $ 2,776 $ 2,622
Charge-offs:
One- to four-family ...................... (20) (164) (105) (60) (306)
Commercial and multi-family .............. -- (35) -- (165) (44)
Consumer ................................. (32) (161) (18) (171) (96)
----------------------------------------------------------------------
(52) (360) (123) (396) (446)
----------------------------------------------------------------------
Recoveries:
One- to four-family ...................... -- -- 37 -- --
Commercial and multi-family .............. -- -- -- 49 --
Consumer ................................. -- -- -- -- --
----------------------------------------------------------------------
-- -- 37 49 --
----------------------------------------------------------------------
Net charge-offs............................ (52) (360) (86) (347) (446)
Additions charged to operations ........... 1,625 625 860 780 600
----------------------------------------------------------------------
Balance at end of year .................... $ 5,821 $ 4,248 $ 3,983 $ 3,209 $ 2,776
======================================================================
Ratio of net charge-offs during the
year to average loans outstanding
during the year.......................... 0.00% 0.03% 0.01% 0.03% 0.04%
======================================================================
Ratio of allowance for loan losses
to total loans at end of year ............. 0.40% 0.33% 0.32% 0.30% 0.25%
======================================================================
Ratio of allowance for loan losses to
non-accruing loans at end of year ......... 177.74% 259.50% 146.70% 87.44% 74.18%
======================================================================
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized in the following table.
June 30,
------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------------------------------
(Dollars in thousands)
One- to four-family............ $2,928 81.53% $2,223 82.61% $2,244 85.34% $1,797 86.15% $1,502 89.01%
Commercial and
multi-family real estate..... 2,040 10.06 1,280 8.42 1,051 6.88 855 7.02 740 6.03
Consumer....................... 853 8.41 745 8.97 688 7.78 557 6.83 534 4.96
------------------------------------------------------------------------------------------------
Total........................ $5,821 100.00% $4,248 100.00% $3,983 100.00% $3,209 100.00% $2,776 100.00%
================================================================================================
11
Critical Accounting Policy
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.
Investment Activities
General.The Bank maintains minimum levels of investments for liquidity purposes.
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 at a level believed
adequate to meet requirements of normal daily activities, repayment of maturing
debt and potential deposit outflows.
At June 30, 2002, 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, are generally considered liquid assets and are generally of relatively
short duration. See "Regulation-Regulatory Capital Requirements." The majority
of investment securities and all mortgage-backed securities were classified as
held to maturity at June 30, 2002, as the Company has a positive intent and
ability to hold these securities to maturity. All investment securities not
classified as held to maturity are classified as available for sale.
12
The following table sets forth the composition of the Company's investment and
mortgage-backed securities portfolios at the dates indicated.
June 30,
-----------------------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------------------
Estimated Percent Estimated Percent Estimated Percent
Fair of Total Fair of Total Fair of Total
Carrying Market Carrying Carrying Market Carrying Carrying Market Carrying
Value Value Value Value Value Value Value Value Value
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Investment securities:
Available for sale:
Equity securities.............. $ 4,295 $ 4,295 2.05% $ -- $ -- --% $ -- $ -- --%
-----------------------------------------------------------------------------------------------
Held to maturity:
U.S. government
agency obligations............ 145,160 144,495 69.31 304,538 299,056 84.55 274,532 254,066 84.39
Obligations of states and
political subdivisions........ -- -- -- 10 11 -- 30 32 0.01
Corporate bonds................ 1,034 1,080 0.49 1,038 1,062 0.29 -- -- --
Trust preferred securities..... 33,296 33,101 15.90 28,383 27,116 7.88 28,464 24,545 8.75
-----------------------------------------------------------------------------------------------
Total held to maturity......... 179,490 178,676 85.70 333,969 327,245 92.72 303,026 278,643 93.15
-----------------------------------------------------------------------------------------------
Total investment securities.... 183,785 182,971 87.75 333,969 327,245 92.72 303,026 278,643 93.15
FHLB of New York stock........... 25,656 25,656 12.25 26,218 26,218 7.28 22,295 22,295 6.85
-----------------------------------------------------------------------------------------------
Total investment securities
and FHLB of New York stock.... $209,441 $208,627 100.00% $360,187 $353,463 100.00% $325,321 $300,938 100.00%
===============================================================================================
Mortgage-backed securities:
Ginnie Mae..................... $ 642 $ 696 0.38% $ 1,035 $ 1,107 0.76% $ 1,358 $ 1,392 1.55%
Freddie Mac.................... 84,757 87,727 49.95 42,961 43,942 31.68 48,759 48,507 55.69
Fannie Mae..................... 82,891 85,570 48.85 90,662 91,485 66.86 37,197 36,886 42.48
Collateralized Mortgage
Obligations/REMICs........... 42 43 0.02 59 58 0.04 79 76 0.09
-----------------------------------------------------------------------------------------------
168,332 174,036 99.20 134,717 136,592 99.34 87,393 86,861 99.81
Unamortized premiums, net........ 1,357 -- 0.80 889 -- 0.66 168 -- 0.19
-----------------------------------------------------------------------------------------------
Total mortgage-backed securities $169,689 $174,036 100.00% $135,606 $136,592 100.00% $ 87,561 $ 86,861 100.00%
===============================================================================================
Investment Securities. At June 30, 2002, the Company's investment securities
(including $4.3 million of investment securities available for sale, $179.5
million of investment securities held to maturity and a $25.7 million investment
in FHLB of New York stock) totaled $209.4 million, or 11% 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. In prior years, PennFed invested in certain non-investment grade
trust preferred securities of other financial institutions. At June 30, 2002,
PennFed held $11.0 million of such non-investment grade securities. In addition,
investment securities at June 30, 2002 included $22.3 million of investment
grade trust preferred securities.
OTS regulations limit investments in corporate debt and equity securities by the
Bank. See "Regulation-Federal Regulation of Savings Associations by the OTS" for
a discussion of additional restrictions on the Company's investment activities.
13
The following table indicates the composition of the held to maturity portion of
the investment securities portfolio based on the final maturities of each
investment. $178,456,000 of the securities in the investment portfolio have call
features and, thus, will likely have a much shorter life than final maturity.
June 30, 2002
-------------------------------------------------------------------------
After
Five Years After Total Investment
Through Ten Securities Held
Ten Years Years to Maturity
-------------------------------------------------------------------------
Book Weighted Book Weighted Book Weighted
Value Average Yield Value Average Yield Value Average Yield
-------------------------------------------------------------------------
(Dollars in thousands)
U.S. government
agency obligations ...... $4,700 6.75% $140,460 6.53% $145,160 6.54%
Corporate bond ............ 1,034 9.88 -- -- 1,034 9.88
Trust preferred
securities .............. -- -- 33,296 8.74 33,296 8.74
-------------------------------------------------------------------------
Total investment securities
held to maturity ........ $5,734 7.31% $173,756 6.95% $179,490 6.97%
=========================================================================
The Company's investment securities portfolio at June 30, 2002 did not contain
tax-exempt securities or securities of any single issuer 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, 2002, mortgage-backed securities totaled
$169.7 million, or 9% of the Company's total assets, of which approximately 15%
consisted of adjustable rate securities. The Company has invested primarily in
government agency securities, principally those of Ginnie Mae, Freddie Mac and
Fannie Mae.
The following table indicates the composition of the mortgage-backed securities
portfolio, excluding unamortized premiums, based on the final maturities of each
security.
June 30, 2002
-------------------------------------------------------------------------------------------
After After
One One Year Five Years After Total
Year or Through Through Ten Mortgage-backed
Less Five Years Ten Years Years Securities
-------------------------------------------------------------------------------------------
Estimated Fair
Book Value Book Value Book Value Book Value Book Value Market Value
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Ginnie Mae ................ $-- $101 $ 208 $ 333 $ 642 $ 696
Freddie Mac ............... 6 524 14,424 69,803 84,757 87,727
Fannie Mae ................ -- -- 8,450 74,441 82,891 85,570
Collateralized Mortgage
Obligations/REMICs ...... -- -- -- 42 42 43
-------------------------------------------------------------------------------------------
Total mortgage-backed
securities ............. $ 6 $625 $23,082 $144,619 $168,332 $174,036
===========================================================================================
Weighted average yield at
year end ................. 8.00% 6.74% 6.92% 6.63% 6.67%
=======================================================================
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.
14
The following table sets forth the activity in the Company's mortgage-backed
securities portfolio for the years indicated.
Year ended June 30,
-------------------------------------
2002 2001 2000
-------------------------------------
(In thousands)
Mortgage-backed securities, net:
At beginning of year .............. $135,606 $ 87,561 $127,983
Plus:
Securities purchased ............. 20,364 32,383 220
Securitization of loans receivable 65,923 47,661 --
Less:
Principal repayments .............. 51,797 31,908 40,522
Amortization of premiums .......... 407 91 120
------------------------------------
At end of year ...................... $169,689 $135,606 $ 87,561
====================================
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, 2002, certificates of deposit
from municipalities totaled $2.4 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 deposits. For example, late in
fiscal 2002 the Company promoted a premium savings account which had the effect
of increasing savings balances by $63.5 million at June 30, 2002. 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. There were no brokered deposits at June 30, 2002 and
2001. See Item 8 - Financial Statements - Note H -Deposits - of the Notes to
Consolidated Financial Statements.
The following table sets forth the deposit flows of the Company during the
periods indicated.
Year ended June 30,
-------------------------------------------
2002 2001 2000
-------------------------------------------
(Dollars in thousands)
Opening balance ................ $ 1,085,335 $ 1,080,350 $ 1,063,600
Net deposits (withdrawals) ..... 51,591 (40,991) (24,630)
Interest credited .............. 37,581 45,976 41,380
-------------------------------------------
Ending balance ................. $ 1,174,507 $ 1,085,335 $ 1,080,350
===========================================
Net increase ................... $ 89,172 $ 4,985 $ 16,750
===========================================
Percent increase ............... 8.22% 0.46% 1.57%
===========================================
15
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 2002.
Maturity
-----------------------------------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
-----------------------------------------------------------------
(In thousands)
Certificates of deposit less than $100,000...... $105,819 $131,527 $130,656 $219,292 $587,294
Certificates of deposit of $100,000 or more..... 17,275 25,221 22,312 40,025 104,833
-----------------------------------------------------------------
Total certificates of deposit .................. $123,094 $156,748 $152,968 $259,317 $692,127
=================================================================
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 when the Company desires additional capacity to fund loan demand
or to extend the life of its liabilities as a means of managing exposure to
interest rate risk.
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 obtained pursuant to several different credit programs,
each of which has its own interest rate and range of maturities.
16
The following table sets forth the maximum month-end balance, average balance,
year-end balance and weighted average cost of FHLB of New York advances and
other borrowings for the periods indicated.
Year ended June 30,
---------------------------------------
2002 2001 2000
---------------------------------------
(In thousands)
Maximum month-end balance for the year ended:
FHLB of New York advances ............................. $504,465 $454,465 $364,465
========================================
Other borrowings:
Overnight repricing lines of credit ................. $ 55,300 $ 84,400 $ 80,200
FHLB of New York one-month overnight repricing
line of credit ..................................... -- -- 30,000
Reverse repurchase agreements callable or maturing
within one year .................................... 48,540 48,840 9,563
Reverse repurchase agreements maturing after one year 19,350 19,350 49,275
Unsecured revolving line of credit .................. 3,964 4,705 --
---------------------------------------
Total other borrowings ............................ $127,154 $157,295 $169,038
========================================
Average balance for the year ended:
FHLB of New York advances ............................. $477,935 $397,614 $322,754
========================================
Other borrowings:
Overnight repricing lines of credit ................. $ 18,764 $ 27,438 $ 30,393
FHLB of New York one-month overnight repricing
line of credit ..................................... -- -- 5,706
Reverse repurchase agreements callable or maturing
within one year .................................... 20,508 30,638 5,353
Reverse repurchase agreements maturing after one year 19,350 2,050 39,601
Unsecured revolving line of credit .................. 1,426 2,038 --
---------------------------------------
Total other borrowings ............................ $ 60,048 $ 62,164 $ 81,053
========================================
Balance at June 30:
FHLB of New York advances ............................. $504,465 $454,465 $364,465
========================================
Other borrowings:
Overnight repricing lines of credit ................. $ -- $ 59,450 $ 72,900
FHLB of New York one-month overnight repricing
line of credit ..................................... -- -- --
Reverse repurchase agreements callable or maturing
within one year .................................... -- 48,840 19,875
Reverse repurchase agreements maturing after one year 19,350 19,350 19,400
Unsecured revolving line of credit .................. 3,964 -- --
---------------------------------------
Total other borrowings ............................. $ 23,314 $127,640 $112,175
========================================
Weighted average cost of funds for the year ended:
FHLB of New York advances ............................. 5.85% 6.18% 6.07%
Other borrowings:
Overnight repricing lines of credit ................. 3.35% 6.02% 6.00%
FHLB of New York one-month overnight repricing
line of credit ..................................... -- -- 5.96%
Reverse repurchase agreements callable or maturing
within one year .................................... 5.36% 5.92% 5.69%
Reverse repurchase agreements maturing after one year 4.99% 5.07% 6.02%
Unsecured revolving line of credit .................. 3.40% 7.81% --
Weighted average cost of funds at June 30:
FHLB of New York advances ............................. 5.66% 6.00% 6.13%
Other borrowings:
Overnight repricing lines of credit ................. -- 4.23% 7.23%
FHLB of New York one-month overnight repricing
line of credit .................................... -- -- --
Reverse repurchase agreements callable or maturing
within one year ................................... -- 4.69% 5.77%
Reverse repurchase agreements maturing after one year 4.92% 4.92% 6.10%
Unsecured revolving line of credit .................. 3.34% -- --
17
Trust Preferred Securities.During fiscal 1998, PennFed formed a wholly-owned
trust subsidiary, PennFed Capital Trust I (the "Trust I"). Effective October 21,
1997, Trust I 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"). Trust I used the
proceeds from the sale of the Trust Preferred securities to purchase 8.90%
junior subordinated deferrable interest debentures issued by PennFed. The
obligations of PennFed related to Trust I constitute a full and unconditional
guarantee by PennFed of Trust I obligations under the Trust Preferred
securities. PennFed used the proceeds from the junior subordinated debentures
for general corporate purposes, including a $20 million capital contribution to
the Bank to support growth.
In March 2001, PennFed formed a second wholly-owned trust subsidiary, PennFed
Capital Trust II (the "Trust II"). Effective March 28, 2001, Trust II sold $12
million of 10.18% cumulative trust preferred securities in a private transaction
exempt from registration under the Securities Act of 1933, as amended. Trust II
used the proceeds from the sale of the securities to purchase 10.18% junior
subordinated deferrable interest debentures issued by PennFed. The obligations
of PennFed related to Trust II constitute a full and unconditional guarantee by
PennFed of Trust II obligations under the Trust Preferred securities. PennFed
used the proceeds from the junior subordinated debentures for general corporate
purposes, including a $4.2 million capital contribution to the Bank to support
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 $37.8 million at June 30, 2002,
in the stock of, or loans to, service corporation subsidiaries. Penn Federal
currently has one service corporation, which is known as Penn Savings Insurance
Agency, Inc. ("PSIA"). At June 30, 2002, the net book value of Penn Federal's
investment in PSIA was $91,000.
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,a service of IFMG Securities, Inc.
("IFMGSI"). Securities are offered through IFMGSI, a registered broker dealer,
member NASD and SIPC. Annuities and insurance are offered through IFS Agencies,
Inc. ("IFSA"), a licensed insurance agency. Neither IFMGSI nor IFSA is
affiliated with the Bank. The Bank's relationship with IFMGSI and IFSA gives
customers convenient access to financial consulting and uninsured non-deposit
investment products, such as fixed and variable annuities and mutual funds. In
addition, securities brokerage services are available through IFMGSI. Life,
health and disability insurance are also available through IFSA. To a much
lesser extent, PSIA also offers homeowners insurance to Bank customers.
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,
2002, the Bank's investment in its operating subsidiary, Ferry Development
Holding Company ("FDHC"), was $346.7 million. FDHC holds and manages an
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 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.
