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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 22-3297339
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, NJ 07052-2989
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
--------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES |X|. NO |_|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES |X|. NO |_|.
As of February 10, 2004, there were issued and outstanding 6,837,251
shares of the Registrant's Common Stock.
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, June 30,
2003 2003
----------- -----------
(Dollars in thousands)
ASSETS
Cash and amounts due from depository institutions .......................... $ 26,737 $ 53,046
Federal funds sold ......................................................... 10,000 30,000
----------- -----------
Cash and cash equivalents ............................................. 36,737 83,046
Investment securities available for sale, at market value, amortized cost of
$4,552 and $4,467 at December 31, 2003 and June 30, 2003 .............. 4,663 4,741
Investment securities held to maturity, at amortized cost, market value of
$414,390 and $345,468 at December 31, 2003 and June 30, 2003 .......... 413,331 339,498
Mortgage-backed securities held to maturity, at amortized cost, market value
of $107,261 and $97,138 at December 31, 2003 and June 30, 2003 ........ 104,856 93,632
Loans held for sale ........................................................ 3,364 11,496
Loans receivable, net of allowance for loan losses of $6,271 and $6,284
at December 31, 2003 and June 30, 2003 ................................ 1,154,591 1,217,422
Premises and equipment, net ................................................ 21,795 21,103
Real estate owned, net ..................................................... 28 28
Federal Home Loan Bank of New York stock, at cost .......................... 24,273 25,223
Accrued interest receivable, net ........................................... 9,301 8,684
Other intangible assets .................................................... 2,268 3,175
Bank owned life insurance ("BOLI") ......................................... 12,224 --
Other assets ............................................................... 4,555 4,404
----------- -----------
$ 1,791,986 $ 1,812,452
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits .............................................................. $ 1,107,257 $ 1,094,666
Federal Home Loan Bank of New York advances ........................... 485,465 504,465
Other borrowings ...................................................... 23,118 26,644
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $1,285 and $923 at December 31, 2003 and
June 30, 2003 ....................................................... 42,015 30,005
Mortgage escrow funds ................................................. 8,844 10,491
Accounts payable and other liabilities ................................ 4,523 17,725
----------- -----------
Total liabilities ..................................................... 1,671,222 1,683,996
----------- -----------
Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $379 at June 30, 2003 .......................... -- 11,621
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 6,872,601 and 6,838,029 shares outstanding at
December 31, 2003 and June 30, 2003 (excluding shares held in
treasury of 5,027,399 and 5,061,971 at December 31, 2003 and 60 60
June 30, 2003).....................................................
Additional paid-in capital ............................................ 67,142 65,689
Employee Stock Ownership Plan Trust debt .............................. (322) (644)
Retained earnings, partially restricted ............................... 128,348 124,797
Accumulated other comprehensive income, net of taxes .................. 66 177
Treasury stock, at cost, 5,027,399 and 5,061,971 shares at
December 31, 2003 and June 30, 2003 ............................... (74,530) (73,244)
----------- -----------
Total stockholders' equity ............................................ 120,764 116,835
----------- -----------
$ 1,791,986 $ 1,812,452
=========== ===========
See notes to consolidated financial statements.
2
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Six months ended
December 31, December 31,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans ..................... $ 16,860 $ 21,696 $ 34,120 $ 44,882
Interest on federal funds sold ................. 79 13 150 13
Interest and dividends on investment securities 5,429 3,608 10,711 6,889
Interest on mortgage-backed securities ......... 1,290 2,044 2,418 4,578
---------- ---------- ---------- ----------
23,658 27,361 47,399 56,362
---------- ---------- ---------- ----------
Interest Expense:
Deposits ....................................... 6,635 8,853 13,225 18,507
Borrowed funds ................................. 7,312 7,557 14,844 15,114
Junior subordinated debentures ................. 673 -- 1,355 --
---------- ---------- ---------- ----------
14,620 16,410 29,424 33,621
---------- ---------- ---------- ----------
Net Interest and Dividend Income Before Provision
for Loan Losses ................................ 9,038 10,951 17,975 22,741
Provision for Loan Losses ........................... -- 200 -- 425
---------- ---------- ---------- ----------
Net Interest and Dividend Income After Provision
for Loan Losses ................................ 9,038 10,751 17,975 22,316
---------- ---------- ---------- ----------
Non-Interest Income:
Service charges ................................ 871 1,230 2,174 2,353
Net gain from real estate operations ........... 1 -- 1 2
Net gain on sales of loans ..................... 363 563 697 794
Other .......................................... 329 266 702 492
---------- ---------- ---------- ----------
1,564 2,059 3,574 3,641
---------- ---------- ---------- ----------
Non-Interest Expenses:
Compensation and employee benefits ............. 3,616 3,313 6,940 6,794
Net occupancy expense .......................... 480 407 903 810
Equipment ...................................... 498 510 984 1,027
Advertising .................................... 78 31 134 118
Amortization of intangibles .................... 454 468 909 942
Federal deposit insurance premium .............. 41 50 85 98
Preferred securities expense ................... -- 1,092 -- 2,184
Other .......................................... 1,090 941 2,001 1,956
---------- ---------- ---------- ----------
6,257 6,812 11,956 13,929
---------- ---------- ---------- ----------
Income Before Income Taxes .......................... 4,345 5,998 9,593 12,028
Income Tax Expense .................................. 1,464 2,174 3,339 4,380
---------- ---------- ---------- ----------
Net Income .......................................... $ 2,881 $ 3,824 $ 6,254 $ 7,648
========== ========== ========== ==========
Weighted average number of common shares outstanding:
Basic .......................................... 6,814,156 6,997,197 6,787,648 7,056,226
========== ========== ========== ==========
Diluted ........................................ 7,243,944 7,526,698 7,239,829 7,589,741
========== ========== ========== ==========
Net income per common share:
Basic........................................... $0.42 $0.55 $0.92 $1.08
===== ===== ===== =====
Diluted......................................... $0.40 $0.51 $0.86 $1.01
===== ===== ===== =====
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended Six months ended
December 31, December 31,
----------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- ------
(In thousands)
Net income ..................................................... $ 2,881 $ 3,824 $ 6,254 $7,648
Other comprehensive income, net of tax:
Unrealized gains on investment securities available for sale:
Unrealized holding gains (losses) arising during period . (56) (81) (111) 44
------- ------- ------- ------
Comprehensive income ........................................... $ 2,825 $ 3,743 $ 6,143 $7,692
======= ======= ======= ======
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended December 31, 2003 and 2002
---------------------------------------------------
Employee
Stock Accumulated
Serial Additional Ownership Other
Preferred Common Paid-In Plan Trust Retained Comprehensive Treasury
