UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2005
-------------------------------------------------
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number: 0-24040
--------------------------------------------------------
PENNFED FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 22-3297339
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 669-7366
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X|. NO |_|.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_|. Accelerated filer |X|. Non-accelerated filer |_|.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES |_|. NO |_|.
As of February 3, 2006, there were issued and outstanding 12,989,650 shares
of the Registrant's Common Stock.
1
PennFed Financial Services, Inc. and Subsidiaries
Form 10-Q
Contents of Report
Page
Number
------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. - Financial Statements
Consolidated Statements of Financial Condition - December 31, 2005
(unaudited) and June 30, 2005 3
Consolidated Statements of Income (unaudited) - For the three and
six months ended December 31, 2005 and 2004 4
Consolidated Statements of Comprehensive Income, (unaudited) - For
the three and six months ended December 31, 2005 and 2004 5
Consolidated Statements of Changes in Stockholders' Equity (unaudited) -
For the six months ended December 31, 2005 and 2004 6
Consolidated Statements of Cash Flows (unaudited) - For the six months
ended December 31, 2005 and 2004 7
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. - Controls and Procedures 23
PART II - OTHER INFORMATION
- ---------------------------
Item 1. - Legal Proceedings 25
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. - Defaults Upon Senior Securities 25
Item 4. - Submission of Matters to a Vote of Security Holders 25
Item 5. - Other Information 25
Item 6. - Exhibits 26
SIGNATURES 27
- ----------
EXHIBITS
- --------
Exhibit Index 28
Exhibit 31.1 - Certification Required by Securities Exchange Act of 1934 Rule
13a -14 (a) (Chief Executive Officer) 30
Exhibit 31.2 - Certification Required by Securities Exchange Act of 1934
Rule 13a -14 (a) (Chief Financial Officer) 31
Exhibit 32 - Certifications Required by Section 1350 of Title 18 of the
United States Code 32
2
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, June 30,
2005 2005
---------- ----------
(unaudited) (audited)
(Dollars in thousands)
ASSETS
Cash and cash equivalents ....................................................... $ 17,988 $ 15,220
Investment securities available for sale, at market value, amortized cost of
$4,946 and $4,849 at December 31, 2005 and June 30, 2005 ................... 4,987 5,011
Investment securities held to maturity, at amortized cost, market value of
$413,059 and $406,726 at December 31, 2005 and June 30, 2005 ............... 420,418 405,498
Mortgage-backed securities held to maturity, at amortized cost, market value
of $68,503 and $79,109 at December 31, 2005 and June 30, 2005 .............. 68,978 78,201
Loans held for sale ............................................................. 242 4,826
Loans receivable, net of allowance for loan losses of $5,913 and $6,050
at December 31, 2005 and June 30, 2005 ..................................... 1,563,078 1,460,654
Premises and equipment, net ..................................................... 20,265 20,903
Real estate owned, net .......................................................... 502 --
Federal Home Loan Bank of New York stock, at cost ............................... 25,028 22,391
Accrued interest receivable, net ................................................ 10,459 9,808
Bank owned life insurance ("BOLI") .............................................. 23,637 23,202
Other assets .................................................................... 5,683 4,837
---------- ----------
$2,161,265 $2,050,551
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits ................................................................... $1,386,375 $1,339,491
Federal Home Loan Bank of New York advances ................................ 450,465 415,465
Other borrowings ........................................................... 141,770 107,952
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $1,196 and $1,218 at December 31, 2005 and
June 30, 2005 ............................................................ 42,104 42,082
Mortgage escrow funds ...................................................... 10,262 10,398
Accounts payable and other liabilities ..................................... 6,117 11,109
---------- ----------
Total liabilities .......................................................... 2,037,093 1,926,497
---------- ----------
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, 13,015,782
and 13,280,038 shares issued and outstanding at December 31, 2005
and June 30, 2005 ..................................................... 130 133
Additional paid-in capital ................................................. 38,703 39,092
Retained earnings .......................................................... 85,315 84,734
Accumulated other comprehensive income, net of taxes ....................... 24 95
---------- ----------
Total stockholders' equity ................................................. 124,172 124,054
---------- ----------
$2,161,265 $2,050,551
========== ==========
