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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 March 31, 2004
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)
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
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(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 May 10, 2004, there were issued and outstanding 6,744,714 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
March 31, June 30,
2004 2003
----------- -----------
(unaudited) (audited)
(Dollars in thousands)
ASSETS
Cash and amounts due from depository institutions ...................................... $ 15,397 $ 53,046
Federal funds sold ..................................................................... 3,500 30,000
----------- -----------
Cash and cash equivalents ......................................................... 18,897 83,046
Investment securities available for sale, at market value, amortized cost of
$4,631 and $4,467 at March 31, 2004 and June 30, 2003 ........................... 4,817 4,741
Investment securities held to maturity, at amortized cost, market value of
$425,323 and $345,468 at March 31, 2004 and June 30, 2003 ......................... 420,286 339,498
Mortgage-backed securities held to maturity, at amortized cost, market value
of $102,475 and $97,138 at March 31, 2004 and June 30, 2003 ....................... 99,487 93,632
Loans held for sale .................................................................... -- 11,496
Loans receivable, net of allowance for loan losses of $6,252 and $6,284
at March 31, 2004 and June 30, 2003 ............................................... 1,197,730 1,217,422
Premises and equipment, net ............................................................ 21,996 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 ....................................................... 10,618 8,684
Other intangible assets ................................................................ 1,814 3,175
Bank owned life insurance ("BOLI") ..................................................... 12,359 --
Other assets ........................................................................... 4,108 4,404
----------- -----------
$ 1,816,413 $ 1,812,452
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits .......................................................................... $ 1,129,537 $ 1,094,666
Federal Home Loan Bank of New York advances ....................................... 485,465 504,465
Other borrowings .................................................................. 27,046 26,644
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $1,274 and $923 at March 31, 2004 and
June 30, 2003 ................................................................... 42,026 30,005
Mortgage escrow funds ............................................................. 8,006 10,491
Accounts payable and other liabilities ............................................ 6,753 17,725
----------- -----------
Total liabilities ................................................................. 1,698,833 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 6,703,004 and 6,838,029 shares outstanding at March
31, 2004 and June 30, 2003 (excluding shares held in treasury
of 5,196,996 and 5,061,971 at March 31, 2004 and June 30, 2003) .............. 60 60
Additional paid-in capital ........................................................ 67,809 65,689
Employee Stock Ownership Plan Trust debt .......................................... (161) (644)
Retained earnings, partially restricted ........................................... 130,486 124,797
Accumulated other comprehensive income, net of taxes .............................. 110 177
Treasury stock, at cost, 5,196,996 and 5,061,971 shares at
March 31, 2004 and June 30, 2003 ............................................... (80,724) (73,244)
----------- -----------
Total stockholders' equity ........................................................ 117,580 116,835
----------- -----------
$ 1,816,413 $ 1,812,452
=========== ===========
See notes to consolidated financial statements.
2
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Nine months ended
March 31, March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans ............................ $ 16,899 $ 20,038 $ 51,019 $ 64,920
Interest on federal funds sold ........................ 25 93 175 106
Interest and dividends on investment securities ....... 6,041 3,805 16,752 10,694
Interest on mortgage-backed securities ................ 1,361 1,640 3,779 6,218
---------- ---------- ---------- ----------
24,326 25,576 71,725 81,938
---------- ---------- ---------- ----------
Interest Expense:
Deposits .............................................. 6,688 7,393 19,913 25,900
Borrowed funds ........................................ 7,239 7,394 22,083 22,508
Junior subordinated debentures ........................ 671 -- 2,026 --
---------- ---------- ---------- ----------
14,598 14,787 44,022 48,408
---------- ---------- ---------- ----------
Net Interest and Dividend Income Before Provision
for Loan Losses ....................................... 9,728 10,789 27,703 33,530
Provision for Loan Losses .................................. -- 100 -- 525
---------- ---------- ---------- ----------
Net Interest and Dividend Income After Provision
for Loan Losses ....................................... 9,728 10,689 27,703 33,005
---------- ---------- ---------- ----------
Non-Interest Income:
Service charges ....................................... 957 1,294 3,131 3,647
Net gain from real estate operations .................. -- 1 1 3
Net gain on sales of loans ............................ 57 498 754 1,292
Other ................................................. 360 220 1,062 712
---------- ---------- ---------- ----------
1,374 2,013 4,948 5,654
---------- ---------- ---------- ----------
Non-Interest Expenses:
Compensation and employee benefits .................... 3,901 3,358 10,841 10,152
Net occupancy expense ................................. 514 498 1,417 1,308
Equipment ............................................. 536 544 1,520 1,571
Advertising ........................................... 102 36 236 154
Amortization of intangibles ........................... 453 465 1,362 1,407
Federal deposit insurance premium ..................... 41 49 126 147
Preferred securities expense .......................... -- 1,092 -- 3,276