Stock Stock Capital Debt Earnings Income Stock
--------- -------- ---------- ---------- ---------- ------------- ----------
(Dollars in thousands)
Balance at June 30, 2002........... $ -- $ 60 $ 63,820 $ (1,244) $ 114,444 $ 18 $ (58,337)
Allocation of Employee Stock
Ownership Plan ("ESOP") stock.... 300
ESOP adjustment.................... 1,052
Purchase of 255,000 shares of
treasury stock................... (6,704)
Issuance of 46,020 shares of
treasury stock for options
exercised and Dividend
Reinvestment Plan ("DRP")........ (286) 594
Cash dividends of $0.20 per
common share..................... (1,407)
Unrealized gain on investment
securities available for sale,
net of income taxes of $134...... 44
Net income for the six months
ended December 31, 2002.......... 7,648
--------- -------- --------- -------- ---------- -------- ----------
Balance at December 31, 2002....... $ -- $ 60 $ 64,872 $ (944) $ 120,399 $ 62 $ (64,447)
========= ======== ========= ======== ========== ======== ==========
Balance at June 30, 2003........... $ -- $ 60 $ 65,689 $ (644) $ 124,797 $ 177 $ (73,244)
Allocation of ESOP stock........... 322
ESOP adjustment.................... 1,453
Purchase of 120,000 shares of
treasury stock................... (3,544)
Issuance of 154,572 shares of
treasury stock for options
exercised and DRP................ (1,372) 2,258
Cash dividends of $0.20 per
common share..................... (1,331)
Unrealized loss on investment
securities available for sale,
net of income taxes of $(52)..... (111)
Net income for the six months
ended December 31, 2003.......... 6,254
--------- -------- --------- -------- ---------- -------- ----------
Balance at December 31, 2003....... $ -- $ 60 $ 67,142 $ (322) $ 128,348 $ 66 $ (74,530)
========= ======== ========= ======== ========== ======== ==========
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended December 31,
-----------------------------
2003 2002
--------- ---------
(In thousands)
Cash Flows from Operating Activities:
Net income ............................................................. $ 6,254 $ 7,648
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans ............................................. (697) (794)
Proceeds from sales of loans held for sale ............................. 81,247 59,184
Amortization of investment and mortgage-backed securities
premium, net ......................................................... 330 401
Depreciation and amortization .......................................... 849 854
Provision for losses on loans and real estate owned .................... -- 425
Amortization of cost of stock plans .................................... 1,775 1,352
Amortization of intangibles ............................................ 909 943
Amortization of premiums on loans and loan fees ........................ 1,818 3,683
Amortization of trust preferred securities and junior
subordinated debentures issuance costs ............................... 17 37
Increase in BOLI ....................................................... (224) --
Increase in accrued interest receivable, net of accrued interest payable (1,919) (945)
(Increase) decrease in other assets .................................... 219 (2,396)
Decrease in accounts payable and other liabilities ..................... (13,150) (6,544)
Decrease in mortgage escrow funds ...................................... (1,647) (2,660)
--------- ---------
Net cash provided by operating activities .............................. 75,781 61,188
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities ...................... 31,320 104,222
Purchases of investment securities held to maturity .................... (105,203) (124,480)
Purchases of investment securities available for sale .................. (85) (107)
Net proceeds (outflow) from principal repayments of loans net of loan
originations ......................................................... 373 (5,876)
Proceeds from loans sold ............................................... 3,181 4,170
Purchases of loans ..................................................... (14,959) (676)
Proceeds from principal repayments of mortgage-backed securities ....... 33,380 39,197
Purchases of mortgage-backed securities ................................ (44,884) --
Purchases of premises and equipment .................................... (1,541) (1,827)
Purchase of BOLI ....................................................... (12,000) --
Redemptions of Federal Home Loan Bank of New York stock ................ 950 433
--------- ---------
Net cash provided by (used in) investing activities .................... (109,468) 15,056
--------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits .................................... 13,893 (46,497)
Increase (decrease) in advances from the Federal Home Loan Bank
of New York and other borrowings ..................................... (22,526) 1,337
Cash dividends paid .................................................... (1,331) (1,407)
Purchases of treasury stock, net of reissuance ......................... (2,658) (6,396)
--------- ---------
Net cash used in financing activities .................................. (12,622) (52,963)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ........................ (46,309) 23,281
Cash and Cash Equivalents, Beginning of Period .............................. 83,046 37,189
--------- ---------
Cash and Cash Equivalents, End of Period .................................... $ 36,737 $ 60,470
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest ............................................................... $ 30,918 $ 35,292
========= =========
Income taxes ........................................................... $ 2,766 $ 5,291
========= =========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at cost ........... $ 72,601 $ 66,641
========= =========
See notes to consolidated financial statements.
6
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries (including Penn Federal Savings
Bank (the "Bank")). These interim consolidated financial statements included
herein should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended June 30, 2003. The interim consolidated financial
statements reflect all normal and recurring adjustments which are, in the
opinion of management, considered necessary for a fair presentation of the
financial condition and results of operations for the periods presented. There
were no adjustments of a non-recurring nature recorded during the six months
ended December 31, 2003 and 2002. The interim results of operations presented
are not necessarily indicative of the results for the full year.
2. Bank Owned Life Insurance
The Bank has purchased Bank Owned Life Insurance ("BOLI") policies to fund
certain future employee benefit costs. The BOLI is recorded at its cash
surrender value and changes in the cash surrender value of the insurance are
recorded in other non-interest income.
3. Adoption of Recently Issued Accounting Standards
Effective July 1, 2003, the Company fully adopted Financial Accounting Standards
Board Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46") as it relates to its wholly owned trust subsidiary, PennFed Capital Trust
II ("Trust II"). Although the required adoption date was recently extended, the
Company elected to early adopt FIN 46, as permitted. FIN 46 is an interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and
addresses consolidation by business enterprises of variable interest entities
having certain characteristics. As a result of the adoption of FIN 46, Trust II
is no longer consolidated. The full adoption of FIN 46 did not have an overall
impact on the Company's consolidated financial condition, results of operations
or cash flows. The primary effect of de-consolidating this subsidiary was a
change in the balance sheet classification of the liabilities from Guaranteed
Preferred Beneficial Interests in the Company's Junior Subordinated Deferrable
Interest Debentures to long-term borrowings. In December 2003, FIN 46 was
revised ("FIN 46R") to clarify some of the provisions in the original FIN 46 and
to exempt certain entities from its requirements. The revisions to FIN 46
contained in FIN 46R do not have an impact on the Company's consolidated
financial condition, results of operations or cash flows.