18
REGULATION
General
Penn Federal is a federally chartered savings bank, and accordingly, the Bank is
subject to comprehensive federal regulation and oversight by the OTS extending
to all its operations. Penn Federal is a member of the FHLB of New York and
certain of its activities are subject to 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 by the OTS. The Bank is a member of the Savings Association
Insurance Fund ("SAIF") and the deposits of Penn Federal are insured by the FDIC
up to applicable limits. As a result, the FDIC has regulatory and examination
authority over the Bank. For purposes of the "Regulation" discussion, the terms
"savings bank," "savings association" and "savings institution" apply to the
Bank.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Associations by the OTS
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. The last regular OTS
examination of the Bank was as of March 2002.
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, 2002 was $303,000.
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. The
FDIC 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 savings association's deposit insurance if it
determines that the savings association has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
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. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained earnings, and certain noncumulative
perpetual preferred stock. In addition, all intangible assets, other than
certain amounts of mortgage servicing rights, and accumulated unrealized gains
and losses on certain available for sale securities must be deducted from assets
and capital for calculating compliance with the requirements. At June 30,2002,
Penn Federal had $5.0 million of intangible assets other than qualifying
mortgage servicing rights.
19
At June 30, 2002, Penn Federal had tangible capital of $158.0 million, or 8.37%
of adjusted total assets, which was approximately $129.7 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 and 4% of risk-weighted assets (as described below). As a result of
the prompt corrective action provisions discussed below, however, a savings
association must maintain a ratio of core capital to adjusted total assets of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such as to allow it to maintain a 3% ratio. Core capital generally
consists of tangible capital plus certain intangible assets up to 25% of
adjusted total assets. At June 30, 2002, Penn Federal did not have any
intangibles which were subject to these tests.
At June 30, 2002, Penn Federal had core capital of $158.0 million, or 8.37% of
adjusted total assets, which was approximately $82.5 million above the 4% ratio
required to be considered adequately capitalized.
The OTS risk-based capital requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of selected items, such as certain permanent and maturing capital
instruments that do not qualify as core capital, allowances for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets and up to 45% of pretax
unrealized gains, net of unrealized losses, on available for sale equity
securities. Supplementary capital may be used to satisfy the risk-based
requirement only to the extent of core capital. At June 30,2002, the Bank had no
capital instruments that qualify as supplementary capital. The Bank had $5.8
million of allowances for loan and lease losses at June 30, 2002, all of which
was included as supplementary capital since it was less than 1.25% of
risk-weighted assets.
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% assigned by the OTS capital regulation based on the risk inherent in the
type of assets.
On June 30, 2002, Penn Federal had total risk-based capital of $163.8 million
(consisting of $158.0 million in core capital and $5.8 million in allowable
supplementary capital) and risk-weighted assets of $1.0 billion (including $46.1
million in converted off-balance sheet items primarily represented by unused
lines of credit) resulting in a risk-based capital ratio of 15.93% of
risk-weighted assets. This amount was $81.5 million above the 8% requirement in
effect on that date.
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 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
mandated to impose additional restrictions 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 found to be 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 on the market value of PennFed's common stock.
20
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 may make capital distributions during any calendar year
equal to 100% of net income for the calendar year-to-date plus retained net
income for the two previous calendar years without OTS approval. The Bank is
required to give the OTS 30 days notice prior to declaring any dividend to
PennFed 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."
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 twelve 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 30,2002, the Bank met
the QTL test and has always met the test since its effective date.
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 Bank Insurance Fund. Until such an association has 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, such an 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 the 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.
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 this record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by Penn Federal. A less than
"satisfactory" rating may be used by the OTS as the basis for the denial of an
application.
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 communities. CRA compliance ratings given by the OTS include
"outstanding," "satisfactory," "needs improvement" and "substantial
noncompliance."
The Bank was examined for CRA compliance in February 2001 and received a rating
of "satisfactory."
21
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. 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.
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 the stock is sold in accordance with certain resale
restrictions. If PennFed meets specified current public information
requirements, each affiliate of PennFed may sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Home Loan Bank System
Penn Federal is a member of the FHLB of New York, which is one of 12 regional
FHLBs that provides loans and correspondent services to its members. Each FHLB
serves as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors of
the FHLB, which are subject to the oversight of the Federal Housing Finance
Board. All borrowings from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB.
As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York. At June 30, 2002, the Bank had $25.7 million in FHLB of New York
stock, which was in compliance with this requirement. Over the past five fiscal
years, the yields earned on its FHLB of New York stock have averaged 6.35% per
annum.
For the year ended June 30, 2002, the Company recorded $1.3 million in dividends
from the FHLB of New York resulting in a 4.87% yield.
Federal and State Taxation
Federal Taxation. PennFed files consolidated federal income tax returns with the
Bank and its subsidiaries. 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 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. This excess amount may then be
used as a credit in a future year to offset the income tax liability calculated
under the regular income tax method. Beginning with tax years ending in 2003,
net operating losses can offset no more than 90% of alternative minimum taxable
income.
The Bank and its consolidated subsidiary have been audited by the Internal
Revenue Service ("IRS") with respect to its 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 PennFed) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Company and its
consolidated subsidiaries.
New Jersey Taxation. The Bank has historically been 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
22
tax purposes, with certain modifications. PennFed is taxed under the New
Jersey Corporation Business Tax Act (the "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, 2002 of 2.25% of New Jersey taxable income (as
defined in the Act). If it fails to meet these tests, it will be taxed at an
annual rate of 9% of New Jersey taxable income. It is anticipated that PennFed
will be taxed as an investment company. Penn Savings Insurance Agency is taxed
under the Act at a rate of 9% on its New Jersey taxable income.
On July 2, 2002, the State of New Jersey enacted a new tax law revising the
state's corporate income tax law. For the Company, the new law is effective
beginning July 1, 2002. Effective with the new tax structure, the New Jersey
Savings Institution Tax is eliminated. Earnings for savings institutions will be
taxed at the 9% corporate tax rate and the tax rate for New Jersey investment
companies will be increased to 3.6% (or 40% of the corporate tax rate). Although
additional clarification of certain aspects of the law is expected, the new tax
law changes are expected to increase the overall effective tax rate of the
Company. The Company's effective tax rate for the year ended June 30, 2002 was
35.5%. Although the Company's effective tax rate may remain relatively stable,
based upon internal analysis, the total effective tax rate could increase to a
maximum of 41%. In addition, for taxable years beginning after December 31,
2001, New Jersey imposes an alternative minimum tax. The Company will be
required to pay the greater of the regular corporate tax or the alternative
minimum tax. The amount of alternative minimum tax can be used as a credit to
offset the income tax liability calculated under the regular corporate business
tax. The alternative minimum tax is based on either 0.4% of gross receipts or
0.8% of gross profits.
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 annual fees to the State of Delaware. PennFed and FDHC are also subject
to an annual franchise tax imposed by the State of Delaware. As Delaware
business trusts, PennFed Capital Trust I and PennFed Capital Trust II are not
required to pay income or franchise taxes to the State of Delaware.
23
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 principal executive
officers of PennFed were as follows: Joseph L. LaMonica, President and Chief
Executive Officer; Jeffrey J. Carfora, Senior Executive Vice President and Chief
Operating Officer; Patrick D. McTernan, Senior Executive Vice President, General
Counsel and Secretary; and Claire M. Chadwick, 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 regarding the executive
officers of the Bank who are not also directors.
Name Age Positions Held with the Bank
- -------------------------------------------------------------------------------------------------------------
Jeffrey J. Carfora........... 44 Senior Executive Vice President and Chief Operating Officer
Claire M. Chadwick........... 42 Executive Vice President and Chief Financial Officer
Barbara A. Flannery.......... 46 Executive Vice President and Retail Banking Group Executive
Maria F. Magurno............. 50 Executive Vice President and Residential Lending Group Executive
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.
Jeffrey J. Carfora - Mr. Carfora is responsible for the daily operations of the
Bank. Mr. Carfora also assists President LaMonica in the development of
corporate policies and goals. Mr. Carfora joined Penn Federal in 1993 as Senior
Vice President and Chief Financial Officer and was appointed Executive Vice
President in 1999. He was named Senior Executive Vice President and Chief
Operating Officer in 2001.
Claire M. Chadwick - Ms. Chadwick is responsible for the financial affairs of
the Bank, which include financial and tax accounting and reporting, budgeting
and investor relations. Ms. Chadwick joined Penn Federal in 1994 and has served
as the Bank's Senior Vice President and Controller since 1999. She was named
Executive Vice President and Chief Financial Officer in 2002.
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.
Maria F. Magurno - Ms. Magurno joined the Bank in October 1997 as Vice President
of Residential Lending. Ms. Magurno is responsible for the Bank's residential
lending operations as well as the collections and servicing departments. She was
named Senior Vice President in 1999 and Executive Vice President in 2001. Prior
to joining Penn Federal, Ms. Magurno was with NatWest Mortgage.
Employees
At June 30, 2002, the Company and its subsidiaries had a total of 294 employees,
including 50 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 total net book
value of the Company's premises and equipment (including land, building and
leasehold improvements and furniture and equipment) at June 30,2002 was $19.6
million.
The Company believes that its current facilities are adequate to meet the
present and foreseeable needs of the Company, subject to possible future
expansion.
24
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.
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 (now
ExxonMobil) 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. The Bank has
continued to vigorously deny liability but has engaged in discussions with
ExxonMobil. The Bank may be willing to enter into a cost sharing arrangement
with ExxonMobil if ExxonMobil will agree to develop and implement the remedial
action work plan required by the NJDEP. A written proposal is expected to be
submitted to the Bank by ExxonMobil. Currently, no written agreement has been
signed and neither party is bound by any verbal conversations.
Based upon an environmental engineering report, a remedial investigation would
cost approximately $30,000. The environmental engineering company has also
indicated that, based upon their experience with similar type projects, the
majority of cases are addressed by natural remediation. Natural remediation
costs, if needed, range from $60,000 to $150,000. At June 30, 2002 and 2001, a
contingent environmental liability of $45,000 is included in Accounts payable
and other liabilities on the Company's Consolidated Statements of Financial
Condition. The $45,000 represents one-half of the remedial investigation
(one-half of $30,000, or $15,000) plus one-half of the lower end of the range
for natural remediation (one-half of $60,000, or $30,000). Based upon the most
current information available, management believes the $45,000 represents the
most likely liability at this time.
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, 2002.
25
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 6, 2002, there were
approximately 470 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.
Fiscal 2002 Closing Price Fiscal 2001 Closing Price
--------------------------- ----------------------------
High Low High Low
--------------------------- ----------------------------
Quarter Ended:
September 30, 2001 and 2000............... $22.480 $19.250 $15.375 $13.000
December 31, 2001 and 2000................ 24.820 18.800 17.063 13.625
March 31, 2002 and 2001................... 27.250 23.160 21.000 16.875
June 30, 2002 and 2001.................... 28.250 23.700 23.100 19.200
The closing price of a common share was $27.90 at June 30, 2002 compared to
$23.10 at June 30, 2001.
In the second quarter of fiscal 2002, the Company increased the quarterly cash
dividend on its common stock to $0.06 per share. Previously, the quarterly cash
dividend was $0.05 per share since the fourth quarter of fiscal 2001. Prior
quarterly cash dividends were $0.04 per share since the second quarter of fiscal
1999. Quarterly cash dividend payments of $0.035 per share were initiated in the
second quarter of fiscal 1997. Subsequent to the end of fiscal 2002, the Company
increased the quarterly cash dividend to $0.10 per share.
The Company's ability to pay cash dividends is substantially dependent on the
dividend payments it receives from the Bank. For a description of the regulatory
restrictions on the ability of the Bank to pay dividends to the Company, see
Item 1. Business -- "Regulation - Limitations on Dividends and Other Capital
Distributions" and Note N --Stockholders' Equity and Regulatory Capital in the
Notes to Consolidated Financial Statements.
The following table sets forth information as of June 30, 2002 with respect to
compensation plans under which shares of Company common stock may be issued.
Equity Commpensation Plan Information
Number of Shares
Remaining Available
for Future Issuance
Under Equity
Number of Shares to Compensation Plans
be Issued Upon Weighted-Average (Excluding Shares
Exercise of Exercise Price of Reflected in the
Plan Category Outstanding Options Outstanding Options First Column)
- -------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by stockholders(1)............................. 1,198,516 $10.42 0
Equity compensation plans not approved
by stockholders................................ N/A N/A N/A
Total............................................ 1,198,516 $10.42 0
(1) The only equity compensation plan approved by stockholders under which
there are outstanding unvested awards and shares available for future
issuances is the Company's 1994 Stock Option and Incentive Plan.
26
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.
At June 30,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------------------
(In thousands, except per share amounts)
Selected Financial Condition Data:
Total assets .......................... $1,892,427 $1,849,377 $1,729,219 $1,558,763 $1,551,938
Loans receivable, net ................. 1,441,260 1,295,492 1,259,248 1,066,611 1,095,852
Investment securities ................. 183,785 333,969 303,026 293,282 178,310
Mortgage-backed securities ............ 169,689 135,606 87,561 127,983 204,452
Deposits .............................. 1,174,507 1,085,335 1,080,350 1,063,600 1,028,100
Total borrowings ...................... 527,779 582,105 476,640 333,203 361,965
Trust Preferred securities, net ....... 44,537 44,461 32,805 32,743 32,681
Stockholders' equity .................. 118,761 112,530 113,981 107,500 103,703
Book value per common share(1) ........ 16.73 15.50 14.37 13.03 11.87
Tangible book value per common share(1) 16.02 14.54 13.24 11.68 10.33
(1) In accordance with Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," the calculation of book value per share
only includes ESOP shares to the extent that they are released or committed
to be released during the fiscal year.
Year ended June 30,
2002 2001 2000 1999 1998
---------------------------------------------------------------
(In thousands, except per share amounts)
Selected Operating Data:
Total interest and dividend income ...................... $121,339 $120,358 $111,763 $105,557 $ 100,805
Total interest expense .................................. 72,862 79,584 71,201 68,786 65,869
---------------------------------------------------------------
Net interest and dividend income ........................ 48,477 40,774 40,562 36,771 34,936
Provision for loan losses ............................... 1,625 625 860 780 600
---------------------------------------------------------------
Net interest income after provision for
loan losses ............................................. 46,852 40,149 39,702 35,991 34,336
---------------------------------------------------------------
Service charges ......................................... 2,961 2,495 2,172 2,113 1,974
Net gain (loss) from real estate operations ............. 87 65 114 31 (156)
Net gain on sales of loans .............................. 194 666 36 860 528
Other non-interest income ............................... 975 588 625 542 321
---------------------------------------------------------------
Total non-interest income ............................... 4,217 3,814 2,947 3,546 2,667
---------------------------------------------------------------
Total non-interest expenses ............................. 28,450 24,642 22,728 21,776 19,563
---------------------------------------------------------------
Income before income taxes .............................. 22,619 19,321 19,921 17,761 17,440
Income tax expense ...................................... 8,036 6,808 7,051 6,304 6,242
---------------------------------------------------------------
Net income .............................................. $ 14,583 $ 12,513 $ 12,870 $ 11,457 $ 11,198
===============================================================
Net income per common share:
Basic................................................... $ 2.02 $ 1.64 $ 1.58 $ 1.36 $ 1.25
===============================================================
Diluted................................................. $ 1.88 $ 1.55 $ 1.50 $ 1.29 $ 1.16
===============================================================
27
At and for the year ended June 30,
-------------------------------------------------------------------
Selected Financial Ratios and Other Data: 2002 2001 2000 1999 1998
-------------------------------------------------------------------
Performance Ratios:
Return on average assets (ratio of net income to
average total assets) ................................... 0.79% 0.72% 0.79% 0.74% 0.78%
Return on average stockholders' equity (ratio of
net income to average stockholders' equity) ............. 12.59 10.95 11.61 11.03 10.96
Net interest rate spread during the year ................... 2.37 2.06 2.22 2.11 2.20
Net interest margin (net interest and dividend
income to average interest-earning assets) .............. 2.68 2.43 2.57 2.45 2.54
Ratio of average interest-earning assets to average
deposits and borrowings ................................. 107.88 107.67 107.64 107.27 107.07
Ratio of earnings to fixed charges(1):
Excluding interest on deposits .......................... 1.74x 1.68x 1.81x 1.88x 1.99x
Including interest on deposits .......................... 1.31x 1.24x 1.28x 1.26x 1.26x
Ratio of non-interest expense to average total assets ...... 1.53% 1.42% 1.39% 1.40% 1.37%
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) .............. 50.58 51.59 47.53 49.24 46.00
Dividend payout ratio ...................................... 11.39 10.37 10.13 11.40 11.20
Asset Quality Ratios:
Non-accruing loans to total loans at end of year ........... 0.23 0.13 0.21 0.34 0.34
Allowance for loan losses to non-accruing loans
at end of year .......................................... 177.74 259.50 146.70 87.44 74.18
Allowance for loan losses to total loans at end of year .... 0.40 0.33 0.32 0.30 0.25
Non-performing assets to total assets at end of year ....... 0.17 0.12 0.18 0.30 0.35
Ratio of net charge-offs during the year to average
loans outstanding during the year ....................... 0.00 0.03 0.01 0.03 0.04
Capital Ratios:
Stockholders' equity to total assets at end of year ........ 6.28 6.08 6.59 6.90 6.68
Average stockholders' equity to average total assets ....... 6.25 6.58 6.78 6.67 7.14
Tangible capital to tangible assets at end of year(2) ...... 8.37 7.87 7.76 7.88 7.09
Core capital to adjusted tangible assets at end of year(2) . 8.37 7.87 7.76 7.88 7.11
Risk-based capital to risk-weighted assets at end of year(2) 15.93 15.69 15.50 16.29 15.16
Other Data:
Number of branch offices at end of year .................... 21 21 20 20 18
Number of deposit accounts at end of year .................. 84,200 88,500 88,300 88,200 87,500
Cash dividends declared per common share ................... $ 0.230 $ 0.170 $ 0.160 $ 0.155 $ 0.140
- --------------
(1) 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.