Other ................................................. 1,090 982 3,091 2,938
---------- ---------- ---------- ----------
6,637 7,024 18,593 20,953
---------- ---------- ---------- ----------
Income Before Income Taxes ................................. 4,465 5,678 14,058 17,706
Income Tax Expense ......................................... 1,499 2,106 4,838 6,486
---------- ---------- ---------- ----------
Net Income ................................................. $ 2,966 $ 3,572 $ 9,220 $ 11,220
========== ========== ========== ==========
Weighted average number of common shares outstanding:
Basic ................................................. 6,762,795 6,950,081 6,779,424 7,021,298
========== ========== ========== ==========
Diluted ............................................... 7,192,948 7,464,791 7,227,905 7,546,527
========== ========== ========== ==========
Net income per common share:
Basic ................................................. $ 0.44 $ 0.51 $ 1.36 $ 1.60
========== ========== ========== ==========
Diluted ............................................... $ 0.41 $ 0.48 $ 1.28 $ 1.49
========== ========== ========== ==========
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended Nine months ended
March 31, March 31,
-------------------- -----------------------
2004 2003 2004 2003
------ ------ ------- -------
(unaudited) (unaudited)
(In thousands)
Net income .............................................................. $2,966 $3,572 $ 9,220 $11,220
Other comprehensive income, net of tax:
Unrealized gains on investment securities available
for sale:
Unrealized holding gains (losses) arising during period .......... 44 76 (67) 120
------ ------ ------- -------
Comprehensive income .................................................... $3,010 $3,648 $ 9,153 $11,340
====== ====== ======= =======
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended March 31, 2004 and 2003
-------------------------------------------------
(unaudited)
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.... 450
ESOP adjustment.................... 1,457
Purchase of 455,000 shares of
treasury stock................... (12,122)
Issuance of 86,116 shares of
treasury stock for options
exercised and Dividend
Reinvestment Plan ("DRP")...... (566) 1,138
Cash dividends of $0.30 per
common share..................... (2,100)
Unrealized gain on investment
securities available for sale,
net of income taxes of $84...... 120
Net income for the nine months
ended March 31, 2003............. 11,220
----- ---- -------- --------- -------- ------ --------
Balance at March 31, 2003.......... $ -- $ 60 $ 65,277 $ (794) $122,998 $ 138 $(69,321)
===== ==== ======== ========= ======== ====== ========
Balance at June 30, 2003........... $ -- $ 60 $ 65,689 $ (644) $124,797 $ 177 $(73,244)
Allocation of ESOP stock........... 483
ESOP adjustment.................... 2,120
Purchase of 308,500 shares of
treasury stock................... (10,022)
Issuance of 173,475 shares of
treasury stock for options
exercised and DRP............... (1,537) 2,542
Cash dividends of $0.30 per
common share..................... (1,994)
Unrealized loss on investment
securities available for sale,
net of income taxes of $(21).... (67)
Net income for the nine months
ended March 31, 2004............. 9,220
----- ---- -------- --------- -------- ------ --------
Balance at March 31, 2004.......... $ -- $ 60 $ 67,809 $ (161) $130,486 $ 110 $(80,724)
===== ==== ======== ========= ======== ====== ========
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended March 31,
------------------------------
2004 2003
--------- ---------
(unaudited) (unaudited)
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income .......................................................................... $ 9,220 $ 11,220
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans .......................................................... (754) (1,292)
Proceeds from sales of loans held for sale .......................................... 87,789 109,166
Amortization of investment and mortgage-backed securities premium, net .............. 406 632
Depreciation and amortization ....................................................... 1,288 1,290
Provision for losses on loans and real estate owned ................................. -- 525
Amortization of cost of stock plans ................................................. 2,603 1,907
Amortization of intangibles ......................................................... 1,362 1,407
Amortization of premiums on loans and loan fees ..................................... 2,251 5,476
Amortization of trust preferred securities issuance and junior
subordinated debentures issuance costs ............................................. 27 57
Increase in BOLI .................................................................... (359) --
(Increase) decrease in accrued interest receivable, net of accrued
interest payable ................................................................... (2,616) 84
(Increase) decrease in other assets ................................................. 666 (2,948)
Increase (decrease) in accounts payable and other liabilities ....................... (10,951) 4,793
Decrease in mortgage escrow funds ................................................... (2,485) (2,709)
Other, net .......................................................................... 6 --
--------- ---------
Net cash provided by operating activities ........................................... 88,453 129,608
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities ................................... 96,275 187,710
Purchases of investment securities held to maturity ................................. (177,140) (264,491)
Purchases of investment securities available for sale ............................... (164) (155)
Net proceeds (outflow) from principal repayments of loans net of loan
originations ..................................................................... (20,160) 14,254
Proceeds from loans sold ............................................................ 3,181 4,170
Purchases of loans .................................................................. (41,119) (676)
Proceeds from principal repayments of mortgage-backed securities .................... 38,700 63,227
Purchases of mortgage-backed securities ............................................. (44,884) (114)
Purchases of premises and equipment ................................................. (2,187) (2,403)
