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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
---- ----
COMMISSION FILE NUMBER 0-24040
PENNFED FINANCIAL SERVICES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-3297339
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
622 EAGLE ROCK AVENUE, WEST ORANGE, NEW JERSEY 07052-2989
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 669-7366
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price of such stock on the
Nasdaq National Market as of September 5, 1997, was $113,925,000. (The
exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is
an affiliate of the registrant.)
As of September 5, 1997, there were issued and outstanding 4,822,124 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K--Portions of the Proxy Statement for 1997 Annual
Meeting of Stockholders.
PART I
ITEM 1. BUSINESS
GENERAL
PennFed Financial Services, Inc. ("PennFed" and with its subsidiary the
"Company"), a Delaware corporation, was organized in March 1994 for the
purpose of becoming the savings and loan holding company for Penn Federal
Savings Bank ("Penn Federal" or the "Bank") in the connection with the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). PennFed owns all of the
outstanding stock of the Bank. All references to the Company, unless otherwise
indicated, prior to July 14, 1994 refer to the Bank and its subsidiary on a
consolidated basis. The Company's common stock is traded on the Nasdaq
National Market Tier of the Nasdaq Stock Market under the symbol "PFSB."
PennFed and the Bank are subject to comprehensive regulation, examination
and supervision by the Office of Thrift Supervision, Department of the
Treasury ("OTS") and by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposits are insured up to applicable limits by the FDIC.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the
needs of the communities it serves. The Company attracts deposits from the
general public and uses such deposits, together with borrowings and other
funds, to originate and purchase one- to four-family residential mortgage
loans, and, to a lesser extent, commercial and multi-family real estate and
consumer loans. See "--Originations, Purchases, Sales and Servicing of Loans."
The Company also invests in mortgage-backed securities secured by one- to
four-family residential mortgages, U.S. Government and agency obligations and
other permissible investments.
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms, which generally include savings, money market, and a
variety of checking accounts, as well as certificate accounts. The Company
generally solicits deposits in its primary market areas.
At June 30, 1997, the Company had total assets of $1.3 billion, deposits of
$918.2 million, borrowings of $288.2 million and stockholders' equity of $97.3
million.
At June 30, 1997, the Company's gross loan portfolio totaled $928.9 million,
including $831.8 million of one- to four-family residential first mortgage
loans, $56.8 million of commercial and multi-family real estate loans and
$40.2 million of consumer loans. In addition, on that date, the Company had
$288.5 million of mortgage-backed securities and $47.7 million of other
investment securities and FHLB of New York stock.
At June 30, 1997, the vast majority of the Company's first and second
mortgage loans (excluding mortgage-backed securities) were secured by
properties located in New Jersey. Of the loans secured by properties outside
the State of New Jersey, the majority are secured by one- to four-family loans
and the balance secured by commercial and multi-family real estate loans. See
"--Originations, Purchases, Sales and Servicing of Loans." The Company's
revenues are derived primarily from interest on loans, mortgage-backed
securities and investments, and income from service charges.
Penn Federal, through its wholly-owned subsidiary, Penn Savings Insurance
Agency, Inc., offers insurance and uninsured annuity products to its
customers. See "--Subsidiary Activities."
The administrative offices of the Company are located at 622 Eagle Rock
Avenue, West Orange, New Jersey 07052-2989, and the telephone number at that
address is (973) 669-7366.
MARKET AREA
The Company's primary market areas are comprised of the Ironbound section of
the City of Newark and surrounding urban communities, the suburban Essex
County areas and selected areas of central/southern New
2
Jersey, which are serviced through seventeen full service offices. Penn
Federal was organized in the Ironbound section of Newark in 1941 and the home
office of the Bank remains there. The City of Newark and immediately adjacent
communities of East Newark and Harrison are primarily urban blue collar areas
with two or more family dwellings and some manufacturing and industry.
Deposits at Bank branches in these areas comprise 35% of total Bank deposits.
The suburban Essex County area consists of communities with predominantly
single family homes, and a white collar commuter population that works in New
York or Newark, or engages in local retail trade or industry. Suburban Essex
County is the Bank's largest market area, accounting for approximately 40% of
total Bank deposits at June 30, 1997. Penn Federal's central/southern New
Jersey branches, with 25% of total Bank deposits, serve retirement populations
and expanding townhouse, multi-family and single family home developments. The
Bank also purchases a significant volume of one- to four-family residential
loans secured by properties located primarily in New Jersey. See "--
Originations, Purchases, Sales and Servicing of Loans."
LENDING ACTIVITIES
General. The Company primarily originates and purchases fixed and adjustable
rate, one- to four-family first mortgage loans. The Company's general policy
is to originate and purchase such mortgages with maturities between 10 and 30
years. Adjustable rate mortgage ("ARM") loans are originated and purchased in
order to increase the percentage of loans with more frequent repricing than
fixed rate, one- to four-family mortgage loans. The Company underwrites
mortgage loans generally using Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines,
although loan amounts may exceed agency limits. See "--Loan Portfolio
Composition" and "--One- to Four-Family Residential Mortgage Lending."
The Company also originates commercial and multi-family real estate loans
and consumer loans. Such loans generally reprice more frequently, have shorter
maturities, and/or have higher yields than fixed rate, one- to four-family
mortgage loans. At June 30, 1997, the Company's total net loan portfolio was
$931.5 million.
Residential and consumer loan applications may be approved by various
officers up to $1.0 million. Commercial and multi-family real estate loan
applications are initially considered and approved at various levels of
authority, depending on the amount of the loan. All commercial and multi-
family real estate loans between $500,000 and $1.0 million must be approved by
the Executive Loan Committee which consists of the President, three executive
officers and the Vice President of Commercial Lending. The approval of the
Company's Board of Directors is required for all loans above $1.0 million.
The aggregate amount of loans that the Company is permitted to make under
applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Company could have invested in any
one real estate project is the greater of 15% of unimpaired capital and
surplus or $500,000. See "Regulation--Federal Regulation of Savings
Associations." At June 30, 1997, the maximum amount which the Company could
have lent to any one borrower and the borrower's related entities was
approximately $11.4 million. The Company's current policy is to limit such
loans to a maximum of 50% of the regulatory limit or $3.0 million, whichever
is less. At June 30, 1997, the Company did not have any loans or series of
loans to one borrower with outstanding balances in excess of $2.8 million. See
"--Commercial and Multi-Family Real Estate Lending." At June 30, 1997, the
Company's largest group of loans to one borrower totaled $2.8 million and
consisted of three commercial real estate loans aggregating $1.9 million and
one commercial real estate loan for $894,000 for which the borrower on the
three commercial real estate loans is only a guarantor. Each loan is secured
by an apartment building located in one of the Company's primary market areas.
At June 30, 1997, there was a total of 14 loans or lender relationships in
excess of $1.0 million, for a total amount of $23.6 million. At that date,
$23.0 million of these were performing in accordance with their respective
repayment terms while $574,000 were 30 days past due and $58,000 were 60 days
past due. See "--Non-Performing and Classified Assets."
3
Loan Portfolio Composition. The following table sets forth the composition
of the Company's loan portfolio at the dates indicated.
JUNE 30,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-
family(/1/)........... $831,843 89.55% $565,924 86.68% $386,125 82.17% $301,843 78.13% $304,838 75.70%
Construction........... -- -- -- -- -- -- 177 0.04 378 0.09
Commercial and multi-
family................ 56,811 6.12 52,014 7.97 50,448 10.74 49,135 12.72 53,120 13.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total first mortgage
loans............... 888,654 95.67 617,938 94.65 436,573 92.91 351,155 90.89 358,336 88.98
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Second mortgages....... 23,665 2.55 23,912 3.66 21,105 4.49 22,532 5.83 30,175 7.49
Home equity lines of
credit................ 14,040 1.51 8,955 1.37 9,792 2.08 10,840 2.81 11,640 2.89
Other.................. 2,512 0.27 2,117 0.32 2,461 0.52 1,825 0.47 2,568 0.64
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans............... 40,217 4.33 34,984 5.35 33,358 7.09 35,197 9.11 44,383 11.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.......... 928,871 100.00% 652,922 100.00% 469,931 100.00% 386,352 100.00% 402,719 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process....... -- -- -- (44) (70)
Unamortized premiums,
deferred loan fees,
and other, net........ 5,202 2,279 606 109 (189)
Allowance for loan
losses................ (2,622) (2,630) (2,860) (3,060) (3,126)
-------- -------- -------- -------- --------
Total loans
receivable, net..... $931,451 $652,571 $467,677 $383,357 $399,334
======== ======== ======== ======== ========
- --------
(1) One- to four-family loans include loans held for sale of $88,000, $536,000
and $1,995,000, at June 30, 1996, 1994 and 1993, respectively. There were
no loans held for sale at June 30, 1997 and 1995.
Loan Maturity. The following schedule sets forth the contractual maturity of
the Company's loan portfolio as of June 30, 1997. Loans that have adjustable
rates are shown as amortizing to final maturity rather than when the interest
rates are next subject to change. Loans with balloon payments are also shown
as amortizing to final maturity (i.e., when the balloon payment is due). All
balances are shown on a gross basis and, thus, include no premium or discount
adjustments. Savings account loans, included in consumer loans, which have no
stated final maturity are reported as due within one year. The table does not
reflect the effects of possible prepayments or scheduled principal
amortization.
AFTER ONE AFTER THREE AFTER FIVE AFTER TEN AFTER
ONE YEAR THROUGH THROUGH THROUGH THROUGH TWENTY
OR LESS THREE YEARS FIVE YEARS TEN YEARS TWENTY YEARS YEARS TOTAL
-------- ----------- ----------- ---------- ------------ -------- --------
(IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-family..... $ 729 $ 3,036 $ 6,868 $28,786 $194,704 $597,720 $831,843
Commercial and multi-
family................. 4,759 7,504 5,983 10,160 20,527 7,878 56,811
------ ------- ------- ------- -------- -------- --------
Total first mortgage
loans................ 5,488 10,540 12,851 38,946 215,231 605,598 888,654
Consumer loans.......... 2,315 1,894 2,431 10,308 22,518 751 40,217
------ ------- ------- ------- -------- -------- --------
Total loans, gross.... $7,803 $12,434 $15,282 $49,254 $237,749 $606,349 $928,871
====== ======= ======= ======= ======== ======== ========
4
Loans due after June 30, 1998 which have fixed interest rates amount to
$510.8 million, while those with adjustable rates amount to $410.3 million,
detailed as follows:
DUE AFTER JUNE 30, 1998
----------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-family............................... $468,860 $362,254 $831,114
Commercial and multi-family....................... 18,082 33,970 52,052
-------- -------- --------
Total first mortgage loans...................... 486,942 396,224 883,166
Consumer.......................................... 23,863 14,039 37,902
-------- -------- --------
Total loans, gross.............................. $510,805 $410,263 $921,068
======== ======== ========
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Company's in-house originations staff,
marketing efforts, its present customers, walk-in customers and referrals from
real estate agents, mortgage brokers and builders. The Company focuses its
lending efforts primarily on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences. During the fiscal
year ended June 30, 1997, the Company originated $74.2 million of fixed rate
real estate loans secured by one- to four-family residential real estate. ARM
loans originated during fiscal 1997 totaled $67.5 million. Substantially, all
of the Company's one- to four-family residential mortgage originations are
secured by properties located in the State of New Jersey.
In addition, the Company has correspondent relationships with two other
institutions through which, during fiscal 1997, it purchased $28.6 million of
newly originated fixed and $166.9 million of newly originated adjustable rate
one- to four-family residential first mortgages, most of which are secured by
properties located in the State of New Jersey and a limited amount of which
are secured by properties located in the Commonwealth of Pennsylvania. These
loans are underwritten by the correspondent institutions using the Company's
guidelines and a portion of those loans are re-underwritten by the Bank on a
test basis. All loans purchased are supported by customary representations and
warranties provided by the correspondent institutions. At June 30, 1997, the
Company's one- to four-family residential mortgage loans totaled $831.8
million, or approximately 89.6% of the Company's gross loan portfolio. In the
event the Company is unable to maintain these two correspondent relationships,
its ability to purchase one- to four-family residential first mortgage loans
meeting its underwriting criteria could be adversely affected. See "--
Originations, Purchases, Sales and Servicing of Loans."
The Company currently originates one- to four-family residential mortgage
loans with terms of up to 30 years in amounts up to 95% of the appraised value
of the security property. The Company generally requires that private mortgage
insurance be obtained in an amount sufficient to reduce the Company's exposure
to 80% or less of the loan-to-value level.
Currently, loans are primarily originated for investment purposes and are,
therefore, being held to maturity in the Company's loan portfolio. Interest
rates charged on loans are competitively priced according to market
conditions.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Properties securing real estate loans
made by the Company are appraised by independent appraisers approved by the
Board of Directors. The Company requires borrowers to obtain title insurance
and fire and property insurance (including flood insurance, if necessary) in
the amount of the loan or the replacement cost, whichever is less. Real estate
loans originated and purchased by the Company generally contain a "due on
sale" clause allowing the Company to declare the unpaid principal balance due
and payable upon the sale of the security property.
Commercial and Multi-Family Real Estate Lending. The Company also engages in
commercial and multi-family real estate lending in its market areas. At June
30, 1997, the Company had $56.8 million of commercial
5
and multi-family real estate loans which represented 6.1% of the Company's
gross loan portfolio. This amount includes less than $300,000 of lines of
credit secured by non-real estate business assets. At June 30, 1997, the
average per loan balance of the Company's commercial and multi-family real
estate loans outstanding was $277,000.
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, mixed-use buildings, small office
buildings, restaurants, warehouses and strip shopping centers. Commercial and
multi-family real estate loans typically have terms that do not exceed 15
years and have a variety of rate adjustment features and other terms.
Generally, the loans are made in amounts up to 75% of the appraised value of
the security property. Adjustable rate commercial and multi-family real estate
loans normally provide for a margin over the U.S. Treasury security adjusted
to a constant maturity of five years, with periodic adjustments after five
years, or over the Prime Rate as reported in the Wall Street Journal. To a
lesser extent, the Company also originates commercial and multi-family real
estate loans with a margin over shorter-term U.S. Treasury securities. In
underwriting these loans, the Company analyzes the current financial condition
of the borrower, the borrower's credit history, and the reliability and
predictability of the cash flow generated by the property securing the loan.
The Company usually requires personal guarantees of the borrowers. Appraisals
on properties securing commercial real estate loans originated by the Company
are performed by independent appraisers approved by the Board of Directors.
The Company has recently established a correspondent relationship with a bank
in New Jersey as part of an overall effort to increase its commercial and
multi-family real estate originations.
Commercial and multi-family real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effect of general
economic conditions on income-producing properties and the increased
difficulty of evaluating and monitoring these types of loans. Furthermore, the
repayment of loans secured by multi-family and commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (e.g., if leases are not
obtained or renewed, or a bankruptcy court modifies a lease term, or a major
tenant is unable to fulfill its lease obligations), the borrower's ability to
repay the loan may be impaired.
Consumer Lending. The Company offers a variety of secured consumer loans,
including home equity lines of credit, second mortgages, automobile loans and
loans secured by savings deposits. In addition, the Company offers unsecured
overdraft checking protection. The Company currently originates substantially
all of its consumer loans in its primary market areas. Since 1992, the Company
has originated consumer loans only on a direct basis, where the Company
extends credit directly to the borrower. Prior to that date, the Company
purchased second mortgages from various affiliated and unaffiliated third
parties. At June 30, 1997, the Company had $3.4 million in purchased second
mortgages, of which $541,000 were non-performing at that date. See "--Non-
Performing Assets and Classified Assets."
The Company originates adjustable rate home equity lines of credit and fixed
rate second mortgage loans generally up to $125,000. Home equity lines of
credit and second mortgage loans together with loans secured by all prior
liens, are generally limited to 75% or less of the appraised value of the
property securing the loan. Second mortgage loans have a maximum term of up to
15 years. Home equity lines of credit may have varying terms up to 20 years.
These loans are underwritten utilizing criteria similar to the Company's first
mortgage loans. As of June 30, 1997, second mortgage loans and home equity
lines of credit amounted to $37.7 million or 4.1% of the Company's gross loan
portfolio.
At June 30, 1997, the Company's total consumer loan portfolio was $40.2
million, or 4.3% of its gross loan portfolio, of which approximately 65% were
fixed rate loans and 35% were adjustable rate loans.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of
6
the borrower's ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral from a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS
For the fiscal year ended June 30, 1997, the Company originated $173.5
million of loans, compared to $143.0 million and $54.5 million in fiscal 1996
and 1995, respectively. Mortgage loan originations are handled by employees of
the Company. Separate origination facilities are not maintained.
During the fiscal years ended June 30, 1997, 1996 and 1995, the Company
purchased $195.5 million, $132.2 million and $87.7 million of one- to four-
family residential first mortgage loans, respectively, primarily through
correspondent relationships with other institutions. The purchased loans
represent both fixed and adjustable rate one- to four-family first mortgages
secured by properties primarily located throughout New Jersey. During fiscal
1997, a limited amount of loans secured by properties located in the
Commonwealth of Pennsylvania were purchased. All loans are purchased on a non-
recourse basis.
From time to time the Company sells one- to four-family mortgage loans,
without recourse, to FHLMC and other secondary market purchasers. The Company
sold loans in aggregate amounts of $585,000, $273,000 and $1.4 million during
the years ended June 30, 1997, 1996 and 1995, respectively.
When loans are sold, the Company may retain the responsibility for servicing
the loans. The Company receives a fee for performing these services. The
Company serviced for others one- to four-family mortgage loans with an
aggregate outstanding principal balance of $78.8 million, $89.2 million and
$80.0 million at June 30, 1997, 1996 and 1995, respectively. The increase in
1996 was due to the purchase of one- to four-family residential mortgage loan
servicing rights for approximately $19.9 million of loans.
7
The following table sets forth the activity in the Company's loan portfolio
for the years indicated.
YEAR ENDED JUNE 30,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Net loans receivable at beginning of year........... $652,571 $467,677 $383,357
PLUS:
Loans originated:
One- to four-family................................ 141,736 119,583 35,588
Commercial and multi-family real estate............ 12,225 7,477 7,147
Consumer........................................... 19,501 15,966 11,745
-------- -------- --------
Total loans originated............................ 173,462 143,026 54,480
-------- -------- --------
Loans purchased:
One- to four-family................................ 195,514 132,238 87,728
Consumer........................................... -- -- 146
-------- -------- --------
Total loans purchased............................. 195,514 132,238 87,874
-------- -------- --------
Total loans originated and purchased.............. 368,976 275,264 142,354
LESS:
One- to four-family loans sold..................... 585 273 1,362
Loan principal payments and other, net............. 87,821 88,557 53,978
Loans transferred to real estate owned............. 1,690 1,540 2,694
-------- -------- --------
Net loans receivable at end of year................. $931,451 $652,571 $467,677
======== ======== ========
NON-PERFORMING AND CLASSIFIED ASSETS
Generally, when a borrower fails to make a required payment on a real estate
secured loan or other secured loan the Company institutes collection
procedures by mailing a delinquency notice. The customer is contacted again,
by telephone, if the delinquency is not promptly cured. In many cases,
delinquencies are cured promptly; however, if a loan secured by real estate or
other collateral has been delinquent for more than 60 days, a letter of notice
of intention to foreclose is sent and the customer is requested to make
arrangements to bring the loan current. At 90 days past due, unless
satisfactory arrangements have been made, immediate repossession commences or
foreclosure procedures are instituted. For unsecured loans, the collection
procedures are similar; however, at 90 days past due, a reserve or charge-off
is recommended and, subsequently, a law suit is filed, if necessary.
At June 30, 1997, the Company's loans delinquent 60 to 89 days totaled $1.5
million; $1.0 million were one- to four-family mortgage loans; $348,000 were
commercial and multi-family real estate loans; and $114,000 were consumer
loans.
8
The table below sets forth the Company's amounts and categories of non-
performing assets and restructured loans. Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more
than 90 days. There are no loans delinquent more than 90 days which are still
accruing. Real estate owned represents assets acquired in settlement of loans
and is shown net of valuation allowances. Restructured loans are all
performing in accordance with modified terms and are, therefore, considered
performing.
AT JUNE 30,
----------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------- -------
(DOLLARS IN THOUSANDS)
NON-ACCRUING LOANS:
One- to four-family................. $3,567 $4,009 $3,040 $ 5,739 $ 8,486
Construction........................ -- -- -- 132 --
Commercial and multi-family......... 1,053 913 1,090 1,966 3,629
Consumer............................ 865 1,264 1,435 2,021 1,896
------ ------ ------ ------- -------
Total non-accruing loans.......... 5,485 6,186 5,565 9,858 14,011
Real estate owned, net.............. 884 1,083 1,177 1,469 1,726
------ ------ ------ ------- -------
Total non-performing assets....... 6,369 7,269 6,742 11,327 15,737
Restructured loans.................. 1,451 2,340 2,922 2,289 2,320
------ ------ ------ ------- -------
Total risk elements............... $7,820 $9,609 $9,664 $13,616 $18,057
====== ====== ====== ======= =======
Non-accruing loans as a percentage
of total loans..................... 0.59% 0.95% 1.18% 2.55% 3.48%
====== ====== ====== ======= =======
Non-performing assets as a
percentage of total assets......... 0.48% 0.67% 0.78% 1.67% 2.71%
====== ====== ====== ======= =======
Total risk elements as a
percentage of total assets....... 0.59% 0.88% 1.11% 2.00% 3.11%
====== ====== ====== ======= =======
For the year ended June 30, 1997, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $139,000, none of which was included in interest
income during this period.
For the year ended June 30, 1997, gross interest income which would have
been recorded had the restructured loans paid in accordance with their
original terms amounted to $263,000. For the year ended June 30, 1997, the
actual amount included in interest income, which was paid in accordance with
the modified loan terms, was $210,000.
Non-Performing Assets. Non-accruing loans at June 30, 1997 were comprised of
47 one- to four-family loans aggregating $3.6 million, 29 second mortgage
loans aggregating $865,000 and five commercial and multi-family real estate
loans, totaling $1.1 million.
Real estate owned at June 30, 1997 included 10 one- to four-family
properties totaling $505,000, the largest of which had a net book value of
$93,000, and two commercial properties with a total net book value of
$379,000.
Restructured Loans. In the normal course of business the Company has
restructured the terms of certain loans. At June 30, 1997, restructured loans
consisted of two commercial real estate loans with individual book balances of
$768,000 and $683,000. These loans have been performing in accordance with
their modified terms.
Other Loans of Concern. As of June 30, 1997, there were $3.7 million of
other loans not included in the table or discussed above where known
information about the possible credit problems of borrowers caused
9
management to have doubts as to the ability of the borrower to comply with
present loan repayment terms and which may result in disclosure of such loans
in the future. Set forth below is a description of other loans of concern with
book values in excess of $1.0 million.
Included in other loans of concern is a loan with a book value of $1.8
million which the Company is monitoring due to periodic delinquencies. The
loan is secured by a first mortgage lien on a banquet facility in Essex
County, New Jersey, as well as personal and corporate guarantees. As of June
30, 1997, the loan was current, and performing in accordance with its
repayment terms.