(2) Represents regulatory capital ratios for the Bank.
28
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 Trusts.
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. 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 laws, regulations or
government policies may also have a material impact on the Company.
Management Strategy
Management's primary goal is to enhance stockholder value, while fostering and
maintaining customer confidence through a continued focus on improved earnings
while managing risks, including liquidity and interest rate risk. 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 production, through origination and
purchase, of traditional one- to four-family first mortgage loans secured by
properties located primarily in New Jersey. The Company produced $529.3 million,
$305.9 million and $278.3 million in one- to four-family mortgage loans in
fiscal 2002, 2001 and 2000, respectively. The Company's interest income has been
derived primarily from one- to four-family mortgage loans, which totaled $1.2
billion or 81.5% of the Company's gross loan portfolio at June 30, 2002.
The Company generally sells its conforming, fixed rate one- to four-family
residential loan production. Sales have been periodically suspended in certain
circumstances. For example, loans were held in portfolio as part of a leverage
strategy associated with the Trust Preferred securities offering in March 2001
and as a partial replacement of investment securities called before maturity
during fiscal 2002. In addition, in fiscal 2001 the Company sold approximately
$65 million of longer duration, one- to four-family residential mortgage loans
in an effort to improve liquidity, interest rate risk and net interest margin.
Total loans sold during fiscal 2002 and fiscal 2001 were $17 million and $94
million, respectively. The level of loan sale activity continues to be actively
evaluated with primary consideration given to interest rate risk, long-term
profitability and liquidity objectives.
Increasing the Commercial and Multi-Family and Consumer Loan Portfolios. In
addition to one- to four-family residential first mortgage lending, the Company
will continue its emphasis on increasing the commercial and multi-family and
consumer loan porfolios as a percentage of total loans. These loans generally
reprice more frequently, have shorter maturities, and/or have higher yields than
one- to four-family first mortgage loans. The Company originated $150.5 million,
$110.6 million and $95.7 million of commercial and multi-family and consumer
loans in fiscal 2002, 2001 and 2000, respectively. As of June 30, 2002, 2001 and
2000, commercial and multi-family and consumer loans represented 18.5%, 17.4%
and 14.7%, respectively, of the total gross loan portfolio.
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. Non-performing assets
as a percentage of total assets were 0.17% at June 30, 2002.
Increasing Core Deposit Balances. The Company's primary source of funds is
deposits. The Company will continue to emphasize growth in generally lower
costing core deposits consisting of checking, money market and savings accounts.
The Company utilizes various techniques to generate these types of deposits
including special promotional rates and offerings. Core deposits increased
$163.3 million, or 51%, in fiscal 2002.
29
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. As part of its interest rate risk
strategy, the Company has emphasized core deposits and utilized
intermediate/longer-term borrowings and has, at select times, emphasized longer
term certificates of deposit. Furthermore, the Company has endeavored to manage
its interest rate risk through the pricing and diversification of its loan
products, including the focus on the production of loans with adjustable rate
features and/or with shorter terms to maturity. The Company has also engaged in
one- to four-family mortgage loan sales whereby longer duration conventional
loans have been sold. See "Interest Rate Sensitivity Analysis" and
"Asset/Liability Strategy."
Improving Non-Interest Income. The Company has and will continue 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 $853,000, or 28%, increase for fiscal 2002
compared to fiscal 2001, due, in part, to growth in core deposits and earnings
from the Bank's Investment Services at Penn Federal program. This program gives
customers convenient access to financial consulting/advisory services and
related uninsured non-deposit investment and insurance products at local branch
offices through a non-affiliated entity.
Controlling Non-Interest Expenses. Non-interest expenses are carefully
monitored, which includes ongoing reviews of staffing levels, facilities and
operations. The Company's ratio of non-interest expenses to average total assets
was 1.53% for the year ended June 30, 2002.
Interest Rate Sensitivity Analysis
Interest Rate Sensitivity 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 positive gap if the amount of interest-earning assets maturing or
repricing within a specified time period exceeds the amount of interest-bearing
liabilities maturing or repricing within the same period. If more
interest-bearing liabilities than interest-earning assets mature or reprice
within a specified period, then the institution is considered to have a negative
gap. Accordingly, in a rising interest rate environment, in an institution with
a positive gap, the yield on its rate sensitive assets would theoretically rise
at a faster pace than the cost of its rate sensitive liabilities, thereby
improving future net interest income. In a falling interest rate environment, a
positive gap would indicate that the yield on rate sensitive assets would
decline at a faster pace than the cost of rate sensitive liabilities and
diminish net interest income. For an institution with a negative 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
Residential 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 interest sensitive
financial instruments. 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 4 years.
Residential fixed and adjustable rate loans are assumed to prepay at an
annualized rate between 10% and 42%. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 8% and 38%
30
while consumer loans are assumed to prepay at a 34% rate. Fixed and adjustable
rate mortgage-backed securities have annual payment assumptions ranging from 10%
to 35%. Demand loans and loans which have no repayment schedule or stated final
maturity, are assumed to be due within six months. Loan and mortgage-backed
securities balances are net of non-performing loans and are not adjusted for
unearned discounts, premiums, and deferred loan fees.
The Company assumes that variable rate savings account balances decay gradually
over time. Based on historical information, 12% of these balances roll-off
within one year; 10% roll-off in the second year; 8% roll-off in the third year;
and 5% roll-off each year thereafter. During fiscal 2001 and 2002, the Bank
promoted "5% Savings for Life" accounts, which totaled $72.5 million at June 30,
2002. These deposits are assumed to have an average life of approximately 10
years. In addition, a "5% Through June 2004 Savings" account was also promoted
during fiscal 2002. At June 30, 2002, the balance in these accounts totaled
$63.5 million. These deposits are assumed to have no decay through June 2004 and
then roll-off 60% over the following four years. The remainder is assumed to
have an average life of 10 years. At June 30, 2002, $222.4 million, or 71%, of
savings accounts are assumed to roll-off after five years. 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.
31
Maturing or Repricing
---------------------------------------------------------------------------------
Year ended June 30,
---------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
---------------------------------------------------------------------------------
(Dollars in thousands)
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family ......................... $ 208,415 $ 124,597 $ 109,347 $ 96,566 $ 86,042 $ 288,770
Average interest rate .................... 7.10% 6.89% 6.89% 6.89% 6.90% 6.96%
Adjustable rate mortgage loans including
one- to four-family and commercial
and multi-family ........................ $ 172,056 $ 73,738 $ 71,568 $ 42,808 $ 26,720 $ 13,198
Average interest rate .................... 6.68% 6.92% 7.11% 7.52% 7.67% 7.67%
Consumer loans including
demand loans ............................. $ 85,698 $ 15,264 $ 10,339 $ 7,108 $ 2,087 $ --
Average interest rate .................... 6.54% 7.44% 7.44% 7.44% 7.44% 0.00%
Investment securities and other ............ $ 44,255 $ 26,958 $ 26,952 $ 17,900 $ 15,767 $ 36,500
Average interest rate .................... 6.62% 6.72% 6.64% 6.73% 6.64% 6.71%
Mortgage-backed securities ................. $ 64,550 $ 125,160 $ -- $ -- $ 22,328 $ 10,002
Average interest rate .................... 4.86% 6.46% 0.00% 0.00% 7.72% 9.03%
Total interest-earning assets ............ $ 574,974 $ 365,717 $ 218,206 $ 164,382 $ 152,944 $ 348,470
=================================================================================
Savings deposits ........................... $ 21,086 $ 15,463 $ 27,008 $ 15,927 $ 9,892 $ 222,364
Average interest rate .................... 1.05% 1.05% 3.37% 3.41% 2.57% 2.95%
Money market and demand deposits
(transaction accounts) ................... $ 20,397 $ -- $ -- $ -- $ -- $ 148,597
Average interest rate .................... 1.50% 0.00% 0.00% 0.00% 0.00% 0.74%
Certificates of deposit .................... $ 432,809 $ 139,025 $ 85,039 $ 25,082 $ 10,172 $ --
Average interest rate .................... 4.03% 3.97% 5.53% 4.81% 4.60% 0.00%
FHLB of New York advances .................. $ -- $ 29,000 $ 60,000 $ 30,000 $ 20,465 $ 365,000
Average interest rate .................... 0.00% 5.09% 5.31% 4.21% 6.03% 5.86%
Other borrowings ........................... $ 3,964 $ 19,350 $ -- $ -- $ -- $ --
Average interest rate .................... 4.25% 4.92% 0.00% 0.00% 0.00% 0.00%
Total deposits and borrowings ............ $ 478,256 $ 202,838 $ 172,047 $ 71,009 $ 40,529 $ 735,961
=================================================================================
Interest earning assets less deposits and
borrowings (interest-rate sensitivity gap) $ 96,718 $ 162,879 $ 46,159 $ 93,373 $ 112,415 ($ 387,491)
==================================================================================
Cumulative interest-rate sensitivity gap ... $ 96,718 $ 259,597 $ 305,756 $ 399,129 $ 511,544 $ 124,053
===============================================================================
Cumulative interest-rate sensitivity
gap as a percentage of total assets
at June 30, 2002 ......................... 5.11% 13.72% 16.16% 21.09% 27.03% 6.56%
===============================================================================
Cumulative interest-rate sensitivity gap
as a percentage of total interest-
earning assets at June 30, 2002 .......... 5.30% 14.23% 16.76% 21.87% 28.03% 6.80%
===============================================================================
Cumulative interest-earning assets as a
percentage of cumulative deposits and
borrowings at June 30, 2002 .............. 120.22% 138.11% 135.84% 143.19% 153.03% 107.29%
===============================================================================
Maturing or Repricing
----------------------------
Year ended June 30,
----------------------------
Total Fair Value
----------------------------
Fixed rate mortgage loans including
one- to four-family and commercial
and multi-family ......................... $ 913,737 $ 927,004
Average interest rate .................... 6.96%
Adjustable rate mortgage loans including
one- to four-family and commercial
and multi-family ........................ $ 400,088 $ 409,516
Average interest rate .................... 6.99%
Consumer loans including
demand loans ............................. $ 120,496 $ 120,815
Average interest rate .................... 6.80%
Investment securities and other ............ $ 168,332 $ 174,036
Average interest rate .................... 6.67%
Mortgage-backed securities ................. $ 222,040 $ 221,226
Average interest rate .................... 6.24%
Total interest-earning assets ............ $1,824,693 $1,852,597
==========================
Savings deposits ........................... $ 311,740 $ 311,740
Average interest rate .................... 2.78%
Money market and demand deposits
(transaction accounts) ................... $ 168,994 $ 168,994
Average interest rate .................... 0.83%
Certificates of deposit .................... $ 692,127 $ 705,786
Average interest rate .................... 4.24%
FHLB of New York advances .................. $ 504,465 $ 536,767
Average interest rate .................... 5.66%
Other borrowings ........................... $ 23,314 $ 24,031
Average interest rate .................... 4.81%
Total deposits and borrowings ............ $1,700,640 $1,747,318
============================
Interest earning assets less deposits and
borrowings (interest-rate sensitivity gap) $ 124,053
==============
Cumulative interest-rate sensitivity gap ...
Cumulative interest-rate sensitivity
gap as a percentage of total assets
at June 30, 2002 .........................
Cumulative interest-rate sensitivity gap
as a percentage of total interest-
earning assets at June 30, 2002 ..........
Cumulative interest-earning assets as a
percentage of cumulative deposits and
borrowings at June 30, 2002 ..............
At June 30, 2002, the Company's total interest-earning assets maturing or
repricing within one year exceeded its total deposits and borrowings maturing or
repricing within one year by $96.7 million, representing a one year positive gap
of 5.11% of total assets, compared to a one year negative gap of 14.48% of total
assets at June 30, 2001. See "Asset/Liability Strategy." The Company's gap
position changed from June 30, 2001. The decline in market interest rates has
resulted in the redemption of certain investment securities with callable
features and has increased prepayment activity on residential mortgage loans,
thereby shifting a larger portion of estimated asset cash flows to within one
year. The proceeds from such activities were used to reduce short-term
borrowings and fund growth in the loan portfolio. Also contributing to the
change in the gap position was the maturity of FHLB of New York advances and
subsequent
32
replacement with advances that have terms in excess of three years. Furthermore,
growth in core deposits and medium-term certificates of deposit coupled with a
decline in short-term certificates of deposit, including municipal certificates
of deposit, also reduced the short-term estimated cash flows of the Company's
interest-bearing liabilities.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis presented in the foregoing
table must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgages,
have features which restrict changes in interest rates in the short-term and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase. The
Company considers all of these factors in monitoring its exposure to interest
rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through additional 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.
As of June 30, 2002, the Bank's internally generated initial NPV ratio was
5.57%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 6.62%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was 1.05%. As of June 30, 2002, the Company's internally generated initial NPV
ratio was 5.18%, the Post-Shock ratio was 6.11%, and the Sensitivity Measure was
0.93%. The duration of assets has declined principally due to increased
prepayment estimates. Conversely, the duration of liabilities has extended
principally due to the decline in short-term fundings, both wholesale and
retail, the extension of FHLB of New York advances and the growth in core
deposits. 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 filed by the Bank with the OTS,
coupled with non-institution specific assumptions which are based on national
averages. As of June 30, 2002, the Bank's initial NPV ratio, as measured by the
OTS, was 9.24% the Bank's Post-Shock ratio was 6.20% and the Sensitivity Measure
was 3.04%.
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, 2002, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
increase 1% 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 3, 5 and 7 years, 15, 20 and 30
year bi-weekly mortgages and fixed rate products with terms of 10, 15 and 20
years.
33
2. The Company has emphasized the origination of variable rate home equity lines
of credit 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 sold a portion of its one- to four-family whole
mortgage loan portfolio in an effort to shorten its average life and duration,
as well as to mitigate prepayment risk and reduce borrowings. The level of such
activity continues to be evaluated with primary consideration given to interest
rate risk, long-term profitability and liquidity objectives.
4. 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, subject to market conditions.
5. The Company has focused on developing and strengthening customer
relationships in an effort to improve earnings and funding stability.
6. The Company has also emphasized growth in core deposit accounts as these
funds are generally lower cost alternatives, are relatively stable, have a
longer duration and assist in strengthening customer relationships.
During fiscal 2002, each of the strategies noted above was employed to manage
the Company's sensitivity to changes in interest rates. In the first half of
fiscal year 2002, short-term market rates declined rapidly while longer-term
market rates followed more gradually and the yield curve significantly
steepened. This shift in rates led to a significant improvement in net interest
rate spread, as short-term wholesale and retail funding costs were sharply
reduced. The decline in long-term rates led to an increase in residential loan
refinance and U.S. government agency security redemption activities. Cash flow
from these asset repayments was partially used to reduce short-term wholesale
funding balances. As market rates continued to fall in the second half of the
fiscal year, it became increasingly difficult to build longer-term deposit
relationships -- customers were not willing to place their funds in lower
yielding, longer-term certificates of deposit. In response, the Bank emphasized
several core deposit account promotions, including personal and business
checking, and premium savings accounts. Deposit growth through these promotions
allowed the Bank to avoid premium pricing on certificates of deposit and to take
advantage of historically low-cost, longer-term wholesale borrowings. As a
result, the Company's net interest rate spread continued to grow throughout the
fiscal year and its sensitivity to rising interest rates was reduced.