Effective July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. In particular, SFAS
149 clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. The adoption of SFAS 149 did not have an impact on the Company's
consolidated financial condition, results of operations or cash flows.
Effective July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes the standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. Under
SFAS 150, a mandatorily redeemable financial instrument shall be classified as a
liability. The adoption of SFAS 150 did not have an impact on the Company's
consolidated financial condition, results of operations or cash flows.
On November 25, 2003, the Financial Accounting Standards Board ratified the
Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1
requires certain quantitative and qualitative disclosures for securities that
are impaired at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. EITF 03-1 did not have an impact on the
Company's consolidated financial condition, results of operations or cash flows
and no additional disclosure was required.
7
4. Recently Issued Accounting Standards
In December 2003, the Financial Accounting Standards Board (the "FASB") issued a
revision of Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132R").
SFAS 132R requires additional disclosures to those in the original Statement of
Financial Accounting Standards No. 132 about the types of plan assets,
investment strategy, measurement date(s), plan obligations, cash flows and
components of net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. The interim period disclosures
required by SFAS 132R are effective for interim periods beginning after December
15, 2003. The adoption of SFAS 132R is not expected to have an impact on the
Company's consolidated financial position, results of operations or cash flows.
5. Junior Subordinated Deferrable Interest Debentures
In 2001, PennFed formed Trust II. On March 28, 2001, Trust II sold $12.0 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. Trust II
used the proceeds from the sale of its 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 deferrable
interest 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 obligations under its trust
preferred securities. The Company used the proceeds from the junior subordinated
deferrable interest debentures for general corporate purposes, including a $4.2
million capital contribution to the Bank to support growth.
In 2003, PennFed formed a wholly-owned trust subsidiary, PennFed Capital Trust
III ("Trust III"). On June 2, 2003, Trust III sold $30.0 million of variable
rate cumulative trust preferred securities in a private transaction exempt from
registration under the Act. Therefore, these securities have not been registered
under the Act. Trust III used the proceeds from the sale of its trust preferred
securities to purchase variable rate junior subordinated deferrable interest
debentures issued by PennFed. The sole assets of Trust III are $30.9 million of
junior subordinated deferrable interest debentures which mature in 2033 and are
redeemable at any time after five years. The obligations of PennFed related to
Trust III constitute a full and unconditional guarantee by PennFed of Trust III
obligations under its trust preferred securities. The Company used the proceeds
from the junior subordinated deferrable interest debentures together with
available cash to redeem $34.5 million of 8.90% cumulative trust preferred
securities issued by PennFed Capital Trust I in October 1997.
6. Computation of EPS
The computation of EPS is presented in the following table.
Three months ended Six months ended
December 31, December 31,
------------------------------ ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Net income ..................................... $ 2,881 $ 3,824 $ 6,254 $ 7,648
=========== =========== =========== ===========
Number of shares outstanding:
Weighted average shares issued ................. 11,900,000 11,900,000 11,900,000 11,900,000
Less: Weighted average shares held in treasury . 5,021,429 4,714,030 5,031,834 4,640,016
Less: Average shares held by the ESOP .......... 952,000 952,000 952,000 952,000
Plus: ESOP shares released or committed to be
released during the fiscal year ..... 887,585 763,227 871,482 748,242
----------- ----------- ----------- -----------
Average basic shares ........................... 6,814,156 6,997,197 6,787,648 7,056,226
Plus: Average common stock equivalents ......... 429,788 529,501 452,181 533,515
----------- ----------- ----------- -----------
Average diluted shares ......................... 7,243,944 7,526,698 7,239,829 7,589,741
=========== =========== =========== ===========
Earnings per common share:
Basic .................................. $ 0.42 $ 0.55 $ 0.92 $ 1.08
=========== =========== =========== ===========
Diluted ................................ $ 0.40 $ 0.51 $ 0.86 $ 1.01
=========== =========== =========== ===========
8
7. Stockholders' Equity and Regulatory Capital
The Bank's regulatory capital amounts and ratios are presented in the following
table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of December 31, 2003
Tangible capital, and ratio to
adjusted total assets ........... $159,289 8.91% $ 26,824 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets ........... $159,289 8.91% $ 71,530 4.00% $ 89,412 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ............ $159,289 17.02% N/A N/A $ 56,159 6.00%
Risk-based capital, and ratio to
risk-weighted assets ............ $165,579 17.69% $ 74,878 8.00% $ 93,598 10.00%
As of June 30, 2003
Tangible capital, and ratio to
adjusted total assets ........... $157,853 8.73% $ 27,127 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets ........... $157,853 8.73% $ 72,339 4.00% $ 90,424 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ............ $157,853 16.54% N/A N/A $ 57,274 6.00%
Risk-based capital, and ratio to
risk-weighted assets ............ $164,241 17.21% $ 76,366 8.00% $ 95,457 10.00%
The previous table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB").
The following table summarizes the Company's capital amounts and ratios under
the FRB's capital requirements for bank holding companies.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of December 31, 2003
Tier I capital, and ratio to
adjusted total assets............ $157,816 8.81% $71,649 4.00% N/A N/A
Tier I capital, and ratio to
risk-weighted assets............. $157,816 17.03% $37,073 4.00% $55,610 6.00%
Total capital, and ratio to
risk-weighted assets............. $164,105 17.71% $74,147 8.00% $92,684 10.00%
As of June 30, 2003
Tier I capital, and ratio to
adjusted total assets............ $151,260 8.35% $72,441 4.00% N/A N/A
Tier I capital, and ratio to
risk-weighted assets............. $151,260 16.00% $37,822 4.00% $56,733 6.00%
Total capital, and ratio to
risk-weighted assets............. $157,647 16.67% $75,644 8.00% $94,555 10.00%
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. 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.
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or 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. These 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 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
these statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
Total assets decreased $20.5 million to $1.792 billion at December 31, 2003 from
total assets of $1.812 billion at June 30, 2003. When compared to June 30, 2003,
the decrease at December 31, 2003 was primarily due to a $71.0 million decrease
in net loans receivable and a $46.3 million decrease in cash and cash
equivalents partially offset by a $73.8 million increase in investment
securities held to maturity and an $11.2 million increase in mortgage-backed
securities. The decrease at December 31, 2003 was also partially offset by a
$12.2 million investment in bank owned life insurance ("BOLI"). The effects of
accelerated prepayments on loans held to maturity and sales of predominately
conforming, fixed rate, one- to four-family residential mortgage loans held for
sale into the secondary market more than offset loan originations. During the
three months ended December 31, 2003, one- to four-family residential loan
production slowed significantly as applications for refinances slowed due to a
recent rise in interest rates. Due to this significant slowdown in mortgage loan
applications and as a means to alternatively invest available cash at higher
yields, in late December 2003, the Company discontinued its loan sale strategy
and began to retain originated one- to four-family residential loans for its
portfolio.