Also, included in other loans of concern at June 30, 1997 are six loans to
one borrower and one loan to an affiliated party totaling $1.1 million
acquired in the 1989 acquisition of First Federal Savings and Loan Association
of Montclair. The six loans consist of one commercial real estate loan of
$454,000, four one-to four-family loans totaling $241,000 and an $88,000 line
of credit. The loan to an affiliated party consists of a commercial real
estate loan of $272,000. All of these loans are secured by properties located
in New Jersey. The commercial real estate loans are secured by mixed-use
properties consisting of retail stores and apartments located in Essex County,
New Jersey. All of these loans were originated from 1985 to 1989 with thirty
year terms. At June 30, 1997, $423,000 of these loans were performing in
accordance with their respective repayment terms while $574,000 were 30 days
past due and $58,000 were 60 days past due. The Company continues to monitor
these loans due to their periodic delinquencies.
All of the other loans of concern have been considered by management in
conjunction with the analysis of the adequacy of the allowance for loan
losses.
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that the establishment of a specific loss reserve is
warranted.
When a savings institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required to either establish a specific
reserve equal to 100% of that portion of the asset so classified or to charge-
off such amount.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly
reviews the assets in its portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets at June 30, 1997, the Bank's classified
assets, including real estate owned, totaled $8.0 million, with $7.4 million
classified as substandard and $618,000 classified as loss. Total classified
assets represent 8.2% of the Company's stockholders' equity and 0.6% of the
Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of loans for which
full collectibility may not be reasonably assured, considers among other
matters, the loan classifications discussed above, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss
experience, and other factors that warrant recognition in providing for an
adequate loan loss allowance.
10
Real estate properties acquired through foreclosure are recorded at the
lower of cost or estimated fair value less costs to dispose of such
properties. If fair value at the date of foreclosure is lower than the balance
of the related loan, the difference will be charged-off to the allowance for
loan losses at the time of transfer. Valuations are periodically updated by
management and if the value declines, a specific provision for losses on real
estate owned is established by a charge to operations.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. In addition, federal regulatory agencies, as an integral part of
the examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to record additions to the
allowance level based upon their assessment of the information available to
them at the time of examination.
The following table sets forth an analysis of the Company's allowance for
loan losses at, and for, the dates indicated.
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
Balance at beginning of year.......... $2,630 $2,860 $3,060 $3,126 $ 3,378
Charge-offs:
One- to four-family................. (392) (195) (267) (489) (5)
Commercial and multi-family......... (147) (508) (223) (93) (170)
Consumer............................ (146) (238) (279) (395) (1,745)
------ ------ ------ ------ -------
(685) (941) (769) (977) (1,920)
------ ------ ------ ------ -------
Recoveries:
One- to four-family................. -- -- -- 28 49
Commercial and multi-family......... -- 101 -- -- --
Consumer............................ 42 -- -- -- 58
------ ------ ------ ------ -------
42 101 -- 28 107
------ ------ ------ ------ -------
Net charge-offs....................... (643) (840) (769) (949) (1,813)
Additions charged to operations....... 635 610 569 883 1,561
------ ------ ------ ------ -------
Balance at end of year................ $2,622 $2,630 $2,860 $3,060 $ 3,126
====== ====== ====== ====== =======
Ratio of net charge-offs during the
year to average loans outstanding
during the year...................... 0.08% 0.16% 0.19% 0.25% 0.43%
====== ====== ====== ====== =======
Ratio of allowance for loan losses to
total loans at end of year........... 0.28% 0.40% 0.61% 0.79% 0.78%
====== ====== ====== ====== =======
Ratio of allowance for loan losses to
non-accruing loans at end of year.... 47.80% 42.52% 51.39% 31.04% 22.31%
====== ====== ====== ====== =======
11
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized in the following table. The portion of the allowance
allocated to each loan category does not represent the total available for
possible future losses within that category since the total allowance is
applicable to the entire loan portfolio.
JUNE 30,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
One- to four-family..... $1,463 89.55% $1,290 86.68% $ 657 82.17% $ 726 78.17% $ 816 75.79%
Commercial and multi-
family real estate..... 654 6.12 782 7.97 1,602 10.74 1,726 12.72 1,804 13.19
Consumer................ 505 4.33 558 5.35 601 7.09 608 9.11 506 11.02
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. $2,622 100.00% $2,630 100.00% $2,860 100.00% $3,060 100.00% $3,126 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
INVESTMENT ACTIVITIES
The Bank must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending
upon the availability of funds and comparative yields on investments in
relation to the return on loans. Historically, the Bank has maintained its
liquid assets above the minimum requirements imposed by the OTS regulations
and at a level believed adequate to meet requirements of normal daily
activities, repayment of maturing debt and potential deposit outflows. As of
June 30, 1997, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable deposit accounts and current borrowings) was 10.36%. See
"Regulation--Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and Federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to provide collateral for borrowings and to fulfill the
Company's asset/liability management policies.
At June 30, 1997, the Company had a securities portfolio consisting
principally of U.S. government obligations and securities of various federal
agencies, including mortgage-backed securities. These investments carry a low
risk weighting for OTS risk-based capital purposes, generally satisfy OTS
liquid-asset requirements and are of relatively short duration. See
"Regulation--Regulatory Capital Requirements" and "Regulation-- Liquidity."
Investment Securities. At June 30, 1997, the Company's investment securities
(including a $12.4 million investment in FHLB of New York stock) totaled $47.7
million, or 3.6% of its total assets. It is the Company's general policy to
purchase U.S. Government securities and federal agency obligations and other
investment grade securities in accordance with its strategic objectives,
including, but not limited to, achieving growth and/or interest rate risk
measurement targets.
12
OTS regulations restrict investments in corporate debt and equity securities
by the Company. See "Regulation--Federal Regulation of Savings Associations"
for a discussion of additional restrictions on the Company's investment
activities.
The following table indicates the composition of the investment securities
portfolio, excluding FHLB of New York stock, based on the final maturities of
each investment. At June 30, 1997, the weighted average life of this portfolio
was 1.0 year, based on the shorter of the remaining maturity, next repricing
date or initial call date.
JUNE 30, 1997
----------------------------------------------------------------
AFTER ONE AFTER FIVE YEARS
ONE YEAR YEAR THROUGH THROUGH TOTAL INVESTMENT
OR LESS FIVE YEARS TEN YEARS SECURITIES
---------- ------------ ---------------- -----------------------
BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE MARKET VALUE
---------- ------------ ---------------- ---------- ------------
(DOLLARS IN THOUSANDS)
U.S. government and
agency obligations..... $4,999 $ -- $30,000 $34,999 $35,125
Obligations of states
and political
subdivisions........... -- 101 190 291 307
------ ----- ------- ------- -------
Total investment
securities............. $4,999 $ 101 $30,190 $35,290 $35,432
====== ===== ======= ======= =======
Weighted average yield
at year end............ 7.95% 5.70% 7.44% 7.51%
====== ===== ======= =======
The Company's investment securities portfolio at June 30, 1997 did not
contain securities of any issuer or tax-exempt securities with an aggregate
book value in excess of 10% of the Company's retained earnings, excluding
those issued by the U.S. Government or its agencies.
The Company's investments, including the mortgage-backed securities
portfolio, are managed in accordance with a written investment policy adopted
by the Board of Directors.
At June 30, 1997, there were no investment securities held for sale.
Mortgage-Backed Securities. The Company, from time to time, purchases
mortgage-backed securities in accordance with its strategic objectives,
including, but not limited to, achieving growth and/or interest rate risk
measurement targets. No purchases were made in fiscal 1997. At June 30, 1997,
mortgage-backed securities totaled $288.5 million, or 21.8% of the Company's
total assets, of which approximately 27% consisted of adjustable rate
securities. The type of securities purchased is based upon the Company's
asset/liability management strategy and balance sheet objectives. Most of the
mortgage-backed securities purchased by the Company over the last several
years were secured by loans with five or seven year balloon terms, 15 year
fixed rate terms or one and three year adjustable rate terms. The Company's
current investment strategy emphasizes mortgage-backed securities with high
credit quality and relatively short duration. The Company has invested
primarily in federal agency securities, principally those of the Government
National Mortgage Association ("GNMA"), FHLMC and FNMA.
13
The following table indicates the composition of the mortgage-backed
securities portfolio, excluding unamortized premiums, based on the final
maturities of each security.
JUNE 30, 1997
-----------------------------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS AFTER TOTAL
ONE YEAR THROUGH THROUGH TEN MORTGAGE-
OR LESS FIVE YEARS TEN YEARS YEARS BACKED SECURITIES
-------- ---------- ---------- -------- ------------------
BOOK BOOK BOOK BOOK BOOK MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
GNMA.................... $ -- $ -- $ 872 $ 3,121 $ 3,993 $ 4,205
FHLMC................... 8,580 56,943 9,097 109,408 184,028 186,350
FNMA.................... -- 20,928 2,829 74,927 98,684 99,632
CMOs/REMICs............. -- -- -- 938 938 938
------ ------- ------- -------- -------- --------
Total mortgage-backed
securities............. $8,580 $77,871 $12,798 $188,394 $287,643 $291,125
====== ======= ======= ======== ======== ========
Weighted average yield
at year end............ 7.00% 6.78% 7.38% 7.26% 7.12%
====== ======= ======= ======== ========
The GNMA, FHLMC and FNMA certificates are modified pass-through mortgage-
backed securities that represent undivided interests in underlying pools of
fixed rate, or certain types of adjustable rate, single-family residential
mortgages issued by these government-sponsored entities. GNMA's guarantee to
the certificate holder of timely payments of principal and interest is backed
by the full faith and credit of the U.S. Government. FNMA and FHLMC provide
the certificate holder a guarantee of timely payments of interest and
scheduled principal payments, whether or not they have been collected.
Collateralized Mortgage Obligations ("CMOs") are special types of pass-
through debt in which the stream of principal and interest payments on the
underlying mortgages or mortgage-backed securities is used to create classes
with different maturities and, in some cases, amortization schedules, as well
as a residual interest, with each such class possessing different risk
characteristics. Real Estate Mortgage Investment Conduits ("REMICs") are
similar, except REMICs are typically issued by a special purpose entity, such
as a trust, corporation or partnership which pools pass-through securities to
create different classes. Management believes these securities may represent
attractive alternatives relative to other investments due to the wide variety
of maturity and repayment options available through such investments. The CMOs
and REMICs acquired by the Company are not interest only or principal only or
residual interests. The Company held $938,000 of CMOs and REMICs at June 30,
1997.
The following table sets forth the Company's mortgage-backed securities
purchase and repayment activities for the years indicated.
YEAR ENDED JUNE 30,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Mortgage-backed securities, net:
At beginning of year.............................. $346,068 $319,436 $204,870
Securities purchased.............................. -- 99,085 148,036
Less:
Principal repayments.............................. 57,266 72,028 32,013
Amortization of premiums.......................... 263 425 1,457
-------- -------- --------
At end of year.................................... $288,539 $346,068 $319,436
======== ======== ========
14
The following table sets forth the composition of the Company's investment
and mortgage-backed securities portfolios at the dates indicated.
JUNE 30,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
BOOK MARKET BOOK BOOK MARKET BOOK BOOK MARKET BOOK
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
-------- --------- -------- -------- --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
INVESTMENT SECURITIES:
U.S. government and
agency obligations..... $ 34,999 $ 35,125 73.37% $ 20,997 $ 21,183 71.57% $ 16,987 $ 17,255 71.00%
Obligations of states
and political
subdivisions........... 291 307 0.61 291 319 0.99 501 535 2.10
Other................... -- -- -- -- -- -- 70 70 0.29
-------- --------- ------ -------- --------- ------ -------- --------- ------
Total investment
securities.......... 35,290 35,432 73.98 21,288 21,502 72.56 17,558 17,860 73.39
FHLB of New York stock.. 12,413 12,413 26.02 8,052 8,052 27.44 6,368 6,368 26.61
-------- --------- ------ -------- --------- ------ -------- --------- ------
Total investment
securities and FHLB
of New York stock... $ 47,703 $ 47,845 100.00% $ 29,340 $ 29,554 100.00% $ 23,926 $ 24,228 100.00%
======== ========= ====== ======== ========= ====== ======== ========= ======
Weighted average life of
investment securities
excluding FHLB of New
York stock(/1/)........ 1.0 years 2.5 years 2.2 years
MORTGAGE-BACKED
SECURITIES:
GNMA................... $ 3,993 $ 4,205 1.38% $ 4,904 $ 5,090 1.42% $ 6,142 $ 6,413 1.92%
FHLMC.................. 184,028 186,350 63.78 221,777 221,240 64.09 213,065 215,423 66.70
FNMA................... 98,684 99,632 34.20 115,896 115,603 33.49 96,110 97,340 30.09
CMOs/REMICs............ 938 938 0.33 1,348 1,342 0.39 2,235 2,231 0.70
Other pass-through
securities(/2/)....... -- -- -- 984 1,056 0.28 1,161 1,161 0.36
-------- --------- ------ -------- --------- ------ -------- --------- ------
287,643 291,125 99.69 344,909 344,331 99.67 318,713 322,568 99.77
Unamortized premiums,
net.................... 896 -- 0.31 1,159 -- 0.33 723 -- 0.23
-------- --------- ------ -------- --------- ------ -------- --------- ------
Total mortgage-backed
securities.......... $288,539 $ 291,125 100.00% $346,068 $ 344,331 100.00% $319,436 $ 322,568 100.00%
======== ========= ====== ======== ========= ====== ======== ========= ======
- --------
(1) The weighted average life of investment securities is based on the shorter
of the remaining maturity, next repricing date or initial call date.
(2)Other pass-through securities is composed of an A-rated privately issued
pass-through security.
SOURCES OF FUNDS
General. The Company's sources of funds are deposits, borrowings, payment of
principal and interest on loans and mortgage-backed securities, interest
received on or maturities of other investment securities and funds provided
from operations.
Borrowings, including FHLB of New York advances, have been used as a
supplement to deposits to fund asset growth and as a mechanism to extend the
average life of the Company's liabilities.
Deposits. The Company offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company's deposits consist of savings,
money market and demand deposit accounts, as well as certificate accounts
currently ranging in terms up to 60 months. The Company solicits deposits
primarily from
15
its market areas and relies primarily on competitive pricing policies,
advertising and customer service to attract and retain deposits. In the latter
part of fiscal 1997, the Company initiated a program to solicit deposits from
municipalities in its market areas. As of June 30, 1997, certificates of
deposit from municipalities totaled $17.1 million.
The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company endeavors to manage the pricing of its deposits
in keeping with its asset/liability management, liquidity and profitability
objectives. In this regard, the Company has from time-to-time paid slightly
higher rates than its competitors to attract longer-term certificates of
deposit. Based on its experience, the Company believes that its savings, money
market and demand deposit accounts are relatively stable sources of deposits.
However, the ability of the Company to attract and maintain certificates of
deposit and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions. At June 30, 1997, the Company had
$1.0 million of brokered deposits. See Note I--Deposits--of the Notes to
Consolidated Financial Statements.
The flow of deposits is influenced significantly by general economic
conditions, changes in interest rates and competition. The following table
sets forth the deposit flows of the Company during the periods indicated.
YEAR ENDED JUNE 30,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Opening balance................................... $836,416 $713,524 $614,860
Net deposits (withdrawals)........................ 47,233 93,407 (7,094)
Conversion deposits............................... -- -- (53,780)
Deposits acquired................................. -- -- 136,811
Interest credited................................. 34,511 29,485 22,727
-------- -------- --------
Ending balance.................................... $918,160 $836,416 $713,524
======== ======== ========
Net increase...................................... $ 81,744 $122,892 $ 98,664
======== ======== ========
Percent increase.................................. 9.77% 17.22% 16.05%
======== ======== ========
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 1997.
MATURITY
--------------------------------------------
OVER OVER OVER
3 MONTHS 3 TO 6 6 TO 12 12
OR LESS MONTHS MONTHS MONTHS TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
Certificates of deposit less than
$100,000........................ $109,988 $109,303 $123,226 $240,359 $582,876
Certificates of deposit of
$100,000 or more................ 27,367 12,498 12,719 28,358 80,942
-------- -------- -------- -------- --------
Total certificates of deposit.... $137,355 $121,801 $135,945 $268,717 $663,818
======== ======== ======== ======== ========
Borrowings. Although deposits are the Company's primary source of funds, the
Company's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread, when the
Company desires additional capacity to fund loan demand or to extend the life
of its liabilities.
The Company's borrowings have consisted of advances from the FHLB of New
York, and to a lesser extent, reverse repurchase agreements. FHLB of New York
advances can be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities.
16
The following table sets forth the maximum month-end balance, average balance
and weighted average cost of FHLB of New York advances and other borrowings for
the periods indicated.
YEAR ENDED JUNE 30,
---------------------------
1997 1996 1995
-------- -------- -------
(DOLLARS IN THOUSANDS)
MAXIMUM BALANCE FOR THE YEAR ENDED:
FHLB of New York advances......................... $205,465 $105,000 $35,000
Other borrowings:
FHLB of New York overnight repricing line of
credit......................................... $ 46,610 $ 46,650 $16,670
FHLB of New York one-month overnight repricing
line of credit................................. 15,000 20,000 5,000
Reverse repurchase agreements maturing within
one year....................................... 30,100 10,000 5,000
Reverse repurchase agreements maturing after one
year........................................... 10,000 -- --
-------- -------- -------
Total other borrowings........................ $101,710 $ 76,650 $26,670
======== ======== =======
AVERAGE BALANCE FOR THE YEAR ENDED:
FHLB of New York advances......................... $147,945 $ 65,625 $17,028
Other borrowings:
FHLB of New York overnight repricing line of
credit......................................... $ 29,537 $ 23,101 $ 9,991
FHLB of New York one-month overnight repricing
line of credit................................. 8,886 4,141 430
Reverse repurchase agreements maturing within
one year....................................... 24,244 2,604 860
Reverse repurchase agreements maturing after one
year........................................... 5,417 -- --
-------- -------- -------
Total other borrowings........................ $ 68,084 $ 29,846 $11,281
======== ======== =======
BALANCE AT JUNE 30:
FHLB of New York advances......................... $205,465 $105,000 $35,000
Other borrowings:
FHLB of New York overnight repricing line of
credit......................................... $ 32,650 $ 36,700 $15,830
FHLB of New York one-month overnight repricing
line of credit................................. 10,000 5,000 --
Reverse repurchase agreements maturing within
one year....................................... 30,100 -- --
Reverse repurchase agreements maturing after one
year........................................... 10,000 -- --
-------- -------- -------
Total other borrowings........................ $ 82,750 $ 41,700 $15,830
======== ======== =======
WEIGHTED AVERAGE COST OF FUNDS FOR THE YEAR ENDED:
FHLB of New York advances......................... 6.14% 5.83% 5.16%
Other borrowings:
FHLB of New York overnight repricing line of
credit......................................... 5.47% 5.61% 5.63%
FHLB of New York one-month overnight repricing
line of credit................................. 5.48% 5.35% 5.63%
Reverse repurchase agreements maturing within
one year....................................... 5.50% 5.81% 6.19%
Reverse repurchase agreements maturing after one
year........................................... 6.24% -- --
WEIGHTED AVERAGE COST OF FUNDS AT JUNE 30:
FHLB of New York advances......................... 6.13% 5.93% 5.86%
Other borrowings:
FHLB of New York overnight repricing line of
credit......................................... 6.63% 5.69% 6.63%
FHLB of New York one-month overnight repricing
line of credit................................. 6.38% 5.63% --
Reverse repurchase agreements maturing within
one year....................................... 5.74% -- --
Reverse repurchase agreements maturing after one
year........................................... 6.24% -- --
17
SUBSIDIARY ACTIVITIES
As a federally chartered savings association, Penn Federal is permitted by
OTS regulations to invest up to 2% of its assets, or $26.5 million at June 30,
1997, in the stock of, or loans to, service corporation subsidiaries. As of
such date, the net book value of Penn Federal's investment in its service
corporation was $15,500. Penn Federal may invest an additional 1% of its
assets in service corporations where such additional funds are used for inner-
city or community development purposes and up to 50% of its total capital in
conforming loans to service corporations in which it owns more than 10% of the
capital stock. In addition to investments in service corporations, federal
associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal association may
engage in directly.
Penn Federal currently has a single service corporation, which is known as
Penn Savings Insurance Agency, Inc. ("PSIA"). PSIA offers insurance and
uninsured annuity products to the Company's customers and members of the
general public.
Penn Federal intends to form a Delaware operating subsidiary to hold and
manage its investment portfolio.
COMPETITION
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from commercial banks, other savings associations,
mortgage banking companies and credit unions making loans secured by real
estate located in the State of New Jersey. Commercial banks, credit unions and
finance companies provide vigorous competition in consumer lending. The
Company competes for real estate and other loans principally on the basis of
the quality of services it provides to borrowers, interest rates and loan fees
it charges, and the types of products offered.
The Company attracts substantially all of its deposits through its branches,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from commercial banks, savings
associations, credit unions and brokerage houses. The Company competes for
these deposits by offering a variety of deposit accounts at competitive rates,
quality customer service, convenient business hours and branch locations with
interbranch deposit and withdrawal privileges.
18
REGULATION
GENERAL
Penn Federal is a federally chartered savings bank, the deposits of which
are federally insured up to applicable limits. Accordingly, the Bank is
subject to comprehensive federal regulation and oversight extending to all its
operations. Penn Federal is a member of the FHLB of New York and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the savings and loan holding company of
Penn Federal, PennFed is also subject to federal regulation and oversight. The
purpose of the regulation of PennFed and other holding companies is to protect
subsidiary savings associations. The Bank is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of Penn Federal are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank. For purposes of the "Regulation"
discussion, the terms "savings bank," "savings association" and "savings
institution" would apply to the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings associations.
As part of this authority, Penn Federal is required to file periodic reports
with the OTS and is subject to periodic examinations by the OTS and the FDIC.
The last regular OTS and FDIC examinations of the Bank were as of June 1996
and May 1992, respectively.
All savings associations are subject to a semi-annual OTS assessment, based
upon the savings association's total assets and supervisory evaluation. The
Bank's OTS assessment for the fiscal year ended June 30, 1997 was $217,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Penn Federal and PennFed.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist and/or removal and
prohibition orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations
and unsafe or unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed
with the OTS. Except under certain circumstances, public disclosure of interim
and final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of Penn Federal
is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except
with approval of the OTS. At June 30, 1997, the Bank was in compliance with
each of these restrictions. Federal savings associations meeting the Qualified
Thrift Lender Test or comparable requirement are also generally authorized to
branch nationwide. See "--Qualified Thrift Lender Test."