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 ................................. (158,548) 1,955
--------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits ................................................. 35,554 (67,530)
Increase (decrease) in advances from the Federal Home Loan Bank
of New York and other borrowings .................................................. (18,598) 3,142
Cash dividends paid ................................................................. (1,993) (2,100)
Purchases of treasury stock, net of reissuance ...................................... (9,017) (11,550)
--------- ---------
Net cash provided by (used in) financing activities ................................. 5,946 (78,038)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ..................................... (64,149) 53,525
Cash and Cash Equivalents, Beginning of Period ........................................... 83,046 37,189
--------- ---------
Cash and Cash Equivalents, End of Period ................................................. $ 18,897 $ 90,714
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for:
Interest ............................................................................ $ 44,890 $ 49,978
========= =========
Income taxes ........................................................................ $ 4,377 $ 9,074
========= =========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at cost ........................ $ 75,722 $ 120,908
========= =========
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 nine months
ended March 31, 2004 and 2003. 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
Effective January 1, 2004, the Company adopted 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 adoption of SFAS 132R did not have an impact on the Company's
consolidated financial condition, results of operations or cash flows.
4. Supplemental Executive Retirement Plan and Director's Retirement Plan
The Company currently provides for a Supplemental Executive Retirement Plan and
a Director's Retirement Plan for certain key executive employees and directors.
Benefits provided are based primarily on years of service and compensation or
fees. Based on the terms of the two plans, there was a $117,000 benefit
obligation as of June 30, 2003. Service cost for the three and nine months ended
March 31, 2004 was $66,000 and $197,000, respectively. Both plans are unfunded
and at March 31, 2004 the benefit obligation of $314,000 is included in accounts
payable and other liabilities in the Consolidated Statements of Financial
Condition. The assumptions used in calculating the benefit obligation included a
4% compensation increase rate and a discount rate of 7%. The accounting for
these postretirement benefits is in accordance with Statement of Financial
Accounting Standards No. 87 "Employer's Accounting for Pensions".
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.
8
6. Computation of EPS
The computation of EPS is presented in the following table.
Three months ended Nine months ended
March 31, March 31,
------------------------------ ------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Net income ............................................. $ 2,966 $ 3,572 $ 9,220 $ 11,220
=========== =========== =========== ===========
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 ......... 5,104,998 4,791,118 5,056,044 4,689,711
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 .............. 919,793 793,199 887,468 763,009
----------- ----------- ----------- -----------
Average basic shares ................................... 6,762,795 6,950,081 6,779,424 7,021,298
Plus: Average common stock equivalents ................. 430,153 514,710 448,481 525,230
----------- ----------- ----------- -----------
Average diluted shares ................................. 7,192,948 7,464,791 7,227,905 7,546,527
=========== =========== =========== ===========
Earnings per common share:
Basic .......................................... $ 0.44 $ 0.51 $ 1.36 $ 1.60
=========== =========== =========== ===========
Diluted ........................................ $ 0.41 $ 0.48 $ 1.28 $ 1.49
=========== =========== =========== ===========
9
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 March 31, 2004
Tangible capital, and ratio to
adjusted total assets.................... $160,687 8.86% $27,208 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets.................... $160,687 8.86% $72,556 4.00% $90,695 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets..................... $160,687 16.82% N/A N/A $57,336 6.00%
Risk-based capital, and ratio to
risk-weighted assets..................... $167,001 17.48% $76,448 8.00% $95,560 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 March 31, 2004
Tier I capital, and ratio to
adjusted total assets.................... $154,169 8.49% $72,664 4.00% N/A N/A
Tier I capital, and ratio to
risk-weighted assets..................... $154,169 16.30% $37,833 4.00% $56,750 6.00%
Total capital, and ratio to
risk-weighted assets..................... $160,483 16.97% $75,667 8.00% $94,583 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%
10
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 increased $4.0 million to $1.816 billion at March 31, 2004 from
total assets of $1.812 billion at June 30, 2003. When compared to June 30, 2003,
the increase at March 31, 2004 was primarily due to an $80.8 million increase in
investment securities held to maturity and a $5.9 million increase in
mortgage-backed securities partially offset by a $64.1 million decrease in cash
and cash equivalents and a $31.2 million decrease in net loans receivable. The
increase at March 31, 2004 was also partially due to a $12.4 million investment
in bank owned life insurance ("BOLI"). As a means to replace investment
securities called before maturity and to invest available cash at higher yields,
investment securities held to maturity were purchased during the period. The
effects of accelerated prepayments on loans held to maturity and sales of mostly
conforming, fixed rate, one- to four-family residential mortgage loans held for
sale into the secondary market more than offset loan originations. During the
six month period ended March 31, 2004, one- to four-family residential loan
production decreased, when compared to the production level achieved during the
first three months of the period, 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 its
portfolio.