Deposits increased $12.6 million to $1.107 billion at December 31, 2003 from
$1.095 billion at June 30, 2003. An increase in core deposit accounts (checking,
money market and savings accounts) of $28.3 million was partially offset by a
$15.7 million decrease in short- and medium-term certificates of deposit. At
December 31, 2003, Federal Home Loan Bank ("FHLB") of New York advances and
other borrowings totaled $508.6 million, reflecting a decrease of $22.5 million
from the $531.1 million at June 30, 2003. Junior subordinated deferrable
interest debentures increased $12.0 million due to the Company's full adoption
of Financial Accounting Standards Board Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). Pursuant to FIN 46, the Company's trust
preferred subsidiaries are no longer consolidated and the $12.4 million junior
subordinated deferrable interest debentures of Trust II are now reflected as
long-term borrowings. In accordance with the adoption of FIN 46, financial
information prior to the adoption date has not been restated.
Non-accruing loans (loans whereby the collection of principal or interest
becomes delinquent more than 90 days) at December 31, 2003 totaled $3.1 million,
as compared to $1.7 million at June 30, 2003. The increase in the amount of
10
non-accruing loans is in the one- to four-family loan category, and primarily
reflects the addition of only two large loans. The ratio of non-accruing loans
to total loans increased to 0.27% at December 31, 2003 from 0.14% at June 30,
2003. Real estate owned at December 31, 2003 remained unchanged from the $28,000
recorded at June 30, 2003. Total non-performing assets (non-accruing loans and
real estate owned) at December 31, 2003 totaled $3.1 million, as compared to
$1.7 million at June 30, 2003. The ratio of non-performing assets to total
assets increased to 0.18% at December 31, 2003 from 0.09% at June 30, 2003.
Stockholders' equity at December 31, 2003 totaled $120.8 million compared to
$116.8 million at June 30, 2003. The increase primarily reflects the net income
recorded for the six months ended December 31, 2003 and the exercise of stock
options, partially offset by the repurchase of 120,000 shares of the Company's
outstanding stock at an average price of $29.54 per share and the declaration of
cash dividends.
Results of Operations
General. For the three months ended December 31, 2003, net income was $2.9
million, or $0.40 per diluted share, compared to net income of $3.8 million, or
$0.51 per diluted share, for the comparable prior year period. For the six
months ended December 31, 2003, net income was $6.3 million, or $0.86 per
diluted share. These results compare to net income of $7.6 million, or $1.01 per
diluted share, for the six months ended December 31, 2002.
Interest and Dividend Income. Interest and dividend income for the three and six
months ended December 31, 2003 decreased to $23.7 million and $47.4 million,
respectively, from $27.4 million and $56.4 million for the three and six months
ended December 31, 2002. In general, the decline in interest and dividend income
reflects a lower level of interest-earning assets due to the effects of loan
sales and accelerated prepayments, and a lower yield earned on these assets as a
cumulative result of prepayments of higher yielding loans and origination of
loans at lower market interest rates. Average interest-earning assets were
$1.716 billion for both the three and six months ended December 31, 2003,
compared to $1.792 billion and $1.807 billion for the comparable prior year
periods. The average yield earned on interest-earning assets decreased to 5.50%
for both the three and six months ended December 31, 2003 from 6.08% and 6.22%
for the three and six months ended December 31, 2002, respectively. As discussed
below, the average yield earned for the three and six months ended December 31,
2003 was also negatively impacted by the suspension of dividends paid on FHLB of
New York stock.
Interest income on residential one- to four-family mortgage loans for the three
and six months ended December 31, 2003 decreased $4.4 million and $10.1 million,
respectively, when compared to the prior year periods. The decreases in interest
income on residential one- to four-family mortgage loans were due to decreases
in the average yield earned on this loan portfolio to 5.52% and 5.45% from 5.93%
and 6.09% for the three and six months ended December 31, 2003, respectively,
when compared to the prior year periods, reflecting the payoff or refinance of
higher yielding loans and the origination of lower yielding loans. In addition,
the decreases in interest income on residential one- to four-family mortgage
loans were due to decreases in the average balance of residential one- to
four-family mortgage loans outstanding of $233.6 million and $236.5 million for
the three and six months ended December 31, 2003, respectively, when compared to
the prior year periods, as the result of accelerated prepayments and loan sales.
Interest income on commercial and multi-family real estate loans decreased
$215,000 and $181,000 for the three and six months ended December 31, 2003,
respectively, when compared to the prior year periods. The decreases in interest
income on commercial and multi-family real estate loans were attributable to
decreases in the average yield earned on these loans. The average yield on
commercial and multi-family real estate loans decreased to 7.28% and 7.38% for
the current three and six month periods, respectively, compared to 7.82% and
7.89% for the three and six months ended December 31, 2002. As with other loans,
the payoff of higher yielding loans and the origination of loans at lower market
interest rates has resulted in a decline in the yield of the commercial and
multi-family real estate loan portfolio. The decreases in interest income for
this portfolio were partially offset by increases in the average outstanding
balance of commercial and multi-family real estate loans of $238,000 and $5.9
million for the three and six months ended December 31, 2003, respectively, when
compared to the prior year periods.
Interest income on consumer loans decreased $225,000 and $488,000 for the three
and six months ended December 31, 2003, respectively, when compared to the prior
year periods. The decreases in interest income for this loan portfolio were
reflective of the lower market interest rates. The average yield earned on
consumer loans decreased to 5.51% and 5.58% for the three and six months ended
December 31, 2003, respectively, from 6.20% and 6.28% for the comparable prior
year periods. In addition, the decreases in interest income on consumer loans
were attributable to decreases of $1.7 million and $2.5 million in the average
balance outstanding for the three and six months ended
11
December 31, 2003, respectively, when compared to the three and six months ended
December 31, 2002.