The OTS, as well as the other federal banking agencies, has developed
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, internal controls and audit systems, asset
quality, earning standards, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. Failure to submit a plan or to comply
with an approved plan would subject the institution to further enforcement
action.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Penn Federal's deposits are insured by the SAIF, which is administered by
the FDIC. Deposits are insured up to applicable limits by the FDIC. As
insurer, the FDIC imposes deposit insurance premiums and is authorized
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to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the deposit insurance funds. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate the institution's
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's SAIF deposit premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums, based upon their level of capital
and supervisory evaluation. The current SAIF premium schedule ranges from
0.00% to 0.27% of deposits. Under the system, institutions classified as well
capitalized (generally those institutions with a core capital ratio of at
least 5% and a risk-based capital ratio of at least 10%) and considered
financially sound with only a few weaknesses pay the lowest premium, while
institutions that are less than adequately capitalized and considered to pose
a substantial risk of loss to the SAIF, pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period. The Bank has been notified by the FDIC that for
the semi-annual assessment period beginning July 1, 1997, it will be assessed
insurance premiums at an annual rate of 0.00%. In addition to the SAIF
assessment, the FDIC is authorized to collect an assessment against SAIF-
assessable deposits to be paid to the Financing Corporation ("FICO"). The
actual FICO assessment rate that is applied to deposits is not tied to the
FDIC risk classification and is determined on a quarterly basis. For the
quarterly period beginning July 1, 1997, the Company's FICO assessment rate is
0.063% of deposits, on an annualized basis.
The FDIC is authorized to increase assessment rates, on a semi-annual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the insurance
premium rates for banks that are insured by the Bank Insurance Fund (the
"BIF") of the FDIC in order to maintain the reserve ratio of the BIF at 1.25%
of BIF insured deposits. The current BIF premium schedule also ranges from
0.00% to 0.27% of deposits. Until December 31, 1999, or such earlier date on
which the last savings association ceases to exist, the FICO rate applied to
BIF deposits must equal one-fifth the FICO assessment rate that is applied to
SAIF deposits.
Prior to September 30, 1996, financial institutions which were members of
the BIF were assessed substantially lower deposit insurance premiums because
the BIF had achieved its required level of reserves while the SAIF had not yet
achieved its required reserves. As a result of legislation signed into law on
September 30, 1996, the SAIF recapitalization plan provided for a one-time
assessment of 0.657% of deposits, which was imposed on all institutions with
SAIF-insured deposits, to enable the SAIF to achieve its required level of
reserves. The assessment was based on deposits as of March 31, 1995, and the
Bank's special assessment was approximately $4.8 million, or $3.1 million, net
of taxes. Following the recapitalization assessment, beginning January 1, 1997
deposit insurance premiums were decreased significantly from the 0.23% of
deposits previously paid by the Bank to 0.00%, plus the FICO assessment
described above.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations, such as Penn Federal, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable
to such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS
is also authorized to impose capital requirements in excess of these standards
on individual associations on a case-by-case basis.
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The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock. In addition, all intangible assets,
other than certain amounts of mortgage servicing rights, must be deducted from
assets and capital for calculating compliance with the requirements. At June
30, 1997, Penn Federal had $15.9 million of intangible assets other than
qualifying mortgage servicing rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely
as agent for its customers are "includable" subsidiaries that are consolidated
for capital purposes in proportion to the association's level of ownership.
For excludable subsidiaries, the debt and equity investments in such
subsidiaries are fully deducted from assets and capital. The Bank has one
subsidiary, Penn Savings Insurance Agency, Inc. which is an includable
subsidiary.
At June 30, 1997, Penn Federal had tangible capital of $73.5 million, or
5.61% of adjusted total assets, which is approximately $53.8 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets up to 25% of adjusted total assets. At June 30,
1997, Penn Federal had $0.4 million of intangibles which were subject to these
tests. As a result of the prompt corrective action provisions discussed below,
however, a savings association must maintain a core capital ratio of at least
4% to be considered adequately capitalized unless its supervisory condition is
such to allow it to maintain a 3% ratio.
At June 30, 1997, Penn Federal had core capital equal to $73.9 million, or
5.64% of adjusted total assets, which is approximately $21.5 million above the
4% ratio required to be considered adequately capitalized.
The OTS risk-based capital requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of selected items, such as certain permanent and maturing
capital instruments that do not qualify as core capital and allowances for
loan and lease losses up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only
to the extent of core capital. At June 30, 1997, the Bank had no capital
instruments that qualify as supplementary capital and had $2.1 million of
allowances for loan and lease losses, all of which was included since it was
less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments
(as defined by regulation), that portion of land loans and nonresidential
construction loans in excess of an 80% loan to value ratio and reciprocal
holdings of qualifying capital instruments. At June 30, 1997, Penn Federal had
$50,000 of such exclusions from capital and assets.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of assets. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On June 30, 1997, Penn Federal had total risk-based capital of $75.9 million
(including $73.9 million in core capital and $2.1 million in allowable
supplementary capital) and risk-weighted assets of $621.3 million (including
$9.0 million in converted off-balance sheet assets) resulting in risk-based
capital of 12.22% of risk-weighted assets. This amount was $26.2 million above
the 8% requirement in effect on that date.
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The OTS has adopted a regulation that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets. This exposure is a measure of the potential
decline in the net portfolio value of a savings association, greater than 2%
of the present value of its assets, based upon a hypothetical 200 basis point
increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The rule provides for a
two quarter lag between calculating interest rate risk and recognizing any
deduction from capital. The OTS has indefinitely postponed the effective date
of the rule. However, if effective, this new rule should have no effect on the
Bank's ability to comply with its risk-based capital requirement.
The federal banking agencies, including the OTS, have also adopted
regulations authorizing the agencies to require a depository institution to
maintain additional total capital to account for concentration of credit risk
and the risk of non-traditional activities.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and, until such plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, discussed below, that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into
a limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more additional mandated specified actions and
operating restrictions, which may cover all aspects of its operations and
include a forced divestiture, merger or acquisition of the association. An
association that becomes "critically undercapitalized" (i.e., a ratio of
tangible equity to total assets of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to
significantly undercapitalized associations.
Any undercapitalized association is also subject to actions by the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver. The OTS is also authorized to reclassify an
association into a lower capital category and impose the restrictions
applicable to such category if the institution is engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Penn
Federal may have a substantial adverse effect on the Bank's operations and
profitability and the market value of PennFed's common stock. Stockholders do
not have preemptive rights, and therefore, if the Company is directed by the
OTS or the FDIC to issue additional shares of common stock, such issuance may
result in the dilution in the percentage of ownership of existing
stockholders.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on associations
with respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the association's
minimum capital requirements or the amount required to be maintained for the
liquidation account established in connection with the Conversion.
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The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account. See "--Regulatory
Capital Requirements."
Generally, Tier 1 associations, which are associations that before and after
the proposed distribution meet their fully phased-in capital requirements, may
make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year. However, a Tier 1 association deemed to be
in need of more than normal supervision by the OTS may be downgraded to a Tier
2 or Tier 3 association as a result of such a determination. Penn Federal
meets the requirements for a Tier 1 association and has not been notified of a
need for more than normal supervision. Tier 2 associations, which are
associations that before and after the proposed distribution meet their
current minimum capital requirements, may make capital distributions of up to
75% of net income over the most recent four quarter period ("safe-harbor
level").
Tier 3 associations (which are associations that do not meet current minimum
capital requirements) that propose to make any capital distribution and Tier 2
associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe-harbor provisions and Tier 1 associations proposing to make
any capital distribution need only submit written notice to the OTS 30 days
prior to such distribution. As a subsidiary of PennFed, the Bank is required
to give the OTS 30 days notice prior to declaring any dividend on its stock.
The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "--Regulatory Capital Requirements."
LIQUIDITY
All savings associations, including Penn Federal, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This liquid asset ratio requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings associations. At the present time,
the minimum liquid asset ratio is 5%. In addition, short-term liquid assets
(e.g., cash, certain time deposits, certain bankers acceptances and short-term
U.S. Treasury obligations) currently must constitute at least 1% of the
association's average daily balance of net withdrawable deposit accounts and
current borrowings. Penalties may be imposed upon associations for violations
of either liquid asset ratio requirement. At June 30, 1997, Penn Federal was
in compliance with both requirements, with an overall liquidity ratio of
10.36% and a short-term liquidity ratio of 2.15%. The OTS has recently issued
a proposal to eliminate the short-term liquidity requirement designed to
reduce the regulatory burden on savings associations.
ACCOUNTING
An OTS policy statement applicable to all savings associations clarifies and
re-emphasizes that the investment activities of a savings association must be
in compliance with approved and documented investment policies and strategies,
and must be accounted for in accordance with generally accepted accounting
principles ("GAAP"). Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. Penn Federal
is in compliance with these policy statements.
The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent
risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings associations, including Penn Federal, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
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its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At June 30, 1997, the Bank met the test and has always met the
test since its effective date.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB of New York
borrowings and is subject to national bank limits for payment of dividends. If
such association has not requalified or converted to a national bank within
three years after the failure, it must divest itself of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB of New York borrowings, which may result
in prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See "--Holding Company
Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution
has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does
it limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with CRA. The CRA requires the OTS, in connection with the
examination of Penn Federal, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by Penn Federal. An unsatisfactory rating may be used as the basis for
the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the
CRA in the past few years, the Bank may be required to devote additional funds
for investment and lending in its local community. The Bank was examined for
CRA compliance in November 1996 and received a rating of outstanding.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to affiliates, are restricted to a percentage of
the association's capital. Affiliates of Penn Federal include PennFed and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. Penn Federal's subsidiary is not deemed an affiliate; however, the
OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
HOLDING COMPANY REGULATION
PennFed is a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, PennFed is required to register and file
reports with the OTS and is subject to regulation and examination
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by the OTS. In addition, the OTS has enforcement authority over PennFed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, PennFed generally is not
subject to activity restrictions. If PennFed acquires control of another
savings association as a separate subsidiary, it would become a multiple
savings and loan holding company and the activities of PennFed and any of its
subsidiaries (other than Penn Federal or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If Penn Federal fails the QTL test, PennFed must obtain the approval of the
OTS prior to continuing after such failure, directly or through any other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure, PennFed must register as, and will become subject
to, the restrictions applicable to bank holding companies. See "--Qualified
Thrift Lender Test." The activities authorized for a bank holding company are
more limited than are the activities authorized for a unitary or multiple
savings and loan holding company.
PennFed must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory
acquisition of a failing savings association.
FEDERAL SECURITIES LAW
The common stock of PennFed is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). PennFed is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
PennFed stock held by persons who are affiliates (generally executive
officers, directors and principal stockholders) of PennFed may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If PennFed meets specified current public information
requirements, each affiliate of PennFed is able to sell in the public market,
without registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking accounts). At June 30, 1997, Penn Federal was in
compliance with these reserve requirements. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements that may be imposed by the OTS. See "--
Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations
to exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
Penn Federal is a member of the FHLB of New York, which is one of 12
regional FHLBs that provides loans and correspondent services to its members.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board
of directors of the FHLB, which are subject to the oversight of the Federal
Housing Finance Board. All borrowings from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB.
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As a member, Penn Federal is required to purchase and maintain stock in the
FHLB of New York. At June 30, 1997, the Bank had $12.4 million in FHLB of New
York stock, which was in compliance with this requirement. In past years, Penn
Federal has received substantial dividends on its FHLB of New York stock. Over
the past five fiscal years such dividends have averaged 7.42%.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have adversely affected the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB of New
York stock in the future.
For the year ended June 30, 1997, dividends paid by the FHLB of New York to
Penn Federal totaled $625,000, resulting in a 6.39% yield.
FEDERAL AND STATE TAXATION
Savings banks that meet certain definitions, tests and other conditions
prescribed by the Internal Revenue Code are allowed to deduct, with
limitations, a bad debt deduction. This deduction is computed as a percentage
of taxable income before such deduction or based upon actual loss experience.
During fiscal 1997, the Company's bad debt deduction was based upon actual
loss experience. During the fiscal years 1996 and 1995, the Company employed
the percentage of taxable income method.
On August 20, 1996 legislation was signed into law which repealed the
percentage of taxable income method for the tax bad debt deduction. This
repeal is effective for the Company's taxable year beginning July 1, 1996. In
addition, the legislation requires the Company to include in taxable income
its tax bad debt reserves in excess of its base year reserves (i.e., the
balance of its bad debt reserves as of June 30, 1988) over a six, seven, or
eight year period, depending upon the attainment of certain loan origination
levels. Since the percentage of taxable income method for the tax bad debt
deduction and the corresponding increase in the tax bad debt reserve in excess
of the base year have been recorded as temporary differences pursuant to SFAS
109, this change in the tax law had no effect on the Company's statement of
operations.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Net operating losses can offset no more than
90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a stockholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad
debt losses). As of June 30, 1997, the Bank's Excess for tax purposes totaled
approximately $14.5 million.
PennFed files consolidated federal income tax returns with the Bank and its
subsidiary. Savings associations, such as the Bank, that file federal income
tax returns as part of a consolidated group are required by applicable
Treasury regulations to reduce their taxable income for purposes of computing
the percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are
functionally related to the activities of the savings association member.
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To the extent a savings association makes "non-dividend distributions," such
distributions will be considered to have been made from the association's tax
bad debt reserves (including the base year reserve) and then from the
association's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the association's income. Non-dividend
distributions include distributions in excess of the association's current and
accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the association's current or
accumulated earnings and profits will not be so included in the association's
income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 34% federal corporate tax rate. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
The Bank and its consolidated subsidiary have been audited by the Internal
Revenue Service ("IRS") with respect to consolidated federal income tax
returns through December 31, 1991. There were no material adjustments made to
taxable income as originally reported to the IRS. In the opinion of
management, any examination of still open returns (including returns of
subsidiaries and predecessors of, or entities merged into, PennFed) would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Company and its consolidated subsidiaries.
New Jersey Taxation. The Bank is taxed under the New Jersey Savings
Institution Tax Act. The tax is an annual privilege tax imposed at a rate of
3% on the net income of the Bank as reported for federal income tax purposes,
with certain modifications. PennFed is taxed under the New Jersey Corporation
Business Tax Act, and if it meets certain tests, will be taxed as an
investment company at an effective annual rate for the taxable year ended June
30, 1997 of 2.3% of New Jersey Taxable Income (as defined). If it fails to
meet such tests, it will be taxed at an annual rate of 9% of New Jersey
Taxable Income. It is anticipated, based upon representations of PennFed
regarding its current and future holdings and operations, that PennFed will be
taxed as an investment company.
Delaware Taxation. As a Delaware holding company, PennFed is exempt from
Delaware corporate income tax, but is required to file an annual report with
and pay an annual fee to the State of Delaware. PennFed is also subject to an
annual franchise tax imposed by the State of Delaware.
27
EXECUTIVE OFFICERS
The executive officers of PennFed are elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors. The executive officers of
PennFed are as follows: Joseph L. LaMonica, President and Chief Executive
Officer; Lucy T. Tinker, Executive Vice President and Chief Operating Officer;
Patrick D. McTernan, Executive Vice President, General Counsel and Secretary;
and Jeffrey J. Carfora, Senior Vice President and Chief Financial Officer.
Executive Officers of PennFed currently do not receive any remuneration in
their capacity as PennFed executive officers.
The following table sets forth certain information as of June 30, 1997
regarding the executive officers of the Bank who are not also directors.
NAME AGE POSITIONS HELD WITH THE BANK
---- --- ----------------------------
Lucy T. Tinker....... 57 Executive Vice President and Chief Operating Officer
Barbara J. Sanders... 45 Senior Vice President and Lending Group Executive
Jeffrey J. Carfora... 39 Senior Vice President and Finance Group Executive
Barbara A. Flannery.. 41 Senior Vice President and Retail Banking Group
Executive
Officers are elected annually by the Board of Directors of the Bank. The
business experience of each executive officer who is not also a director is
set forth below.
Lucy T. Tinker--Ms. Tinker is responsible for the daily operations of the
Bank. Ms. Tinker also assists President LaMonica in the development of
corporate policies and goals. Ms. Tinker joined Penn Federal in 1989 as Vice
President and Treasurer. In 1990, she was appointed Senior Vice President and
Finance Group Executive. She was appointed Executive Vice President and Chief
Operating Officer in 1993.
Barbara J. Sanders--Ms. Sanders manages the Bank's lending operations which
include commercial, residential and consumer lending, collections, servicing
and quality control. Ms. Sanders has held her current position since 1990.
Jeffrey J. Carfora--Mr. Carfora manages the Bank's finance division which
includes financial and tax accounting and reporting, strategic planning and
budgeting, and treasury and asset/liability management. Prior to joining Penn
Federal in 1993, Mr. Carfora was with Carteret Savings Bank.
Barbara A. Flannery--Ms. Flannery is responsible for the retail branch
network. Ms. Flannery has served Penn Federal in various capacities since
joining the Bank in 1980, including the management of product development,
marketing and various aspects of branch activities.
EMPLOYEES
At June 30, 1997, the Company and its subsidiary had a total of 211
employees, including 42 part-time employees. The Company's employees are not
represented by any collective bargaining group.
ITEM 2. PROPERTIES
The Company conducts its business at its headquarters, operations center and
the Bank's branch offices located in its primary market areas. The following
table sets forth information relating to each of the Company's properties as
of June 30, 1997.
The total net book value of the Company's premises and equipment (including
land, building and leasehold improvements and furniture and equipment) at June
30, 1997 was $16.4 million.
28
LEASE TOTAL
OWNED OR EXPIRATION APPROXIMATE
LOCATION ACQUIRED LEASED DATE SQUARE FOOTAGE
- ----------------------------------- -------- -------- ---------- --------------
HOME OFFICE:
36 Ferry Street
Newark, New Jersey................. 1954 Owned -- 3,700
OPERATIONS CENTER:
622 Eagle Rock Avenue
West Orange, New Jersey............ 1988 Owned -- 48,063(/1/)
BRANCH OFFICES:
59 Main Street
Sayreville, New Jersey............. 1982 Owned -- 3,400
Pathmark Office
1043 US Highway 9 N
Old Bridge, New Jersey............. 1992 Leased 11/30/99 500
410 Bergen Street
Harrison, New Jersey............... 1983 Leased 11/30/03 2,000
77 Main Street
Farmingdale, New Jersey............ 1984 Owned -- 1,785
471 County Road 52
Marlboro, New Jersey............... 1978 Owned -- 2,000
1696 Route 88 West
Brick, New Jersey.................. 1975 Owned -- 1,525
155 Central Avenue
East Newark, New Jersey............ 1973 Owned -- 1,771
37 Wilson Avenue
Newark, New Jersey................. 1976 Owned -- 7,500
493 Bloomfield Avenue
Montclair, New Jersey.............. 1991 Owned -- 7,395(/2/)
323 Orange Road
Montclair, New Jersey.............. 1989 Owned -- 1,650
620 Bloomfield Avenue
Verona, New Jersey................. 1995 Owned -- 5,460(/3/)
597 Valley Road
Montclair, New Jersey.............. 1989 Owned -- 5,467(/4/)
265 Bloomfield Avenue
Caldwell, New Jersey............... 1995 Owned -- 7,140
198 Jefferson Street
Newark, New Jersey................. 1993 Leased 8/31/98 2,070
23 Little Falls Road
Fairfield, New Jersey.............. 1995 Owned -- 4,125
29
LEASE TOTAL
OWNED OR EXPIRATION APPROXIMATE
LOCATION ACQUIRED LEASED DATE SQUARE FOOTAGE
- ---------------------------------- -------- -------- ---------- --------------
OTHER PROPERTIES:
151 Eagle Rock Avenue (future
branch location)
Roseland, New Jersey.............. 1997 Owned -- 8,300
340 Atlantic City Boulevard (U.S.
Highway 9) (future branch
location)
Bayville, New Jersey.............. 1997 Leased 8/31/07 3,600
White Horse Pike
Winslow, New Jersey............... 1986 Owned -- 4.01 acres
- --------
(1)Includes 20,332 square feet leased to unaffiliated third parties.
(2)Includes 2,100 square feet leased to unaffiliated third parties.
(3)Land is leased through 1/31/99 with 5 year options.
(4)Includes 3,080 square feet leased to unaffiliated third parties.
The Company believes that its current facilities are adequate to meet the
present and foreseeable needs of the Company, subject to possible future
expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time as plaintiff or defendant in
various legal actions arising in the normal course of its business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings should
not have a material effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "PFSB." At September 5, 1997, there were
approximately 600 stockholders of record for the Company's common stock (not
including the number of persons or entities holding stock in nominee or street
name through various brokerage firms).
MARKET INFORMATION
The following table sets forth the high and low closing sales prices per
common share for the periods indicated. The closing price of a common share
was $27.25 at June 30, 1997 compared to $15.50 at June 30, 1996.
1997 CLOSING PRICE 1996 CLOSING PRICE
------------------- -------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
QUARTER ENDED:
September 30......................... $ 18.375 $ 14.875 $ 15.375 $ 12.500
December 31.......................... 20.750 18.125 15.375 13.750
March 31............................. 25.250 20.000 15.875 14.500
June 30.............................. 27.375 22.250 16.000 14.625
The Company initiated a quarterly cash dividend on its common stock of $0.07
per share in the second quarter of fiscal 1997.
30
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company and its
subsidiary is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements, including notes thereto, included
elsewhere in this document.
AT JUNE 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED FINANCIAL
CONDITION DATA:
Total assets............ $1,321,751 $1,086,524 $868,926 $680,157 $581,474
Loans receivable, net... 931,451 652,571 467,677 383,357 399,334
Mortgage-backed
securities............. 288,539 346,068 319,436 204,870 123,288
Investment securities... 35,290 21,288 17,558 11,167 11,302
Deposits................ 918,160 836,416 713,524 614,860(/1/) 525,268
Total borrowings........ 288,215 146,700 50,830 15,000 10,000
Stockholders' equity.... 97,270 90,564 94,170 41,985 37,432
Book value per common
share.................. 21.83 20.50 18.17 -- --
Tangible book value per
common share........... 18.26 16.33 14.11 -- --
- --------
(1) Includes approximately $53.8 million received and held on deposit for the
purchase of stock in the Company's initial public offering completed on
July 14, 1994.