Deposits increased $34.9 million to $1.130 billion at March 31, 2004 from $1.095
billion at June 30, 2003. An increase in core deposit accounts (checking, money
market and savings accounts) of $42.7 million was partially offset by a $7.8
million decrease in short- and medium-term certificates of deposit. At March 31,
2004, Federal Home Loan Bank ("FHLB") of New York advances and other borrowings
totaled $512.5 million, reflecting a decrease of $18.6 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.
11
Non-accruing loans (loans whereby the collection of principal or interest
becomes delinquent for more than 90 days) at March 31, 2004 totaled $2.9
million, as compared to $1.7 million at June 30, 2003. The increase in the
amount of non-accruing loans is in the one- to four-family loan category, and
primarily reflects the addition of two loans. The ratio of non-accruing loans to
total loans increased to 0.24% at March 31, 2004 from 0.14% at June 30, 2003.
Real estate owned at March 31, 2004 remained unchanged from the $28,000 recorded
at June 30, 2003. Total non-performing assets (non-accruing loans and real
estate owned) at March 31, 2004 totaled $2.9 million, as compared to $1.7
million at June 30, 2003. The ratio of non-performing assets to total assets
increased to 0.16% at March 31, 2004 from 0.09% at June 30, 2003.
Stockholders' equity at March 31, 2004 totaled $117.6 million compared to $116.8
million at June 30, 2003. The increase primarily reflects the net income
recorded for the nine months ended March 31, 2004 and the exercise of stock
options, partially offset by the repurchase of 188,500 shares of the Company's
outstanding stock at an average price of $34.37 per share and the declaration of
cash dividends.
Results of Operations
General. For the three months ended March 31, 2004, net income was $3.0 million,
or $0.41 per diluted share, compared to net income of $3.6 million, or $0.48 per
diluted share, for the comparable prior year period. For the nine months ended
March 31, 2004, net income was $9.2 million, or $1.28 per diluted share. These
results compare to net income of $11.2 million, or $1.49 per diluted share, for
the nine months ended March 31, 2003.
Interest and Dividend Income. Interest and dividend income for the three and
nine months ended March 31, 2004 decreased to $24.3 million and $71.7 million,
respectively, from $25.6 million and $81.9 million for the three and nine months
ended March 31, 2003. 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
$1.741 billion and $1.724 billion for the three and nine months ended March 31,
2004, respectively, compared to $1.755 billion and $1.789 billion for the
comparable prior year periods. The average yield earned on interest-earning
assets decreased to 5.59% for the three months ended March 31, 2004 from 5.85%
for the three months ended March 31, 2003. For the nine months ended March 31,
2004, the average yield earned on interest-earning assets decreased to 5.53%
from 6.10% for the comparable prior year period.
Interest income on residential one- to four-family mortgage loans for the three
and nine months ended March 31, 2004 decreased $3.0 million and $13.1 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 5.47% and 5.46% from 5.73%
and 5.97% for the three and nine months ended March 31, 2004, 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 $169.1 million and $214.1 million for the three
and nine months ended March 31, 2004, 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
$23,000 and $204,000 for the three and nine months ended March 31, 2004,
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 7.40% and 7.39% for
the current three and nine month periods, respectively, compared to 7.74% and
7.84% for the three and nine months ended March 31, 2003. 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 yield for this
portfolio were partially offset by increases in the average outstanding balance
of commercial and multi-family real estate loans of $4.7 million and $5.5
million for the three and nine months ended March 31, 2004, respectively, when
compared to the prior year periods.
Interest income on consumer loans decreased $138,000 and $627,000 for the three
and nine months ended March 31, 2004, 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 5.45% and 5.54% for the three and nine months ended
March 31, 2004, respectively, from 6.17% and 6.25% for the comparable prior year
periods. The decrease in yield on consumer loans for the three months ended
March 31, 2004
12
was partially offset by a $3.3 million increase in the average balance
outstanding of this loan portfolio, when compared to the prior year period. For
the nine months ended March 31, 2004, the decrease in interest income on
consumer loans was partially attributable to a decrease of $599,000 in the
average balance outstanding, when compared to the nine months ended March 31,
2003.