Residential mortgage loan sale activities were reestablished in late fiscal 2002
to manage interest rate risk, as fixed rate, long-term loan production
accelerated.
As a result of the above activity, one- to four-family first mortgage loan
balances grew $106.3 million between June 30, 2001 and June 30, 2002; adjustable
rate balances fell $93.5 million, despite attractive pricing of these products,
while fixed rate balances increased $199.8 million. Consumer loan balances
increased $5.2 million. Prime-based home equity lines of credit fell $5.2
million while other consumer products, principally fixed rate second mortgages
generally with shorter durations than one- to four-family residential mortgages,
increased $10.3 million. Commercial and multi-family real estate loan balances
grew $36.0 million during the current fiscal year with $23.4 million of the
growth in adjustable rate products.
At June 30, 2002, medium and long-term certificates of deposits with remaining
maturities greater than one year totaled $259.3 million compared to $275.4
million at June 30, 2001. The reduction of certificates of deposit was more than
offset by a $163.3 million increase in core deposit balances. Checking and money
market account balances grew $35.4 million, while savings balances increased
$127.9 million. Furthermore, wholesale borrowings with remaining maturities
greater than one year totaled $523.8 million at June 30, 2002, reflecting growth
of $120.0 million during the current fiscal year. Short-term retail deposit
balances with remaining maturities less than one year, including municipal
deposit balances, fell $57.3 million and short-term wholesale funding balances
fell $174.3 million between June 30, 2001 and June 30, 2002.
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 41% of total deposits at June 30, 2002, tend to be less
susceptible to rapid changes in interest rates than certificates of deposit
balances.
34
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,
2002, 2001 and 2000 and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived from
average daily balances. The average balance of loans receivable includes
non-accruing loans. The yields and costs include fees which are considered
adjustments to yields.
Year ended June 30,
-----------------------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans ........................... $1,135,205 $ 75,201 6.62% $1,040,942 $ 73,480 7.06% $ 988,454 $ 69,085 6.99%
Commercial and multi-family real
estate loans .................... 124,669 10,277 8.24 97,921 8,455 8.63 79,604 6,788 8.53
Consumer loans ................... 118,576 8,018 6.76 107,695 8,311 7.72 83,187 6,153 7.40
---------- --------- ---------- -------- ---------- --------
Total loans receivable .......... 1,378,450 93,496 6.78 1,246,558 90,246 7.24 1,151,245 82,026 7.12
Federal funds sold ............... 34 1 2.94 1,013 61 6.02 307 17 5.54
Investment securities and other .. 262,379 17,323 6.60 327,208 22,716 6.94 323,190 22,547 6.98
Mortgage-backed securities ....... 164,671 10,519 6.39 105,297 7,335 6.97 105,913 7,173 6.77
---------- --------- ---------- -------- ---------- --------
Total interest-earning assets ... 1,805,534 $ 121,339 6.72 1,680,076 $120,358 7.16 1,580,655 $111,763 7.07
========= ======== ========
Non-interest earning assets ........ 48,849 55,173 55,857
---------- ---------- ----------
Total assets .................... $1,854,383 $1,735,249 $1,636,512
========== ========== ==========
Deposits and borrowings:
Money market and demand
deposits ........................ $ 144,657 $ 1,206 0.83% $ 124,926 $ 1,468 1.18% $ 115,827 $ 1,329 1.15%
Savings deposits ................. 230,691 5,131 2.22 163,292 2,830 1.73 161,845 2,645 1.63
Certificates of deposit .......... 760,339 35,844 4.71 812,440 46,987 5.78 786,949 42,784 5.44
---------- --------- ---------- -------- ---------- --------
Total deposits .................. 1,135,687 42,181 3.71 1,100,658 51,285 4.66 1,064,621 46,758 4.39
FHLB of New York advances ........ 477,935 27,940 5.85 397,614 24,571 6.18 322,754 19,591 6.07
Other borrowings ................. 60,048 2,741 4.56 62,164 3,728 6.00 81,053 4,852 5.99
---------- --------- ---------- -------- ---------- --------
Total deposits and borrowings ... 1,673,670 $ 72,862 4.35 1,560,436 $ 79,584 5.10 1,468,428 $ 71,201 4.85
========= ======== ========
Other liabilities .................. 20,352 24,734 24,417
---------- ---------- ----------
Total liabilities ............... 1,694,022 1,585,170 1,492,845
Trust Preferred securities ......... 44,499 35,849 32,774
Stockholders' equity ............... 115,862 114,230 110,893
---------- ---------- ----------
Total liabilities and
stockholders' equity .......... $1,854,383 $1,735,249 $1,636,512
========== ========== ==========
Net interest income and net interest
rate spread ...................... $ 48,477 2.37% $ 40,774 2.06% $ 40,562 2.22%
========= ==== ========== ==== ========== ====
Net interest-earning assets and
interest margin .................. $ 131,864 2.68% $ 119,640 2.43% $ 112,227 2.57%
========== ==== ========== ==== ========== ====
Ratio of interest-earning assets to
deposits and borrowings .......... 107.88% 107.67% 107.64%
====== ====== ======
35
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.
Year ended June 30,
-------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
---------------------------------------------- -------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------------- -------------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
--------------------------------------------------------------------------------------------
(In thousands)
Interest-earning assets:
One- to four-family
mortgage loans ............... $ 6,654 $ (4,523) $ (410) $ 1,721 $ 3,668 $ 690 $ 37 $ 4,395
Commercial and multi-family
real estate loans ............ 2,310 (383) (105) 1,822 1,562 85 20 1,667
Consumer loans .................. 840 (1,029) (104) (293) 1,813 266 79 2,158
---------------------------------------------------------------------------------------------
Total loans receivable ....... 9,804 (5,935) (619) 3,250 7,043 1,041 136 8,220
Federal funds sold .............. (59) (31) 30 (60) 39 2 3 44
Investment securities and other . (4,500) (1,113) 220 (5,393) 280 (110) (1) 169
Mortgage-backed securities ...... 4,136 (609) (343) 3,184 (42) 205 (1) 162
---------------------------------------------------------------------------------------------
Total interest-earning assets $ 9,381 $ (7,688) $ (712) $ 981 $ 7,320 $ 1,138 $ 137 $ 8,595
=============================================================================================
Deposits and borrowings:
Money market and demand
deposits ........................ $ 232 $ (427) $ (67) $ (262) $ 104 $ 32 $ 3 $ 139
Savings deposits ................ 1,168 802 331 2,301 24 160 1 185
Certificates of deposit ......... (3,013) (8,687) 557 (11,143) 1,386 2,729 88 4,203
---------------------------------------------------------------------------------------------
Total deposits ................ (1,613) (8,312) 821 (9,104) 1,514 2,921 92 4,527
FHLB of New York advances ....... 4,964 (1,327) (268) 3,369 4,544 354 82 4,980
Other borrowings ................ (127) (890) 30 (987) (1,131) 9 (2) (1,124)
---------------------------------------------------------------------------------------------
Total deposits and borrowings . $ 3,224 $(10,529) $ 583 $ (6,722) $ 4,927 $ 3,284 $ 172 $ 8,383
=============================================================================================
Net change in net interest income $ 6,157 $ 2,841 $(1,295) $ 7,703 $ 2,393 $(2,146) $ (35) $ 212
=============================================================================================
36
Financial Condition
Comparison of Financial Condition at June 30, 2002 and June 30, 2001
Total assets increased $43.1 million to $1.892 billion at June 30, 2002 from
total assets of $1.849 billion at June 30, 2001. The increase was primarily due
to the origination and purchase of loans offset by a decrease in investment
securities and principal payments on loans and mortgage-backed securities. Lower
market interest rates have resulted in certain investment securities being
called before maturity. A decision to retain conforming, fixed rate one- to
four-family residential mortgage loans in the portfolio throughout most of
fiscal 2002, coupled with the lower market interest rates and the resulting
effect of loan refinancing activity, led to growth in the loan portfolio during
fiscal 2002.
During the year ended June 30, 2002, the Company securitized approximately $66
million of one- to four-family mortgage loans as Freddie Mac mortgage-backed
securities. These securities are held in the Company's mortgage-backed
securities portfolio for collateral purposes.
Deposits increased $89.2 million to $1.174 billion at June 30, 2002 from $1.085
billion at June 30, 2001. An increase in core deposit accounts (checking, money
market and savings accounts) and medium-term certificates of deposit was
partially offset by a decrease in short-term certificates of deposit, including
municipal certificates of deposit. FHLB of New York advances increased $50.0
million from $454.5 million at June 30, 2001 to $504.5 million at June 30, 2002,
while other borrowings decreased $104.3 million from $127.6 million at June 30,
2001 to $23.3 million at June 30, 2002. The decrease in other borrowings
primarily reflects the use of funds received from investment securities being
called before maturity and the increase in medium-term and core deposits.
Non-performing assets at June 30, 2002 totaled $3.3 million, representing 0.17%
of total assets, compared to $2.1 million, or 0.12% of total assets, at June 30,
2001. Non-accruing loans totaled $3.3 million, with a ratio of non-accruing
loans to total loans of 0.23% at June 30, 2002 as compared to $1.6 million, or
0.13% of total loans, at June 30, 2001. Real estate owned decreased to $28,000
at June 30, 2002 from $500,000 at June 30, 2001.
Stockholders' equity at June 30, 2002 totaled $118.8 million compared to $112.5
million at June 30, 2001. The increase primarily reflects the net income
recorded for the year ended June 30, 2002 and the exercise of stock options,
offset by the repurchase of 500,000 shares of the Company's outstanding stock at
an average market price of $22.24 per share and the declaration of dividends.
Results of Operations
Comparison of Operating Results for the Years Ended June 30, 2002 and June 30,
2001
General. For the year ended June 30, 2002, net income was $14.6 million, or
$1.88 per diluted share, compared to net income of $12.5 million, or $1.55 per
diluted share, for the year ended June 30, 2001.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 2002 increased to $121.3 million from $120.4 million for the year ended
June 30, 2001. The increase in the year ended June 30, 2002 was due to an
increase in average interest-earning assets, offset by a decrease in the average
yield earned on interest-earning assets. Average interest-earning assets were
$1.8 billion for the year ended June 30, 2002 compared to $1.7 billion for the
prior fiscal year. The average yield on interest-earning assets decreased to
6.72% for the year ended June 30, 2002 from 7.16% for the year ended June 30,
2001.
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 2002 increased $1.7 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 $94.3 million in the average balance
outstanding for the year ended June 30, 2002 over the prior fiscal year. The
increase in interest income on residential one- to four-family mortgage loans
was partially offset by a decrease in the average yield earned on this loan
portfolio to 6.62% for the year ended June 30, 2002 compared to 7.06% for the
prior fiscal year.
Interest income on commercial and multi-family real estate loans increased $1.8
million for the year ended June 30, 2002 when compared to the prior year. The
increase in interest income on commercial and multi-family real estate loans was
attributable to an increase of $26.7 million in the average outstanding balance
for the year ended June 30, 2002 compared to the prior year. The growth in
interest income on this portfolio was partially offset by a decrease in
37
the average yield earned on commercial and multi-family real estate loans. The
average yield decreased to 8.24% for the current year compared to 8.63% for the
year ended June 30, 2001.
Interest income on consumer loans decreased $293,000 for the year ended June 30,
2002 compared to the prior year. The decrease in interest income for this loan
portfolio was due to a decrease in the average yield earned on these loans. The
average yield decreased to 6.76% for the year ended June 30, 2002 compared to
7.72% for the prior year. Substantially offsetting the decrease in interest
income on consumer loans for the current year was an increase of $10.9 million
in the average balance outstanding when compared to the prior year.
Interest income on investment securities and other interest-earning assets
decreased $5.4 million for the year ended June 30, 2002 compared to the prior
year. The decrease in interest income on these securities is partially
attributable to a $64.8 million decrease in the average balance outstanding for
the year ended June 30, 2002, when compared to the prior year. In addition, the
decrease in interest income on investment securities and other interest-earning
assets was due to a decline in the average yield earned on these securities. The
average yield decreased to 6.60% for the current year compared to 6.94% for the
prior year.
Interest income on the mortgage-backed securities portfolio increased $3.2
million for the year ended June 30, 2002 compared to the prior year. The
increase in interest income on mortgage-backed securities primarily reflects a
$59.4 million increase in the average balance outstanding for the year ended
June 30, 2002 compared to the prior year. The increase in interest income was
partially offset by a decrease in the average yield earned on the
mortgage-backed securities portfolio to 6.39% for the year ended June 30, 2002
compared to 6.97% for the year ended June 30, 2001.
Interest Expense. Interest expense decreased $6.7 million for the year ended
June 30, 2002 from $79.6 million for fiscal 2001. The decrease in the current
year was attributable to a decrease in the Company's cost of funds from a rate
of 5.10% to 4.35%, when compared to the prior year, as a result of lower market
interest rates. Partially offsetting the decrease in rate during the current
year was a $113.2 million increase in total average deposits and borrowings,
when compared to the year ended June 30, 2001.
For the year ended June 30, 2002, the average rate paid on deposits decreased to
3.71% from 4.66% for the year ended June 30, 2001. The average balance of
deposits increased $35.0 million from the $1.1 billion for the year ended June
30, 2001.
The average cost of FHLB of New York advances decreased to 5.85% from 6.18% for
the year ended June 30, 2002 while the average balance of FHLB of New York
advances increased $80.3 million when compared to the prior year. For the year
ended June 30, 2002, the average rate paid on other borrowings decreased to
4.56% from 6.00% for the year ended June 30, 2001. The average balance of other
borrowings decreased $2.1 million compared to the prior year.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the year ended June 30, 2002 was $48.5 million,
reflecting a $7.7 million increase from the $40.8 million recorded in the prior
fiscal year. Average net interest-earning assets increased $12.2 million for the
year ended June 30, 2002 when compared to the prior year, and the net interest
margin of 2.68% for the current year reflected a 0.25% increase from 2.43% for
the year ended June 30, 2001. A decline in short-term market interest rates and
growth in the Company's loan portfolio and core deposit accounts contributed to
the improvements in net interest margin.
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 2002 was $1.6 million compared to $625,000 for the prior fiscal year. The
allowance for loan losses at June 30, 2002 of $5.8 million reflects a $1.6
million increase from the $4.2 million at June 30, 2001. The allowance for loan
losses as a percentage of non-accruing loans was 177.74% at June 30, 2002,
compared to 259.50% at June 30, 2001. The decrease is principally attributable
to an increase in the Company's non-performing loans. Non-performing loans were
$3.3 million at June 30, 2002 compared to $1.6 million at June 30, 2001. The
allowance for loan losses as a percentage of total loans at June 30, 2002 was
0.40% compared to 0.33% at June 30, 2001.
Non-Interest Income. For the year ended June 30, 2002, non-interest income was
$4.2 million compared to $3.8 million for the prior fiscal year. The increase in
non-interest income was primarily due to an increase in service charges and
other non-interest income offset by a decrease in the net gain on sales of
loans, when compared to the year ended June 30, 2001.
Service charge income for the year ended June 30, 2002 was $3.0 million,
reflecting an increase of $466,000 over the $2.5 million recorded for the prior
year. Service charges were positively impacted by fees associated with various
38
loan prepayments and refinances. Other non-interest income increased to $975,000
for the year ended June 30, 2002 from $588,000 for the year ended June 30, 2001.
Other non-interest income included $283,000 from an increase in earnings from
the Investment Services at Penn Federal program for the year ended June 30, 2002
when compared to the prior year. Through this program, customers have convenient
access to financial consulting/advisory services and related uninsured
non-deposit investment and insurance products.
During the year ended June 30, 2002, the net gain on sales of loans was $194,000
as compared to $666,000 for the year ended June 30, 2001. Loan production was
retained in portfolio during most of the current year as a partial replacement
of the investment securities called before maturity. In addition, effective with
the issuance of the $12 million of Trust Preferred securities in March 2001, a
determination was made to suspend the sale of conforming, fixed rate one- to
four-family mortgage loan production to leverage the proceeds of the issuance.