YEAR ENDED JUNE 30,
-----------------------------------------------
1997(/1/) 1996 1995 1994 1993
--------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED OPERATING DATA:
Total interest and dividend
income....................... $85,401 $68,123 $52,719 $43,045 $46,085
Total interest expense........ 53,073 39,121 27,153 20,825 23,382
------- ------- ------- ------- -------
Net interest and dividend
income....................... 32,328 29,002 25,566 22,220 22,703
Provision for loan losses..... 635 610 569 883 1,561
------- ------- ------- ------- -------
Net interest income after
provision for loan losses.... 31,693 28,392 24,997 21,337 21,142
------- ------- ------- ------- -------
Service charges............... 1,666 1,602 1,476 1,686 1,634
Net gain (loss) from real
estate operations............ (181) 104 117 (541) (549)
Net gain (loss) on sales of
loans........................ -- -- -- (19) 652
Net gain on sales of
investment securities........ -- 94 -- -- 91
Other......................... 298 402 532 540 35
------- ------- ------- ------- -------
Total non-interest income..... 1,783 2,202 2,125 1,666 1,863
------- ------- ------- ------- -------
Total non-interest expenses... 22,385 (/1/) 17,642 17,561 15,556 15,688
------- ------- ------- ------- -------
Income before taxes and
cumulative effect of change
in accounting principle...... 11,091 12,952 9,561 7,447 7,317
Income tax expense............ 4,205 5,111 3,921 3,005 2,647
Cumulative effect of change in
accounting principle......... -- -- -- 111 --
------- ------- ------- ------- -------
Net income.................... $ 6,886 (/1/) $ 7,841 $ 5,640 $ 4,553 $ 4,670
======= ======= ======= ======= =======
Net income per common share:
Primary....................... $ 1.46 (/1/) $ 1.55 $ 1.08 $ -- $ --
======= ======= ======= ======= =======
Fully diluted................. $ 1.44 (/1/) $ 1.55 $ 1.08 $ -- $ --
======= ======= ======= ======= =======
- --------
(1) Fiscal 1997 includes the effect of a one-time SAIF recapitalization
assessment of approximately $4.8 million, or $3.1 million net of taxes.
Excluding this non-recurring assessment, total non-interest expenses would
have been $17.6 million, net income would have been $9.9 million, primary
earnings per share would have been $2.11 and fully diluted earning per
share would have been $2.09.
31
AT AND FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------
1997(/1/) 1996 1995 1994 1993
------------ ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED FINANCIAL RATIOS
AND OTHER DATA:
Return on average assets
(ratio of net income to
average total assets).... 0.58%(/1/) 0.82% 0.74% 0.76% 0.80%
Return on average
stockholders' equity
(ratio of net income to
average stockholders'
equity).................. 7.42(/1/) 8.36 5.97 11.40 13.25
Net interest rate spread
during the year.......... 2.58 2.96 3.24 3.90 4.24
Net interest margin (net
interest and dividend
income to average
interest-earning
assets).................. 2.83 3.22 3.58 3.95 4.24
Ratio of average interest-
earning assets to average
deposits and borrowings.. 105.30 105.87 109.05 101.57 100.01
Ratio of earnings to fixed
charges(/2/):
Excluding interest on
deposits............... 1.86x 3.35x 7.28x 10.44x 7,318.00x
Including interest on
deposits............... 1.21x 1.33x 1.35x 1.36x 1.31x
Ratio of non-interest
expense to average
total assets............. 1.87%(/1/) 1.84% 2.31% 2.58% 2.70%
Efficiency ratio (non-
interest expense,
excluding amortization of
intangibles, to net
interest and dividend
income and non-interest
income excluding gains
and real estate
operations).............. 57.95(/1/) 48.53 58.63 59.10 59.09
ASSET QUALITY RATIOS:
Non-accruing loans to
total loans at end of
year..................... 0.59 0.95 1.18 2.55 3.48
Allowance for loan losses
to non-accruing loans at
end of year.............. 47.80 42.52 51.39 31.04 22.31
Allowance for loan losses
to total loans at end
of year.................. 0.28 0.40 0.61 0.79 0.78
Non-performing assets to
total assets at end
of year.................. 0.48 0.67 0.78 1.67 2.71
Ratio of net charge-offs
during the year to
average loans outstanding
during the year.......... 0.08 0.16 0.19 0.25 0.43
CAPITAL RATIOS:
Stockholders' equity to
total assets at end of
year..................... 7.36 8.34 10.84 6.17 6.44
Average stockholders'
equity to average
total assets............. 7.76 9.80 12.44 6.63 6.06
Tangible capital to
tangible assets at end
of year(/3/)............. 5.61 5.92 6.29 5.55 5.55
Core capital to adjusted
tangible assets at end
of year(/3/)............. 5.64 5.97 6.38 5.71 5.81
Risk-based capital to
risk-weighted assets at
end of year(/3/)......... 12.22 13.47 14.49 13.16 11.61
OTHER DATA:
Number of branch offices
at end of year........... 17 17 17 16 16
Number of deposit accounts
at end of year........... 85,400 81,700 78,800 63,100 64,800
- --------
(1) Fiscal 1997 results include the effect of a one-time SAIF recapitalization
assessment of approximately $4.8 million, or $3.1 million net of taxes.
Excluding this non-recurring assessment, return on average assets would
have been 0.83%, return on average stockholders' equity would have been
10.70%, the ratio of non-interest expense to average total assets would
have been 1.47% and the efficiency ratio would have been 43.92%.
(2) The ratio of earnings to fixed charges excluding interest on deposits is
calculated by dividing income before taxes and extraordinary items before
interest on borrowings by interest on borrowings on a pretax basis. The
ratio of earnings to fixed charges including interest on deposits is
calculated by dividing income before income taxes and extraordinary items
before interest on deposits and borrowings by interest on deposits plus
interest on borrowings on a pretax basis.
(3) Represents regulatory capital ratios for the Bank.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the
Federal Securities Laws. Actual results or performance could differ materially
then those contemplated, expressed or implied by the forward-looking
statements contained herein.
GENERAL
In July 1994, PennFed became the savings and loan holding company of the
Bank. Currently, the results of operations of the Company are primarily those
of the Bank.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Company's provision for loan losses and operating expenses.
General economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities also
significantly affect the Company's results of operations. Future changes in
applicable law, regulations or government policies may also have a material
impact on the Company.
As noted previously, the deposits of savings associations, such as the Bank,
are presently insured by the SAIF, which, along with the BIF, are the two
insurance funds administered by the FDIC. Financial institutions which were
members of the BIF, prior to September 30, 1996, experienced substantially
lower deposit insurance premiums because the BIF had achieved its required
level of reserves while the SAIF had not yet achieved its required reserves.
As a result of legislation signed into law on September 30, 1996, the SAIF
recapitalization plan provided for a one-time assessment of 0.657% of deposits
which was imposed on all SAIF insured institutions to enable the SAIF to
achieve its required level of reserves. The assessment was based on deposits
as of March 31, 1995, and the Bank's special assessment was approximately $4.8
million, or $3.1 million, net of taxes. Accordingly, this special one-time
SAIF recapitalization assessment significantly increased non-interest expenses
and adversely effected the Company's results of operations for the year ended
June 30, 1997. Following the recapitalization assessment, beginning January 1,
1997 deposit insurance premiums decreased significantly from the 0.23% of
deposits previously paid by the Bank to 0.00% plus the assessment to be paid
to the Financing Corporation ("FICO"). Such assessment for the quarterly
period beginning July 1, 1997 amounted to 0.063% of deposits, on an annualized
basis. See "Regulation--Insurance of Accounts and Regulation by the FDIC."
MANAGEMENT STRATEGY
Management's primary goal continues to be to improve profitability, while
continuing to manage interest rate risk, so as to enhance stockholder value,
and to foster and maintain customer confidence. The Company's current
strategies focus on: (i) emphasizing lending secured by one- to four-family
residential first mortgages, (ii) increasing the commercial and multi-family
and consumer loan portfolios, (iii) maintaining asset quality, (iv) increasing
deposit balances, (v) managing the Company's exposure to interest rate risk,
and (vi) controlling non-interest expenses.
Emphasizing Lending Secured by One- to Four-Family Residential First
Mortgages. The Company has emphasized, and plans to continue to emphasize,
originating and purchasing traditional one- to four-family first mortgage
loans secured by properties located in New Jersey. Correspondent loan
purchases of one- to four-family mortgage loans through June 1997 have been
primarily secured by properties located throughout New Jersey with a limited
purchase of loans secured by real estate located in the Commonwealth of
Pennsylvania. The Company has approved the purchase of a limited amount of
loans secured by real estate located in the Commonwealth of Virginia and the
Commonwealth of Massachusetts through an existing correspondent relationship,
though none were purchased as of June 30, 1997. The Company originated or
purchased $337.3 million, $251.8 million and $123.3 million in one- to four-
family mortgage loans in fiscal 1997, 1996 and 1995, respectively. The
Company's interest income has been derived primarily from one- to four-family
mortgage loans on residential real estate which totaled $831.8 million or
89.55% of the Company's gross loan portfolio at June 30, 1997.
33
Increasing the Commercial and Multi-Family and Consumer Loan Portfolios. In
addition to one- to four-family residential first mortgage lending, the
Company plans to increase its emphasis on commercial and multi-family and
consumer lending. Such loans reprice more frequently, have shorter maturities,
and/or have higher yields than one- to four-family first mortgage loans. The
Company originated $31.7 million, $23.4 million and $18.9 million of
commercial and multi-family and consumer loans in fiscal 1997, 1996 and 1995,
respectively. The Company has recently established a correspondent
relationship with a bank in New Jersey as part of an overall effort to
increase its commercial and multi-family real estate originations.
Maintaining Asset Quality. The Company's loan portfolio consists primarily
of one- to four-family mortgages, which are considered to have less risk than
commercial and multi-family real estate or consumer loans.
The Company's non-performing assets consist of non-accruing loans and real
estate owned. The Company focuses on strong underwriting and collection
efforts and aggressive marketing of real estate owned properties. In addition,
the Company has occasionally restructured loans by reducing the interest rate
or deferring principal and interest payments in order to return the loan to a
performing status. As a result, non-performing assets as a percentage of total
assets was 0.48% at June 30, 1997 compared to 2.71% at June 30, 1993.
Increasing Deposit Balances. The Company's primary source of funds is
deposits. Deposits have increased 10%, 17% and 16% in fiscal 1997, 1996 and
1995, respectively. The Company plans to continue to emphasize deposit growth,
particularly longer-term certificates of deposit, and increase its emphasis on
transaction accounts. It has recently emphasized the solicitation of deposits
from municipalities.
Managing the Company's Exposure to Interest Rate Risk. The Company has an
asset/liability committee that meets no less than weekly to price loan and
deposit products and monthly to develop, implement and review policies to
manage interest rate risk. The Company has endeavored to manage its interest
rate risk through the pricing and diversification of its loan and deposit
products, including the focus on the origination and purchase of first
mortgage loans with shorter terms to maturity and/or with adjustable rate
features, as well as the origination of commercial and multi-family real
estate and consumer loans which generally have shorter expected average lives
or reprice at shorter intervals than one- to four-family residential first
mortgage products. In addition, the Company has purchased government agency
mortgage-backed securities with short to intermediate average lives which
generally do not exceed 4.5 years or which have adjustable rate features.
Furthermore, as part of its interest rate risk strategy, the Company has
emphasized longer term certificates of deposit and utilized intermediate term
borrowings. The Company has also engaged in intermediate term interest rate
swaps designed to extend the maturities of six month certificates of deposit
to three to five years. See "--Interest Rate Sensitivity" and "--
Asset/Liability Strategy."
Controlling Non-Interest Expenses. Non-interest expenses are carefully
monitored, including ongoing reviews of staffing levels, supplies, facilities
and operations. Excluding the effects of the one-time SAIF recapitalization
assessment, the Company's ratio of non-interest expenses to average total
assets was 1.47% for the year ended June 30, 1997 compared to 1.84% for the
prior fiscal year. The Company's efficiency ratio, excluding the effects of
the SAIF assessment, was 43.92% for the year ended June 30, 1997 compared to
48.53% for the prior fiscal year.
INTEREST RATE SENSITIVITY
Interest Rate Gap. The interest rate risk inherent in assets and liabilities
may be determined by analyzing the extent to which such assets and liabilities
are "interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest-earning assets maturing
or repricing within a defined period and the amount of interest-bearing
liabilities maturing or repricing within the same period is defined as the
interest rate sensitivity gap. An institution is considered to have a negative
gap if the amount of interest-bearing liabilities maturing or repricing within
a specified time period exceeds the amount of interest-earning assets maturing
or repricing within the same period. If more interest-earning assets than
interest-bearing liabilities mature or reprice within a specified period, then
34
the institution is considered to have a positive gap. Accordingly, in a rising
interest rate environment, in an institution with a negative gap, the cost of
its rate sensitive liabilities would theoretically rise at a faster pace than
the yield on its rate sensitive assets, thereby diminishing future net
interest income. In a falling interest rate environment, a negative gap would
indicate that the cost of rate sensitive liabilities would decline at a faster
pace than the yield on rate sensitive assets and improve net interest income.
For an institution with a positive gap, the reverse would be expected.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Company's exposure to interest rate risk.
Management maintains an asset/liability committee consisting of the Chief
Executive Officer, the Chief Operating Officer, the Finance Group Executive,
the Lending Group Executive, the Retail Banking Group Executive, the
Treasurer, the Controller and the Director of Product Management/Customer
Service, which meets regularly and reviews the Company's interest rate risk
position and makes recommendations for adjusting this position. In addition,
the Board reviews on a monthly basis the Company's asset/liability position,
including simulations of the effect on the Company's capital and earnings of
various interest rate scenarios and operational strategies.
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps. Except for the
effects of prepayments and scheduled principal amortization on mortgage
related assets, the table presents principal cash flows and related weighted
average interest rates by the earlier of term to repricing or contractual term
to maturity. Callable government agency securities are assumed to be called
within one year. For interest rate swaps, the table presents notional amounts
and weighted average interest rates by contractual maturity dates.
Residential fixed and adjustable rate loans are assumed to have annual
payment rates between 12% and 18% of the portfolio. Commercial and multi-
family real estate loans are assumed to prepay at an annualized rate between
7% and 38% while consumer loans are assumed to prepay at a 30% rate. Fixed and
adjustable rate mortgage-backed securities, including CMOs and REMICs, have
annual payment assumptions ranging from 15% to 34%. Demand loans and loans
which have no repayment schedule or stated final maturity, are assumed to be
due within six months. Loan and mortgage-backed securities balances are net of
non-performing loans and are not adjusted for unearned discounts, premiums,
and deferred loan fees.
The Company assumes, based on historical information, that $135.9 million or
80% of savings accounts at June 30, 1997, are core deposits and are,
therefore, expected to roll-off after five years. The remaining savings
accounts are assumed to roll-off over the first eighteen months. Transaction
accounts, excluding money market accounts, are assumed to roll-off after five
years. Money market accounts are assumed to be variable accounts and are
reported as repricing within six months. No roll-off rate is applied to
certificates of deposit. Fixed maturity deposits reprice at maturity.
35
MATURING OR REPRICING
-----------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
-------- --------- --------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Fixed-rate mortgage
loans including one- to
four-family and
commercial and multi-
family................. $ 71,704 $ 73,395 $ 65,488 $ 57,935 $ 52,484 $169,452 $ 490,458 $ 491,107
Average interest rate.. 7.76% 7.80% 7.80% 7.79% 7.80% 7.85% 7.81%
Adjustable rate mortgage
loans including one- to
four-family and
commercial and multi-
family................. $116,889 $ 47,421 $ 92,714 $ 37,422 $ 54,869 $ 44,261 $ 393,576 $ 385,059
Average interest rate.. 7.67% 7.51% 7.32% 7.67% 7.48% 7.65% 7.52%
Consumer loans including
demand loans........... $ 24,396 $ 5,967 $ 4,315 $ 3,171 $ 1,503 $ -- $ 39,352 $ 39,591
Average interest rate.. 8.47% 8.98% 8.98% 8.98% 8.98% -- % 8.66%
Mortgage-backed
securities............. $107,173 $ 36,893 $ 53,710 $ 46,348 $ 14,700 $ 28,819 $ 287,643 $ 291,125
Average interest rate.. 7.36% 6.99% 6.96% 6.88% 7.08% 7.08% 7.12%
Investment securities
and other.............. $ 47,412 $ 101 $ -- $ -- $ -- $ 190 $ 47,703 $ 47,845
Average interest rate.. 7.18% 5.67% -- % -- % -- % 9.47% 7.18%
Total interest-earning
assets................ $367,574 $ 163,777 $ 216,227 $144,876 $123,556 $242,722 $1,258,732 $1,254,727
======== ========= ========= ======== ======== ======== ========== ==========
Savings deposits........ $ 22,643 $ 11,321 $ -- $ -- $ -- $135,859 $ 169,823 $ 169,823
Average interest rate.. 2.20% 2.20% -- % -- % -- % 2.20% 2.20%
Money market and demand
deposits (transaction
accounts).............. $ 15,461 $ -- $ -- $ -- $ -- $66,901 $ 82,362 $ 82,362
Average interest rate.. 2.10% -- % -- % -- % -- % 0.95% 1.17%
Certificates of
deposit................ $395,100 $ 126,037 $ 88,755 $ 17,148 $ 36,684 $ 94 $ 663,818 $ 665,043
Average interest rate.. 5.50% 5.88% 6.59% 5.90% 6.28% 6.90% 5.77%
FHLB of New York
advances............... $ 30,000 $ 55,000 $ 90,000 $ -- $ 30,000 $ 465 $ 205,465 $ 205,919
Average interest rate.. 5.80% 6.09% 6.17% -- % 6.42% 7.39% 6.13%
Other borrowings........ $ 72,750 $ -- $ -- $ -- $ 10,000 $ -- $ 82,750 $ 82,671
Average interest rate.. 6.23% -- % -- % -- % 6.24% -- % 6.23%
Total deposits and
borrowings............ $535,954 $ 192,358 $ 178,755 $ 17,148 $ 76,684 $203,319 $1,204,218 $1,205,818
Interest rate swaps (pay
fixed,
receive floating)...... $(70,000) $ 20,000 $ 40,000 $ -- $ 10,000 $ -- $ -- $ 169
Average pay rate....... -- % 6.70% 6.46% -- % 6.25% -- % 6.50%
Average receive rate... 5.79% -- % -- % -- % -- % -- % 5.79%
Total deposits and
borrowings, including
the effects of
interest rate swaps... $465,954 $ 212,358 $ 218,755 $ 17,148 $ 86,684 $203,319 $1,204,218 $1,205,987
======== ========= ========= ======== ======== ======== ========== ==========
Interest-earning assets
less deposits and
borrowings (interest-
rate sensitivity gap).. $(98,380) $ (48,581) $ (2,528) $127,728 $ 36,872 $ 39,403 $ 54,514
======== ========= ========= ======== ======== ======== ==========
Cumulative interest-rate
sensitivity gap........ $(98,380) $(146,961) $(149,489) $(21,761) $ 15,111 $ 54,514
======== ========= ========= ======== ======== ========
Cumulative interest-rate
sensitivity gap as a
percentage of total
assets
at June 30, 1997....... (7.44)% (11.12)% (11.31)% (1.65)% 1.14% 4.12%
======== ========= ========= ======== ======== ========
Cumulative interest-rate
sensitivity gap as a
percentage of total
interest- earning
assets at June 30,
1997................... (7.82)% (11.68)% (11.88)% (1.73)% 1.20% 4.33%
======== ========= ========= ======== ======== ========
Cumulative interest-
earning assets as a
percentage of
cumulative deposits and
borrowings at June 30,
1997................... 78.89% 78.33% 83.34% 97.62% 101.51% 104.53%
======== ========= ========= ======== ======== ========
36
At June 30, 1997, 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 $98.4 million, representing a one year
negative gap of 7.44% of total assets, compared to a one year negative gap of
13.97% of total assets at June 30, 1996. See "--Asset/Liability Strategy." The
Company's negative gap position improved from June 30, 1996 as a result of
significant growth in medium-term funds and adjustable rate residential first
and second mortgage loan products. New loan activity was strong and
residential refinance activity remained relatively slow during the year.
Second mortgage activity was re-focused and emphasized variable and medium-
term fixed rate products. As a result of continued emphasis on generating
longer term deposits, growth in two through five year certificates of deposit
far out paced activity in the shorter-term products. Furthermore, in an effort
to lengthen the maturities of interest-bearing liabilities, the Company
supplemented funding needs through the use of FHLB of New York medium-term
advances and engaged in interest rate swaps. Callable government agency
securities, with final maturities of seven years or less, but initially
callable within one year and periodically thereafter, have also been purchased
to supplement loan growth. Such investments are anticipated to be called prior
to their stated final maturities.
In evaluating the Company's exposure to interest rate risk, certain
limitations inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgages, have features which restrict changes in interest
rates in the short-term and over the life of the asset. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels may
deviate significantly from those assumed in calculating the table. Finally,
the ability of many borrowers to service their debt may decrease in the event
of an interest rate increase. The Company considers all of these factors in
monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through selected interest rate risk ("IRR") measures
set forth by the OTS. The IRR measures used by the OTS include an IRR
"Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity Measure." A
low Post-Shock NPV ratio indicates greater exposure to IRR. Greater exposure
can result from a low initial NPV ratio or high sensitivity to changes in
interest rates. The Sensitivity Measure is the decline in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces
a larger decline. At least quarterly, and generally monthly, management models
the change in net portfolio value ("NPV") over a variety of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. An NPV ratio, in any interest
rate scenario, is defined as the NPV in that rate scenario divided by the
market value of assets in the same scenario.
As of June 30, 1997, the Bank's internally generated initial NPV ratio was
8.15%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 5.48%. The change in the NPV ratio, or the Bank's Sensitivity
Measure was 2.67%. NPV is also measured internally on a consolidated basis. As
of June 30, 1997, the Company's initial NPV ratio was 8.76%, the Post-Shock
ratio was 6.12%, and the Sensitivity Measure was 2.64%. Variances between the
Bank's and the Company's NPV ratios are attributable to balance sheet items
which are adjusted during consolidation, such as intercompany borrowings and
capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions and, as such, generally result in lower
levels of presumed interest rate risk (i.e., higher Post-Shock NPV ratio and
lower Sensitivity Measure) than OTS measurements indicate.
The OTS measures the Bank's (unconsolidated) IRR on a quarterly basis using
data from the quarterly Thrift Financial Reports, coupled with non-institution
specific assumptions which are based on national averages. As of June 30,
1997, the Bank's initial NPV ratio, as measured by the OTS, was 7.23%. The
Bank's Post-Shock ratio was 4.02% and the Sensitivity Measure was 3.21%. At
June 30, 1996 the Bank's initial NPV ratio was 6.95%, the Post-Shock ratio was
3.20% and the Sensitivity Measure was 3.75%.
37
In addition to monitoring NPV and gap, management also monitors the duration
of assets and liabilities and the effects on net interest income resulting
from parallel and non-parallel increases or decreases in rates.
At June 30, 1997, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward
would decrease 11.2% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
ASSET/LIABILITY STRATEGY
The primary elements of the Company's asset/liability strategy include the
following:
1. The Company focuses on shortening the average life and duration of its
portfolio of one- to four-family mortgage loans by promoting one year
adjustable rate products, with initial fixed rate terms of 1, 3 and 5 years,
15 and 30 year bi-weekly mortgages and fixed rate products with terms of 10,
15 and 20 years.
2. The Company is increasing its emphasis on the origination of variable
rate home equity lines and fixed rate second mortgage loans as well as
variable and fixed rate commercial and multi-family real estate loans having
maturities or terms to repricing significantly shorter than one- to four-
family residential mortgage loans.
3. During fiscal 1997, the Company purchased government agency guaranteed
investments with final maturities within seven years which are initially
callable within one year and periodically thereafter. Such investments are
expected to be called prior to their final maturities. The Company may
continue to purchase such investments, as well as government agency guaranteed
mortgage-backed securities with an expected average life at purchase of 4.5
years or less, as needed, in accordance with its strategic objectives.