Interest income on investment securities and other interest-earning assets
increased $2.2 million and $6.1 million for the three and nine months ended
March 31, 2004, respectively, compared to the prior year periods. The increases
in interest income on these securities were attributable to $185.6 million and
$176.9 million increases in the average balance outstanding for the three and
nine months ended March 31, 2004, 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 nine months ended March 31, 2004 was
negatively impacted by declines in the average yield earned on these securities.
The average yield decreased to 5.36% and 5.32% for the current three and nine
month periods, respectively, compared to 5.74% and 5.86% for the three and nine
months ended March 31, 2003 as called investment securities were replaced with
lower yielding investments.
Interest income on the mortgage-backed securities portfolio decreased $279,000
and $2.4 million for the three and nine months ended March 31, 2004,
respectively, compared to the prior year periods. The decreases in interest
income on mortgage-backed securities for the three and nine months ended March
31, 2004 were due to decreases in the average yield earned on this portfolio to
5.32% and 5.15%, respectively, from 5.54% and 5.83% for the three and nine
months ended March 31, 2003. In addition, the decreases in interest income on
mortgage-backed securities were due to decreases in the average balance
outstanding of $16.2 million and $44.4 million for the three and nine months
ended March 31, 2004, respectively, when compared to the prior year periods,
primarily due to accelerated prepayments.
Interest Expense. Interest expense decreased $189,000 and $4.4 million for the
three and nine months ended March 31, 2004, 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 3.48% and 3.51%
for the three and nine months ended March 31, 2004, respectively, from 3.64% and
3.84% for the prior year periods, as a result of lower market interest rates.
The decrease in the cost of funds for the three months ended March 31, 2004 was
partially offset by an increase in total average deposits and borrowings of
$33.1 million, when compared to the three months ended March 31, 2003. For the
nine months ended March 31, 2004, the decrease in interest expense was also
attributable to a decrease in total average deposits and borrowings of $17.1
million, when compared to the prior year period.
The average rate paid on deposits decreased to 2.41% for the three and nine
months ended March 31, 2004 from 2.70% and 3.02% for the three and nine months
ended March 31, 2003, respectively. Average deposit balances increased $5.0
million and decreased $47.8 million to $1.114 billion and $1.095 billion for the
three and nine months ended March 31, 2004, respectively, from $1.109 billion
and $1.143 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 nine months ended March 31, 2004, 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 $19.0 million and $13.0
million for the three and nine months ended March 31, 2004, respectively, when
compared to the prior year periods. For the three and nine months ended March
31, 2004, the average balance of other borrowings increased $5.1 million and
$1.8 million, respectively, when compared to the three and nine months ended
March 31, 2003. The average rate paid on other borrowings decreased to 3.91% and
4.29% for the three and nine months ended March 31, 2004, respectively, compared
to 4.58% and 4.61% for the prior year periods.
Pursuant to FIN 46, interest expense for the three and nine months ended March
31, 2004 included the costs associated with the junior subordinated deferrable
interest debentures. For the three and nine months ended March 31, 2004, the
junior subordinated deferrable interest debentures had an average balance of
$42.0 million and an average cost of 6.35% and 6.37%, respectively.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three and nine months ended March 31, 2004 was
$9.7 million and $27.7 million, respectively, compared to $10.8 million and
13
$33.5 million recorded in the prior year periods. Average net interest-earning
assets decreased $46.8 million and $48.1 million for the three and nine months
ended March 31, 2004, respectively, when compared to the prior year periods. The
net interest rate spread and net interest margin for the three months ended
March 31, 2004 were 2.11% and 2.24%, respectively, a decrease from 2.21% and
2.45% for the comparable prior year period. For the nine months ended March 31,
2004, the net interest rate spread and net interest margin were 2.02% and 2.16%,
respectively, a decrease from 2.26% and 2.51% for the nine months ended March
31, 2003. 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.
Provision for Loan Losses. There was no provision for loan losses recorded for
the three and nine months ended March 31, 2004, which is consistent with the
continuation of the Company's historically low levels of non-accruing loans and
loan chargeoffs. 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 $100,000 and $525,000 were recorded for
the three and nine months ended March 31, 2003, respectively. The allowance for
loan losses at March 31, 2004 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 215.59% at March 31, 2004, compared to 373.60% at June
30, 2003. Non-accruing loans were $2.9 million at March 31, 2004 compared to
$1.7 million at June 30, 2003. The allowance for loan losses as a percentage of
total loans at March 31, 2004 was 0.52% 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 and nine months ended March 31, 2004,
non-interest income was $1.4 million and $4.9 million, respectively, compared to
$2.0 million and $5.7 million for the prior year periods. The decreases in
non-interest income for the current periods were primarily due to decreases in
service charges and net gain on sales of loans partially offset by increases in
other non-interest income, when compared to the three and nine months ended
March 31, 2003.