Interest income on investment securities and other interest-earning assets
increased $1.8 million and $3.8 million for the three and six months ended
December 31, 2003, respectively, compared to the prior year periods. The
increases in interest income on these securities were attributable to $173.7
million and $172.5 million increases in the average balance outstanding for the
three and six months ended December 31, 2003, respectively, when compared to the
prior year periods. As a partial offset to the reduction in loans and
mortgage-backed securities due to increased prepayments, additional investment
securities were purchased. The interest income on investment securities and
other interest-earning assets for the three and six months ended December 31,
2003 was negatively impacted by declines in the average yield earned on these
securities. The average yield decreased to 5.20% and 5.29% for the current three
and six month periods, respectively, compared to 5.92% and 5.93% for the three
and six months ended December 31, 2002 as called investment securities were
replaced with lower yielding investments. In addition, the interest income on
investment securities and other interest-earning assets for the three months
ended December 31, 2003 was adversely affected by the suspension of dividends
paid on FHLB of New York stock. As a result, no dividend income was recorded for
this stock during the three months ended December 31, 2003, compared to $349,000
for the three months ended December 31, 2002.
Interest income on the mortgage-backed securities portfolio decreased $754,000
and $2.2 million for the three and six months ended December 31, 2003,
respectively, compared to the prior year periods. The decreases in interest
income on mortgage-backed securities for the three and six months ended December
31, 2003 were due to a decrease in the average yield earned on this portfolio to
5.08% and 5.06%, respectively, from 5.68% and 5.94% for the three and six months
ended December 31, 2002. In addition, the decreases in interest income on
mortgage-backed securities were due to decreases in the average balance
outstanding of $42.4 million and $58.5 million for the three and six months
ended December 31, 2003, respectively, when compared to the prior year period,
primarily due to accelerated prepayments.
Interest Expense. Interest expense decreased $1.8 million and $4.2 million for
the three and six months ended December 31, 2003, respectively, from the
comparable prior year periods. The decreases in the current year periods were
attributable to decreases in the Company's cost of funds to average rates of
3.50% and 3.53% for the three and six months ended December 31, 2003,
respectively, from 3.86% and 3.93% for the prior year periods, as a result of
lower market interest rates. The decreases in interest expense for the three and
six months ended December 31, 2003 were also attributable to decreases in total
average deposits and borrowings of $31.2 million and $42.2 million,
respectively, when compared to the prior year periods.
For the three and six months ended December 31, 2003, the average rate paid on
deposits decreased to 2.40% and 2.42%, respectively, from 3.05% and 3.17% for
the three and six months ended December 31, 2002. Average deposit balances
decreased $54.4 million and $74.3 million to $1.096 billion and $1.085 billion
for the three and six months ended December 31, 2003, respectively, from $1.150
billion and $1.159 billion for the comparable prior year periods. The lower
level of interest rates during the current year periods when compared to the
prior year periods resulted in decreases in the balance of certificates of
deposit while core deposit balances increased. With a reduction in the Company's
funding needs as a result of loan sales and accelerated loan prepayments,
maturing, higher costing certificates of deposit were priced to allow runoff.
The average cost of FHLB of New York advances increased slightly to 5.68% and
5.67% for the three and six months ended December 31, 2003, respectively, from
5.66% for both of the prior year periods. Due to maturing FHLB of New York
advances, the average balance of advances decreased $18.5 million and $10.0
million for the three and six months ended December 31, 2003, respectively, when
compared to the prior year periods. For the three months ended December 31,
2003, the average balance of other borrowings decreased $279,000, while the
average balance of other borrowings for the six months ended December 31, 2003
increased $123,000, when compared to the respective prior year periods. For the
three and six months ended December 31, 2003, the average rate paid on other
borrowings decreased to 4.55% and 4.52%, respectively, from 4.61% and 4.64% for
the three and six months ended December 31, 2002.
Pursuant to FIN 46, interest expense for the three and six months ended December
31, 2003 included the costs associated with the junior subordinated deferrable
interest debentures. For the three and six months ended December 31, 2003, the
junior subordinated deferrable interest debentures had an average balance of
$42.0 million and an average cost of 6.34% and 6.38%, respectively.
12
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three and six months ended December 31, 2003
was $9.0 million and $18.0 million, respectively, compared to $11.0 million and
$22.7 million recorded in the prior year periods. Average net interest-earning
assets decreased $44.8 million and $48.8 million for the three and six months
ended December 31, 2003, respectively, when compared to the prior year periods.
The net interest rate spread and net interest margin for the three months ended
December 31, 2003 were 2.00% and 2.14%, respectively, a decrease from 2.22% and
2.47% for the comparable prior year period. For the six months ended December
31, 2003, the net interest rate spread and net interest margin were 1.97% and
2.12%, respectively, a decrease from 2.29% and 2.54% for the six months ended
December 31, 2002. The net interest margin was reduced during the current year
periods when compared to the prior year periods principally due to the effect of
accelerated prepayments resulting from lower market interest rates.
Additionally, the net interest margin for the three and six months ended
December 31, 2003 was reduced due to the suspension of dividends paid by the
FHLB of New York on its stock for the three months ended December 31, 2003.
Assuming a dividend was paid by the FHLB of New York for the three months ended
December 31, 2003 approximately equal to the $318,000 payment which was made for
the three months ended September 30, 2003, the Company's net interest margin
would have increased approximately 0.07% and 0.04% for the three and six months
ended December 31, 2003, respectively.
Provision for Loan Losses. There was no provision for loan losses recorded for
the three and six months ended December 31, 2003, as management believes the
current allowance for loan losses is adequate to absorb probable losses on
existing loans that may become uncollectible. Loan loss provisions of $200,000
and $425,000 were recorded for the three and six months ended December 31, 2002,
respectively. The allowance for loan losses at December 31, 2002 of $6.3 million
is relatively unchanged from the balance at June 30, 2003. The allowance for
loan losses as a percentage of non-accruing loans was 201.25% at December 31,
2003, compared to 373.60% at June 30, 2003. Non-accruing loans were $3.1 million
at December 31, 2003 compared to $1.7 million at June 30, 2003. The allowance
for loan losses as a percentage of total loans at December 31, 2003 was 0.54%
compared to 0.51% at June 30, 2003 primarily due to the amount of the overall
loan portfolio. See the discussion in this Form 10-Q under "Critical Accounting
Policy".
Non-Interest Income. For the three months ended December 31, 2003, non-interest
income was $1.6 million compared to $2.1 million for the prior year period. For
the six months ended December 31, 2003, non-interest income of $3.6 million was
relatively unchanged compared to the six months ended December 31, 2002. The
decrease in non-interest income for the current three month period was primarily
due to decreases in service charges and net gain on sales of loans partially
offset by an increase in other non-interest income, when compared to the prior
year period. For the six months ended December 31, 2003, an increase in other
non-interest income was offset by decreases in service charges and net gain on
sales of loans, when compared to the six months ended December 31, 2002.