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Six months ended
December 31, December 31,
--------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans ....................... $ 21,112 $ 18,820 $ 41,568 $ 37,297
Interest and dividends on investment securities .. 6,329 6,023 12,592 12,121
Interest on mortgage-backed securities ........... 909 1,156 1,873 2,386
------------ ------------ ------------ ------------
28,350 25,999 56,033 51,804
------------ ------------ ------------ ------------
Interest Expense:
Deposits ......................................... 10,198 7,312 19,455 14,324
Borrowed funds ................................... 7,619 7,008 14,994 14,022
Junior subordinated deferrable interest debentures 898 740 1,757 1,448
------------ ------------ ------------ ------------
18,715 15,060 36,206 29,794
------------ ------------ ------------ ------------
Net Interest and Dividend Income Before Provision
for Loan Losses .................................. 9,635 10,939 19,827 22,010
Provision for Loan Losses ............................. -- -- -- --
------------ ------------ ------------ ------------
Net Interest and Dividend Income After Provision
for Loan Losses .................................. 9,635 10,939 19,827 22,010
------------ ------------ ------------ ------------
Non-Interest Income:
Fees and service charges ......................... 704 867 4,174 1,593
Income on BOLI ................................... 219 121 435 249
Net gain on sales of loans ....................... 21 70 143 94
Net gain (loss) from real estate operations ...... 2 157 (1) 157
Other ............................................ 153 140 334 362
------------ ------------ ------------ ------------
1,099 1,355 5,085 2,455
------------ ------------ ------------ ------------
Non-Interest Expenses:
Compensation and employee benefits ............... 3,067 3,079 6,326 6,272
Extinguishment of debt ........................... -- -- 1,351 --
Equipment ........................................ 538 543 1,509 1,078
Net occupancy expense ............................ 594 559 1,179 1,098
Advertising ...................................... 165 227 299 394
Federal deposit insurance premium ................ 45 43 87 84
Amortization of intangible assets ................ -- 454 -- 907
Other ............................................ 979 1,276 2,390 2,467
------------ ------------ ------------ ------------
5,388 6,181 13,141 12,300
------------ ------------ ------------ ------------
Income Before Income Taxes ............................ 5,346 6,113 11,771 12,165
Income Tax Expense .................................... 1,892 2,133 4,185 4,397
------------ ------------ ------------ ------------
Net Income ............................................ $ 3,454 $ 3,980 $ 7,586 $ 7,768
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic ............................................ 13,086,856 13,718,508 13,175,181 13,727,069
============ ============ ============ ============
Diluted .......................................... 13,509,140 14,114,728 13,604,862 14,187,618
============ ============ ============ ============
Net income per common share:
Basic ............................................ $ 0.26 $ 0.29 $ 0.58 $ 0.57
============ ============ ============ ============
Diluted .......................................... $ 0.26 $ 0.28 $ 0.56 $ 0.55
============ ============ ============ ============
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended Six months ended
December 31, December 31,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
(unaudited) (unaudited)
(In thousands)
Net income .................................................. $ 3,454 $ 3,980 $ 7,586 $ 7,768
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period on
investment securities available for sale, net of tax .... (17) (8) (71) 46
------- ------- ------- -------
Comprehensive income ........................................ $ 3,437 $ 3,972 $ 7,515 $ 7,814
======= ======= ======= =======
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended December 31, 2005 and 2004
---------------------------------------------------
(unaudited)
Accumulated
Serial Additional Other
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income Total
--------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Balance at June 30, 2004 ........... $ -- $ 9 $ 42,839 $ 75,523 $ 28 $ 118,399
Repurchase of 359,400
outstanding shares ............... (2) (896) (4,828) (5,726)
Issuance of 432,306 shares of
stock for options exercised and
Dividend Reinvestment Plan
("DRP") .......................... 2 1,079 247 1,328
Tax benefit from stock option plan . 2,863 2,863
Cash dividends of $0.10 per
common share ..................... (1,343) (1,343)
Unrealized holding gains on
investment securities available
for sale, net of income taxes
of $31 ........................... 46 46
Two-for-one split in the form of
a 100% stock dividend ............ 128 (128) --
Net income for the six months
ended December 31, 2004 .......... 7,768 7,768
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2004 ....... $ -- $ 137 $ 45,885 $ 77,239 $ 74 $ 123,335
========= ========= ========= ========= ========= =========
Balance at June 30, 2005 ........... $ -- $ 133 $ 39,092 $ 84,734 $ 95 $ 124,054
Repurchase of 327,200
outstanding shares ............... (3) (815) (5,333) (6,151)