Service charge income for the three and nine months ended March 31, 2004 was
$957,000 and $3.1 million, respectively, compared to $1.3 million and $3.6
million recorded for the prior year periods. Due to increased interest rates
during the past six month period when compared to the same period during the
prior fiscal year, loan prepayments and modifications decreased significantly,
resulting in a decline in service charge income for the current year periods.
During the three and nine months ended March 31, 2004, the net gain on sales of
loans was $57,000 and $754,000, respectively, compared to $498,000 and $1.3
million for the three and nine months ended March 31, 2003. Approximately $1.8
million and $48.4 million of conforming, fixed rate one- to four-family
residential mortgage loans were sold into the secondary market during the three
and nine months ended March 31, 2004, respectively. In addition, during the
three and nine months ended March 31, 2004, the Company sold approximately $4.6
million and $38.6 million of primarily fixed rate one- to four-family
residential mortgage loans to other financial institutions, respectively. For
the comparable prior year periods, there were no such sales to other financial
institutions; however, during the three months ended March 31, 2003, the Company
recognized a $200,000 gain on a commitment to sell approximately $6.2 million of
one- to four-family residential mortgage loans to a financial institution.
Approximately $49.4 million and $107.9 million of conforming, fixed rate one- to
four-family residential mortgage loans were sold into the secondary market
during the three and nine months ended March 31, 2003, respectively.
Furthermore, 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 last six month period ended March 31, 2004,
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 $140,000 and $350,000 for the three and nine
months ended March 31, 2004 to $360,000 and $1.1 million, respectively, compared
to $220,000 and $712,000 for the prior year periods. The increases in other
non-interest income for the three and nine months ended March 31, 2004 were
primarily due to $134,000 and $359,000 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 nine months ended
March 31, 2004 were $6.6 million and $18.6 million, respectively, compared to
$7.0 million and $21.0 million for the prior year periods, which included
14
$1.1 million and $3.3 million of preferred securities expense, respectively.
With the adoption of FIN 46, the cost of the trust preferred securities is
included in interest expense. Excluding the effect of preferred securities
expense for the prior year periods, the increases in non-interest expenses for
the three and nine months ended March 31, 2004 were partially attributable to
increases in compensation expense related to the Employee Stock Ownership Plan
("ESOP"). For the three and nine months ended March 31, 2004, the Company
recorded compensation expense related to the ESOP of $1.1 million and $3.0
million, respectively, compared to $784,000 and $2.3 million for the prior year
periods, reflecting the appreciation in the Company's stock price over the
periods. The majority of the ESOP expense represented a non-cash valuation
adjustment to reflect the value of the Company's stock. The Company will cease
recognizing compensation expense related to the ESOP after June 30, 2004, when
the ESOP shares will be fully allocated. The Company's non-interest expenses as
a percent of average assets decreased to 1.47% and 1.39% for the three and nine
months ended March 31, 2004, respectively, from 1.55% and 1.51% for the
comparable prior year periods.
Income Tax Expense. Income tax expense for the three and nine months ended March
31, 2004 was $1.5 million and $4.8 million, respectively, compared to $2.1
million and $6.5 million for the three and nine months ended March 31, 2003. The
effective tax rate for the three and nine months ended March 31, 2004 was 33.6%
and 34.4%, respectively, compared to 37.1% and 36.6% 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.