Service charge income for the three and six months ended December 31, 2003 was
$871,000 and $2.2 million, respectively, compared to $1.2 million and $2.4
million recorded for the prior year periods. Due to a recent increase in
interest rates during the current three month period, loan prepayments and
modifications decreased significantly, and is reflected as a decline in service
charge income.
During the three and six months ended December 31, 2003, the net gain on sales
of loans was $363,000 and $697,000, respectively, compared to $563,000 and
$794,000 for the three and six months ended December 31, 2002. Approximately
$8.1 million and $46.6 million of conforming, fixed rate one- to four-family
residential mortgage loans were sold into the secondary market during the three
and six months ended December 31, 2003, respectively. In addition, during the
three and six months ended December 31, 2003, the Company sold approximately
$16.2 million and $33.9 million of primarily fixed rate one- to four-family
residential mortgage loans to other financial institutions, respectively. There
were no such sales for the comparable prior year periods. Approximately $46.0
million and $58.5 million of conforming, fixed rate one- to four-family
residential mortgage loans were sold into the secondary market during the three
and six months ended December 31, 2002, respectively. During the three months
ended December 31, 2003 and 2002, a $3.0 million and a $4.0 million commercial
real estate loan participation was sold, respectively, as a means to reduce the
Company's credit exposure on a large commercial real estate loan relationship,
realizing a net gain each period of approximately $183,000. During the three
months ended December 31, 2003, one- to four-family residential loan production
slowed significantly as applications for refinances slowed due to a rise in
interest rates. Due to this significant slowdown in mortgage loan applications
and as a means to alternatively invest available cash at higher yields, in late
December 2003, the Company discontinued its loan sale strategy and began to
retain originated one- to four-family residential loans for portfolio.
Other non-interest income increased $63,000 and $210,000 for the three and six
months ended December 31, 2003 to $329,000 and $702,000, respectively, compared
to $266,000 and $492,000 for the prior year periods. The increase in
13
other non-interest income for the three and six months ended December 31, 2003
was primarily due to $134,000 and $224,000 of income from the investment in
BOLI. Other non-interest income for the current year periods also included the
earnings of the unconsolidated subsidiaries Trust II and Trust III, pursuant to
FIN 46.
Non-Interest Expenses. Non-interest expenses for the three and six months ended
December 31, 2003 were $6.3 million and $12.0 million, respectively, compared to
$6.8 million and $13.9 million for the prior year periods, which included $1.1
million and $2.2 million of preferred securities expense, respectively. With the
adoption of FIN 46, the cost of the trust preferred securities is included in
interest expense. The Company's non-interest expenses as a percent of average
assets decreased to 1.40% and 1.34% for the three and six months ended December
31, 2003, respectively, from 1.46% and 1.49% for the comparable prior year
periods.
Income Tax Expense. Income tax expense for the three and six months ended
December 31, 2003 was $1.5 million and $3.3 million, respectively, compared to
$2.2 million and $4.4 million for the three and six months ended December 31,
2002. The effective tax rate for the three and six months ended December 31,
2003 was 33.7% and 34.8%, respectively, compared to 36.2% and 36.4% for the
prior year periods. The decreases in the effective tax rate were primarily due
to the purchase of BOLI, for which the change in the cash surrender value is not
subject to tax.
14
Analysis of Net Interest Income
The following tables set forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income for the three and six months ended December 31, 2003 and 2002 and
reflect 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.
Three Months Ended December 31,
-----------------------------------------------------------------------------
2003 2002
----------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
----------- -------- -------- ------------ -------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans................................... $ 889,186 $ 12,281 5.52% $ 1,122,821 $ 16,677 5.93%
Commercial and multi-family real
estate loans............................ 161,142 2,988 7.28 160,904 3,203 7.82
Consumer loans............................. 114,548 1,591 5.51 116,217 1,816 6.20
----------- -------- ------------ --------
Total loans receivable.................. 1,164,876 16,860 5.76 1,399,942 21,696 6.17
Federal funds sold......................... 31,852 79 0.97 4,141 13 1.19
Investment securities and other............ 417,399 5,429 5.20 243,657 3,608 5.92
Mortgage-backed securities................. 101,665 1,290 5.08 144,035 2,044 5.68
----------- -------- ------------ --------
Total interest-earning assets........... 1,715,792 $ 23,658 5.50 1,791,775 $ 27,361 6.08
======== ========
Non-interest earning assets.................... 65,976 69,524
----------- ------------
Total assets............................ $ 1,781,768 $ 1,861,299
=========== ============
Deposits and borrowings:
Money market and demand deposits........... $ 168,666 $ 80 0.19% $ 171,153 $ 253 0.59%
Savings deposits........................... 382,712 2,453 2.54 332,090 2,194 2.62
Certificates of deposit.................... 544,595 4,102 2.99 647,155 6,406 3.93
----------- -------- ------------ --------
Total deposits.......................... 1,095,973 6,635 2.40 1,150,398 8,853 3.05
FHLB of New York advances.................. 486,003 7,043 5.68 504,465 7,281 5.66
Other borrowings........................... 23,148 269 4.55 23,427 276 4.61
Junior subordinated debentures............. 42,009 673 6.34 -- -- --
----------- -------- ------------ --------
Total deposits and borrowings........... 1,647,133 $ 14,620 3.50 1,678,290 $ 16,410 3.86
======== ========
Other liabilities.............................. 15,225 19,310
----------- ------------
Total liabilities....................... 1,662,358 1,697,600
Trust Preferred securities..................... --- 44,565
Stockholders' equity........................... 119,410 119,134
----------- ------------
Total liabilities and stockholders'
equity.............................. $ 1,781,768 $ 1,861,299
=========== ============
Net interest income and net
interest rate spread....................... $ 9,038 2.00% $ 10,951 2.22%
======== ==== ======== ====
Net interest-earning assets and
interest margin............................ $ 68,659 2.14% $ 113,485 2.47%
=========== ==== ============ ====
Ratio of interest-earning assets to
deposits and borrowings.................... 104.17% 106.76%
====== ======
(1) Annualized.