However, prior to the issuance of these Trust Preferred securities, nearly $29
million of conforming, fixed rate one- to four-family residential loans were
sold, generating gains of $259,000. In addition, during the year ended June 30,
2001, the Company sold approximately $65 million of longer duration, one- to
four-family residential mortgage loans in an effort to improve funding,
liquidity, interest rate risk and net interest margin and recorded net gains on
sales of these loans of $407,000. In April 2002, the Company re-instituted its
strategy of selling conforming, fixed rate one- to four-family mortgage loans.
Non-Interest Expenses. The Company's non-interest expenses were $28.5 million
for the year ended June 30, 2002 compared to $24.6 million for the prior year.
An increase in preferred securities expense due to the issuance of $12 million
of Trust Preferred securities in March 2001, additional "non-cash" expense
related to the Employee Stock Ownership Plan, additional costs related to the
Bank's new Business Development department and expenses related to the Company's
development of an internet presence contributed to the increase in non-interest
expenses during the current year when compared to the prior year. The Company's
non-interest expenses as a percent of average assets increased to 1.53% for the
year ended June 30, 2002 from 1.42% for the prior year.
Income Tax Expense. Income tax expense for the year ended June 30, 2002 was $8.0
million compared to $6.8 million for the prior fiscal year. The effective tax
rate was 35.5% for the year ended June 30, 2002 compared to 35.2% for the year
ended June 30, 2001. As a result of legislation enacted in New Jersey in July
2002 revising the state's corporate income tax law, the Company believes based
on an internal analysis, that its effective tax rate could increase to a maximum
of 41%. See Item 1. Business -- "Regulation - Federal and State Taxation."
Comparison of Operating Results for the Years Ended June 30, 2001 and June 30,
2000
General. For the year ended June 30, 2001 net income was $12.5 million, or $1.55
per diluted share, compared to net income of $12.9 million, or $1.50 per diluted
share, for the year ended June 30, 2000.
Interest and Dividend Income. Interest and dividend income for the year ended
June 30, 2001 increased to $120.4 million from $111.8 million for the year ended
June 30, 2000. The increase in the year ended June 30, 2001 was due to an
increase in average interest-earning assets, coupled with an increase in the
average yield earned on interest-earning assets. Average interest-earning assets
were $1.7 billion for the year ended June 30, 2001 compared to $1.6 billion for
the prior fiscal year. The average yield on interest-earning assets increased to
7.16% for the year ended June 30, 2001 from 7.07% for the year ended June 30,
2000.
Interest income on residential one- to four-family mortgage loans for the year
ended June 30, 2001 increased $4.4 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 $52.5 million in the average balance
outstanding for the year ended June 30, 2001 over the prior fiscal year. The
increase in interest income on residential one- to four-family mortgage loans
was also the result of an increase in the average yield earned on this loan
portfolio to 7.06% for the year ended June 30, 2001 compared to 6.99% for the
prior fiscal year.
Interest income on commercial and multi-family real estate loans increased $1.7
million for the year ended June 30, 2001 when compared to the prior year. The
increase in interest income on commercial and multi-family real estate loans was
attributable to an increase of $18.3 million in the average outstanding balance
for the year ended June 30, 2001 compared to the prior year. The growth in
interest income on this portfolio was also due to an increase in the average
yield earned on commercial and multi-family real estate loans. The average yield
increased to 8.63% for fiscal 2001 compared to 8.53% for the year ended June 30,
2000.
39
Interest income on consumer loans increased $2.2 million for the year ended June
30, 2001 compared to the prior year. The increase in interest income for this
loan portfolio was due to an increase of $24.5 million in the average balance
outstanding for the year ended June 30, 2001 when compared to the prior year.
Also contributing to the increase in interest income on consumer loans was an
increase in the average yield earned on these loans. The average yield increased
to 7.72% for the year ended June 30, 2001 compared to 7.40% for the prior year.
Interest Expense. Interest expense increased $8.4 million for the year ended
June 30, 2001 from $71.2 million for fiscal 2000. The increase was attributable
to an increase in total average deposits and borrowings as well as an increase
in the Company's cost of funds. Average deposits and borrowings increased $92.0
million for the year ended June 30, 2001 compared to the 2000 period. The
average rate paid on deposits and borrowings increased to 5.10% for the year
ended June 30, 2001 from 4.85% for the prior fiscal year.
Net Interest and Dividend Income. Net interest and dividend income for the year
ended June 30, 2001 was $40.8 million, reflecting an increase from $40.6 million
recorded in the prior fiscal year. Average net interest-earning assets increased
$7.4 million for the year ended June 30, 2001 when compared to the prior year,
while the net interest margin of 2.43% for fiscal 2001 reflected a 0.14% decline
from 2.57% for the year ended June 30, 2000. The compression in the net interest
margin when compared to the prior year was attributable to increased short-term
interest rates and the resulting rise in the Company's cost of funds, as well as
continued stock repurchases by the Company. However, the margin for the fourth
quarter of fiscal 2001 of 2.53% improved from a margin of 2.45% for the June 30,
2000 quarter as short term market interest rates began to decline substantially
during the latter half of fiscal 2001.
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 2001 was $625,000 compared to $860,000 for the prior fiscal year. The
allowance for loan losses at June 30, 2001 of $4.2 million reflects a $265,000
increase from the June 30, 2000 level. The allowance for loan losses as a
percentage of non-performing loans was 259.50% at June 30, 2001, compared to
146.70% at June 30, 2000. The increase was 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, 2001 was 0.33%.
Non-Interest Income. For the year ended June 30, 2001, non-interest income was
$3.8 million compared to $2.9 million for the prior fiscal year. The increase in
non-interest income was primarily due to an increase in the net gain on sales of
loans during fiscal 2001 when compared to fiscal 2000. During the year ended
June 30, 2001, the net gain on sales of loans was $666,000 as compared to
$36,000 for the year ended June 30, 2000. Under a Company strategy of selling
conforming, fixed rate one- to four-family residential loan production,
approximately $29 million of such loans were sold during fiscal 2001, generating
gains of $259,000 for the year ended June 30, 2001. In addition, during the year
ended June 30, 2001, the Company sold approximately $65 million of longer
duration, one- to four-family residential mortgage loans in an effort to improve
liquidity, interest rate risk and net interest margin and recorded net gain on
sales of such loans of $407,000. Effective with the issuance of the $12 million
of Trust Preferred securities in March 2001, a determination was made whereby
conforming, fixed rate one- to four-family mortgage loan production would not be
sold for a period of time to leverage the proceeds of such issuance. Service
charge income increased to $2.5 million for the year ended June 30, 2001 versus
$2.2 million for the comparable prior year. The net gain from real estate
operations was $65,000 for the year ended June 30, 2001 compared to $114,000 for
the year ended June 30, 2000. Other non-interest income for the year ended June
30, 2000 included a $48,000 gain on the sale of a former branch location.
Non-Interest Expenses. The Company's non-interest expenses were $24.6 million
for the year ended June 30, 2001 compared to $22.7 million for the prior year.
Additional "non-cash" expense related to the Employee Stock Ownership Plan, an
increase in occupancy expense attributable to harsh winter weather, additional
costs for the Bank's new Business Development department and expenses related to
the expansion of network capacity and the Company's development of an internet
presence all contributed to the increased non-interest expenses for the year
ended June 30, 2001, when compared to the prior year. However, the Company's
non-interest expenses as a percent of average assets only increased slightly to
1.42% for the year ended June 30, 2001 from 1.39% for the prior year.
Income Tax Expense. Income tax expense for the year ended June 30, 2001 was $6.8
million compared to $7.1 million for the prior fiscal year. The effective tax
rate was 35.2% for the year ended June 30, 2001 compared to 35.4% for the year
ended June 30, 2000.
40
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.
The Bank maintains appropriate levels of liquid assets. The Company's most
liquid assets are cash and cash equivalents, U.S. government agency securities
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.
In the event that the Company should require funds beyond its ability to
generate them internally, additional sources of funds are available through the
use of FHLB of New York advances and reverse repurchase agreements. In addition,
the Company may access funds, if necessary, through the use of a $50.0 million
overnight repricing line of credit and a $50.0 million variable rate 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 loan commitments, and to meet operating expenses. At June 30, 2002, the
Company had outstanding commitments to extend credit which amounted to $130.9
million (including $92.1 million in available lines of credit), commitments to
sell loans of $4.4 million and commitments to purchase loans of $455,000.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Company's foreseeable liquidity needs.
The Company's cash needs for the year ended June 30, 2002 were provided by
operating activities, including the sale of loans, proceeds from maturities of
investment securities, increased deposits and principal repayments of loans and
mortgage-backed securities. During fiscal 2002, the cash provided was primarily
used to fund investing activities, which included the origination and purchase
of loans and the purchase of investment and mortgage-backed securities and to
paydown other borrowings. During fiscal 2001, the Company's cash needs were
provided by operating activities, including the sales of loans, by proceeds from
the Trust Preferred securities offering and by maturities of investment
securities. The Company's fiscal 2001 cash needs were also provided by increased
deposits, an increase in advances from the FHLB of New York and other borrowings
and principal repayments of loans and mortgage-backed securities. During fiscal
2001, the cash provided was used for investing activities, which included the
origination and purchase of loans and the purchase of investment and
mortgage-backed securities. Additionally, in fiscal 2001 cash provided was used
for the repurchase of common stock. The Company's cash needs for the year ended
June 30, 2000 were provided by operating activities, proceeds from maturities of
investment securities, an increase in advances from the FHLB of New York and
other borrowings, increased deposits and principal repayments on loans and
mortgage-backed securities. During fiscal 2000, the cash provided was primarily
used to fund investing activities, which included the origination and purchase
of loans and the purchase of investment securities.
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk-adjusted assets; a
ratio of core capital to 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, 2002, the Bank exceeded all regulatory
capital requirements and qualified as a "well-capitalized" institution. See
"Regulation" and Note N - 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 and increased
to $0.05 per share in the fourth quarter of fiscal 2001. The quarterly cash
dividend was increased to $0.06 per share in the second quarter of fiscal 2002
and was recently increased again to $0.10 per share effective with the first
quarter dividend for fiscal 2003. Total dividends paid for the years ended June
30, 2002, 2001, and 2000 were $0.23 per share, $0.17 per share and $0.16 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.
41
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, 2002 and 2001, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2002 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
July 26, 2002
42
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
June 30,
-----------------------------
2002 2001
-----------------------------
(Dollars in thousands)
Assets
Cash and cash equivalents .......................................................... $ 37,189 $ 15,771
Investment securities available for sale, at market value, amortized cost of
$4,266 at June 30, 2002 ......................................................... 4,295 --
Investment securities held to maturity, at amortized cost, market value
of $178,676 and $327,245 at June 30, 2002 and 2001 .............................. 179,490 333,969
Mortgage-backed securities held to maturity, at amortized cost, market value
of $174,036 and $136,592 at June 30, 2002 and 2001 .............................. 169,689 135,606
Loans held for sale ................................................................ 1,592 83
Loans receivable, net of allowance for loan losses of $5,821 and $4,248
at June 30, 2002 and 2001 ....................................................... 1,439,668 1,295,409
Premises and equipment, net ........................................................ 19,598 20,354
Real estate owned, net ............................................................. 28 500
Federal Home Loan Bank of New York stock, at cost .................................. 25,656 26,218
Accrued interest receivable, net ................................................... 9,564 11,590
Goodwill and other intangible assets ............................................... 5,043 6,983
Other assets ....................................................................... 615 2,894
-----------------------------
$ 1,892,427 $ 1,849,377
===========================
Liabilities and Stockholders' Equity
Liabilities:
Deposits ........................................................................ $ 1,174,507 $ 1,085,335
Federal Home Loan Bank of New York advances ..................................... 504,465 454,465
Other borrowings ................................................................ 23,314 127,640
Mortgage escrow funds ........................................................... 12,772 11,979
Accounts payable and other liabilities .......................................... 14,071 12,967
-----------------------------
Total liabilities ............................................................... 1,729,129 1,692,386
-----------------------------
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures ....................................... 46,500 46,500
Unamortized issuance expenses ................................................... (1,963) (2,039)
-----------------------------
Net Trust Preferred securities .................................................. 44,537 44,461
-----------------------------
Commitments and Contingencies (Note M)
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,
11,900,000 shares issued and 7,347,552 and 7,620,329 shares
outstanding at June 30, 2002 and 2001 (excluding shares held in treasury of
4,552,448 and4,279,671 at June 30, 2002 and 2001) ............................. 60 60
Additional paid-in capital ...................................................... 63,820 61,504
Employee Stock Ownership Plan Trust debt ........................................ (1,244) (1,801)
Retained earnings, partially restricted ......................................... 114,444 102,694
Accumulated other comprehensive income, net of taxes ............................ 18 --
Treasury stock, at cost, 4,552,448 and 4,279,671 shares at June 30, 2002 and 2001 (58,337) (49,927)
-----------------------------
Total stockholders' equity ...................................................... 118,761 112,530
-----------------------------
$ 1,892,427 $ 1,849,377
=============================
See notes to consolidated financial statements
43
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Income
For the years ended June 30,
---------------------------------------------------
2002 2001 2000
---------------------------------------------------
(Dollars in thousands)
Interest and Dividend Income:
Interest and fees on loans . . . . . . . . . . . . . . . $ 93,496 $ 90,246 $ 82,026
Interest on federal funds sold . . . . . . . . . . . . . 1 61 17
Interest and dividends on investment securities . . . . . 17,323 22,716 22,547
Interest on mortgage-backed securities . . . . . . . . . 10,519 7,335 7,173
---------------------------------------------------
121,339 120,358 111,763
---------------------------------------------------
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . 42,181 51,285 46,758
Borrowed funds . . . . . . . . . . . . . . . . . . . . . 30,681 28,299 24,443
---------------------------------------------------
72,862 79,584 71,201
---------------------------------------------------
Net Interest and Dividend Income Before
Provision for Loan Losses . . . . . . . . . . . . . . . . 48,477 40,774 40,562
Provision for Loan Losses . . . . . . . . . . . . . . . . 1,625 625 860
---------------------------------------------------
Net Interest and Dividend Income After
Provision for Loan Losses . . . . . . . . . . . . . . . . 46,852 40,149 39,702
---------------------------------------------------
Non-Interest Income:
Service charges . . . . . . . . . . . . . . . . . . . . . 2,961 2,495 2,172
Net gain from real estate operations . . . . . . . . . . 87 65 114
Net gain on sales of loans . . . . . . . . . . . . . . . 194 666 36
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 975 588 625
---------------------------------------------------
4,217 3,814 2,947
---------------------------------------------------
Non-Interest Expenses:
Compensation and employee benefits . . . . . . . . . . . 13,203 11,283 9,843
Net occupancy expense . . . . . . . . . . . . . . . . . . 1,603 1,659 1,663
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 2,318 1,877 1,763
Advertising . . . . . . . . . . . . . . . . . . . . . . . 484 475 393
Amortization of intangibles . . . . . . . . . . . . . . . 1,940 2,014 2,121
Federal deposit insurance premium . . . . . . . . . . . . 203 217 429
Preferred securities expense . . . . . . . . . . . . . . 4,368 3,452 3,132
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,331 3,665 3,384
---------------------------------------------------
28,450 24,642 22,728
---------------------------------------------------
Income Before Income Taxes . . . . . . . . . . . . . . . . 22,619 19,321 19,921
Income Tax Expense . . . . . . . . . . . . . . . . . . . . 8,036 6,808 7,051
---------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 14,583 $ 12,513 $ 12,870
===================================================
Weighted average number of common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 7,225,613 7,609,221 8,138,104
===================================================
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 7,768,422 8,098,603 8,582,513
===================================================
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.02 $ 1.64 $ 1.58
===================================================
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.88 $ 1.55 $ 1.50
===================================================
See notes to consolidated financial statements.
44
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
For the years ended June 30,
-------------------------------------------
2002 2001 2000
-------------------------------------------
(In thousands)
Net income ............................................................ $14,583 $12,513 $12,870
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities available for sale:
Unrealized holding gains arising during period ..................... 18 -- --
-------------------------------------------
Comprehensive income .................................................. $14,601 $12,513 $12,870
===========================================
See notes to consolidated financial statements.