15
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 nine months ended March 31, 2004 and 2003 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 March 31,
-----------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
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................................... $ 901,473 $ 12,319 5.47% $1,070,621 $15,297 5.73%
Commercial and multi-family real
estate loans............................ 162,016 3,022 7.40 157,330 3,045 7.74
Consumer loans............................. 114,700 1,558 5.45 111,446 1,696 6.17
----------- -------- ---------- -------
Total loans receivable.................. 1,178,189 16,899 5.73 1,339,397 20,038 6.01
Federal funds sold......................... 9,875 25 1.00 31,844 93 1.17
Investment securities and other............ 450,694 6,041 5.36 265,051 3,805 5.74
Mortgage-backed securities................. 102,259 1,361 5.32 118,432 1,640 5.54
----------- -------- ---------- -------
Total interest-earning assets........... 1,741,017 $ 24,326 5.59 1,754,724 $25,576 5.85
======== =======
Non-interest earning assets.................... 61,985 63,441
----------- ----------
Total assets............................ $ 1,803,002 $1,818,165
=========== ==========
Deposits and borrowings:
Money market and demand deposits........... $ 161,793 $ 73 0.18% $ 167,192 $ 133 0.32%
Savings deposits........................... 397,486 2,544 2.57 343,126 2,150 2.54
Certificates of deposit.................... 554,789 4,071 2.94 598,749 5,110 3.46
----------- -------- ---------- -------
Total deposits.......................... 1,114,068 6,688 2.41 1,109,067 7,393 2.70
FHLB of New York advances.................. 485,465 6,957 5.68 504,465 7,126 5.66
Other borrowings........................... 28,540 282 3.91 23,419 268 4.58
Junior subordinated debentures............. 42,020 671 6.35 -- -- --
----------- -------- ---------- -------
Total deposits and borrowings.............. 1,670,093 $ 14,598 3.48 1,636,951 $14,787 3.64
======== =======
Other liabilities.............................. 13,972 16,413
----------- ----------
Total liabilities....................... 1,684,065 1,653,364
Trust Preferred securities..................... --- 44,584
Stockholders' equity........................... 118,937 120,217
----------- ----------
Total liabilities and stockholders'
equity.............................. $ 1,803,002 $1,818,165
=========== ==========
Net interest income and net
interest rate spread....................... $ 9,728 2.11% $10,789 2.21%
======== ====== ======= ======
Net interest-earning assets and
interest margin............................ $ 70,924 2.24% $ 117,773 2.45%
=========== ====== ========== ======
Ratio of interest-earning assets to
deposits and borrowings.................... 104.25% 107.19%
====== ======
(1) Annualized.
16
Nine Months Ended March 31,
-----------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
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................................... $ 906,133 $ 37,131 5.46% $1,120,200 $50,201 5.97%
Commercial and multi-family real
estate loans............................ 161,398 9,076 7.39 155,876 9,280 7.84
Consumer loans............................. 115,340 4,812 5.54 115,939 5,439 6.25
----------- -------- ---------- -------
Total loans receivable.................. 1,182,871 51,019 5.73 1,392,015 64,920 6.21
Federal funds sold......................... 23,491 175 0.97 11,995 106 1.16
Investment securities and other............ 420,096 16,752 5.32 243,242 10,694 5.86
Mortgage-backed securities................. 97,774 3,779 5.15 142,176 6,218 5.83
----------- -------- ---------- -------
Total interest-earning assets........... 1,724,232 $ 71,725 5.53 1,789,428 $81,938 6.10
======== =======
Non-interest earning assets.................... 63,739 63,612
----------- ----------
Total assets............................ $ 1,787,971 $1,853,040
=========== ==========
Deposits and borrowings:
Money market and demand deposits........... $ 167,525 $ 240 0.19% $ 168,433 $ 723 0.57%
Savings deposits........................... 380,198 7,285 2.54 331,661 6,552 2.63
Certificates of deposit.................... 547,012 12,388 3.01 642,476 18,625 3.86
----------- -------- ---------- -------
Total deposits.......................... 1,094,735 19,913 2.41 1,142,570 25,900 3.02
FHLB of New York advances.................. 491,444 21,259 5.67 504,465 21,688 5.66
Other borrowings........................... 25,126 824 4.29 23,337 820 4.61
Junior subordinated debentures............. 42,009 2,026 6.37 -- -- --
----------- -------- ---------- -------
Total deposits and borrowings........... 1,653,314 $ 44,022 3.51 1,670,372 $48,408 3.84
======== =======
Other liabilities.............................. 16,008 18,515
----------- ----------
Total liabilities....................... 1,669,322 1,688,887
Trust Preferred securities..................... --- 44,565
Stockholders' equity........................... 118,649 119,588
----------- ----------
Total liabilities and stockholders'
equity.............................. $ 1,787,971 $1,853,040
=========== ==========
Net interest income and net
interest rate spread....................... $ 27,703 2.02% $33,530 2.26%
======== ====== ======= ======
Net interest-earning assets and
interest margin............................ $ 70,918 2.16% $ 119,056 2.51%
=========== ====== ========== ======
Ratio of interest-earning assets to
deposits and borrowings.................... 104.29% 107.13%
====== ======
(1) Annualized.
18
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.