4. The Company emphasizes the lengthening of maturities of its liabilities
through its pricing of longer-term certificates of deposit and by utilizing
intermediate term FHLB of New York advances and interest rate swaps, subject
to market conditions.
5. The Company is increasing its emphasis on transaction accounts as such
funds are lower cost alternatives to certificates of deposit and FHLB of New
York advances and strengthen customer relationships.
Approximately 75%, or $199.4 million, of the total net growth of $265.9
million experienced in one- to four-family mortgages between June 30, 1996 and
June 30, 1997 was accomplished in the adjustable rate portfolio and
approximately 97%, or $5.1 million, of the $5.2 million total net growth in
the consumer lending portfolio was attributable to growth in variable rate
home equity lines of credit. Adjustable rate commercial and multi-family real
estate loans increased approximately 42% from June 30, 1996 to $32.7 million,
while fixed rate commercial and multi-family real estate loans declined
approximately 17% to $24.1 million.
Additionally, medium and long-term funds increased approximately 42.5%, or
$220.4 million, from June 30, 1996 through the use of interest rate swaps
(designed to synthetically lengthen the maturities of short-term deposits) as
well as growth in two through five year certificates of deposit, FHLB of New
York advances and other borrowings. Short-term funds (one year or less)
remained relatively constant.
Generally, the investment policy of the Company is to invest funds not
utilized in its lending activities or required for other corporate purposes
among various categories of investments and maturities based upon the
Company's asset/liability management policies. Investments generally include
U.S. Treasury and government agency securities and mortgage-backed securities.
Additionally, the Company emphasizes and promotes its savings, money market
and transaction accounts, and certificates of deposit with varying maturities
through five years, principally within its primary market areas. The balances
of savings, money market and transaction accounts, which represented
approximately 27.5%, or $252.2 million, of total deposits at June 30, 1997,
tend to be less susceptible to rapid changes in interest rates than
certificates of deposit balances.
38
Collectively, these strategies resulted in a narrowing of the Company's
interest rate gap and a reduction in IRR during fiscal 1997. Management will
continue to monitor and employ such strategies, as necessary, in conjunction
with its overall strategic objectives.
Analysis of Net Interest Income. The following table sets forth certain
information relating to the Company's consolidated statements of financial
condition and the consolidated statements of income for the years ended June
30, 1997, 1996 and 1995, and reflects the average yield on assets and average
cost of liabilities for the periods indicated. Such yields and costs are
derived from average daily balances. The average balance of loans receivable
includes non-accruing loans. The yields and costs include fees which are
considered adjustments to yields.
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ OUTSTANDING EARNED/ OUTSTANDING EARNED/
BALANCE PAID YIELD/RATE BALANCE PAID YIELD/RATE BALANCE PAID YIELD/RATE
----------- -------- ---------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING
ASSETS:
One- to four-family
mortgage loans....... $ 713,260 $ 53,554 7.51% $ 457,167 $ 35,078 7.67% $327,888 $ 26,008 7.93%
Commercial and multi-
family real estate
loans................ 54,396 4,912 9.03 49,378 4,817 9.76 47,367 4,667 9.85
Consumer loans........ 35,977 3,302 9.18 33,362 3,380 10.13 33,029 3,389 10.26
---------- -------- --------- -------- -------- --------
Total loans
receivable......... 803,633 61,768 7.69 539,907 43,275 8.02 408,284 34,064 8.34
Mortgage-backed
securities........... 317,394 22,030 6.94 329,821 22,549 6.84 270,136 16,143 5.98
Investment securities
and other............ 22,611 1,603 7.09 31,264 2,299 7.35 36,189 2,512 6.94
---------- -------- --------- -------- -------- --------
Total interest-
earning assets..... 1,143,638 $ 85,401 7.47 900,992 $ 68,123 7.56 714,609 $ 52,719 7.38
======== ======== ========
Non-interest earning
assets............... 53,664 56,302 44,393
---------- --------- --------
Total assets........ $1,197,302 $ 957,294 $759,002
========== ========= ========
DEPOSITS AND
BORROWINGS:
Money market and
demand deposits
(transaction
accounts)............ $ 80,099 $ 977 1.22% $ 79,360 $ 1,371 1.73% $ 71,606 $ 1,311 1.83%
Savings deposits...... 174,114 3,876 2.23 181,839 4,114 2.26 182,947 4,165 2.28
Certificates of
deposit.............. 615,870 35,319 5.73 494,337 28,116 5.69 372,469 20,155 5.41
---------- -------- --------- -------- -------- --------
Total deposits...... 870,083 40,172 4.62 755,536 33,601 4.45 627,022 25,631 4.09
FHLB of New York
advances............. 147,945 9,078 6.14 65,625 3,827 5.83 17,028 878 5.16
Other borrowings...... 68,084 3,823 5.62 29,846 1,693 5.67 11,281 644 5.71
---------- -------- --------- -------- -------- --------
Total deposits and
borrowings......... 1,086,112 $ 53,073 4.89 851,007 $ 39,121 4.60 655,331 $ 27,153 4.14
======== ======== ========
Other liabilities..... 18,337 12,446 9,272
---------- --------- --------
Total liabilities... 1,104,449 863,453 664,603
Stockholders' equity... 92,853 93,841 94,399
---------- --------- --------
Total liabilities
and stockholders'
equity............. $1,197,302 $ 957,294 $759,002
========== ========= ========
Net interest income and
net interest rate
spread................ $ 32,328 2.58% $ 29,002 2.96% $ 25,566 3.24%
======== ====== ======== ====== ======== ======
Net interest-earning
assets and interest
margin................ $ 57,526 2.83% $ 49,985 3.22% $ 59,278 3.58%
========== ====== ========= ====== ======== ======
Ratio of interest-
earning assets to
deposits and
borrowings............ 105.30% 105.87% 109.05%
====== ====== ======
39
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and deposits and borrowings have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (1) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (2) changes attributable to
changes in rate (changes in rate multiplied by prior volume), (3) changes
attributable to changes in rate/volume (changes in rate multiplied by changes
in volume), and (4) the net change.
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
---------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO TOTAL DUE TO TOTAL
----------------------------- INCREASE ---------------------------- INCREASE
VOLUME RATE RATE/VOLUME (DECREASE) VOLUME RATE RATE/VOLUME (DECREASE)
------- ------- ----------- ---------- ------- ------ ----------- ----------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
One- to four-family
mortgage loans........ $19,650 $ (752) $(422) $18,476 $10,252 $ (850) $(332) $ 9,070
Commercial and multi-
family real estate
loans................. 489 (358) (36) 95 198 (46) (2) 150
Consumer loans......... 265 (318) (25) (78) 34 (43) -- (9)
------- ------- ----- ------- ------- ------ ----- -------
Total loans
receivable.......... 20,404 (1,428) (483) 18,493 10,484 (939) (334) 9,211
Mortgage-backed
securities............ (850) 344 (13) (519) 3,569 2,325 512 6,406
Investment securities
and other............. (636) (83) 23 (696) (342) 149 (20) (213)
------- ------- ----- ------- ------- ------ ----- -------
Total interest-
earning assets...... $18,918 $(1,167) $(473) $17,278 $13,711 $1,535 $ 158 $15,404
======= ======= ===== ======= ======= ====== ===== =======
DEPOSITS AND BORROWINGS:
Money market and
demand deposits
(transaction
accounts)............. $ 13 $ (403) $ (4) $ (394) $ 142 $ (74) $ (8) $ 60
Savings deposits....... (175) (66) 3 (238) (25) (26) -- (51)
Certificates of
deposit............... 6,912 234 57 7,203 6,593 1,029 339 7,961
------- ------- ----- ------- ------- ------ ----- -------
Total deposits....... 6,750 (235) 56 6,571 6,710 929 331 7,970
FHLB of New York
advances.............. 4,801 200 250 5,251 2,508 115 326 2,949
Other borrowings....... 2,169 (17) (22) 2,130 1,059 (4) (6) 1,049
------- ------- ----- ------- ------- ------ ----- -------
Total deposits and
borrowings.......... $13,720 $ (52) $ 284 $13,952 $10,277 $1,040 $ 651 $11,968
======= ======= ===== ======= ======= ====== ===== =======
Net change in net
interest income....... $ 5,198 $(1,115) $(757) $ 3,326 $ 3,434 $ 495 $(493) $ 3,436
======= ======= ===== ======= ======= ====== ===== =======
FINANCIAL CONDITION
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JUNE 30, 1996
Total assets increased $235.2 million, or 21.6%, to $1.322 billion at June
30, 1997 from total assets of $1.087 billion at June 30, 1996. The increase
was primarily attributable to a $278.9 million increase in net loans
receivable, particularly in the Company's one- to four-family first mortgage
loan portfolio. At June 30, 1997, net loans receivable were $931.5 million
compared to $652.6 million at June 30, 1996. The increase in loans receivable
was funded by retail deposit growth, additional medium-term FHLB of New York
advances and increased other borrowings as well as principal payments on
mortgage-backed securities.
Non-performing assets at June 30, 1997 totaled $6.4 million, representing
0.48% of total assets, compared to $7.3 million, or 0.67% of total assets, at
June 30, 1996. Non-accruing loans decreased to $5.5 million and the ratio of
non-accruing loans to total loans decreased to 0.59% at June 30, 1997 as
compared to $6.2 million, or 0.95% at June 30, 1996. Real estate owned
decreased to $884,000 at June 30, 1997 from $1.1 million at June 30, 1996.
40
Deposits increased $81.7 million to $918.2 million at June 30, 1997 from
$836.4 million at June 30, 1996. FHLB of New York advances were $205.5 million
at June 30, 1997, a $100.5 million increase from $105.0 million at June 30,
1996. In addition, at June 30, 1997 the Company had $82.8 million of other
borrowings, consisting of $72.8 million of short-term and overnight borrowings
and a $10.0 million reverse repurchase agreement maturing in December 2001.
Other borrowings at June 30, 1996 totaled $41.7 million and consisted of
short-term and overnight borrowings.
Stockholders' equity at June 30, 1997 totaled $97.3 million compared to
$90.6 million at June 30, 1996. The increase primarily reflects the net income
recorded for the year ended June 30, 1997, partially offset by the repurchase
of 32,500 shares of the outstanding stock at an average price of $20.04 per
share and the declaration of dividends.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND JUNE
30, 1996
General. For the year ended June 30, 1997, net income was $6.9 million, or
$1.46 per primary share, including the effects of the one-time SAIF
recapitalization assessment. The SAIF recapitalization assessment for the
Company totaled $4.8 million, or an after-tax cost of $3.1 million, or $0.65
per share. Excluding the effects of the SAIF assessment, net income for the
year ended June 30, 1997, of $9.9 million or $2.11 per primary share compared
favorably to net income of $7.8 million, or $1.55 per primary share, for the
year ended June 30, 1996.
Interest and Dividend Income. Interest and dividend income for the year
ended June 30, 1997 increased to $85.4 million from $68.1 million for the year
ended June 30, 1996. The increase in the current year was due to an increase
in average interest-earning assets, primarily residential loans, partially
offset by a decrease in the average yield earned on interest-earning assets.
Average interest-earning assets were $1.1 billion for the year ended June 30,
1997 compared to $901.0 million for the comparable prior fiscal year. The
average yield on interest-earning assets decreased to 7.47% for the year ended
June 30, 1997 from 7.56% for the year ended June 30, 1996.
Interest income on residential one- to four-family mortgage loans for the
year ended June 30, 1997 increased $18.5 million to $53.6 million, or 52.7%
when compared to the prior fiscal year. The increase in interest income on
residential one- to four-family mortgage loans was due to an increase of
$256.1 million to $713.3 million in the average balance outstanding for the
year ended June 30, 1997 over the prior fiscal year. The increase in the
average balance on residential one- to four-family mortgage loans was
partially offset by a decrease of 0.16% in the average yield earned on this
loan portfolio to 7.51% for the year ended June 30, 1997 from the prior fiscal
year.
Interest Expense. Interest expense increased $14.0 million to $53.1 million
for the year ended June 30, 1997, from $39.1 million for fiscal 1996. The
increase was attributable to an increase in total average deposits, primarily
certificates of deposit, and borrowings coupled with an increase in the
Company's cost of funds. Average deposits and borrowings increased $235.1
million to $1.1 billion for the year ended June 30, 1997 compared to the 1996
period. The average rate paid on deposits and borrowings increased to 4.89%
for the year ended June 30, 1997 from 4.60% for the prior fiscal year.
Net Interest and Dividend Income. Net interest and dividend income for the
year ended June 30, 1997, was $32.3 million, reflecting an increase from $29.0
million recorded in the prior fiscal year. The increase reflects the Company's
growth in assets, primarily in adjustable rate residential one- to four-family
mortgage loans. The net interest rate spread and net interest margin for the
current fiscal year were 2.58% and 2.83%, respectively, a decline from 2.96%
and 3.22%, respectively, during fiscal 1996. The decline was partially
attributable to the Company's efforts to reduce its sensitivity to changes in
interest rates by extending the average life of liabilities and focusing on
adjustable rate one- to four-family mortgage loans. This resulted in the
Company paying higher
41
rates to attract longer-term deposits and initially receiving lower yields on
adjustable rate loans than would otherwise be obtainable on fixed rate loans.
Since the Company's liabilities generally reprice more quickly than its
assets, net interest rate spread and net interest margins will likely decrease
if interest rates rise.
Provision for Loan Losses. The provision for loan losses for the year ended
June 30, 1997 was $635,000 compared to $610,000 for the prior fiscal year. The
allowance for loan losses at June 30, 1997 of $2.6 million is comparable to
the June 30, 1996 level. The allowance for loan losses as a percentage of non-
performing loans was 47.80% at June 30, 1997, compared to 42.52% at June 30,
1996. See "Business--Non-Performing and Classified Assets."
Non-Interest Income. For the year ended June 30, 1997 non-interest income
was $1.8 million compared to $2.2 million for the prior fiscal year. The
decrease was partially attributable to a net loss from real estate operations
of $181,000 compared to a net gain from real estate operations of $104,000 for
the prior fiscal year. The decrease in net gains from real estate operations
is partially reflective of additional reserves established in accordance with
internal policies and guidelines on real estate properties currently owned by
the Company. Additionally, non-interest income for the year ended June 30,
1996 included a $94,000 gain on sale of investments available for sale and a
$62,000 gain on sale of a property no longer used in operations.
Non-Interest Expenses. The Company's non-interest expenses were $22.4
million for the year ended June 30, 1997. Non-interest expenses for the year
ended June 30, 1997 included $4.8 million for the one-time SAIF
recapitalization assessment. Excluding this SAIF assessment, non-interest
expenses for the year ended June 30, 1997 would have been comparable to the
$17.6 million reported for the year ended June 30, 1996. The Company's non-
interest expenses, excluding the SAIF assessment, as a percent of average
assets declined to 1.47% for the year ended June 30, 1997 from 1.84% for the
prior fiscal year.
As noted above, beginning January 1, 1997 deposit insurance premiums have
decreased significantly from the 0.23% of deposits previously paid by the Bank
to 0.063% for the FICO assessment.
Income Tax Expense. Income tax expense for the year ended June 30, 1997 was
$4.2 million compared to $5.1 million for the prior fiscal year. Excluding the
effects of the one-time SAIF recapitalization assessment, income tax expense
of $6.0 million was recorded for fiscal 1997. The effective tax rate was 37.9%
for the year ended June 30, 1997. Excluding the effect of the one-time SAIF
recapitalization assessment, the effective tax rate was 37.5% for the year
ended June 30, 1997 compared to 39.5% for the year ended June 30, 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND JUNE
30, 1995
General. For the year ended June 30, 1996 net income was $7.8 million, or
$1.55 per share, compared to net income of $5.6 million, or $1.08 per share,
for the year ended June 30, 1995. The results for fiscal 1995 included several
significant non-recurring charges related to the March 1995 acquisition of
three former Carteret Federal Savings Bank branches and related deposits (the
"Acquisition").
Interest and Dividend Income. Interest and dividend income for the year
ended June 30, 1996 increased to $68.1 million from $52.7 million for the year
ended June 30, 1995. The increase in fiscal 1996 was due to an increase in
average interest-earning assets, primarily one- to four- family residential
loans, and to a much lesser extent, an increase in the average yield earned on
interest-earning assets. Average interest-earning assets were $901.0 million
for the year ended June 30, 1996, versus $714.6 million for the prior fiscal
year. The average yield earned on interest-earning assets increased to 7.56%
for the year ended June 30, 1996 from 7.38% for the prior fiscal year.
Interest income on residential one- to four-family mortgage loans for the
year ended June 30, 1996 increased $9.1 million to $35.1 million, or 34.9%,
when compared to fiscal 1995. The increase in interest income on residential
one- to four-family mortgage loans was due to an increase of $129.3 million in
the average balance outstanding for fiscal 1996 over the prior fiscal year.
The increase in the average balance on residential one- to
42
four-family mortgage loans was partially offset by a decrease of 0.26% in the
average yield earned on this loan portfolio to 7.67% for the year ended June
30, 1996 from the comparable prior fiscal year.
Interest income on the mortgage-backed securities portfolio increased $6.4
million to $22.5 million, or 39.7%, for the year ended June 30, 1996, as
compared to the prior fiscal year. The increase in interest income on
mortgage-backed securities reflects increases in the average balance
outstanding of $59.7 million to $329.8 million for the year ended June 30,
1996 over the prior fiscal year. In addition, the average yield earned on
these securities increased 0.86% to 6.84% for fiscal 1996 when compared to the
year ended June 30, 1995.
Interest on investment securities and other interest-earning assets
decreased $214,000 for the year ended June 30, 1996 from the prior fiscal year
due to a decrease in the average balance outstanding for fiscal year 1996
partially offset by an increase in the average yield earned on these
securities.
Interest Expense. Interest expense increased to $39.1 million for the year
ended June 30, 1996 from $27.2 million for fiscal 1995. The increase was
attributable to an increase in total average deposits and borrowings coupled
with an increase in the Company's cost of funds. Average deposits and
borrowings increased $195.7 million to $851.0 million for the year ended June
30, 1996 compared to the prior fiscal year. The average rate paid on deposits
and borrowings increased to 4.60% for the year ended June 30, 1996 from 4.14%
for the prior fiscal year.
Net Interest and Dividend Income. Net interest and dividend income for the
year ended June 30, 1996 was $29.0 million, reflecting an increase from $25.6
million recorded in the prior fiscal year. The increase reflects substantial
asset growth, primarily in residential one- to four-family mortgage loans and
securities. The net interest rate spread was 2.96% for the year ended June 30,
1996 and 3.24% for the year ended June 30, 1995. Net interest margin for the
year ended June 30, 1996 was 3.22%, a decline from 3.58% during fiscal 1995.
Provision for Loan Losses. The provision for loan losses for the year ended
June 30, 1996 was $610,000 compared to $569,000 for the prior year. The
allowance for loan losses at June 30, 1996 of $2.6 million reflects a $230,000
decrease from the June 30, 1995 level. The allowance for loan losses as a
percentage of non-performing loans was 42.52% at June 30, 1996, compared to
51.39% at June 30, 1995. The decrease in the allowance ratio was primarily
attributable to the payoff of a $1.3 million troubled debt restructured
commercial real estate loan which required the utilization of approximately
$400,000 of specific reserves previously allocated to the loan.
Non-Interest Income. For the year ended June 30, 1996 non-interest income
was $2.2 million, an increase of $77,000 when compared to the prior fiscal
year. The increase was primarily due to a $94,000 gain on sale of investments
available for sale and a $126,000 increase in income from service charges. The
fiscal 1996 net gain from real estate operations of $104,000 was comparable to
the prior fiscal year. Finally, non-interest income for the year ended June
30, 1996 included a $62,000 gain on sale of a property no longer used in
operations. For the year ended June 30, 1995, non-interest income included a
$400,000 recovery from a litigation settlement, partially offset by a $200,000
loss on disposition of computer equipment.
Non-Interest Expenses. The Company's non-interest expenses of $17.6 million
for the fiscal year ended June 30, 1996 was relatively unchanged from the
prior fiscal year ended June 30, 1995. The Company's non-interest expenses as
a percent of average assets declined significantly to 1.84% for the fiscal
year ended June 30, 1996 from 2.31% for the prior fiscal year. Total non-
interest expenses for fiscal 1996 included a $1.2 million increase in
amortization of intangibles, due to the Acquisition, and a $355,000 increase
in Federal deposit insurance premiums, reflective of the growth in deposits.
The results for the prior fiscal year included $297,000 of Acquisition related
expenses, $470,000 of expenses related to the termination of the Company's
defined benefit pension plan and $300,000 of deposit servicing expenses also
relating to the Acquisition.
Income Tax Expense. Income tax expense for the year ended June 30, 1996 was
$5.1 million compared to $3.9 million for the prior fiscal year. The effective
tax rate was 39.5% for fiscal 1996 and 41.0% for fiscal 1995.
43
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's primary sources of funds are deposits, principal
and interest payments on loans and mortgage-backed securities, and borrowings
from the FHLB of New York. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, general economic conditions
and competition. The Company has competitively set rates on deposit products
for selected terms and, when necessary, has supplemented deposits with longer-
term or less expensive alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less
during the preceding calendar month. Liquid assets for purposes of this ratio
include cash, accrued interest receivable, certain time deposits, U.S.
Treasury and Government agencies and other securities and obligations
generally having remaining maturities of less than five years. The Company's
most liquid assets are cash and cash equivalents, short-term investments and
mortgage-backed securities. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period. At June 30, 1997 and 1996, liquidity eligible assets totaled $99.5
million and $128.9 million, respectively. At June 30, 1997 and 1996, the
Bank's liquidity ratios were 10.36% and 15.17%, respectively.
In the event that the Company should require funds beyond its ability to
generate them internally, additional sources of funds are available through
the use of FHLB of New York advances and reverse repurchase agreements. In
addition, the Company may access funds, if necessary, through the use of a
$50.0 million overnight repricing line of credit and a $50.0 million one-month
overnight repricing line of credit from the FHLB of New York. The Company uses
its liquid resources principally to fund maturing certificates of deposit and
deposit withdrawals, to purchase loans and securities, to fund existing and
future commitments, and to meet operating expenses. At June 30, 1997, the
Company had outstanding commitments to extend credit which amounted to $27.1
million (including $17.4 million in available lines of credit) and commitments
to purchase loans of $32.7 million. Management believes that loan repayments
and other sources of funds will be adequate to meet the Company's foreseeable
liquidity needs.
In addition to cash provided by operating activities, the Company's fiscal
1997 and 1996 cash needs were principally provided by increased deposits and
an increase in advances from the FHLB of New York and other borrowings. During
fiscal 1997, the cash provided was principally used for investing activities,
which included the origination and purchase of loans. During fiscal 1996 the
cash provided was principally used for investing activities, which included
the purchase of investment and mortgage-backed securities and the origination
and purchase of loans. In addition to cash provided by operating activities,
during fiscal 1995 the cash needs of the Company were principally provided by
increased deposits, primarily from the Acquisition, and an increase in
borrowings. The cash was principally utilized for investing activities, which
included the purchase of mortgage-backed securities and loans.