Issuance of 62,944 shares of
stock for options exercised and
DRP .............................. 157 131 288
Tax benefit from stock option plan . 269 269
Cash dividends of $0.14 per
common share ..................... (1,803) (1,803)
Unrealized holding losses on
investment securities available
for sale, net of income taxes
of $(50) ......................... (71) (71)
Net income for the six months
ended December 31, 2005 .......... 7,586 7,586
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2005 ....... $ -- $ 130 $ 38,703 $ 85,315 $ 24 $ 124,172
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
6
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended December 31,
-----------------------------
2005 2004
----------- --------------
(unaudited) (unaudited)
(In thousands)
Cash Flows from Operating Activities:
Net income ............................................................ $ 7,586 $ 7,768
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans ............................................ (143) (94)
Proceeds from sales of loans originated for sale ...................... 4,857 2,771
Originations of loans held for sale ................................... (4,078) (5,333)
Net gain on sales of real estate owned ................................ -- (157)
Amortization of investment and mortgage-backed securities
premium, net ........................................................ 219 138
Depreciation and amortization ......................................... 1,303 906
Tax benefit related to stock options .................................. 269 2,863
Amortization of intangible assets ..................................... -- 907
Amortization of premiums on loans and loan fees ....................... 1,007 900
Amortization of junior subordinated debentures issuance costs ......... 22 22
Income on BOLI ........................................................ (435) (249)
Increase in accrued interest receivable, net of accrued
interest payable .................................................... (921) (855)
(Increase) decrease in other assets ................................... (846) 147
Decrease in accounts payable and other liabilities .................... (4,942) (3,697)
Decrease in mortgage escrow funds ..................................... (136) (2,722)
Other, net ............................................................ -- 5
--------- ---------
Net cash provided by operating activities ............................. 3,762 3,320
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities held to maturity .... -- 12,929
Purchases of investment securities held to maturity ................... (14,977) (10,000)
Purchases of investment securities available for sale ................. (97) (85)
Proceeds from principal repayments of mortgage-backed securities
held to maturity .................................................... 9,061 12,117
Net outflow from loan originations net of principal repayments of loans (123,492) (90,520)
Proceeds from loans sold .............................................. 23,531 6,502
Purchases of premises and equipment ................................... (665) (401)
Net inflow (outflow) from real estate owned activity .................. (24) 630
Purchases of BOLI ..................................................... -- (10,000)
(Purchases) redemptions of Federal Home Loan Bank of New York stock ... (2,637) 1,671
--------- ---------
Net cash used in investing activities ................................. (109,300) (77,157)
--------- ---------
Cash Flows from Financing Activities:
Net increase in deposits .............................................. 47,154 66,270
Proceeds from advances from the Federal Home Loan Bank of New York
and other borrowings ................................................ 100,000 29,475
Repayment of advances from the Federal Home Loan Bank of New
York and other borrowings ........................................... (65,000) (50,000)
Increase in other short term borrowings ............................... 33,818 33,803
Cash dividends paid ................................................... (1,803) (1,343)
Repurchases of outstanding shares, net of reissuances ................. (5,863) (4,398)
--------- ---------
Net cash provided by financing activities ............................. 108,306 73,807
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ....................... 2,768 (30)
Cash and Cash Equivalents, Beginning of Period ............................. 15,220 14,859
--------- ---------
Cash and Cash Equivalents, End of Period ................................... $ 17,988 $ 14,829
========= =========
7
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Six months ended December 31,
-----------------------------
2005 2004
------------- -------------
(unaudited) (unaudited)
(In thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest ...................................................................... $ 36,151 $ 30,856
========= =========
Income taxes .................................................................. $ 5,563 $ 384
========= =========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at lower of cost or market $ 19,583 $ 6,428
========= =========
Transfer of loans receivable to real estate owned, net ........................ $ 477 $ 472
========= =========
See notes to consolidated financial statements.