March 31, June 30,
2004 2003
--------- --------
(Dollars in thousands)
Non-accruing loans:
One- to four-family .................................................... $2,828 $1,451
Commercial and multi-family ............................................ 24 --
Consumer ............................................................... 48 231
------ ------
Total non-accruing loans ........................................... 2,900 1,682
Real estate owned, net ...................................................... 28 28
------ ------
Total non-performing assets ........................................ 2,928 1,710
------ ------
Total risk elements ................................................ $2,928 $1,710
====== ======
Non-accruing loans as a percentage of total loans ........................... 0.24% 0.14%
====== ======
Non-performing assets as a percentage of total assets ....................... 0.16% 0.09%
====== ======
Total risk elements as a percentage of total assets ......................... 0.16% 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 management's estimate of the borrower's
ability to repay the loan given the availability of collateral, other sources of
19
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 of 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 March 31, 2004, 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 $110.3 million, representing a one year negative
gap of 6.07% 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 steepened 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 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 may indicate greater exposure to IRR.
Greater exposure can result from a
20
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 March 31, 2004, the Bank's internally generated initial NPV ratio was
8.89%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 7.56%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 1.33%. As of March 31, 2004, the Company's internally generated
initial NPV ratio was 8.52%, the Post-Shock ratio was 7.13%, and the Sensitivity
Measure was negative 1.39%. 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 and decay 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
December 31, 2003 (the latest date for which information is available), the
Bank's initial NPV ratio, as measured by the OTS, was 9.35%, the Bank's
Post-Shock ratio was 5.71% and the Sensitivity Measure was negative 3.64%.
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 March 31, 2004, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 4.0% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
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 nine months ended March 31, 2004 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 nine months ended March 31,
2004, 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 nine months ended March
31, 2004, the cash provided was used to fund an investment in BOLI and for the
repurchase of common stock. During the nine months ended March 31, 2003, the
cash needs of the Company were provided 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
21
well as to fund a decrease in deposits. Additionally, during the nine months
ended March 31, 2003, 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 March 31, 2004, 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
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 "Exchange Act")) as of March 31, 2004
was carried out 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 the Company's disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Exchange 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. There
have been no changes in internal controls over financial reporting (as defined
in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended
March 31, 2004, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material financial and non-financial information concerning the
Company's business. While the company believes the present design of its
disclosure controls and procedures is effective to achieve its goal, future
events affecting its business may cause the Company to modify its disclosure
controls and procedures.
22
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities
The following table summarizes the Company's stock repurchase activity for
each month during the three months ended March 31, 2004. All shares
repurchased during the three months ended March 31, 2004 were repurchased
in the open market.
Total Number Maximum Number
Total Number Average of Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Repurchased Per Share Announced Plan Under the Plan
----------- ---------- -------------------- ------------------
Repurchases for the Month
-------------------------
January 1 - January 31, 2004........ 30,000 $34.32 30,000 135,000
February 1 - Febuary 29, 2004....... 126,800 $34.17 126,800 343,200
March 1 - March 31, 2004............ 31,700 $35.19 31,700 311,500
--------- ------ ---------
Total repurchases................... 188,500 $34.37 188,500
========= ====== =========
At March 31, 2004, the Company had one repurchase plan under which it had not
yet completed all approved repurchases. This repurchase plan was publicly
announced February 27, 2004 and authorized the Company to repurchase up to 5%,
or 335,000, of its outstanding shares over the following 18 months. During the
three months ended March 31, 2004, the Company completed a separate repurchase
plan that was publicly announced May 15, 2003. This repurchase plan authorized
the Company to repurchase up to 5%, or 340,000, of its outstanding shares over
an 18 month period.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
During the third quarter of fiscal 2004, the Company filed or
furnished the following reports on Form 8-K:
Item # Item Description Filing Date
------------------------------------------------------------------------------------------
7 & 12 Second Quarter Earnings Release January 30, 2004
5 & 7 Announcement of a New Stock Repurchase
Program and the Substantial Completion of
the Existing Program March 1, 2004
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: May 14, 2004 By: /s/ Joseph L. LaMonica
-------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Principal Executive Officer)
Date: May 14, 2004 By: /s/ Claire M. Chadwick
-------------------------------------
Claire M. Chadwick
Executive Vice President,
Chief Financial Officer and
Controller
(Principal Financial and Accounting Officer)
24
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 *******
(j) Supplemental Executive Death Benefit Plan *******
(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 and further amended on Form 8-A/A-3
(the "Form 8-A/A-3") filed with the Securities and Exchange
Commission on March 1, 2004. 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, 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 and the Fourth Amendment to the
Stockholders Protection Rights Agreement is filed as an exhibit to
the Form 8-A/A-3. 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.
25
**** 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.
****** 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.
******* 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 17, 2004 (File No. 0-24040). Such previously
filed document is hereby incorporated by reference in accordance
with Item 601 of Regulation S-K.
26