Current regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percentage of risk adjusted assets;
a leverage ratio of core capital to total adjusted assets; and a tangible
capital ratio expressed as a percentage of total adjusted assets. As of June
30, 1997, the Bank exceeded all regulatory capital requirements and qualified
as a "well-capitalized" institution. See "Regulation" and Note P--
Stockholders' Equity and Regulatory Capital, in the Notes to Consolidated
Financial Statements.
The Company initiated a quarterly cash dividend on its common stock of $0.07
per share in the second quarter of fiscal 1997 and paid a total of $0.21 per
share during the fiscal year ended June 30, 1997. The declaration and payment
of dividends are subject to, among other things, PennFed's financial condition
and results of operations, regulatory capital requirements, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiary
West Orange, New Jersey
We have audited the accompanying consolidated statements of financial
condition of PennFed Financial Services, Inc. and Subsidiary (the "Company")
as of June 30, 1997 and 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PennFed
Financial Services, Inc. and Subsidiary as of June 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for investments in the year ended June 30,
1995 to conform with Statement of Financial Accounting Standards No. 115.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
July 31, 1997
45
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents........................... $ 10,729 $ 11,629
Investment securities held to maturity, at amortized
cost, market value of $35,432 and $21,502 at June
30, 1997 and 1996.................................. 35,290 21,288
Mortgage-backed securities held to maturity, at
amortized cost, market value of $291,125 and
$344,331 at June 30, 1997 and 1996................. 288,539 346,068
Loans held for sale................................. -- 88
Loans receivable, net of allowance for loan losses
of $2,622 and $2,630 at
June 30, 1997 and 1996............................. 931,451 652,483
Premises and equipment, net......................... 16,435 16,035
Real estate owned, net.............................. 884 1,083
Federal Home Loan Bank of New York stock, at cost... 12,413 8,052
Accrued interest receivable, net.................... 7,196 6,742
Goodwill and other intangible assets................ 15,918 18,430
Other assets........................................ 2,896 4,626
----------- -----------
$ 1,321,751 $ 1,086,524
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.......................................... $ 918,160 $ 836,416
Federal Home Loan Bank of New York advances....... 205,465 105,000
Other borrowings.................................. 82,750 41,700
Mortgage escrow funds............................. 8,855 5,930
Due to banks...................................... 7,237 5,989
Accounts payable and other liabilities............ 2,014 925
----------- -----------
Total liabilities............................... 1,224,481 995,960
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE O)
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, 5,950,000 shares issued and 4,822,124
and 4,823,665 shares outstanding at June 30, 1997
and 1996 (excluding shares held in treasury of
1,127,876 and 1,126,335 at June 30, 1997 and
1996)............................................ 60 60
Additional paid-in capital........................ 57,441 57,057
Restricted stock--Management Recognition Plan..... (1,062) (1,316)
Employee Stock Ownership Plan Trust debt.......... (3,671) (4,061)
Retained earnings, partially restricted........... 61,051 55,172
Treasury stock, at cost, 1,127,876 and 1,126,335
shares at June 30, 1997 and 1996................. (16,549) (16,348)
----------- -----------
Total stockholders' equity...................... 97,270 90,564
----------- -----------
$1,321,751 $1,086,524
=========== ===========
See notes to consolidated financial statements.
46
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30,
------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans................... $ 61,768 $ 43,275 $ 34,064
Interest on federal funds sold............... -- 1 632
Interest and dividends on investment securi-
ties........................................ 1,603 2,298 1,880
Interest on mortgage-backed securities....... 22,030 22,549 16,143
--------- --------- ---------
85,401 68,123 52,719
--------- --------- ---------
INTEREST EXPENSE:
Deposits..................................... 40,172 33,601 25,631
Borrowed funds............................... 12,901 5,520 1,522
--------- --------- ---------
53,073 39,121 27,153
--------- --------- ---------
Net Interest and Dividend Income Before
Provision for Loan Losses..................... 32,328 29,002 25,566
Provision for Loan Losses...................... 635 610 569
--------- --------- ---------
Net Interest and Dividend Income After Provi-
sion for Loan Losses.......................... 31,693 28,392 24,997
--------- --------- ---------
NON-INTEREST INCOME:
Service charges.............................. 1,666 1,602 1,476
Net gain (loss) from real estate operations.. (181) 104 117
Net gain on sales of investment securities... -- 94 --
Other........................................ 298 402 532
--------- --------- ---------
1,783 2,202 2,125
--------- --------- ---------
NON-INTEREST EXPENSES:
Compensation and employee benefits........... 7,897 7,617 8,605
Net occupancy expense........................ 1,129 1,129 1,053
Equipment.................................... 1,580 1,580 1,568
Advertising.................................. 326 298 273
Amortization of intangibles.................. 2,512 2,625 1,395
Federal deposit insurance premium............ 1,112 1,680 1,325
SAIF recapitalization assessment............. 4,813 -- --
Other........................................ 3,016 2,713 3,342
--------- --------- ---------
22,385 17,642 17,561
--------- --------- ---------
Income Before Income Taxes..................... 11,091 12,952 9,561
Income Tax Expense............................. 4,205 5,111 3,921
--------- --------- ---------
Net Income..................................... $ 6,886 $ 7,841 $ 5,640
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUT-
STANDING:
Primary...................................... 4,719,928 5,063,218 5,233,497
========= ========= =========
Fully diluted................................ 4,786,491 5,078,439 5,326,487
========= ========= =========
NET INCOME PER COMMON SHARE:
Primary...................................... $ 1.46 $ 1.55 $ 1.08
========= ========= =========
Fully diluted................................ $ 1.44 $ 1.55 $ 1.08
========= ========= =========
See notes to consolidated financial statements.
47
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
RESTRICTED EMPLOYEE UNREALIZED
STOCK- STOCK GAIN ON
SERIAL ADDITIONAL MANAGEMENT OWNERSHIP INVESTMENTS
PREFERRED COMMON PAID-IN RECOGNITION PLAN TRUST RETAINED AVAILABLE TREASURY
STOCK STOCK CAPITAL PLAN DEBT EARNINGS FOR SALE STOCK
--------- ------ ---------- ----------- ---------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
BALANCE AT JUNE 30,
1994................... $-- $-- $ -- $ -- $ -- $41,985 $-- $ --
Net proceeds from
5,950,000 shares of
common stock issued in
stock conversion....... 60 56,828
Acquisition of 476,000
shares of stock by
ESOP................... (4,760)
Allocation of ESOP
stock.................. 337
ESOP adjustment......... 53
Purchase of 534,000
shares of treasury
stock.................. (6,472)
Issuance of 208,845
shares of treasury
stock for MRP.......... (2,194) (292) 2,486
Amortization of MRP
stock.................. 440
Increase in unrealized
gain on investments
available for sale..... 59
Net income for the year
ended June 30, 1995.... 5,640
---- ---- ------- ------- ------- ------- ---- --------
BALANCE AT JUNE 30,
1995................... -- 60 56,881 (1,754) (4,423) 47,333 59 (3,986)
Allocation of ESOP
Stock.................. 362
ESOP Adjustment......... 176
Purchase of 801,860
shares of treasury
stock.................. (12,370)
Issuance of 680 shares
of treasury stock for
options exercised...... (2) 8
Amortization of MRP
stock.................. 438
Decrease in unrealized
gain on investments
available for sale .... (59)
Net income for the year
ended June 30, 1996.... 7,841
---- ---- ------- ------- ------- ------- ---- --------
BALANCE AT JUNE 30,
1996................... -- 60 57,057 (1,316) (4,061) 55,172 -- (16,348)
Allocation of ESOP
stock.................. 390
ESOP and MRP
adjustment............. 345
Purchase of 32,500
shares of treasury
stock.................. (651)
Issuance of 1,804 shares
of treasury stock for
options exercised and
Dividend Reinvestment
Plan................... (20) 27
Issuance of 29,155
shares of treasury
stock for MRP.......... 39 (462) 423
Amortization of MRP
stock.................. 716
Cash dividends.......... (987)
Net income for the year
ended June 30, 1997.... 6,886
---- ---- ------- ------- ------- ------- ---- --------
BALANCE AT JUNE 30,
1997................... $-- $ 60 $57,441 $(1,062) $(3,671) $61,051 $-- $(16,549)
==== ==== ======= ======= ======= ======= ==== ========
See notes to consolidated financial statements.
48
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 6,886 $ 7,841 $ 5,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from sales of loans held for sale... 585 273 1,362
Originations of loans held for sale.......... (497) (361) (826)
Gain on sales of investment securities....... -- (94) --
Gain on sales of real estate owned........... (29) (236) (597)
Amortization of investment and mortgage-
backed securities premium, net.............. 260 415 1,268
Depreciation and amortization................ 1,301 1,315 1,297
Provision for losses on loans and real estate
owned....................................... 747 618 650
Amortization of cost of stock plans.......... 1,466 978 900
Amortization of intangibles.................. 2,512 2,625 1,395
Amortization of premiums on loans and loan
fees........................................ 414 371 87
Increase in accrued interest receivable, net
of accrued interest payable................. (113) (835) (1,512)
(Increase) decrease in other assets.......... 1,731 (1,294) (43)
(Increase) decrease in deferred income tax
asset....................................... 185 (174) (261)
Increase (decrease) in accounts payable and
other liabilities........................... 891 (894) 866
Increase in mortgage escrow funds............ 2,925 1,160 946
Increase in due to banks..................... 1,248 2,348 468
Other, net................................... (2) (83) (98)
--------- --------- ---------
Net cash provided by operating activities.... 20,510 13,973 11,542
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities.................................. 16,000 6,210 13,605
Proceeds from sales of investment securities
available for sale.......................... -- 104 --
Purchases of investment securities held to
maturity.................................... (30,000) (10,000) (19,746)
Net (outflow) proceeds from principal
repayments of loans and loan originations... (86,193) (55,090) (1,479)
Purchases of loans........................... (195,514) (132,238) (87,874)
Proceeds from principal repayments of
mortgage-backed securities.................. 57,266 72,028 32,013
Purchases of mortgage-backed securities...... -- (99,085) (148,036)
Proceeds from sale of premises and
equipment................................... -- 326 --
Purchases of premises and equipment.......... (1,701) (529) (2,159)
Proceeds from sales of real estate owned..... 1,806 1,868 5,008
Purchases of Federal Home Loan Bank of New
York stock.................................. (4,361) (1,684) (1,322)
--------- --------- ---------
Net cash used in investing activities........ (242,697) (218,090) (209,990)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of deposits, net of sale of
deposits.................................... -- -- 136,811
Deposit premium.............................. -- -- (18,141)
Decrease in deposits due to conversion
deposits.................................... -- -- (53,780)
Net increase in deposits..................... 81,403 122,502 15,284
Advances from the Federal Home Loan Bank of
New York and other borrowings............... 141,515 95,870 35,830
Cash dividends paid.......................... (987) -- --
Purchases of treasury stock, net of
reissuance.................................. (644) (12,362) (6,472)
Net proceeds from issuance of common stock... -- -- 52,128
--------- --------- ---------
Net cash provided by financing activities.... 221,287 206,010 161,660
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents................................. (900) 1,893 (36,788)
Cash and Cash Equivalents, Beginning of
Year........................................ 11,629 9,736 46,524
--------- --------- ---------
Cash and Cash Equivalents, End of Year....... $ 10,729 $ 11,629 $ 9,736
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest..................................... $ 52,054 $ 38,731 $ 26,804
========= ========= =========
Income taxes................................. $ 3,504 $ 5,133 $ 4,451
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON--CASH ACTIVITIES:
Transfer of loans receivable to real estate
owned, net.................................. $ 1,690 $ 1,540 $ 2,694
========= ========= =========
Unrealized gain on investments available for
sale........................................ $ -- $ (59) $ 59
========= ========= =========
Issuance of treasury stock for Management
Recognition Plan............................ $ 423 $ -- $ 2,486
========= ========= =========
See notes to consolidated financial statements.
49
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PennFed Financial Services, Inc. ("PennFed") was organized in March 1994 for
the purpose of becoming the savings and loan holding company for Penn Federal
Savings Bank (the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion").
Principles of Consolidation--The consolidated financial statements of
PennFed and subsidiary (together the "Company") include the accounts of
PennFed and the Bank. PennFed owns all of the outstanding stock of the Bank
issued on July 14, 1994 (see Note B--Stock Conversion). All references to the
Company, unless otherwise indicated, prior to July 14, 1994, refer to the Bank
and its subsidiary on a consolidated basis. All intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant area in the accompanying financial statements where estimates have
an impact is in the allowance for loan losses.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and amounts due from depository institutions.
Investment Securities and Mortgage-Backed Securities--In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), debt securities
classified as held to maturity are carried at amortized cost only if the
reporting entity has a positive intent and ability to hold those securities to
maturity.
The Company classifies investment securities and mortgage-backed securities
as either held to maturity or available for sale. Investment securities and
mortgage-backed securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, since the Company has
both the ability and intent to hold the securities to maturity. Investments
available for sale are carried at market value with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity.
Loans Held for Sale--Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Aggregate net unrealized losses are recognized in a valuation
allowance by charges to income.
Loans Receivable--Interest income is not accrued on loans where management
has determined that the borrowers may be unable to meet contractual principal
or interest obligations or where interest and/or principal is 90 days or more
past due. When a loan is placed on nonaccrual status, accrual of interest
ceases and, in general, uncollected past due interest (including interest
applicable to prior years, if any) is reversed and charged against current
income. Therefore, interest income is not recognized unless the financial
condition and payment record of the borrower warrant the recognition of
interest income. Interest on loans that have been restructured is generally
accrued according to the renegotiated terms.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures" ("SFAS 118"). The
Company
50
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accounts for impaired loans, except those loans that are accounted for at fair
value or at the lower of cost or fair value, at the present value of the
estimated future cash flows of the loan discounted at the loan's effective
interest rate or at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. A loan is impaired when it
is probable that all principal and interest amounts will not be collected
according to the loan contract. Delinquent, smaller balance, homogeneous loans
that are evaluated collectively on a portfolio basis are not considered
impaired under SFAS 114. The Company generally evaluates the collectibility of
consumer and one- to four-family loans on a total portfolio basis.
Allowance for Loan Losses--The allowance for loan losses is established
through charges to earnings. Loan losses are charged against the allowance for
loan losses when management believes that the recovery of principal is
unlikely. If, as a result of loans charged off or increases in the size or
risk characteristics of the loan portfolio, the allowance is below the level
considered by management to be adequate to absorb future loan losses on
existing loans, the provision for loan losses is increased to the level
considered necessary to provide an adequate allowance. The allowance is an
amount that management believes will be adequate to absorb possible losses on
existing loans that may become uncollectible, based on evaluations of the
collectibility of the loans. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay. Economic conditions
may result in the necessity to change the allowance quickly in order to react
to deteriorating financial conditions of the Company's borrowers. As a result,
additional provisions on existing loans may be required in the future if
borrowers' financial conditions deteriorate or if real estate values decline.
Premises and Equipment--Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation of
premises and equipment are computed on the straight-line method over three to
ten years for furniture and equipment and twenty-five to forty years for
buildings. Amortization of leasehold improvements is provided using the
straight-line method over the terms of the respective lease or estimated
useful life of the improvement, whichever is shorter.
Real Estate Owned--Real estate properties acquired by foreclosure are
recorded at the lower of cost or estimated fair value less costs to dispose
with any write down charged against the allowance for loan losses. Subsequent
valuations are periodically performed by management and the carrying value is
adjusted by a charge to expense to reflect any subsequent declines in the
estimated fair value. Further declines in real estate values may result in
increased foreclosed real estate expense in the future. Routine holding costs
are charged to expense as incurred and improvements to real estate owned that
increase the fair value of the real estate are capitalized. Gains on sale of
real estate owned are generally recognized upon disposition of the property.
Losses are charged to operations as incurred.
Goodwill--The excess of cost over fair value of assets acquired ("goodwill")
arising from the acquisitions discussed in Note C is amortized to expense by
an accelerated method over the estimated remaining lives of long-term,
interest-bearing assets acquired (14 years) in accordance with Statement of
Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions."
Core Deposit Premium--The premium resulting from the valuation of core
deposits arising from the aforementioned acquisitions is being amortized to
expense over the estimated average remaining life of the existing customer
deposit base acquired (10 years).
Due to Banks--This item represents a book overdraft relating to outstanding
checks written on the Company's Federal Home Loan Bank of New York operating
account.
51
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes--Federal and state income taxes are based upon earnings
reported after permanent differences have been deducted. Deferred income taxes
are provided for temporary differences in the basis of assets and liabilities
between financial statement and income tax amounts.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") the Company uses an asset and
liability method for financial accounting and reporting for income taxes. The
statement also requires that a deferred tax liability be recognized for any
increase in the tax bad debt reserve in excess of the reserve balance at
December 31, 1987.
Earnings Per Share--The earnings per share computations for the years ended
June 30, 1997, 1996 and 1995 were determined by dividing net income for the
periods by the weighted average number of shares of common stock outstanding
and common stock equivalents. Stock options are regarded as common stock
equivalents and are, therefore, considered in earnings per share calculations
if dilutive. Common stock equivalents are computed using the treasury stock
method. Because earnings per share were based upon the weighted average number
of days outstanding during the period, the weighted average number of shares
for the year ended June 30, 1995 only includes shares outstanding since July
14, 1994 (the date of Conversion). The weighted average number of shares
outstanding does not include shares which are unallocated by the Employee
Stock Ownership Plan ("ESOP"). Additionally, treasury shares are not included
in the calculation.
Loan Origination Fees and Discounts and Premiums--Nonrefundable loan
origination fees net of certain direct loan origination costs are deferred.
Net deferred fees on loans held for investment are amortized into income over
the life of the related loans by use of the level-yield method. Net deferred
fees on loans originated for sale are deferred and recognized as part of the
gain or loss on sale of loans.
Discounts and premiums on investment and mortgage-backed securities and
loans purchased are recognized as income/expense over the estimated life of
the asset purchased using the level-yield method.
Interest Rate Swaps--The Company has utilized interest rate swaps as a
component of managing interest rate risk. Swap agreements are held for
purposes other than trading. The Company's swaps are considered to be matched
swaps, as they are specifically linked with a liability. Periodic net cash
settlements under swap agreements are accrued as an adjustment to interest
expense over the life of the agreements. In the event of the termination of an
interest rate swap agreement, the gain or loss would be deferred and amortized
as an adjustment to interest expense over the shorter of the remaining life of
the hedged item or the remaining contract period. In the event of liquidation
of the liability to which the interest rate swap is linked, the interest rate
swap would be recorded at its fair market value with any change in such fair
market value recorded in the period it occurs.
Recently Adopted Accounting Standards--Effective July 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Refer to Note M--Stock Plans for a further
discussion.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
supersedes Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights". Under SFAS 125, after the transfer of a
financial asset, the Company recognizes the financial and servicing assets it
controls and the liabilities it has incurred. Furthermore, the Company no
longer recognizes the financial assets for which control has been surrendered
and liabilities have been extinguished. The adoption of SFAS 125 did not have
an effect on the financial condition or results of operations of the Company.
Reclassifications--Certain reclassifications have been made to prior years'
financial statements to conform with current year's presentation.
52
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
B. STOCK CONVERSION
On July 14, 1994, the Bank completed the Conversion and became a wholly
owned subsidiary of PennFed, a newly formed holding company. In connection
with an initial public offering, PennFed issued 5,950,000 shares of common
stock at $10 per share ($.01 par value), increasing consolidated equity by
$52.1 million, which was net of conversion expenses of approximately $2.7
million and shares issued to the ESOP representing 8% of the shares of common
stock issued. The Bank received proceeds of $28.0 million from PennFed in
exchange for all of its common stock.
As part of the Conversion, in order to grant a priority to eligible account
holders in the event of future liquidation in accordance with Office of Thrift
Supervision ("OTS") regulations, the Company established a liquidation account
in an amount equal to $40.9 million (the retained earnings of the Bank as of
March 31, 1994). The total amount of the liquidation account will be decreased
as the balances of eligible account holders are reduced subsequent to the
Conversion. In the event of a complete liquidation of the Company, and only in
such event, eligible account holders who continue to maintain their deposit
accounts shall be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
C. BRANCH ACQUISITIONS
On March 10, 1995, the Bank acquired from the Resolution Trust Corporation
("RTC") the deposit liabilities and certain of the assets and other
liabilities of four branch offices of Carteret Federal Savings Bank, Madison,
New Jersey ("Carteret"). The four Carteret branch offices were located in
Caldwell, Verona, Fairfield and Wayne, New Jersey. Immediately following the
purchase, under a pre-arranged "consortium" agreement, Atlantic Stewardship
Bank of Midland Park, New Jersey acquired from the Bank the deposit
liabilities and certain of the assets and other liabilities of the Wayne, New
Jersey branch office. In connection with this transaction, no gain or loss was
recorded by the Bank.
The Bank submitted an $18,739,000 deposit premium bid, of which $18,000,000
related to the Caldwell, Verona and Fairfield branches. In addition to the
$18,000,000 deposit premium, the Bank also capitalized $141,000 of expenses
reflecting a total deposit premium intangible asset of $18,141,000.
The Company acquired Sayreville Savings and Loan Association effective
September 1982 and First Federal Savings and Loan Association of Montclair
effective September 1989. The acquisitions have been accounted for as
purchases and, accordingly, the purchase prices have been allocated to assets
and liabilities acquired based on their fair value at their date of
acquisition. For each of the years ended June 30, 1997, 1996 and 1995, the
effect of the amortization of goodwill was to reduce income before income
taxes by approximately $496,000, $609,000 and $739,000, respectively.
53
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D. INVESTMENT SECURITIES
JUNE 30, 1997 JUNE 30, 1996
---------------- ----------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(IN THOUSANDS)
U.S. Treasury and Government Agencies:
Maturing:
Within one year......................... $ 4,999 $ 5,055 $ 5,999 $ 6,054
After one year but within five years.... -- -- 14,998 15,129
After five years but within ten years... 30,000 30,070 -- --
------- ------- ------- -------
34,999 35,125 20,997 21,183
Obligations of states and political
subdivisions:
Maturing:
After one year but within five years.... 101 102 101 103
After five years but within ten years... 190 205 190 216
------- ------- ------- -------
291 307 291 319
------- ------- ------- -------
$35,290 $35,432 $21,288 $21,502
======= ======= ======= =======
Gross unrealized gains of investment securities at June 30, 1997 and 1996
were as follows:
JUNE 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
U.S. Treasury and Government Agencies.......................... $ 125 $ 186
Obligations of states and political subdivisions............... 17 28
------- -------
$ 142 $ 214
======= =======
There were no gross unrealized losses of investment securities at June 30,
1997 or 1996.
For the year ended June 30, 1996, sales of investment securities with a cost
basis of $10,000 generated gross gains of $94,000. There were no sales of
investment securities for the years ended June 30, 1997 and 1995.