8
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries (including Penn Federal Savings
Bank (the "Bank")). These interim consolidated financial statements included
herein should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended June 30, 2005. The interim consolidated financial
statements reflect all normal and recurring adjustments which are, in the
opinion of management, considered necessary for a fair presentation of the
financial condition and results of operations for the periods presented. There
were no adjustments of a non-recurring nature recorded during the six months
ended December 31, 2005 and 2004. The interim results of operations presented
are not necessarily indicative of the results for the full year.
2. Supplemental Executive Retirement Plan and Directors' Retirement Plan
The Company currently provides for a Supplemental Executive Retirement Plan
("SERP") and a Directors' Retirement Plan ("DP") for certain key executive
employees and directors. Benefits provided are based primarily on years of
service and compensation or fees. Both plans are unfunded and at December 31,
2005, the benefit obligation of $1,100,000 was included in Accounts payable and
other liabilities in the Consolidated Statements of Financial Condition. At
December 31, 2005, the assumptions used in calculating the benefit obligation
included a 4% compensation increase rate and a discount rate of 5%. At December
31, 2004, the assumptions used in calculating the benefit obligation included a
4% compensation increase rate and a discount rate of 7%. The accounting for
these postretirement benefits is in accordance with Statement of Financial
Accounting Standards No. 87 "Employers' Accounting for Pensions." The Company
has not made, and does not expect to make, any contributions to these plans
during the fiscal year ending June 30, 2006.
Net periodic pension cost for the Company's SERP and DP included the following
components:
Three months ended December 31,
------------------------------
2005 2004
------------- --------------
SERP DP SERP DP
----- ----- ----- -----
(In thousands)
Service cost ........................... $ 41 $ 8 $ 61 $ 11
Interest cost .......................... 14 2 7 1
Amortization of prior service cost ..... 6 1 (2) (1)
----- ----- ----- -----
Net periodic pension expense ........... $ 61 $ 11 $ 66 $ 11
===== ===== ===== =====
Six months ended December 31,
------------------------------
2005 2004
------------- --------------
SERP DP SERP DP
----- ----- ----- -----
(In thousands)
Service cost ........................... $ 314 $ 40 $ 122 $ 22
Interest cost .......................... 29 4 14 2
Amortization of prior service cost ..... 13 2 (4) (2)
----- ----- ----- -----
Net periodic pension expense ........... $ 356 $ 46 $ 132 $ 22
===== ===== ===== =====
9
3. Computation of Earnings Per Share ("EPS")
The computation of EPS is presented in the following table.
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Net income ................................... $ 3,454 $ 3,980 $ 7,586 $ 7,768
=========== =========== =========== ===========
Number of shares outstanding:
Weighted average shares issued and outstanding 13,086,856 13,718,508 13,175,181 13,727,069
Plus: Average common stock equivalents ....... 422,284 396,220 429,681 460,549
----------- ----------- ----------- -----------
Average diluted shares ....................... 13,509,140 14,114,728 13,604,862 14,187,618
=========== =========== =========== ===========
Earnings per common share:
Basic ................................ $ 0.26 $ 0.29 $ 0.58 $ 0.57
=========== =========== =========== ===========
Diluted .............................. $ 0.26 $ 0.28 $ 0.56 $ 0.55
=========== =========== =========== ===========
4. Stockholders' Equity and Regulatory Capital
During the three months ended December 31, 2005, the Company repurchased 256,600
shares of its outstanding common stock at prices ranging from $17.10 to $19.57
per share, for a total cost of $4,792,000. During the six months ended December
31, 2005, the Company repurchased 327,200 shares of its outstanding common stock
at prices ranging from $17.10 to $19.75 per share, for a total cost of
$6,151,000.