45
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of
Changes in Stockholders' Equity
For the Years Ended June 30, 2002, 2001 and 2000
Restricted Employee
Stock - Stock Accumulated
Serial Additional Management Ownership Other
Preferred Common Paid-In Recognition Plan Trust Retained Comprehensive Treasury
Stock Stock Capital Plan Debt Earnings Income Stock
--------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at June 30, 1999...................... $ -- $ 59 $59,488 $ -- $(2,804) $ 80,673 $ -- $(29,916)
Allocation of Employee Stock Ownership
Plan (ESOP) stock............................ 484
ESOP and Management Recognition
Plan (MRP) adjustment........................ 999
Purchase of 492,000 shares of treasury stock (6,931)
Issuance of 72,461 shares of treasury stock
for options exercised and Dividend
Reinvestment Plan (DRP)...................... (362) 725
Reissuance of 2,142 shares for MRP............ 1 36 (36)
Amortization of MRP stock..................... 36
Cash dividends of $0.16 per common share...... (1,341)
Net income for the year ended June 30, 2000 12,870
--------------------------------------------------------------------------------------
Balance at June 30, 2000...................... -- 60 60,523 -- (2,320) 91,840 -- (36,122)
Allocation of ESOP stock...................... 519
ESOP adjustment............................... 981
Purchase of 845,000 shares of treasury stock (14,545)
Issuance of 69,310 shares of treasury stock
for options exercised and DRP................ (343) 740
Cash dividends of $0.17 per common share...... (1,316)
Net income for the year ended June 30, 2001 12,513
--------------------------------------------------------------------------------------
Balance at June 30, 2001...................... -- 60 61,504 -- (1,801) 102,694 -- (49,927)
Allocation of ESOP stock...................... 557
ESOP adjustment............................... 2,316
Purchase of 500,000 shares of treasury stock (11,119)
Issuance of 227,223 shares of treasury stock
for options exercised and DRP................ (1,157) 2,709
Cash dividends of $0.23 per common share...... (1,676)
Unrealized gain on investment securities
available for sale, net of income taxes...... 18
Net income for the year ended June 30, 2002 14,583
-------------------------------------------------------------------------------------
Balance at June 30, 2002...................... $ -- $ 60 $63,820 $ -- $(1,244) $114,444 $18 $(58,337)
=====================================================================================
See notes to consolidated financial statements
46
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
For the years ended June 30,
--------------------------------------
2002 2001 2000
--------------------------------------
(In thousands)
Cash Flows from Operating Activities:
Net income ............................................................ $ 14,583 $ 12,513 $ 12,870
Adjustments to reconcile net income to net cash provided by operating
activities:
Net gain on sales of loans ............................................ (194) (666) (36)
Proceeds from sales of loans held for sale ............................ 16,846 94,765 5,568
Net gain on sales of real estate owned ................................ (218) (101) (126)
Amortization of investment and mortgage-backed securities premium, net 448 171 192
Depreciation and amortization ......................................... 1,887 1,421 1,385
Provision for losses on loans and real estate owned ................... 1,676 641 860
Amortization of cost of stock plans .................................. 2,873 1,499 1,520
Amortization of intangibles ........................................... 1,940 2,014 2,121
Amortization of premiums on loans and loan fees ....................... 3,703 2,278 1,437
Amortization of Trust Preferred securities issuance costs ............. 76 65 62
(Increase) decrease in accrued interest receivable, net of accrued
interest payable ...................................................... 1,339 (1,076) (1,659)
(Increase) decrease in other assets ................................... 2,279 696 (200)
Decrease in deferred income tax liability ............................. (396) (320) (118)
Increase (decrease) in accounts payable and other liabilities ......... 1,490 (268) 2,058
Increase in mortgage escrow funds ..................................... 793 91 1,786
Other, net ............................................................ (19) -- (34)
--------------------------------------
Net cash provided by operating activities ............................. 49,106 113,723 27,686
--------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of investment securities available for sale ........ 14 -- --
Proceeds from maturities of investment securities ..................... 304,586 50,011 10,175
Purchases of investment securities held to maturity ................... (150,148) (81,034) (19,991)
Purchases of investment securities available for sale ................. (4,281) -- --
Net outflow from loan originations net of principal repayments of loans (201,815) (145,281) (94,799)
Purchases of loans .................................................... (31,861) (36,319) (106,049)
Proceeds from principal repayments of mortgage-backed securities ...... 51,797 31,908 40,522
Purchases of mortgage-backed securities ............................... (20,364) (32,383) (220)
Proceeds from sale of premises and equipment .......................... 14 -- 250
Purchases of premises and equipment ................................... (1,126) (1,699) (2,487)
Net inflow from real estate owned activity ............................ 644 612 1,161
(Purchases) redemptions of Federal Home Loan Bank of New York stock ... 562 (3,923) (5,672)
--------------------------------------
Net cash used in investing activities ................................. (51,978) (218,108) (177,110)
--------------------------------------
Cash Flows From Financing Activities:
Net increase in deposits .............................................. 89,859 4,698 17,862
Increase (decrease) in advances from the Federal Home Loan Bank of New
York and other borrowings ............................................ (54,326) 105,465 143,437
Net proceeds from issuance of Trust Preferred securities .............. -- 11,591 --
Cash dividends paid ................................................... (1,676) (1,316) (1,341)
Purchases of treasury stock, net of reissuance ........................ (9,567) (14,148) (6,568)
--------------------------------------
Net cash provided by financing activities ............................. 24,290 106,290 153,390
--------------------------------------
Net Increase in Cash and Cash Equivalents ............................. 21,418 1,905 3,966
Cash and Cash Equivalents, Beginning of Year .......................... 15,771 13,866 9,900
--------------------------------------
Cash and Cash Equivalents, End of Year ................................ $ 37,189 $ 15,771 $ 13,866
======================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest .............................................................. $ 73,401 $ 78,790 $ 71,043
======================================
Income taxes .......................................................... $ 7,743 $ 6,951 $ 7,608
======================================
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to real estate owned, net ................ $ 6 $ 692 $ 382
======================================
Transfer of loans receivable to loans held for sale, at market ........ $ 18,160 $ 94,182 $ 352
======================================
Securitization of loans receivable and transfer to mortgage-backed
securities ............................................................ $ 65,923 $ 47,661 $ --
======================================
Transfer of premises and equipment, net to real estate owned, net ..... $ -- $ -- $ 50
======================================
See notes to consolidated financial statements.
47
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended June 30, 2002, 2001 and 2000
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, PennFed Capital Trust I and PennFed
Capital Trust II). PennFed owns all of the outstanding stock of the Bank issued
on July 14, 1994. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 accumulated other comprehensive income in
stockholders' equity. Unrealized gains and losses are accounted for on a
specific identification method. Declines in the fair value of held to maturity
and available for sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses.
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.
Loans Receivable -- Loans are stated at unpaid principal balances, net of the
allowance for loan losses, unamortized premiums and deferred loan fees. Interest
income on loans is accrued and credited to income as earned. Loan origination
fees and premiums on purchased loans are deferred and amortized to interest
income over the life of the loan as an adjustment to the loan's yield.
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
48
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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.
Real Estate Owned -- Real estate properties acquired by foreclosure are recorded
at the lower of cost or estimated fair value less anticipated 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 or increases in the estimated costs to dispose.
Unanticipated 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 B 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).
Income Taxes -- In accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), the Company uses the 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.
49
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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.
B. Branch Acquisitions
In 1995, the Bank acquired the deposit liabilities and certain of the assets and
other liabilities of three of the Company's branch offices. The Bank recorded a
total deposit premium intangible asset of $18,141,000 in connection with the
acquisition. For the years ended June 30, 2002, 2001 and 2000, amortization of
the deposit premium intangible of $1,814,000 was recorded each year. At June 30,
2002 and 2001, the deposit premium intangible was $4,989,000 and $6,803,000,
respectively.
The Company acquired First Federal Savings and Loan Association of Montclair
effective September 1989. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to assets and liabilities acquired
based on their fair value at their date of acquisition. For each of the years
ended June 30, 2002, 2001 and 2000, the effect of the amortization of goodwill
was to reduce income before income taxes by approximately $126,000, $200,000 and
$274,000, respectively. At June 30, 2002 and 2001, goodwill was $54,000 and
$180,000, respectively.
C. Investment Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
-----------------------------------------------------
(In thousands)
June 30, 2002
Available for Sale:
Equity securities ........................................ $ 4,266 $ 29 $ -- $ 4,295
=====================================================
Held to Maturity:
U.S. government agency obligations ....................... $ 145,160 $ 429 $ (1,094) $ 144,495
Corporate bonds .......................................... 1,034 46 -- 1,080
Trust preferred securities ............................... 33,296 301 (496) 33,101
-----------------------------------------------------
Total held to maturity .................................. $ 179,490 $ 776 $ (1,590) $ 178,676
=====================================================
June 30, 2001
Held to Maturity:
U.S. government agency obligations ....................... $ 304,538 $ -- $ (5,482) $ 299,056
Obligations of states and political subdivisions ......... 10 1 -- 11
Corporate bonds .......................................... 1,038 24 -- 1,062
Trust preferred securities ............................... 28,383 26 (1,293) 27,116
-----------------------------------------------------
Total held to maturity .................................. $ 333,969 $ 51 $ (6,775) $ 327,245
=====================================================
50
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The amortized cost and estimated fair market value of investment securities held
to maturity at June 30, 2002, by contractual maturity, are shown below. The
expected maturity may differ from the contractual maturity because issuers may
have the right to call obligations. Available for sale securities have been
excluded from the table as they are equity securities.
Estimated
Amortized Fair Market
Cost Value
------------------------
June 30, 2002 (In thousands)
Held to Maturity:
Maturing after five years but within ten years ....... $ 5,734 $ 5,775
Maturing after ten years ............................. 173,756 172,901
----------------------
Total held to maturity ............................. $179,490 $178,676
======================
At June 30, 2002 and 2001, investment securities with a carrying value of
$49,265,000 and $ 174,879,000, respectively, were pledged to secure Federal Home
Loan Bank of New York advances and other borrowings.
For the year ended June 30, 2002, the Company sold $14,800 of investment
securities available for sale for proceeds of $14,500. Gross losses of less than
$1,000 were recognized on the sale. There were no sales of investment securities
for the years ended June 30, 2001 and 2000.
D. Mortgage-Backed Securities
June 30,
-----------------------
2002 2001
-----------------------
(In thousands)
Ginnie Mae ............................... $ 642 $ 1,035
Freddie Mac .............................. 84,757 42,961
Fannie Mae ............................... 82,891 90,662
Collateralized Mortgage Obligations/REMICs 42 59
-----------------------
168,332 134,717
Unamortized premiums, net ................ 1,357 889
-----------------------
$169,689 $135,606
=======================
The estimated fair market values of mortgage-backed securities were $174,036,000
and $136,592,000 at June 30, 2002 and 2001, respectively. There were no sales of
mortgage-backed securities in the years ended June 30, 2002, 2001 and 2000.
The carrying value of mortgage-backed securities pledged were as follows:
June 30,
------------------------
2002 2001
------------------------
(In thousands)
Pledged to secure:
Federal Home Loan Bank of New York advances ......... $130,817 $ 52,530
Other borrowings .................................... 10,318 40,700
Public funds on deposit.............................. 1,871 2,816
------------------------
$143,006 $ 96,046
========================
Collateralized mortgage obligations consist primarily of fixed and adjustable
rate sequentially paying securities with short durations.
51
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, 2002 and 2001 were as follows:
June 30, 2002 June 30, 2001
----------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
----------------------------------------------
(In thousands)
Ginnie Mae ............................... $ 54 $ -- $ 71 $--
Freddie Mac .............................. 2,384 -- 823 78
Fannie Mae ............................... 1,929 21 822 652
Collateralized Mortgage Obligations/REMICs 1 -- -- --
----------------------------------------------
$4,368 $ 21 $1,716 $ 730
==============================================
E. Loans Receivable, Net
June 30,
--------------------------
2002 2001
--------------------------
(In thousands)
First Mortgage Loans:
Conventional ................................ $ 1,168,914 $ 1,061,343
FHA insured.................................. 2,838 3,865
VA guaranteed ............................... 393 611
--------------------------
Total one- to four-family ................... 1,172,145 1,065,819
Commercial and multi-family ................. 144,585 108,625
--------------------------
Total first mortgage loans .................... 1,316,730 1,174,444
--------------------------
Consumer:
Second mortgages ............................ 58,671 48,133
Home equity lines of credit ................. 55,247 60,412
Other ....................................... 6,948 7,140
--------------------------
Total consumer loans........................... 120,866 115,685
--------------------------
Total loans.................................... 1,437,596 1,290,129
--------------------------
Add (Less):
Allowance for loan losses.................... (5,821) (4,248)
Unamortized premium ......................... 1,764 2,764
Unearned income on consumer loans ........... (1) (1)
Net deferred loan fees ...................... 7,722 6,848
--------------------------
3,664 5,363
--------------------------
$1,441,260 $1,295,492
==========================
At June 30, 2002, there were $1,592,000 one- to four-family mortgage loans
included in loans held for sale. At June 30, 2002, there were commitments to
sell these loans. At June 30, 2001, there was an $83,000 FHA one- to four-family
mortgage loan included in loans held for sale. At June 30, 2001, there was no
commitment to sell this loan.
Non-accruing loans at June 30, 2002 and 2001 were $3,275,000 and $1,637,000,
respectively, which represents 0.23% and 0.13%, respectively, of total loans
outstanding. The total interest income that would have been recorded for the
years ended June 30, 2002 and 2001, 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 $121,000 and $60,000, respectively.
At June 30, 2002 there were no impaired loans. At June 30, 2001 impaired loans
totaled $49,000. The average balance of impaired loans for the years ended June
30, 2002 and 2001 was $121,000 and $61,000, respectively. All impaired loans
have a related allowance for losses, which totaled $0 and $12,000 at June 30,
2002 and 2001, 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, 2002 and 2001 was $23,000 and $12,000,
respectively.
52
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Total interest income that would have been recorded for the years ended June 30,
2002 and 2001, had these loans been current in accordance with their loan terms,
was approximately $5,000 and $7,000, respectively.
The following is an analysis of the allowance for loan losses:
Year ended June 30,
-----------------------------------
2002 2001 2000
-----------------------------------
(In thousands)
Balance, beginning of year .......................... $ 4,248 $ 3,983 $ 3,209
Provisions for losses on loans....................... 1,625 625 860
Recoveries .......................................... -- -- 37
Losses charged to allowance ....................... (52) (360) (123)
-----------------------------------
Balance, end of year ............................... $ 5,821 $ 4,248 $ 3,983
===================================
The Company's loan portfolio consists primarily of loans secured by residential
and commercial real estate located in its market areas. Therefore, the
collectibility of these loans is dependent to a large degree on the overall
strength of the New Jersey economy, as well as the specific strength of the real
estate sector.
At June 30, 2002 and 2001, commercial and multi-family real estate loans totaled
$144,585,000 and $108,625,000, respectively. These loans are considered by
management to be of somewhat greater risk of collectibility due to their
dependency on income production. The majority of the Company's commercial and
multi-family real estate loans were collateralized by real estate located in New
Jersey. Commercial and multi-family real estate loans collateralized by
multi-family or mixed use properties were $41,971,000 and $35,239,000 at June
30, 2002 and 2001, respectively. At June 30, 2002 and 2001, the commercial and
multi-family real estate loan portfolio included $1,791,000 and $1,923,000,
respectively, of lines of credit secured by non-real estate business assets.
Furthermore, there were $7,278,000 and $1,217,000 of loans outstanding at June
30, 2002 and 2001, respectively, under the Accounts Receivable Financing Program
for small and mid-sized businesses. The remaining loans in this portfolio were
collateralized by other types of non-residential, commercial real estate
properties.
Loans serviced for others totaled approximately $167,829,000 and $141,488,000 at
June 30, 2002 and 2001, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, collection activities 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 $1,739,000 and $1,588,000 at June 30,
2002 and 2001, respectively.