15
Six Months Ended December 31,
-----------------------------------------------------------------------------
2003 2002
----------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
----------- -------- -------- ------------ -------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans................................... $ 908,463 $ 24,811 5.45% $ 1,144,989 $ 34,904 6.09%
Commercial and multi-family real
estate loans............................ 161,089 6,054 7.38 155,149 6,235 7.89
Consumer loans............................. 115,661 3,255 5.58 118,185 3,743 6.28
----------- -------- ------------ --------
Total loans receivable.................. 1,185,213 34,120 5.73 1,418,323 44,882 6.30
Federal funds sold......................... 30,298 150 0.97 2,071 13 1.19
Investment securities and other............ 404,797 10,711 5.29 232,337 6,889 5.93
Mortgage-backed securities................. 95,531 2,418 5.06 154,048 4,578 5.94
----------- -------- ------------ --------
Total interest-earning assets........... 1,715,839 $ 47,399 5.50 1,806,779 $ 56,362 6.22
======== ========
Non-interest earning assets.................... 64,616 63,698
----------- ------------
Total assets............................ $ 1,780,455 $ 1,870,477
=========== ============
Deposits and borrowings:
Money market and demand deposits........... $ 170,391 $ 167 0.19% $ 169,054 $ 590 0.69%
Savings deposits........................... 371,553 4,742 2.53 325,927 4,402 2.68
Certificates of deposit.................... 543,124 8,316 3.04 664,340 13,515 4.04
----------- -------- ------------ --------
Total deposits.......................... 1,085,068 13,225 2.42 1,159,321 18,507 3.17
FHLB of New York advances.................. 494,434 14,302 5.67 504,465 14,562 5.66
Other borrowings........................... 23,419 542 4.52 23,296 552 4.64
Junior subordinated debentures............. 42,004 1,355 6.38 -- -- --
----------- -------- ------------ --------
Total deposits and borrowings........... 1,644,925 $ 29,424 3.53 1,687,082 $ 33,621 3.93
======== ========
Other liabilities.............................. 17,026 19,566
----------- ------------
Total liabilities....................... 1,661,951 1,706,648
Trust Preferred securities..................... --- 44,556
Stockholders' equity........................... 118,504 119,273
----------- ------------
Total liabilities and stockholders'
equity.............................. $ 1,780,455 $ 1,870,477
=========== ============
Net interest income and net
interest rate spread....................... $ 17,975 1.97% $ 22,741 2.29%
======== ==== ======== ====
Net interest-earning assets and
interest margin............................ $ 70,914 2.12% $ 119,697 2.54%
=========== ==== ============ ====
Ratio of interest-earning assets to
deposits and borrowings.................... 104.31% 107.09%
====== ======
(1) Annualized.
16
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets. 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.
December 31, June 30,
2003 2003
------------ ------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ................................................ $3,033 $1,451
Commercial and multi-family ........................................ 15 --
Consumer ........................................................... 68 231
------ ------
Total non-accruing loans ....................................... 3,116 1,682
Real estate owned, net .................................................. 28 28
------ ------
Total non-performing assets .................................... 3,144 1,710
------ ------
Total risk elements ............................................ $3,144 $1,710
====== ======
Non-accruing loans as a percentage of total loans ....................... 0.27% 0.14%
====== ======
Non-performing assets as a percentage of total assets ................... 0.18% 0.09%
====== ======
Total risk elements as a percentage of total assets ..................... 0.18% 0.09%
====== ======
Critical Accounting Policy
Allowance for Loan Losses - The allowance for loan losses is established through
charges to earnings based on management's evaluation of the probable credit
losses presently inherent in its loan portfolio. This evaluation, which includes
a review of loans for which full collectibility may not be reasonably assured,
considers among other matters, loan classifications, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss experience,
portfolio growth and composition 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 the 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 income.
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 probable 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.
Where appropriate, reserves are allocated to individual loans that exhibit
observed or probable credit weakness. For example, reserves may be specifically
assigned for loans that are 90 days or more past due, loans where the borrower
has filed for bankruptcy or loans identified by the Company's internal loan
review process. Reserves are based upon
17
management's estimate of the borrower's ability to repay the loan given the
availability of collateral, other sources of cash flow and legal options
available to the Company. For loans not subject to specific reserve allocations,
historical loss rates by loan category are applied. An unallocated reserve is
maintained to recognize the imprecision in estimating and measuring loss when
evaluating reserves for individual loans or pools of loans. Reserves on
individual loans are reviewed no less frequently than quarterly and adjusted as
appropriate.
The Company has not substantively changed any aspect of its overall approach in
its determination of the level of the allowance for loan losses. There have been
no material changes in assumptions or estimation techniques as compared to prior
periods that impacted the determination of the current period allowance.
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 allowance 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. These 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.
Interest Rate Sensitivity
Interest Rate Sensitivity Gap. The interest rate risk inherent in assets and
liabilities may be determined by analyzing the extent to which these assets and
liabilities are "interest rate sensitive" and by measuring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a defined time period if it matures or reprices within
that period. The difference or mismatch between the amount of interest-earning
assets maturing or repricing within a defined period and the amount of
interest-bearing liabilities maturing or repricing within the same period is
defined as the interest rate sensitivity gap. An institution is considered to
have a negative gap if the amount of interest-bearing liabilities maturing or
repricing within a specified time period exceeds the amount of interest-earning
assets maturing or repricing within the same period. If more interest-earning
assets than interest-bearing liabilities mature or reprice within a specified
period, then the institution is considered to have a positive gap. Accordingly,
in a rising interest rate environment, in an institution with a negative gap,
the cost of its rate sensitive liabilities would theoretically rise at a faster
pace than the yield on its rate sensitive assets, thereby diminishing future net
interest income. In a falling interest rate environment, a negative gap would
indicate that the cost of rate sensitive liabilities would decline at a faster
pace than the yield on rate sensitive assets and improve net interest income.
For an institution with a positive gap, the reverse would be expected.
At December 31, 2003, the Company's total deposits and borrowings maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing within one year by $27.3 million, representing a one year negative gap
of 1.53% of total assets, compared to a one year positive gap of $193.7 million,
or 10.69%, of total assets at June 30, 2003. The Company's gap position changed
from June 30, 2003 primarily due to the lengthening of asset cash flows as the
yield curve has begun to steepen and prepayment activity on loans and
mortgage-backed securities has slowed. Additionally, due to the increase in
long-term interest rates, certain investment securities with callable features
are no longer assumed to be redeemed within one year. Furthermore, the
short-term estimated cash flows of the Company's interest-bearing liabilities
increased due to an increase in certificates of deposit maturing within one
year, an increase in medium-term borrowings maturing within one year and the
repricing of higher yielding savings accounts in July 2004. Partially offsetting
the effect from these items was an increase in core deposits.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates in the short-term and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate significantly from those assumed in
calculating the gap position. Finally, the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through additional
18
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 high
sensitivity to changes in interest rates. The Sensitivity Measure is the change
in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates,
whichever produces a larger decline. At least quarterly, and generally monthly,
management models the change in net portfolio value ("NPV") over a variety of
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. An NPV ratio, in any
interest rate scenario, is defined as the NPV in that rate scenario divided by
the market value of assets in the same scenario. Assumptions used in calculating
interest rate sensitivity are periodically reviewed and modified as appropriate.