E. MORTGAGE-BACKED SECURITIES
JUNE 30,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
Government National Mortgage Association..................... $ 3,993 $ 4,904
Federal Home Loan Mortgage Corporation....................... 184,028 221,777
Federal National Mortgage Association........................ 98,684 115,896
Collateralized Mortgage Obligations/REMICs................... 938 1,348
Private Pass-through Securities.............................. -- 984
-------- --------
287,643 344,909
Unamortized premiums, net.................................... 896 1,159
-------- --------
$288,539 $346,068
======== ========
The estimated market values of mortgage-backed securities were $291,125,000
and $344,331,000 at June 30, 1997 and 1996, respectively. There were no sales
of mortgage-backed securities in the years ended June 30, 1997, 1996 and 1995.
54
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying value of mortgage-backed securities pledged were as follows:
JUNE 30,
-----------------
1997 1996
--------- -------
(IN THOUSANDS)
Pledged to secure:
Federal Home Loan Bank of New York Advances.................. $ 72,004 $ --
Other borrowings............................................. 41,566 --
Interest rate swap agreements................................ 1,789 401
Public funds on deposit...................................... 384 482
--------- -----
$ 115,743 $ 883
========= =====
Collateralized mortgage obligations consist primarily of fixed and
adjustable rate sequentially paying securities with short durations.
The gross unrealized gains and losses of mortgage-backed securities held at
June 30, 1997 and 1996 were as follows:
JUNE 30, 1997 JUNE 30, 1996
--------------------- ---------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
---------- ---------- ---------- ----------
(IN THOUSANDS)
Government National Mortgage
Association...................... $ 214 $ -- $ 189 $ 1
Federal Home Loan Mortgage
Corporation...................... 2,604 965 1,401 2,846
Federal National Mortgage
Association...................... 1,225 492 967 1,513
Collateralized Mortgage
Obligations/REMICs............... 3 3 3 9
Private Pass-through Securities... -- -- 72 --
------ ------ ------ ------
$4,046 $1,460 $2,632 $4,369
====== ====== ====== ======
55
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
F. LOANS RECEIVABLE, NET
JUNE 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
First Mortgage Loans:
Conventional.............................................. $824,100 $561,526
FHA insured............................................... 6,046 2,226
VA guaranteed............................................. 1,697 2,172
-------- --------
Total one- to four-family................................. 831,843 565,924
Commercial and multi-family............................... 56,811 52,014
-------- --------
Total first mortgage loans ................................. 888,654 617,938
-------- --------
Consumer:
Second mortgages.......................................... 23,665 23,912
Home equity lines of credit............................... 14,040 8,955
Other..................................................... 2,512 2,117
-------- --------
Total consumer loans........................................ 40,217 34,984
-------- --------
Total loans................................................. 928,871 652,922
-------- --------
Add (Less):
Allowance for loan losses................................. (2,622) (2,630)
Unamortized premium....................................... 3,610 2,036
Unearned income on consumer loans......................... (36) (249)
Net deferred loan fees.................................... 1,628 492
-------- --------
2,580 (351)
-------- --------
$931,451 $652,571
======== ========
At June 30, 1997, there were no loans classified as held for sale.
Conventional one- to four-family mortgage loans at June 30, 1996 included
$88,000 of mortgages held for sale. At June 30, 1996, the Company had a
commitment to sell these loans.
Non-accruing loans at June 30, 1997 and 1996 were $5,485,000 and $6,186,000,
respectively, which represents 0.59% and 0.95%, respectively, of total loans
outstanding. The total interest income that would have been recorded for the
years ended June 30, 1997 and 1996, had these loans been current in accordance
with their original terms, or since the date of origination if outstanding for
only part of the year, was approximately $139,000 and $229,000, respectively.
At June 30, 1997 and 1996, impaired loans totaled $1,687,000 and $2,381,000,
respectively. The average balance of impaired loans for the years ended June
30, 1997 and 1996 was $2,255,000 and $3,755,000, respectively. All impaired
loans have a related allowance for losses, which totaled $460,000 and $617,000
at June 30, 1997 and 1996, respectively. Interest income related to impaired
loans is recognized under the cash-basis method. Interest income recognized on
impaired loans for the years ended June 30, 1997 and 1996 was $120,000 and
$190,000, respectively. Total interest income that would have been recorded
for the years ended June 30, 1997 and 1996, had these loans been current in
accordance with their loan terms, was approximately $303,000 and $315,000,
respectively.
56
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has restructured the terms of certain loans. Those loans,
considered to be troubled debt restructurings, had a balance of $1,451,000 and
$2,340,000 at June 30, 1997 and 1996, respectively. The interest earned on
restructured loans that are performing in accordance with their modified terms
amounted to $210,000 and $214,000 for the years ended June 30, 1997 and 1996,
respectively. These loans would have earned $263,000 and $399,000 for the
years ended June 30, 1997 and 1996, respectively, had they performed in
accordance with their original terms.
The following is an analysis of the allowance for loan losses:
JUNE 30,
----------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Balance, beginning of year.............................. $2,630 $2,860 $3,060
Provisions for losses on loans.......................... 635 610 569
Recoveries.............................................. 42 101 --
Losses charged to allowance............................. (685) (941) (769)
------ ------ ------
Balance, end of year.................................... $2,622 $2,630 $2,860
====== ====== ======
The Company's loan portfolio consists primarily of loans secured by
residential and commercial real estate located in its market areas. Therefore,
the collectibility of these loans is dependent to a large degree on the
overall strength of the New Jersey economy, as well as the specific strength
of the real estate sector.
At June 30, 1997 and 1996, commercial and multi-family real estate loans
totaled $56,811,000 and $52,014,000, respectively. These loans are considered
by management to be of somewhat greater risk of collectibility due to their
dependency on income production. Commercial and multi-family real estate loans
collateralized by multi-family mixed use properties were $25,114,000 and
$19,639,000 at June 30, 1997 and 1996, respectively. The remaining commercial
real estate loans were collateralized by commercial properties. Additionally,
the majority of the Company's commercial and multi-family real estate loans
were collateralized by real estate in the State of New Jersey.
Loans serviced for others totaled approximately $78,781,000 and $89,170,000
at June 30, 1997 and 1996, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees from
investors and certain charges assessed to borrowers, such as late payment
fees. In connection with these loans serviced for others, the Company held
borrowers escrow balances of $926,000 and $976,000 at June 30, 1997 and 1996,
respectively.
G. PREMISES AND EQUIPMENT, NET
JUNE 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Land........................................................... $ 3,709 $ 3,340
Buildings and improvements..................................... 13,510 12,715
Leasehold improvements......................................... 1,219 1,218
Furniture and equipment........................................ 8,194 7,660
------- -------
26,632 24,933
Less: accumulated depreciation and amortization................ 10,197 8,898
------- -------
$16,435 $16,035
======= =======
57
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
H. REAL ESTATE OWNED
JUNE 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Acquired by foreclosure or deed in lieu of foreclosure......... $ 986 $ 1,144
Allowance for losses on real estate owned...................... (102) (61)
------ -------
$ 884 $ 1,083
====== =======
Results of real estate operations were as follows:
JUNE 30,
-------------------
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
Net gain on sales of real estate owned..................... $ 29 $ 236 $ 597
Holding costs.............................................. (98) (124) (399)
Provision for losses on real estate owned.................. (112) (8) (81)
----- ----- -----
Net gain (loss) from real estate operations................ $(181) $ 104 $ 117
===== ===== =====
Activity in the allowance for losses on real estate owned was as follows:
JUNE 30,
-------------------
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
Balance, beginning of year................................. $ 61 $ 177 $ 220
Provisions charged to operations........................... 112 8 81
Losses charged to allowance................................ (71) (124) (124)
----- ----- -----
Balance, end of year....................................... $ 102 $ 61 $ 177
===== ===== =====
I. DEPOSITS
JUNE 30, 1997 JUNE 30, 1996
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand................ $ 31,203 $ 35,485
Interest-bearing demand.................... 51,159 1.88% 46,645 1.93%
Savings accounts........................... 169,823 2.22 178,035 2.28
Certificates with remaining maturities of:
One year or less.......................... 395,101 5.50 389,366 5.22
Over one to three years................... 214,792 6.17 99,087 5.76
Over three years to five years............ 53,831 6.16 85,923 6.53
Over five years........................... 94 6.90 59 4.43
-------- --------
Total certificates......................... 663,818 5.77 574,435 5.65
Accrued interest payable................... 2,157 1,816
-------- --------
$918,160 4.68% $836,416 4.48%
======== ==== ======== ====
58
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate amount of accounts with a denomination of $100,000 or more was
approximately $96,822,000 and $51,107,000 at June 30, 1997 and 1996,
respectively.
J. FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank of New York ("FHLB of New York") advances are
scheduled to mature as follows:
JUNE 30, 1997 JUNE 30, 1996
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
One to two years............................ $ 85,000 5.99% $ 40,000 5.53%
Three to four years......................... 90,000 6.17 65,000 6.17
Four to five years.......................... 30,000 6.42 -- --
Over five years............................. 465 7.39 -- --
-------- --------
$205,465 $105,000
======== ========
The FHLB of New York advances are all fixed rate borrowings collateralized
either under a blanket pledge agreement by one- to four-family mortgage loans
or with mortgage-backed securities.
At June 30, 1997, the Company had available from the FHLB of New York an
overnight repricing line of credit for $50,000,000 which expires on May 1,
1998. The line of credit has a variable interest rate. At June 30, 1997 and
1996, the Company had $32,650,000 and $36,700,000 of overnight borrowings
under this credit line with an interest rate of 6.63% and 5.69%, respectively.
Also at June 30, 1997, the Company had available from the FHLB of New York a
one-month overnight repricing line of credit for $50,000,000 which expires on
May 1, 1998. This line of credit has a variable interest rate. At June 30,
1997, the Company had $10,000,000 drawn under this line of credit with an
interest rate of 6.38%.
From time to time, the Company enters into sales of securities under
agreements to repurchase ("reverse repurchase agreements"). These agreements
are accounted for as financing arrangements and the obligations to repurchase
securities sold are reflected as other borrowings in the accompanying
consolidated statements of financial condition. The reverse repurchase
agreements are collateralized by mortgage-backed securities which continue to
be carried as assets by the Company, with a carrying value of $41,566,000 and
a market value of $41,762,000.
At June 30, 1996, there were no reverse repurchase agreements outstanding.
At June 30, 1997, reverse repurchase agreements are scheduled to mature as
follows:
WEIGHTED
AVERAGE
INTEREST
AMOUNT RATE
------- --------
(DOLLARS IN
THOUSANDS)
Within one year................................................ $30,100 5.74%
After one year but within five years........................... 10,000 6.24%
-------
$40,100 5.86%
=======
The average balance of reverse repurchase agreements for the years ended
June 30, 1997 and 1996 was $29,661,000 and $2,604,000, respectively.
59
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
K. PENSION PLAN
The Company previously had a noncontributory defined benefit pension plan
(the "Pension Plan") covering substantially all of its employees. Effective
July 3, 1995, the Company terminated its Pension Plan. Service benefits ceased
on May 19, 1995. In addition to the net pension expense in fiscal 1995, the
Company recognized a loss in fiscal 1995 of approximately $470,000 reflecting
the termination of the Pension Plan in accordance with Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
Pension expense for the year ended June 30, 1995 was $243,000, and consisted
of the following components:
JUNE 30, 1995
--------------
(IN THOUSANDS)
Service cost benefits earned during the period................... $161
Interest cost on projected benefit obligations................... 101
Actual return on Pension Plan assets............................. (82)
Net amortization and deferral of unrecognized net gain........... 63
----
Net periodic pension cost........................................ $243
====
L. INCENTIVE SAVINGS PLAN
The Company's employee benefits include a 401(k) Plan (the "Plan"). All
employees of the Company who work at least 1,000 hours per year and are at
least 20 1/2 years old are eligible to participate in the Plan. The Plan
provides for a discretionary Company match of employee contributions. For the
years ended June 30, 1997, 1996 and 1995, expense related to the Plan was
$78,000, $70,000, and $120,000, respectively.
M. STOCK PLANS
Employee Stock Ownership Plan ("ESOP")
In connection with the Conversion, the Company established an ESOP for
eligible employees. All full-time employees are eligible to participate in the
ESOP after they attain age 21 and complete one year of service during which
they work at least 1,000 hours. Employees were credited for years of service
to the Company prior to the adoption of the ESOP for participation and vesting
purposes. The Bank's contribution is allocated among participants on the basis
of compensation. Each participant's account will be credited with cash or
shares of the Company's common stock based upon compensation earned during the
year with respect to which the contribution is made. After completing seven
years of service, a participant will be 100% vested in his/her ESOP account.
ESOP participants are entitled to receive distributions from the ESOP account
only upon termination of service, which includes retirement and death.
The ESOP borrowed $4,760,000 from PennFed and purchased 476,000 shares of
common stock issued in the Conversion. This loan is to be repaid from
discretionary contributions by the Bank to the ESOP trust. The Bank intends to
make contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt, assuming a ten year term and an interest
rate of 7.46%. Annual contributions to the ESOP, which are used to fund
principal and interest payments on the ESOP debt, total $692,000. At June 30,
1997 and 1996, the loan had an outstanding balance of $3,671,000 and
$4,061,000 and the ESOP had unallocated shares of 367,138 and 406,065,
respectively. Based upon a $27.25 closing price per share of common stock on
June 30, 1997, the unallocated shares had a fair value of $10,005,000. The
unamortized balance of the ESOP debt is reflected as a reduction of
stockholders' equity.
60
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the years ended June 30, 1997 and 1996, the Bank recorded compensation
expense related to the ESOP of $740,000 and $544,000, respectively. The
compensation expense related to the ESOP includes $433,000 and $175,000,
respectively, for a valuation adjustment to reflect the increase in the
average fair value of allocated shares for the period from the time of
purchase to the allocation date. The ESOP allocated 38,927 and 36,225 shares
for the years ended June 30, 1997 and 1996, respectively, to participants in
the plan.
Management Recognition Plan
In connection with the Conversion, the Company established a Management
Recognition Plan ("MRP") as a means of enhancing and encouraging the
recruitment and retention of directors and officers. A maximum amount of an
additional 4%, or 238,000 shares, of the shares outstanding upon Conversion
may be awarded under the plan. As of June 30, 1997, 238,000 shares of
restricted stock have been awarded under the MRP. The shares vest in equal
installments generally over a five-year period, with the final installment
vesting on April 28, 1999. For the years ended June 30, 1997 and 1996, the
Company recorded expense of $732,000 and $440,000, respectively, related to
the MRP.
Stock Option Plan
In connection with the Conversion, the Company established the 1995 Stock
Option and Incentive Plan ("Option Plan"). The exercise price for the options
granted under the Option Plan cannot be less than the fair market value of the
Company's common stock on the date of the grant. The options vest in equal
installments generally over a five-year period, with the final installment
vesting on April 28, 1999. Transactions during the years ended June 30, 1997,
1996 and 1995 relating to the Option Plan are as follows:
EXERCISE
OPTIONS PRICE
------- ----------------
Balance, June 30, 1994................................ --
Granted............................................. 513,225 $10.50
Exercised........................................... --
Expired............................................. --
Forfeited........................................... --
-------
Balance, June 30, 1995................................ 513,225 10.50
Granted............................................. --
Exercised........................................... (680) 10.50
Expired............................................. (1,300) 10.50
Forfeited........................................... (5,520) 10.50
-------
Balance, June 30, 1996................................ 505,725 10.50
Granted............................................. 62,475 15.88
Exercised........................................... (700) 10.50
Expired............................................. --
Forfeited........................................... (300) 10.50
-------
Balance, June 30, 1997................................ 567,200 $10.50 to $15.88
At June 30, 1997, 1996 and 1995, 339,880 options, 201,930 options and
102,645 options were exercisable, respectively.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), if fully adopted, requires companies to
measure employee stock compensation plans based on the fair value method of
accounting. The Company has adopted the disclosure-only provisions of SFAS
123. Accordingly, the Company continues to apply Accounting Principles Board
Opinion No. 25, "Accounting for
61
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Issued to Employees," ("APB 25") and related interpretations in
accounting for its plans. In accordance with APB 25, no compensation expense
has been recognized for its stock-based compensation plans other than for
restricted stock. Proforma disclosures as if the Company fully adopted the
cost recognition requirements under SFAS 123 are presented below.
The estimated fair value of each stock option granted during fiscal 1997 is
estimated as $2.28 on the date of grant using the simple Black-Scholes option-
pricing model with the following assumptions: stock volatility of 15.91%,
risk-free interest rate of 6.50%, and an expected life of 8 years. Had
compensation cost for the fiscal 1997 grants been determined based upon the
fair value at the grant date been determined consistent with the methodology
prescribed under SFAS 123, the Company's pro forma net income and primary
earnings per share would have been approximately $6.8 million and $1.44,
respectively. As the SFAS 123 method of accounting has not been applied to
stock options granted prior to July 1, 1996, the resulting proforma effect on
net income for fiscal 1997 is not representative of the proforma effect on net
income in future years.
N. INCOME TAXES
Savings banks that meet certain definitions, tests and other conditions
prescribed by the Internal Revenue Code are allowed to deduct, with
limitations, a bad debt deduction. This deduction is computed as a percentage
of taxable income before such deduction or based upon actual loss experience.
During fiscal 1997, the Company's bad debt deduction was based upon actual
loss experience. During the fiscal years 1996 and 1995, the Company employed
the percentage of taxable income method.
On August 20, 1996 legislation was signed into law which repealed the
percentage of taxable income method for tax bad debt deduction. This repeal is
effective for the Company's taxable year beginning July 1, 1996. In addition,
the legislation requires the Company to include in taxable income its tax bad
debt reserves in excess of its base year reserves over a six, seven, or eight
year period, depending upon the attainment of certain loan origination levels.
Since the percentage of taxable income method for tax bad debt deduction and
the corresponding increase in the tax bad debt reserve in excess of the base
year have been recorded as temporary differences pursuant to SFAS 109, this
change in the tax law had no effect on the Company's statement of operations.
The income tax provision is comprised of the following components:
YEAR ENDED JUNE 30,
---------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Current provision........................................ $4,020 $5,285 $4,183
Deferred provision (benefit)............................. 185 (174) (262)
------ ------ ------
Total income tax provision............................... $4,205 $5,111 $3,921
====== ====== ======
62
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes payable is included in accounts payable and other liabilities
in the consolidated statements of financial condition at June 30, 1997. The
financial statements also include a net deferred tax asset of $97,000 that has
been recorded for the temporary differences between the tax basis and the
financial statement carrying amounts of assets and liabilities. The source of
these temporary differences and their deferred tax effect at June 30, 1997 and
1996 is as follows:
JUNE 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses.................................... $ 182 $ 214
Litigation reserves.......................................... 47 89
Deposit premium intangible................................... 503 279
MRP expense.................................................. 229 189
Depreciation................................................. 363 245
------- -------
Total deferred tax assets...................................... 1,324 1,016
------- -------
Deferred tax liabilities:
Deferred loan fees........................................... 882 271
Loan sale premiums........................................... 18 21
Purchase accounting.......................................... 327 442
------- -------
Total deferred tax liabilities................................. 1,227 734
------- -------
Net deferred tax asset......................................... $ 97 $ 282
======= =======
A reconciliation of the statutory income tax provision to the effective
income tax provision is as follows:
YEAR ENDED JUNE 30,
----------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Income tax provision at statutory rate (35% for 1997
and 1996 and 34% for 1995)........................... $3,882 $4,533 $3,346
Amortization of intangibles........................... 174 213 259
State and local tax provision......................... 214 262 200
Tax bracket rate differential......................... -- (24) (80)
Other, net............................................ (65) 127 196
------ ------ ------
Total income tax provision............................ $4,205 $5,111 $3,921
====== ====== ======
Pursuant to SFAS 109, the Company is not required to provide deferred taxes
on its tax loan loss reserve as of December 31, 1987. The amount of this
reserve on which no deferred taxes have been provided is approximately
$16,300,000. This reserve could be recognized as taxable income and create a
current and/or deferred tax liability using the income tax rates then in
effect if one of the following occur: (1) the Company's retained earnings
represented by this reserve are used for dividends or distributions in
liquidation or for any other purpose other than to absorb losses from bad
debts, (2) the Company fails to qualify as a Bank, as provided by the Internal
Revenue Code, or (3) there is a change in federal tax law.
63
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
O. COMMITMENTS AND CONTINGENCIES
Lease Commitments--At June 30, 1997, minimum rental commitments under all
noncancellable operating leases with initial or remaining terms of more than
one year are as follows:
YEAR ENDING JUNE 30, MINIMUM RENT
- -------------------- --------------
(IN THOUSANDS)
1998............................................................. $157
1999............................................................. 137
2000............................................................. 71
2001............................................................. 38
2002............................................................. 40
2003 and later................................................... 57
----
$500
====
Rentals under long-term operating leases for certain branch offices amounted
to $169,000, $176,000 and $189,000 for the years ended June 30, 1997, 1996 and
1995, respectively. Rental income of $452,000, $481,000 and $420,000 for the
years ended June 30, 1997, 1996 and 1995, respectively, is netted against
occupancy expense in the consolidated statements of income.
Financial Instruments With Off-Balance Sheet Risk--The Company is a party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments are not recorded on the balance sheet when either the exchange of
the underlying asset or liability has not yet occurred or the notional amounts
are used solely as a means to determine the cash flows to be exchanged. These
financial instruments are commitments to extend credit, unused lines of
credit, commitments to purchase loans and interest rate swaps. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statements of
financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
The following summarizes the notional amount of off-balance sheet financial
instruments:
JUNE 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Commitments to extend credit................................... $ 9,692 $28,834
Unused lines of credit......................................... 17,366 10,813
Commitments to purchase loans.................................. 32,660 59,046
Interest rate swaps............................................ 70,000 20,000
Commitments to extend credit and unused lines of credit are legally binding
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments and lines of credit
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained
by the Company upon extension of credit is based on
64
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
management's credit evaluation of the borrower. Collateral held varies but may
include mortgages on commercial and residential real estate and other tangible
properties.
Commitments to purchase loans represent agreements to purchase loans through
correspondent relationships established by the Company with other
institutions. The Company purchased newly originated one- to four-family
residential mortgages secured by properties located in the State of New Jersey
and, to a lesser extent, the Commonwealth of Pennsylvania. Prior to purchase,
the Company underwrites these loans in the same manner used in its own
originations.
The Company periodically enters into interest rate swap agreements to help
reduce certain interest rate exposure on a portion of the short-term deposits.
Interest rate swaps are contractual agreements between two parties to exchange
interest payments at particular intervals, computed on different terms, on a
specified notional amount. The notional amounts represent the base on which
interest due each counter party is calculated and do not represent the
potential for gains or losses associated with the market risk or credit risk
of such transactions. At June 30, 1997, the Company had $70 million in
notional amount interest rate swap agreements outstanding on which the Company
pays a fixed interest rate ranging from 6.25% to 6.71% and receives a floating
interest rate, based on three-month LIBOR, from the counter parties, which are
nationally recognized investment firms. At June 30, 1997, three-month LIBOR
was 5.78%. The average balance of notional amount interest rate swap
agreements in fiscal 1997 and 1996 was $52,356,000 and $658,000, respectively.