F. Premises and Equipment, Net
June 30,
--------------------
2002 2001
--------------------
(In thousands)
Land ................................................ $ 4,622 $ 4,563
Buildings and improvements .......................... 16,343 16,137
Leasehold improvements .............................. 1,624 1,612
Furniture and equipment ............................. 12,879 12,066
--------------------
35,468 34,378
Less: accumulated depreciation and amortization ..... 15,870 14,024
--------------------
$19,598 $20,354
====================
53
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
G. Real Estate Owned
June 30,
-------------------
2002 2001
-------------------
(In thousands)
Acquired by foreclosure or deed in lieu of foreclosure... $ 110 $ 531
Allowance for losses on real estate owned ............... (82) (31)
--------------------
Real estate owned, net .................................. $ 28 $ 50
===================
Results of real estate operations were as follows:
Year ended June 30,
---------------------------
2002 2001 2000
---------------------------
(In thousands)
Net gain on sales of real estate owned ...... $ 218 $ 101 $ 126
Holding costs ............................... (80) (20) (12)
Provision for losses on real estate owned.... (51) (16) --
---------------------------
Net gain from real estate operations ........ $ 87 $ 65 $ 114
===========================
Activity in the allowance for losses on real estate owned was as follows:
Year ended June 30,
-----------------------------
2002 2001 2000
-----------------------------
(In thousands)
Balance, beginning of year ................... $ 31 $ 33 $ 82
Provisions charged to operations.............. 51 16 --
Losses charged to allowance .................. -- (18) (49)
-----------------------------
Balance, end of year ......................... $ 82 $ 31 $ 33
=============================
H. Deposits
June 30, 2002 June 30, 2001
-------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
-------------------------------------------------
(Dollars in thousands)
Non-interest-bearing demand .............. $ 57,285 $ 50,677
Interest-bearing demand .................. 91,392 1.28% 65,857 1.10%
Money market accounts .................... 20,317 1.48 17,091 2.80
Savings accounts ......................... 311,740 2.72 183,806 1.88
Certificates with remaining maturities of:
One year or less ........................ 432,807 4.03 490,118 4.97
Over one year to three years ............ 224,065 4.56 219,215 5.86
Over three years to five years .......... 35,255 4.75 56,238 6.09
---------- ----------
Total certificates ....................... 692,127 4.24 765,571 5.30
Accrued interest payable ................. 1,646 2,333
---------- ----------
$1,174,507 3.35% $1,085,335 4.17%
========== ==========
The aggregate amount of accounts with a denomination of $100,000 or more was
approximately $234,551,000 and $167,393,000 at June 30, 2002 and 2001,
respectively.
54
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
I. 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:
June 30, 2002 June 30, 2001
---------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
---------------------------------------------------
(Dollars in thousands)
Within one year .............................. $125,000 5.98% $ 70,000 6.06%
After one year but within two years .......... 79,000 5.48 145,000 5.98
After two years but within three years ....... 160,000 5.86 79,000 5.48
After three years but within four years....... 120,000 5.30 90,000 6.37
After four years but within five years ....... 20,465 5.02 70,000 6.09
After five years ............................. -- -- 465 7.39
-------- --------
$504,465 5.66% $454,465 6.00%
======== ========
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, 2002, the Company had available from the FHLB of New York an
overnight repricing line of credit for $50,000,000 which expires on May 9, 2003.
The line of credit has a variable interest rate. At June 30, 2002 there were no
overnight borrowings under this credit line. At June 30, 2001, the Company had
$59,450,000 of overnight borrowings with an interest rate of 4.23% under a
$100,000,000 overnight repricing line of credit which expired on May 9 2002. 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, 2002 or 2001. Also, the Company had available from
the FHLB of New York a variable rate one-month overnight repricing line of
credit for $50,000,000 which expires on May 9, 2003. There were no borrowings
under this line at June 30, 2002 or 2001. The Company also has a $5,000,000
unsecured revolving line of credit. This line of credit has a variable interest
rate tied to 30-day LIBOR. At June 30, 2002, the Company had $3,964,000 of
borrowings under this line of credit with an interest rate of 3.34%. There were
no borrowings under this line at June 30, 2001.
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 $20,318,000 and $70,700,000 and a
market value of $20,512,000 and $69,929,000 at June 30, 2002 and 2001,
respectively. Based on the provisions of these reverse repurchase agreements,
counterparties are not permitted to sell or repledge the collateral pledged by
the Company.
The following table presents reverse repurchase agreements at the earlier of the
callable date or the maturity date:
June 30, 2002 June 30, 2001
---------------------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
---------------------------------------------------
(Dollars in thousands)
Within one year ................................ $ -- --% $48,840 4.69%
After one year but within five years............ 19,350 4.92 19,350 4.92
------- -------
$19,350 4.92% $68,190 4.76%
======= =======
The average balance of reverse repurchase agreements for the years ended June
30, 2002 and 2001 was $39,858,000 and $32,688,000, respectively.
55
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
J. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
In October 1997, PennFed formed a wholly-owned trust subsidiary, PennFed Capital
Trust I (the "Trust I"). Effective October 21, 1997, Trust I sold $34.5 million
of 8.90% cumulative trust preferred securities to the public which are reflected
on the Consolidated Statements of Financial Condition as Guaranteed Preferred
Beneficial Interests in the Company's Junior Subordinated Debentures (the "Trust
Preferred securities"). Trust I 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 Trust I are $35.6 million of
junior subordinated debentures which mature in 2027 and are redeemable at any
time after five years. The obligations of PennFed related to Trust I constitute
a full and unconditional guarantee by PennFed of Trust I 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.
In March 2001, PennFed formed a second wholly-owned trust subsidiary, PennFed
Capital Trust II (the "Trust II"). Effective March 28, 2001, Trust II sold $12
million of 10.18% cumulative trust preferred securities in a private transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Act"). Therefore, these securities have not been registered under the Act. The
trust preferred securities are reflected on the Consolidated Statements of
Financial Condition as Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures. Distributions payable on these Trust
Preferred securities, as well as the distributions payable on the $34.5 million
of Trust Preferred securities issued in October 1997, are included as a
component of non-interest expense on the Consolidated Statements of Income.
Trust II used the proceeds from the sale of the Trust Preferred securities to
purchase 10.18% junior subordinated deferrable interest debentures issued by
PennFed. The sole assets of Trust II are $12.4 million of junior subordinated
debentures which mature in 2031 and are redeemable at any time after ten years.
The obligations of PennFed related to Trust II constitute a full and
unconditional guarantee by PennFed of Trust II Issuer's obligations under the
Trust Preferred securities. The Company used the proceeds from the junior
subordinated debentures for general corporate purposes, including a $4.2 million
capital contribution to the Bank to support future growth.
K. Employee Benefit Plans
401(K) 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, 2002, 2001 and 2000, expense related
to the Plan was $155,000, $110,000 and $111,000, respectively. At June 30, 2002
and 2001, the Plan assets included common stock of the Company with a market
value of $755,000 and $538,000, respectively.
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.
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,
2002 and 2001, the loan had an outstanding balance of $1,244,000 and $1,801,000
and the ESOP had unallocated shares of
56
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
248,716 and 360,280, respectively. Based upon a $27.90 closing price per share
of common stock on June 30, 2002, the unallocated shares had a fair value of
$6,939,000. The unamortized balance of the ESOP debt is reflected as a reduction
of stockholders' equity.
For the years ended June 30, 2002, 2001 and 2000, the Bank recorded compensation
expense related to the ESOP of $2,494,000, $1,680,000 and $1,256,000,
respectively. The compensation expense related to the ESOP includes $2,020,000,
$1,242,000 and $865,000, 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 111,564, 103,818 and
96,612 shares for the years ended June 30, 2002, 2001 and 2000, 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 were permitted to
be awarded under the plan. All 476,000 shares of restricted stock were 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 original shares awarded, 2,142 shares did not vest and were cancelled.
These 2,142 shares were re-awarded and vested during the year ended June 30,
2000. No MRP expense was recorded for the years ended June 30, 2002 and 2001.
For the year ended June 30, 2000, the Company recorded expense of $36,000
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 Option Plan was subsequently amended to
increase the number of shares of common stock available for awards thereunder
from 1,190,000 to 1,671,246. 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, 2002, 2001 and 2000
relating to the Option Plan are as follows:
Weighted
Average
Exercise
Options Price
-----------------------------
Balance, June 30, 1999 .................................. 1,485,950 $ 9.13
Granted ............................................... 74,336 16.81
Exercised ............................................. (69,270) 5.25
Expired ............................................... (666) 17.19
Forfeited ............................................. (333) 17.19
-----------------------------
Balance, June 30, 2000 .................................. 1,490,017 9.69
Granted ............................................... -- --
Exercised ............................................. (66,650) 5.95
Expired ............................................... -- --
Forfeited ............................................. -- --
-----------------------------
Balance, June 30, 2001 .................................. 1,423,367 9.86
Granted ............................................... -- --
Exercised ............................................. (224,851) 6.90
Expired ............................................... -- --
Forfeited ............................................. -- --
-----------------------------
Balance, June 30, 2002 .................................. 1,198,516 $10.42
=============================
At June 30, 2002, 2001 and 2000, 1,192,516 options, 1,414,366 options and
1,474,267 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
57
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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.
No pro forma disclosures as required under SFAS 123 are presented for the years
ended June 30, 2002 and 2001 as there were no options granted during those
fiscal years. The estimated weighted average fair value of each stock option
granted during fiscal 2000 was estimated as $8.83 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 26.14%;
risk-free interest rate of 5.83%; 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 2000 pro forma net income and diluted earnings per share would
have been approximately $12.5 million and $1.46, 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 effect on net income is not representative of
the pro forma effect on net income in future years.
Supplemental Retirement Plan
The Board of Directors has approved the establishment of a Supplemental
Retirement Plan for key executive employees and directors. In connection with
the adoption of this plan, an initial funding amount of $150,000 was accrued at
June 30, 2002.
L. Income Taxes
The income tax provision is comprised of the following components:
Year ended June 30,
-----------------------------------
2002 2001 2000
-----------------------------------
(In thousands)
Current provision.......................... $8,432 $7,128 $7,169
Deferred benefit........................... (396) (320) (118)
-----------------------------------
Total income tax provision................. $8,036 $6,808 $7,051
===================================
Income taxes payable is included in Accounts payable and other liabilities in
the Consolidated Statements of Financial Condition at June 30, 2002 and 2001.
The financial statements also include a net deferred tax liability of $10,000
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, 2002
and 2001 is as follows:
June 30,
----------------------
2002 2001
----------------------
(In thousands)
Deferred tax assets:
Allowance for loan losses ....................................... $ 1,877 $ 1,227
Litigation reserves ............................................. 16 16
Deposit premium intangible....................................... 1,534 1,323
Depreciation .................................................... 505 480
----------------------
Total deferred tax assets........................................ 3,932 3,046
----------------------
Deferred tax liabilities:
Deferred loan fees .............................................. 3,622 3,049
Loan sale premiums .............................................. -- 8
Purchase accounting ............................................. 133 137
Servicing asset ................................................. 176 247
Unrealized gain on investment securities available for sale ..... 11 --
----------------------
Total deferred tax liabilities .................................. 3,942 3,441
----------------------
Net deferred tax asset (liability) .............................. $ (10) $ (395)
======================
58
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
A reconciliation of the statutory income tax provision to the effective income
tax provision is as follows:
Year ended June 30,
-------------------------------
2002 2001 2000
-------------------------------
(In thousands)
Income tax provision at statutory rate..... $ 7,917 $ 6,762 $ 6,972
Amortization of intangibles ............... 44 70 96
State and local income tax provision ...... 64 -- --
Other, net ................................ 11 (24) (17)
------------------------------
Total income tax provision ................ $ 8,036 $ 6,808 $ 7,051
==============================
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.
M. Commitments and Contingencies
Lease Commitments -- At June 30, 2002, minimum rental commitments under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:
Minimum Rent
Year ending June 30, (In thousands)
- -------------------- --------------
2003............................................................. $ 296
2004............................................................. 230
2005............................................................. 192
2006............................................................. 197
2007............................................................. 201
2008 and later................................................... 526
------
$1,642
======
Rentals under long-term operating leases for certain branch offices amounted to
$341,000, $328,000 and $345,000 for the years ended June 30, 2002, 2001 and
2000, respectively. Rental income of $490,000, $470,000 and $439,000 for the
years ended June 30, 2002, 2001 and 2000, 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. These financial instruments are not recorded on the balance sheet when
either the exchange of the underlying asset or liability has not yet occurred.
These financial instruments include commitments to extend credit, unused lines
of credit, commitments to sell loans and commitments to purchase loans. 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.
59
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following summarizes the notional amount of off-balance sheet financial
instruments:
June 30,
-----------------------
2002 2001
-----------------------
(In thousands)
Commitments to extend credit................ $38,781 $63,951
Unused lines of credit ..................... 92,138 85,816
Commitments to sell loans .................. 2,805 --
Commitments to purchase loans............... 455 17,699
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 sell loans represent agreements to sell loans prior to the time
the loan is closed and funded. The Company currently sells one- to four-family
mortgage loans, meeting certain criteria, on a forward basis. The loans are sold
and the selling price determined prior to the time the loan is closed and
funded.
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 primarily located in New Jersey. Prior to
purchase, the Company applies the same underwriting criteria used in its own
originations.
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 (now ExxonMobil) 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. The Bank has continued to vigorously deny liability but has engaged
in discussions with ExxonMobil. The Bank may be willing to enter into a cost
sharing arrangement with ExxonMobil if ExxonMobil will agree to develop and
implement the remedial action work plan required by the NJDEP. A written
proposal is expected to be submitted to the Bank by ExxonMobil. Currently, no
written agreement has been signed and neither party is bound by any verbal
conversations.
Based upon an environmental engineering report, a remedial investigation would
cost approximately $30,000. The environmental engineering company has also
indicated that, based upon their experience with similar type projects, the
majority of cases are addressed by natural remediation. Natural remediation
costs, if needed, range from $60,000 to $150,000. At June 30, 2002 and 2001, a
contingent environmental liability of $45,000 is included in Accounts payable
and other liabilities on the Company's Consolidated Statements of Financial
Condition. The $45,000 represents one-half of the remedial investigation
(one-half of $30,000, or $15,000) plus one-half of the lower end of the range
for natural remediation (one-half of $60,000, or $30,000). Based upon the most
current information available, management believes the $45,000 represents the
most likely liability at this time.
60
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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.
N. 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, 2002, the Company repurchased 500,000 shares of
its outstanding common stock at prices ranging from $19.25 to $27.14 per share,
for a total cost of $11,119,000. During the year ended June 30, 2001, the
Company repurchased 845,000 shares of its outstanding common stock. The prices
paid for the repurchased shares ranged from $13.13 to $22.65 per share, for a
total cost of $14,545,000. During the year ended June 30, 2000, the Company
repurchased 492,000 shares of its outstanding common stock at prices ranging
from $11.06 to $15.81 per share, for a total cost of $6,931,000.
On March 21, 1996, the Board of Directors of the Company (the "Board") 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 and each share issued after that date and
prior to the expiration or redemption of the Rights. 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.
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 $67.50 exercise price, a number of
shares of the Company's common stock having an aggregate market value of
$135.00. 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 $67.50 exercise price, a number of
shares of common stock of such other person having an aggregate market value of
$135.00. 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 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, 2002, the Bank met all capital adequacy
requirements to which it was 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.
61
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.
To Be Well
Capitalized Under
For Minimum Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
(Dollars in thousands)
As of June 30, 2002
Tangible capital, and ratio to
adjusted total assets................................ $158,034 8.37% $28,323 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets................................ $158,034 8.37% $75,529 4.00% $ 94,411 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets................................. $158,034 15.36% N/A N/A $ 61,722 6.00%
Risk-based capital, and ratio to
risk-weighted assets................................. $163,828 15.93% $82,296 8.00% $102,869 10.00%
As of June 30, 2001
Tangible capital, and ratio to
adjusted total assets................................ $144,825 7.87% $27,617 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets................................ $144,825 7.87% $73,645 4.00% $ 92,056 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets................................. $144,825 15.25% N/A N/A $ 56,999 6.00%
Risk-based capital, and ratio to
risk-weighted assets................................. $149,050 15.69% $75,998 8.00% $ 94,998 10.00%
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 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").
62
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following table summarizes the Company's capital amounts and ratios under
the FRB's capital requirements for bank holding companies.
To Be Well
Capitalized Under
For Minimum Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
(Dollars in thousands)
As of June 30, 2002
Tangible capital, and ratio to
adjusted total assets.......................... $151,600 8.02% $28,349 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets............................ $151,600 8.02% $75,597 4.00% $ 94,496 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets............................. $151,600 14.87% N/A N/A $ 61,150 6.00%
Risk-based capital, and ratio to
risk-weighted assets............................. $157,386 15.44% $81,534 8.00% $101,917 10.00%
As of June 30, 2001
Tangible capital, and ratio to
adjusted total assets.......................... $140,729 7.64% $27,638 1.50% N/A N/A
Tier 1 (core) capital, and ratio to
adjusted total assets............................ $140,729 7.64% $73,702 4.00% $ 92,127 5.00%
Tier 1 (core) capital, and ratio to
risk-weighted assets............................. $140,729 14.97% N/A N/A $ 56,401 6.00%
Risk-based capital, and ratio to
risk-weighted assets............................. $144,954 15.42% $75,202 8.00% $ 94,002 10.00%
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, are generally permitted to make capital
distributions without OTS approval during a calendar year equal to 100% of
calendar year-to-date net income plus retained net income for the two previous
calendar years. A savings institution, such as the Bank, which is a subsidiary
of a savings and loan holding company, must file a notice of the proposed
dividend or other capital distribution with the OTS at least 30 days prior to
the declaration of such dividend or distribution. At June 30, 2002, the Bank
could have paid dividends totaling approximately $17.4 million.