As of December 31, 2003, the Bank's internally generated initial NPV ratio was
8.90%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 8.14%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 0.76%. As of December 31, 2003, the Company's internally generated
initial NPV ratio was 8.75%, the Post-Shock ratio was 7.70%, and the Sensitivity
Measure was negative 1.06%. 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, including discount rates, and generally result
in lower levels of presumed interest rate risk than Office of Thrift Supervision
("OTS") measurements indicate.
The OTS measures the Bank's 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
September 30, 2003 (the latest date for which information is available), the
Bank's initial NPV ratio, as measured by the OTS, was 9.03%, the Bank's
Post-Shock ratio was 5.79% and the Sensitivity Measure was negative 3.24%.
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 December 31, 2003, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 1.9% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
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.
The Company uses its liquid resources principally to fund maturing certificates
of deposit and deposit withdrawals, to purchase loans and securities, to fund
existing and future loan commitments, and to meet operating expenses. Management
believes that loan repayments and other sources of funds will be adequate to
meet the Company's foreseeable liquidity needs.
The Company's cash needs for the six months ended December 31, 2003 were
provided by operating activities, including the sale of loans, proceeds from
maturities of investment securities, principal repayments of loans and
mortgage-backed securities and an increase in deposits. During the six months
ended December 31, 2003, the cash provided was used to fund investing
activities, which included the origination and purchase of loans and the
purchase of investment and mortgage-backed securities, as well as for the
repayment of FHLB of New York advances and other borrowings. Additionally,
during the six months ended December 31, 2003, the cash provided was used to
fund an investment in BOLI. During the six months ended December 31, 2002, the
cash needs of the Company were provided
19
by operating activities, including the sale of loans, proceeds from maturities
of investment securities and principal repayments of loans and mortgage-backed
securities. During this period, the cash provided was used for investing
activities, which included the origination of loans and the purchase of
investment securities, as well as to fund a decrease in deposits. Additionally,
during the six months ended December 31, 2002, the cash provided was used for
the repurchase of common stock.
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 December 31, 2003, the Bank exceeded all
regulatory capital requirements and qualified as a "well-capitalized"
institution (see Note 7. - Stockholders' Equity and Regulatory Capital, in the
Notes to Consolidated Financial Statements).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's most significant form of market risk is interest rate risk, as the
majority of its assets and liabilities are sensitive to changes in interest
rates. See the discussion in this Form 10-Q under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity."
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
-------------------------------------------------
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934 (the "Act")) was carried out as of December
31, 2003 under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management. The Company's Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2003, the Company's
disclosure controls and procedures are effective in ensuring that the
information required to be disclosed by the Company in the reports it files or
submits under the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
in a timely manner, and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: During the quarter ended December 31,
-----------------------------
2003, no change occurred in the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
20
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders (Annual Meeting) was held on
October 29, 2003.
(b) Directors elected:
Joseph L. LaMonica
Mario Teixeira, Jr.
(c) At the Annual Meeting the stockholders considered:
(i) the election of two directors,
(ii) the proposal to change the Company's state of incorporation
from Delaware to Maryland,
(iii) the ratification of the appointment of Deloitte & Touche LLP
as independent auditors for the Company for the fiscal year
ending June 30, 2004.
The vote on the election of two directors was as follows:
FOR WITHHELD
--------- --------
Joseph L. LaMonica 6,108,870 345,110
Mario Teixeira, Jr. 6,368,215 85,765
There were no broker non-votes with respect to the proposal.
The vote on the proposal to change the Company's state of
incorporation from Delaware to Maryland was as follows:
FOR AGAINST ABSTAIN NON-VOTE
--------- ------- ------- --------
4,088,228 538,917 67,222 1,759,613
The vote on the ratification of the appointment of Deloitte &
Touche LLP as independent auditors for the Company for the
fiscal year ending June 30, 2004 was as follows:
FOR AGAINST ABSTAIN
--------- ------- -------
6,377,425 48,556 27,999
There were no broker non-votes with respect to the proposal.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
During the second quarter of fiscal 2004, the Company filed or
furnished the following reports on Form 8-K:
Item # Item Description Filing Date
-----------------------------------------------------------------------------------------
7 & 12 First Quarter Earnings Release and the Script of the
Financial Presentation from the Company's Annual
Meeting of Stockholders October 29, 2003
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: February 13, 2004 By: /s/ Joseph L. LaMonica
-------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Principal Executive Officer)
Date: February 13, 2004 By: /s/ Claire M. Chadwick
-------------------------------------
Claire M. Chadwick
Executive Vice President,
Chief Financial Officer and
Controller
(Principal Financial and Accounting Officer)
22
EXHIBIT INDEX
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) Articles of Incorporation *
3 (ii) Bylaws *
4 Stockholder Protection Rights Agreement **
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 ****
(h) Employment Agreement with Claire M. Chadwick ******
(i) Supplemental Executive Retirement Plan ******
(a) First Amendment to the Supplemental Executive Retirement Plan 10(i)(a)
(j) Supplemental Executive Death Benefit Plan 10(j)
(k) Outside Director's Retirement Plan ******
(l) Form of Consulting Agreement ******
11 Statement re: computation of per share earnings 11
15 Letter re: unaudited interim financial information Not required
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
22 Published report regarding matters submitted to vote of security holders None
23 Consents of experts and counsel None
24 Power of Attorney None
31.1 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Executive Officer) 31.1
31.2 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Financial Officer) 31.2
32 Certifications Required by Section 1350 of Title 18 of the United States Code 32
99 Additional Exhibits Not applicable
- -------------------------
*Filed as an appendix to the Company's Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934, filed with the
Securities and Exchange Commission on September 22, 2003. 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, 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, the Second Amendment to the
Stockholders Protection Rights Agreement is filed as an exhibit to the
Form 8-A/A-2 and the Third Amendment to the Stockholders Protection
Rights Agreement is filed as an exhibit to the Form 8-K filed with the
Securities and Exchange Commission on October 29, 2003. These documents
are hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
***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 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.
23
*****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.
******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 22, 2003 (File No. 0-24040). All of such previously filed
documents are hereby incorporated by reference in accordance with Item
601 of Regulation S-K.
24