Included in interest expense for the year ended June 30, 1997 and 1996 was
$459,000 and $8,000, respectively, of expense related to interest rate swap
agreements. Mortgage-backed securities with a carrying value of $1,789,000 and
$401,000 at June 30, 1997 and 1996, respectively, were pledged to secure these
agreements. The interest rate swap agreements mature between June 18, 1999 and
March 21, 2002.
Other Contingencies--The Company is a defendant in certain claims and legal
actions arising in the ordinary course of business. Management does not
anticipate losses on any of these claims or actions which would have a
material adverse effect on the accompanying consolidated financial statements.
P. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
During the year ended June 30, 1997, the Company repurchased 32,500 shares
of its outstanding common stock. The prices paid for the repurchased shares
ranged from $20.00 to $20.19 per share, for a total cost of $651,000. During
the year ended June 30, 1996, the Company repurchased 801,860 shares of its
outstanding common stock at prices ranging from $14.63 to $16.00 per share,
for a total cost of $12,370,000. During the year ended June 30, 1995, the
Company repurchased 534,000 shares of its outstanding common stock at prices
ranging from $11.63 to $12.31 per share for a total cost of $6,472,000. On
April 28, 1995, 208,845 shares were reissued to the participants of the
Company's Management Recognition Plan.
On March 21, 1996, the Board of Directors of the Company (the "Board")
adopted a Stockholder Protection Rights Plan and declared a dividend of one
common share purchase right ("Right") for each share of common stock of the
Company outstanding on April 1, 1996. Until it is announced that a person or
group has acquired 10% or more of the outstanding common stock of the Company
("Acquiring Person") or has commenced a tender offer that could result in such
person or group owning 10% or more of such common stock, the Rights will
initially be redeemable for $0.01 each, will be evidenced solely by the
Company's common stock certificates, will automatically trade with the
Company's common stock and will not be exercisable. Following any such
announcement, separate Rights certificates would be distributed, with each
Right entitling its holder to purchase one share of the Company's common stock
for an exercise price of $60.
Upon announcement that any person or group has become an Acquiring Person
and unless the Board acts to redeem the Rights, then ten business days after
such announcement (the "Flip-in Date"), each Right (other
65
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
than Rights beneficially owned by any Acquiring Person or transferee thereof,
which Rights become void) will entitle the holder to purchase, for the $60
exercise price, a number of shares of the Company's common stock having an
aggregate market value of $120. In addition, if, after the Acquiring Person
gains control of the Board, the Company is involved in a merger with any
person or sells more than 50% of its assets or earning power to any person (or
has entered into an agreement to do either of the foregoing), and, in the case
of a merger, an Acquiring Person will receive different treatment than other
stockholders, each Right will entitle its holder to purchase, for the $60
exercise price, a number of shares of common stock of such other person having
an aggregate market value of $120. If any person or group acquires between 10%
and 50% of the Company's common stock, the Board may, at its option, require
the Rights to be exchanged for common stock of the Company. The Rights
generally may be redeemed by the Board for $0.01 per Right prior to the Flip-
in Date.
The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements could result in certain mandatory and possible discretionary
actions by the OTS that, if undertaken, could have a direct material effect on
the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
quantitative capital guidelines.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of tangible capital of
not less than 1.5% of tangible assets, core capital of not less than 3% of
adjusted tangible assets and risk-based capital of not less than 8% of risk-
weighted assets. As of June 30, 1997, the Bank meets all capital adequacy
requirements to which it is subject.
As of its last regulatory examination the Bank was categorized as "well
capitalized" under the prompt corrective action framework. To be considered as
"well capitalized", the Bank must maintain a core capital ratio of not less
than 5% and a risk-based capital ratio of not less than 10%. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Bank's capital amounts and ratios are presented in the following table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ --------- ----------------- --------
(DOLLARS IN THOUSANDS)
AS OF JUNE 30, 1997
Tangible capital............ $73,470 5.61% $ 19,658 1.50% N/A N/A
Core capital................ $73,907 5.64% $ 52,440 4.00% $ 65,550 5.00%
Risk-based capital.......... $75,929 12.22% $ 49,702 8.00% $ 62,127 10.00%
AS OF JUNE 30, 1996
Tangible capital............ $63,980 5.92% $ 16,216 1.50% N/A N/A
Core capital................ $64,619 5.97% $ 32,451 3.00% $ 54,086 5.00%
Risk-based capital.......... $66,730 13.47% $ 39,622 8.00% $ 49,528 10.00%
In August 1993, the OTS adopted a regulation requiring that an amount be
added to an institution's risk-based capital requirement equal to 50% of the
decline in market value of portfolio equity ("MVPE") that exceeds 2% of the
institution's assets, under a hypothetical 200 basis points shock in interest
rates. MVPE is defined as the market value of assets, less the market value of
liabilities, plus or minus the market value of off-
66
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
balance sheet items. At the present time, the OTS has indefinitely postponed
the effective date of the rule. However, if the regulation had been in effect
at June 30, 1997, the Bank would still have exceeded its risk-based capital
requirement.
The Bank's management believes that, with respect to regulations, the Bank
will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Bank, such as increased
interest rates or a further downturn in the economy in areas where the Bank
has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its future minimum capital
requirements.
The previous table reflects information for the Bank. Savings and loan
holding companies, such as the Company, are not subject to capital
requirements for capital adequacy purposes or for prompt corrective action
requirements. Bank holding companies, however, are subject to such capital
requirements. The following summarizes the Company's regulatory capital
position under Bank holding company requirements.
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ --------- ----------------- --------
(DOLLARS IN THOUSANDS)
Stockholders' equity.... $ 97,270
Less: Goodwill.......... (1,421)
Deposit premium
intangible........... (14,497)
----------
Tangible capital, and
ratio to adjusted total
assets................. $ 81,352 6.23% $ 19,826 1.50%
========== =========
Add: Qualifying
intangible assets...... $ 438
----------
Tier 1(core) capital,
and ratio to adjusted
total assets........... $ 81,790 6.26% $ 39,175 3.00% $ 66,088 5.00%
========== ========= =========
Tier 1 (core) capital,
and ratio to risk-
weighted assets........ $ 81,790 13.26% $ 24,673 4.00% $ 37,010 6.00%
========== ========= =========
Less: Equity investments
and investments in real
estate................. $ (50)
Add: Allowance for loan
losses................. 2,073
----------
Total risk-based
capital, and ratio to
risk-weighted assets... $ 83,813 13.59% $ 49,346 8.00% $ 61,683 10.00%
========== ========= =========
Total assets............ $1,321,751
==========
Adjusted total assets... $1,305,833
==========
Risk-weighted assets.... $ 616,827
==========
Federal regulations impose certain limitations on the payment of dividends
and other capital distributions by the Bank. Under current regulations,
savings institutions, such as the Bank, that meet the fully phased-in capital
requirements, as defined, subsequent to a capital distribution are generally
permitted to make such capital distribution without OTS approval, so long as
they have not been notified of the need from more than normal supervision by
the OTS. The Bank has not been so notified and, therefore, may make capital
distributions during a calendar year equal to 100% of net income plus 50% of
the amount by which the lesser of the association's tangible, core or risk-
based capital exceeds its fully phased-in capital requirement for such capital
component, as measured at the beginning of the calendar year. At June 30,
1997, the Bank could have paid dividends totaling approximately $16.6 million.
67
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Q. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 1997 and 1996 were as follows:
JUNE 30, 1997 JUNE 30, 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents........ $ 10,729 $ 10,729 $ 11,629 $ 11,629
Investment securities............ 35,290 35,432 21,288 21,502
Mortgage-backed securities....... 288,539 291,125 346,068 344,331
FHLB of New York stock........... 12,413 12,413 8,052 8,052
---------- ---------- ---------- ----------
Total cash and investments....... 346,971 349,699 387,037 385,514
Loans held for sale.............. -- -- 88 88
Loans receivable, less allowance
for loan losses................. 931,451 923,822 652,483 643,560
---------- ---------- ---------- ----------
Total loans...................... 931,451 923,822 652,571 643,648
Accrued interest receivable,
net............................. 7,196 7,196 6,742 6,742
---------- ---------- ---------- ----------
Total financial assets........... $1,285,618 $1,280,717 $1,046,350 $1,035,904
========== ========== ========== ==========
Financial liabilities:
Deposits......................... $ 918,160 $ 919,385 $ 836,416 $ 837,587
FHLB of New York advances........ 205,465 205,919 105,000 103,856
Other borrowings................. 82,750 82,671 41,700 41,700
Mortgage escrow funds............ 8,855 8,855 5,930 5,930
Due to banks..................... 7,237 7,237 5,989 5,989
---------- ---------- ---------- ----------
Total financial liabilities...... $1,222,467 $1,224,067 $ 995,035 $ 995,062
========== ========== ========== ==========
JUNE 30, 1997 JUNE 30, 1996
--------------------- ---------------------
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Off-balance sheet financial
instruments:
Commitments to extend credit....... $ 9,692 $ -- $ 28,834 $ --
Unused lines of credit............. 17,366 -- 10,813 --
Commitments to purchase loans...... 32,660 -- 59,046 --
Interest rate swaps................ 70,000 169 20,000 138
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value:
Cash and Cash Equivalents--For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities and Mortgage-Backed Securities--For these securities,
fair values are based on quoted market prices.
Federal Home Loan Bank of New York Stock--For this security, the carrying
amount, which is par, is a reasonable estimate of fair value. All transactions
in the capital stock of the FHLB of New York are executed at par.
Loans Held for Sale--Fair value is based on the contractual sales price.
68
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans Receivable--Fair values are estimated for portfolios of loans with
similar financial characteristics. The total loan portfolio is first divided
into performing, held for sale and nonperforming categories. Performing loans
are then segregated into adjustable and fixed-rate interest terms. Fixed rate
loans are segmented by type, such as residential real estate mortgage, non-
residential, commercial real estate and consumer loans. Residential loans are
further segmented by maturity.
For loans, fair value is calculated by discounting scheduled future cash
flows through estimated maturity using a discount rate equivalent to the rate
at which the Company would currently make loans which are similar with regard
to collateral, maturity and type of borrower. The discounted value of the cash
flows is reduced by a credit risk adjustment based on internal loan
classifications. Based on the current composition of the Company's loan
portfolio, as well as both past experience and current economic conditions and
trends, future cash flows are adjusted by prepayment assumptions which shorten
the estimated remaining time to maturity and, therefore, impact the fair
market valuation.
Accrued Interest Receivable, Net--For these short-term assets, the carrying
amount is a reasonable estimate of fair value.
Deposits--The fair value of deposits with no stated maturity, such as
savings, money market and other demand accounts, is equal to the amount
payable on demand as of June 30, 1997 and 1996. Time deposits are segregated
by type and original term. The fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is equivalent to
the rate currently offered by the Company for deposits of similar type and
maturity.
Federal Home Loan Bank of New York Advances--The fair value of FHLB of New
York advances is based on the discounted value of contractual cash flows. The
discount rate is equivalent to the rate currently offered by the FHLB of New
York on borrowings of similar type and maturity.
Other Borrowings--For these short-term borrowings, the carrying amount is a
reasonable estimate of fair value.
Mortgage Escrow Funds and Due to Banks--For these short-term liabilities,
the carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit--No fair value is estimated for commitments to
extend credit since the fees collected on these commitments approximates the
amount of costs incurred.
Unused Lines of Credit--No estimated fair value is presented for unused
lines of credit because the rates associated with these lines are market
rates.
Commitments to Purchase Loans--No fair value is estimated due to the short-
term nature of these commitments.
Interest Rate Swaps--For this off-balance sheet financial instrument, fair
value represents the amount the Company would have to pay to terminate the
agreements based upon quoted market prices as provided by financial
institutions which are counter parties to the agreements.
R. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company at times has made loans to
and engaged in other financial transactions with its directors, officers and
employees. Such transactions are generally made on substantially the same
terms as those prevailing at the time for comparable transactions with others
and do not involve more than normal risk of collectibility.
69
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following sets forth an analysis of loans, all of which are current, to
directors, officers and employees:
JUNE 30,
----------------
1997 1996
------- -------
(IN THOUSANDS)
Balance, beginning of year.................................... $ 3,260 $ 3,193
New loans granted............................................. 1,178 789
Repayments/reductions......................................... (568) (722)
------- -------
Balance, end of year.......................................... $ 3,870 $ 3,260
======= =======
In addition to the above amount of loans, at June 30, 1997 and 1996, there
was $33,000 and $720 of outstandings on overdraft checking lines for
directors, officers and employees, respectively.
S. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS"), simplifying the standards previously found in APB
Opinion No. 15, "Earnings Per Share." The current presentation of primary EPS
is replaced with a presentation of basic EPS. Dual presentation of basic and
diluted EPS will be required on the face of the income statement as well as a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB Opinion No. 15. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. The
adoption of SFAS 128 is not expected to have a material effect on the
Company's financial condition or results of operations.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards to reporting and display
of comprehensive income and its components. SFAS 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The Company will be
required to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the statement of financial condition. SFAS 130 is effective
for fiscal years beginning after December 15, 1997, with reclassification of
earlier periods. The adoption of SFAS 130 is not expected to have a material
effect on the Company's financial condition or results of operations.
T. CONDENSED FINANCIAL INFORMATION OF PENNFED FINANCIAL SERVICES, INC. (PARENT
COMPANY ONLY)
The following are the condensed financial statements for PennFed, parent
company only, as of June 30, 1997 and 1996 and for the years ended June 30,
1997, 1996 and 1995 and should be read in conjunction with the Notes to
Consolidated Financial Statements. PennFed had no results of operations prior
to the Conversion on July 14, 1994 (See Note B).
70
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Condensed Statements of Financial Condition
JUNE 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
ASSETS
Cash........................................................... $ 27 $ 26
Intercompany overnight investment.............................. 8,628 8,729
------- -------
Total cash and cash equivalents.............................. 8,655 8,755
Investment in subsidiary bank.................................. 89,388 82,418
Intercompany receivable........................................ -- 2
------- -------
$98,043 $91,175
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities......................... $ 776 $ 611
Stockholders' equity........................................... 97,267 90,564
------- -------
$98,043 $91,175
======= =======
Condensed Statements of Operations
YEAR ENDED JUNE 30,
--------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
INCOME:
Interest income on intercompany balances................. $ 755 $1,210 $1,305
Interest income on investment securities................. -- -- 246
------ ------ ------
755 1,210 1,551
EXPENSES:
Other.................................................... 346 374 386
------ ------ ------
Income before undistributed net income of subsidiary
bank.................................................... 409 836 1,165
Equity in undistributed net income of subsidiary bank.... 6,625 7,310 4,894
------ ------ ------
Income before income taxes............................... 7,034 8,146 6,059
Income tax expense....................................... 148 305 419
------ ------ ------
NET INCOME............................................... $6,886 $7,841 $5,640
====== ====== ======
71
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Condensed Statements of Cash Flows
YEAR ENDED JUNE 30,
---------------------------
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 6,886 $ 7,841 $ 5,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiary bank............................... (6,625) (7,310) (4,894)
Amortization of investment securities
discount...................................... -- -- (246)
Amortization of cost of stock plans............ 716 438 440
(Increase) decrease in other assets............ (1) 142 (144)
Increase in other liabilities.................. 165 212 397
------- -------- --------
Net cash provided by operating activities.... 1,141 1,323 1,193
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiary bank................... -- -- (28,000)
Proceeds from maturities of investment
securities...................................... -- -- 10,000
Purchase of investment securities................ -- -- (9,754)
ESOP loan........................................ -- -- (4,760)
Proceeds from principal repayment on ESOP loan... 390 362 337
------- -------- --------
Net cash provided by (used in) investing
activities.................................. 390 362 (32,177)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock... -- -- 56,888
Purchases of treasury stock, net of re-issuance.. (644) (12,362) (6,472)
Payment of cash dividends........................ (987) -- --
------- -------- --------
Net cash provided by (used in) financing
activities.................................. (1,631) (12,362) 50,416
------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (100) (10,677) 19,432
Cash and cash equivalents, beginning of year..... 8,755 19,432 --
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR........... $ 8,655 $ 8,755 $ 19,432
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Income taxes................................. $ 131 $ 363 $ 229
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of treasury stock for MRP............. $ 423 $ -- $ 2,486
======= ======== ========
72
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
U. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-----------------------------------------
1996 1997
------------------------ ----------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income................ $19,716 $20,979 $22,001 $22,705
Total interest expense............... 11,830 12,971 13,697 14,575
------- ------- ------- -------
Net interest income.................. 7,886 8,008 8,304 8,130
Provision for loan losses............ 175 152 154 154
Non-interest income.................. 409 405 469 500
Non-interest expenses................ 9,235 4,381 4,403 4,366
Income tax expense (benefit)......... (346) 1,482 1,590 1,479
------- ------- ------- -------
Net income (loss).................. $ (769) $ 2,398 $ 2,626 $ 2,631
======= ======= ======= =======
Net income (loss) per common share:
Primary............................ $ (0.17) $ 0.51 $ 0.55 $ 0.57
======= ======= ======= =======
Fully diluted...................... $ (0.17) $ 0.51 $ 0.55 $ 0.55
======= ======= ======= =======
QUARTER ENDED
-----------------------------------------
1996 1997
------------------------ ----------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income................ $15,369 $16,612 $17,504 $18,638
Total interest expense............... 8,768 9,477 10,000 10,876
------- ------- ------- -------
Net interest income.................. 6,601 7,135 7,504 7,762
Provision for loan losses............ 110 150 150 200
Non-interest income.................. 564 584 507 547
Non-interest expenses................ 4,337 4,411 4,537 4,357
Income tax expense................... 1,070 1,242 1,304 1,495
------- ------- ------- -------
Net income......................... $ 1,648 $ 1,916 $ 2,020 $ 2,257
======= ======= ======= =======
Net income per common share:
Primary............................ $ 0.31 $ 0.37 $ 0.40 $ 0.47
======= ======= ======= =======
Fully diluted...................... $ 0.31 $ 0.37 $ 0.40 $ 0.47
======= ======= ======= =======
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed reporting a change of
accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Concerning Directors and Executive Officers
Information concerning Directors of the Registrant is incorporated herein by
reference from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 24, 1997, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation," a copy of which
will be filed not later than 120 days after the close of the fiscal year. For
information concerning Executive Officers of the Registrant who are not also
Directors, see "Executive Officers" in Part I of this Annual Report on Form
10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Information concerning compliance with the reporting requirements of Section
16(a) of the Securities Exchange Act of 1934 by Directors, Officers and ten
percent beneficial owners of the Registrant is incorporated herein by
reference from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 24, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 24, 1997, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation," a copy of which
will be filed not later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Registrant's
definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to
be held on October 24, 1997, except for information contained under the
headings "Compensation Committee Report on Executive Compensation" and "Stock
Performance Presentation," a copy of which will be filed not later than 120
days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Registrant's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on
October 24, 1997, except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock
Performance Presentation," a copy of which will be filed not later than 120
days after the close of the fiscal year.
74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The following information appearing in Part I, Item 8 of this Form 10-K is
incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 1997 and 1996
Consolidated Statements of Income for the Years Ended June 30, 1997, 1996
and 1995
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for Years Ended June 30, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
(A) (2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is not applicable.
REGULATION REFERENCE TO
S-K PRIOR FILING
EXHIBIT OR EXHIBIT
NUMBER DOCUMENT NUMBER
---------- ------------------------------------------------ --------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3(i) Certificate of Incorporation *
3(ii) Bylaws *
4 Instruments defining the rights of security *
holders, including indentures
4(i) Stockholder Protection Rights Agreement ***
9 Voting trust agreement None
10 Material contracts:
(a) Employee Stock Ownership Plan *
(b) 1995 Stock Option and Incentive Plan *
(c) Management Recognition Plan *
(d) Employment Agreement with Joseph L. LaMonica **
(e) Employment Agreement with Patrick D. **
McTernan
(f) Employment Agreement with Lucy T. Tinker **
11 Statement re: computation of per share earnings 11
12 Statements re: computation of ratios 12
13 Annual Report to security holders Not applicable
16 Letter re: change in certifying accountant Not applicable
18 Letter re: change in accounting principles None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to None
vote of security holders
23 Consents of independent auditors and counsel 23
24 Power of Attorney Not applicable
27 Financial Data Schedule 27
99 Additional Exhibits Not applicable
- --------
* Filed as exhibits to the Company's Registration Statement on Form S-1 under
the Securities Act of 1933, filed with the Securities and Exchange
Commission on March 25, 1994 (Registration No. 33-76854). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
75
** Filed as exhibits to the Company's Form 10-K under the Securities Act of
1934, filed with Securities and Exchange Commission on September 27, 1994.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
*** Filed as an exhibit to the Company's Registration Statement on Form 8-A
under the Securities Act of 1934, filed with the Securities and Exchange
Commission on March 28, 1996. This document is hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
(B) REPORTS ON FORM 8-K:
There were no reports filed on Form 8-K for the three month period ended
June 30, 1997.
76
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PENNFED FINANCIAL SERVICES, INC.
Date: September 24, 1997 /s/ Joseph L. LaMonica
By: _________________________________
JOSEPH L. LAMONICA
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(DULY AUTHORIZED REPRESENTATIVE)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ Joseph L. LaMonica /s/ William C. Anderson
By: _________________________________ By: _________________________________
JOSEPH L. LAMONICA WILLIAM C. ANDERSON
PRESIDENT, CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
Date: September 24, 1997
Date: September 24, 1997
/s/ Patrick D. McTernan /s/ Amadeu L. Carvalho
By: _________________________________ By: _________________________________
PATRICK D. MCTERNAN AMADEU L. CARVALHO
EXECUTIVE VICE PRESIDENT, GENERAL DIRECTOR
COUNSEL, SECRETARY AND DIRECTOR
Date: September 24, 1997
Date: September 24, 1997
/s/ Marvin D. Schoonover /s/ Mario Teixeira, Jr.
By: _________________________________ By: _________________________________
MARVIN D. SCHOONOVER MARIO TEIXEIRA, JR.
DIRECTOR
DIRECTOR
Date: September 24, 1997
Date: September 24, 1997
/s/ Lucy T. Tinker /s/ Jeffrey J. Carfora
By: _________________________________ By: _________________________________
LUCY T. TINKER JEFFREY J. CARFORA
EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT AND CHIEF
OPERATING OFFICER FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
(PRINCIPAL ACCOUNTING OFFICER)
Date: September 24, 1997 Date: September 24, 1997
77
INDEX TO EXHIBITS
EXHIBIT
NUMBER
-------
11 Computation of per share earnings.....................................
12 Computation of Ratios of Earnings to Fixed Charges....................
21 Subsidiaries of the registrant........................................
23 Consent of Independent Auditors.......................................
27 Financial Data Schedule...............................................