63
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
O. Computation of EPS
The computation of EPS is presented in the following table.
For the year ended June 30,
------------------------------------------------
2002 2001 2000
------------------------------------------------
(Dollars in thousands, except per share amounts)
Net income............................................. $ 14,583 $ 12,513 $ 12,870
================================================
Number of shares outstanding:
Weighted average shares issued......................... 11,900,000 11,900,000 11,899,842
Less: Weighted average shares held in treasury......... 4,383,643 3,891,390 3,261,279
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................... 661,256 552,611 451,541
------------------------------------------------
Average basic shares................................... 7,225,613 7,609,221 8,138,104
Plus: Average common stock equivalents................. 542,809 489,382 444,409
------------------------------------------------
Average diluted shares................................. 7,768,422 8,098,603 8,582,513
================================================
Earnings per common share:
Basic................................................ $ 2.02 $ 1.64 $ 1.58
================================================
Diluted.............................................. $ 1.88 $ 1.55 $ 1.50
================================================
P. Disclosure About Fair Value of Financial Instruments
The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 2002 and 2001 were as follows:
June 30, 2002 June 30, 2001
----------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------
(In thousands)
Financial assets:
Cash and cash equivalents ...................... $ 37,189 $ 37,189 $ 15,771 $ 15,771
Investment securities .......................... 183,785 182,971 333,969 327,245
Mortgage-backed securities ..................... 169,689 174,036 135,606 136,592
FHLB of New York stock ......................... 25,656 25,656 26,218 26,218
----------------------------------------------------
Total cash and investments ..................... 416,319 419,852 511,564 505,826
----------------------------------------------------
Loans held for sale ............................ 1,592 1,592 83 83
Loans receivable, less allowance for loan losses 1,439,668 1,462,682 1,295,409 1,303,741
----------------------------------------------------
Total loans .................................... 1,441,260 1,464,274 1,295,492 1,303,824
Accrued interest receivable, net ............... 9,564 9,564 11,590 11,590
----------------------------------------------------
Total financial assets ........................... $1,867,143 $1,893,690 $1,818,646 $1,821,240
====================================================
Financial liabilities:
Deposits ....................................... $1,174,507 $1,188,166 $1,085,335 $1,096,859
FHLB of New York advances ...................... 504,465 536,767 454,465 470,466
Other borrowings ............................... 23,314 24,031 127,640 128,024
Mortgage escrow funds .......................... 12,772 12,772 11,979 11,979
Net Trust Preferred securities ................. 44,537 46,490 44,461 47,798
----------------------------------------------------
Total financial liabilities ...................... $1,759,595 $1,808,226 $1,723,880 $1,755,126
====================================================
64
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
June 30, 2002 June 30, 2001
---------------------------------------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------
(In thousands)
Off-balance sheet financial instruments:
Commitments to extend credit........................... $38,781 $ -- $63,951 $ --
Unused lines of credit................................. 92,138 -- 85,816 --
Commitments to sell loans.............................. 2,805 -- -- --
Commitments to purchase loans.......................... 455 -- 17,699 --
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,
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.
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, 2002 and 2001. 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-- 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 or prices for similar securities.
65
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 Sell Loans -- No fair value is estimated as no unrealized gains
or losses are assumed to occur due to the sales price being fixed when the loan
is sold forward.
Commitments to Purchase Loans -- No fair value is estimated due to the
short-term nature of these commitments.
Q. 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 made on the same terms as those prevailing at
the time for comparable transactions with others and do not involve more than
normal risk of collectibility.
The following sets forth an analysis of loans, all of which are current, to
directors, officers and employees:
June 30,
---------------------
2002 2001
---------------------
(In thousands)
Balance, beginning of year............................ $4,888 $4,780
New loans granted..................................... 2,424 2,146
Repayments/reductions................................. (1,322) (2,038)
--------------------
Balance, end of year.................................. $5,990 $4,888
====================
In addition to the above amount of loans, at June 30, 2002 and 2001, there was
$43,000 and $48,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.
R. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
requires that upon adoption, amortization of goodwill will cease and instead,
the carrying value of goodwill will be evaluated for impairment on an annual
basis. Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment upon adoption and then at least
annually thereafter. SFAS 142 will be effective for fiscal years beginning after
December 15, 2001. The Company has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred, if a reasonable estimate of fair value can be made. The
associated asset retirement cost would be capitalized as part of the carrying
amount of the long-lived asset. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. The Company has not determined the impact, if
any, that this statement will have on its consolidated financial position or
results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of " ("SFAS 121"). SFAS 144 retains the
requirements of SFAS 121 for recognizing and measuring the impairment loss of
long-lived assets to be held and used. For long-lived assets to be disposed of
by sale, SFAS 144 requires a single accounting model be used for all long-lived
assets, whether previously held and used or newly acquired. Long-lived assets to
be disposed of other than by sale would be considered held and used until
disposition. SFAS 144 also broadens the presentation of discontinued operations
in the income statement to include more disposal transactions. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company has
not determined the impact, if any, that this statement will have on its
consolidated financial position or results of operations.
66
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
S. 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, 2002 and 2001 and for the years ended June 30, 2002, 2001
and 2000 and should be read in conjunction with the Notes to Consolidated
Financial Statements.
Condensed Statements of Financial Condition
June 30,
--------------------------
2002 2001
--------------------------
(In thousands)
Assets
Cash...................................................................... $ 26 $ 25
Intercompany overnight investment......................................... 639 1,582
--------------------------
Total cash and cash equivalents........................................... 665 1,607
Investment securities held to
maturity, at amortized cost............................................ 10,968 10,987
Investment in subsidiaries............................................. 165,030 153,609
Prepaid Trust Preferred securities expenses........................... 1,963 2,039
Accrued interest receivable.............................................. 267 267
Other assets......................................................... 1,201 1,054
--------------------------
$180,094 $169,563
==========================
Liabilities and Stockholders' Equity
Junior subordinated debentures........................................ $ 47,940 $ 47,940
Intercompany loan payable............................................ 7,100 7,100
Unsecured revolving line of credit.................................... 3,964 --
Accrued interest payable............................................... 633 608
Other accrued expenses and other liabilities......................... 1,696 1,385
Stockholders' equity.................................................. 118,761 112,530
--------------------------
$180,094 $169,563
==========================
Condensed Statements of Operations
Year ended June 30,
-----------------------------------
2002 2001 2000
-----------------------------------
(In thousands)
Income
Interest income on intercompany balances ............................... $ 158 $ 243 $ 301
Interest income on investment securities ............................... 988 990 992
Other income ........................................................... 2 4 4
-----------------------------------
1,148 1,237 1,297
Expenses
Interest expense on Junior subordinated debentures ..................... 4,425 3,491 3,166
Interest on intercompany loan .......................................... 466 718 666
Interest on unsecured revolving line of credit ......................... 49 159 --
Other expenses ......................................................... 492 428 412
-----------------------------------
5,432 4,796 4,244
-----------------------------------
Loss before undistributed net income of subsidiaries ................... (4,284) (3,559) (2,947)
Equity in undistributed net income of subsidiaries...................... 17,414 14,863 14,819
-----------------------------------
Income before income taxes ............................................. 13,130 11,304 11,872
Income tax benefit ..................................................... (1,453) (1,209) (998)
-----------------------------------
Net income ............................................................. $ 14,583 $ 12,513 $ 12,870
====================================
67
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
Condensed Statements of Cash Flows
Year ended June 30,
---------------------------------------
2002 2001 2000
---------------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income ............................................................... $ 14,583 $ 12,513 $ 12,870
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed net income of subsidiaries ................... (17,414) (14,863) (14,819)
Amortization of investment securities premium ........................ 19 18 15
Amortization of cost of stock plans .................................. -- -- 36
Increase in accrued interest payable, net of accrued
interest receivable ................................................. 25 80 4
(Increase) decrease in prepaid Trust Preferred securities
expense and other assets ............................................ (71) (840) 1,064
Increase (decrease) in accrued expenses and other liabilities ........ 311 531 (282)
---------------------------------------
Net cash used in operating activities ............................... (2,547) (2,561) (1,110)
---------------------------------------
Cash Flows From Investing Activities:
Investment in subsidiary bank ............................................ -- (4,200) --
Investment in Trust II ................................................... -- (372) --
Dividends received from subsidiary bank .................................. 8,327 10,492 6,492
Proceeds from principal repayment on ESOP loan ........................... 557 519 484
Proceeds from maturities of investment securities ........................ -- -- 165
---------------------------------------
Net cash provided by investing activities .............................. 8,884 6,439 7,141
---------------------------------------
Cash Flows From Financing Activities:
Increase in unsecured revolving line of credit ........................... 3,964 -- --
Proceeds from issuance of junior subordinated debentures ................. -- 12,372 --
Purchases of treasury stock, net of reissuance ........................... (9,567) (14,148) (6,568)
Cash dividends paid ...................................................... (1,676) (1,316) (1,341)
---------------------------------------
Net cash used in financing activities .................................. (7,279) (3,092) (7,909)
---------------------------------------
Net increase (decrease) in cash and cash equivalents ..................... (942) 786 (1,878)
Cash and cash equivalents, beginning of year ............................. 1,607 821 2,699
---------------------------------------
Cash and cash equivalents, end of year ................................... $ 665 $ 1,607 $ 821
=======================================
68
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
T. Quarterly Financial Data (Unaudited)
Quarter ended
-----------------------------------------------
2001 2002
-----------------------------------------------
September 30 December 31 March 31 June 30
-----------------------------------------------
(In thousands, except per share amounts)
Total interest income ......... $31,934 $30,330 $28,992 $30,083
Total interest expense ........ 19,779 18,600 17,145 17,338
-----------------------------------------------
Net interest income ........... 12,155 11,730 11,847 12,745
Provision for loan losses ..... 550 375 300 400
Non-interest income ........... 845 1,009 1,048 1,315
Non-interest expenses ......... 6,930 6,844 7,027 7,649
Income tax expense ............ 1,967 1,949 1,964 2,156
-----------------------------------------------
Net income ................... $ 3,553 $ 3,571 $ 3,604 $ 3,855
===============================================
Net income per common share:
Basic ........................ $ 0.49 $ 0.49 $ 0.50 $ 0.54
===============================================
Diluted ...................... $ 0.45 $ 0.46 $ 0.47 $ 0.50
===============================================
Quarter ended
-----------------------------------------------
2000 2001
-----------------------------------------------
September 30 December 31 March 31 June 30
-----------------------------------------------
(In thousands, except per share amounts)
Total interest income .......... $ 30,436 $30,020 $29,657 $30,245
Total interest expense ......... 20,581 20,280 19,364 19,359
-----------------------------------------------
Net interest income ............ 9,855 9,740 10,293 10,886
Provision for loan losses ...... 200 125 125 175
Non-interest income ............ 1,059 975 833 947
Non-interest expenses .......... 5,804 5,906 6,313 6,619
Income tax expense ............. 1,734 1,651 1,649 1,774
-----------------------------------------------
Net income..................... $ 3,176 $ 3,033 $ 3,039 $ 3,265
===============================================
Net income per common share:
Basic.......................... $ 0.41 $ 0.40 $ 0.40 $ 0.44
===============================================
Diluted........................ $ 0.39 $ 0.38 $ 0.38 $ 0.41
===============================================
69
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 23, 2002, except for
information contained under the headings "Audit Committee Reports,"
"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 23, 2002.
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 23, 2002, 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 23, 2002, 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 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
23, 2002, 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 14. Controls and Procedures
In the fiscal year ended June 30, 2002, the Registrant did not make any
significant changes in, nor take any corrective actions regarding, its internal
controls or other factors that could significantly affect these controls. The
Registrant periodically reviews its internal controls for effectiveness, but did
conduct such a review during the fiscal year ended June 30, 2002. In the future,
the Registrant plans to conduct an evaluation of its disclosure controls and
procedures each quarter.
70
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following information appearing in Part II, Item 8 of this Form 10-K is
incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 2002 and 2001
Consolidated Statements of Income for the Years Ended June 30, 2002,
2001 and 2000
Consolidated Statements of Comprehensive Income for the Years Ended
June 30, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended June 30,
2002, 2001 and 2000
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.
71
(a) (3) Exhibits:
Regulation Reference to
S-K Prior Filing
Exhibit or Exhibit
Number Document Number
- ------ -------- ------
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3 (i) Certificate of Incorporation *
3 (ii) Bylaws **
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 Amended and Restated 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 Jeffrey J. Carfora *****
(g) Employment Agreement with Barbara A. Flannery ****
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
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
99 Additional Exhibits Not applicable
* Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, filed with the Securities and
Exchange Commission on March 25, 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 an exhibit to the Company's Form 10-K under the Securities
Exchange Act of 1934, filed with the Securities and Exchange
Commission on September 24, 1999 (File No. 0-24040). Such previously
filed document is hereby incorporated by reference in accordance with
Item 601 of Regulation S-K.
*** Filed as an exhibit to the Company's Registration Statement on Form
8-A under the Securities Exchange 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 exhibits to the Company's Form 10-K under the Securities
Exchange Act of 1934, filed with the Securities and Exchange
Commission on September 24, 2001 (File No. 0-24040). All of such
previously filed documents are hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
***** Filed as an exhibit to the Company's Form 10-Q under the Securities
Exchange Act of 1934, filed with the Securities and Exchange
Commission on February 14, 2002 (File No. 0-24040). Such previously
filed document is hereby incorporated by reference in accordance with
Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three month period ended June
30, 2002.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: September 23, 2002 By: /s/ Joseph L. LaMonica
--------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Joseph L. LaMonica By: /s/ William C. Anderson
---------------------- -----------------------
Joseph L. LaMonica William C. Anderson
President, Chief Executive Officer Chairman of the Board
and Director
(Principal Executive Officer)
Date: September 23, 2002 Date: September 23, 2002
By: /s/ Patrick D. McTernan By: /s/ Amadeu L. Carvalho
----------------------- ----------------------
Patrick D. McTernan Amadeu L. Carvalho
Senior Executive Vice President, Director
General Counsel, Secretary
and Director
Date: September 23, 2002 Date: September 23, 2002
By: /s/ Marvin D. Schoonover By: /s/ Mario Teixeira, Jr.
------------------------ -----------------------
Marvin D. Schoonover Mario Teixeira, Jr.
Director Director
Date: September 23, 2002 Date: September 23, 2002
By: /s/ Jeffrey J. Carfora By: /s/ Claire M. Chadwick
---------------------- ----------------------
Jeffrey J. Carfora Claire M. Chadwick
Senior Executive Vice President and Executive Vice President,
Chief Operating Officer Chief Financial Officer
(Principal Financial Officer) and Controller
(Principal Accounting Officer)
Date: September 23, 2002 Date: September 23, 2002
73
CERTIFICATION
I, Joseph L. LaMonica, certify that:
1. I have reviewed this annual report on Form 10-K of PennFed Financial
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 23, 2002 /s/ Joseph L. LaMonica
-------------------------------------
Joseph L. LaMonica
President and Chief Executive Officer
74
CERTIFICATION
I, Claire M. Chadwick, certify that:
1. I have reviewed this annual report on Form 10-K of PennFed Financial
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 23, 2002 /s/ Claire M. Chadwick
--------------------------------
Claire M. Chadwick
Executive Vice President, Chief
Financial Officer and Controller
75
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned hereby certifies in his capacity as an officer of PennFed Financial
Services, Inc. (the "Company") that the Annual Report of the Company on Form
10-K for the year ended June 30, 2002 fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and results of operations of the Company as of the dates and
for the periods presented in the financial statements included in such report.
By: /s/ Joseph L. LaMonica
--------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
Date: September 23, 2002
By: /s/ Claire M. Chadwick
--------------------------------------
Claire M. Chadwick
Executive Vice President,
Chief Financial Officer and Controller
Date: September 23, 2002
76