The Bank's regulatory capital amounts and ratios are presented in the following
table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
(Dollars in thousands)
As of December 31, 2005
Tangible capital, and ratio to
adjusted total assets .......... $168,450 7.80% $ 32,388 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets .......... $168,450 7.80% $ 86,367 4.00% $107,959 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ........... $168,450 14.38% N/A N/A $ 70,284 6.00%
Risk-based capital, and ratio to
risk-weighted assets ........... $174,381 14.89% $ 93,712 8.00% $117,141 10.00%
As of June 30, 2005
Tangible capital, and ratio to
adjusted total assets .......... $169,765 8.28% $ 30,750 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets .......... $169,765 8.28% $ 82,001 4.00% $102,501 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ........... $169,765 15.29% N/A N/A $ 66,614 6.00%
Risk-based capital, and ratio to
risk-weighted assets ........... $175,880 15.84% $ 88,819 8.00% $111,024 10.00%
The previous table reflects information for the Bank. Savings and loan holding
companies, such as PennFed, are not subject to capital requirements for capital
adequacy purposes or for prompt corrective action requirements. Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
The consolidated financial statements are prepared in conformity with U.S.
generally accepted accounting principles. The preparation of the financial
statements requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While the
Company bases estimates on historical experience, current information and other
factors deemed to be relevant, actual results could differ from those estimates.
Management believes the following policies are both important to the reported
financial condition and results of operations and require subjective judgments
and are, therefore, considered critical accounting policies.
Allowance for Loan Losses - The allowance for loan losses is established through
charges to income based on management's evaluation of the probable credit losses
presently inherent in the Company's loan portfolio. This evaluation, which
includes a review of loans for which full collectibility may not be reasonably
assured, considers among other matters, loan classifications, the estimated fair
value of the underlying collateral, economic conditions, historical loan loss
experience, portfolio growth and composition and other factors that warrant
recognition in providing for an adequate loan loss allowance.
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 loan losses on existing loans, the provision for loan losses
is increased to the level considered necessary to provide an adequate allowance.
The allowance is an amount that management believes will be adequate to absorb
probable losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of the loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrowers' ability to pay.
Economic conditions may result in the necessity to change the allowance in order
to react to deteriorating financial conditions of the Company's borrowers. As a
result, additional provisions on existing loans may be required in the future if
borrowers' financial conditions deteriorate or if real estate values decline.
Where appropriate, reserves are allocated to individual loans that exhibit
actual or probable credit weakness. For example, reserves may be specifically
assigned for loans that are 90 days or more past due, loans where the borrower
has filed for bankruptcy or loans identified by the Company's internal loan
review process. Reserves are based upon management's estimate of the borrower's
ability to repay the loan given the availability of collateral, other sources of
cash flow and legal options available to the Company. For loans not subject to
specific reserve allocations, loss rates by loan category are applied. A reserve
is maintained to recognize the imprecision in estimating and measuring loss when
evaluating reserves for individual loans or pools of loans. Reserves on
individual loans are reviewed no less frequently than quarterly and adjusted as
appropriate.
The Company has not substantively changed any aspect of its overall approach in
its determination of the level of the allowance for loan losses. There have been
no material changes in assumptions or estimation techniques as compared to prior
periods that impacted the determination of the current period allowance.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and earnings could be significantly affected if circumstances differ
substantially from the assumptions used in making the final determination.
Future additions to the Company's allowance will be the result of periodic loan,
property and collateral reviews and thus cannot be predicted in advance. In
addition, federal regulatory agencies, as an integral part of the examination
process, periodically review the Company's allowance for loan losses. These
agencies may require the Company to record additions to the allowance level
based upon their assessment of the information available to them at the time of
examination.
Accounting for Income Taxes - In the accounting for income taxes, the Company
records amounts that represent taxes payable for the current year as well as
deferred tax assets and liabilities arising from transactions that have
differing effects for financial statements and tax returns. Judgment is required
in assessing the future tax effects of transactions that have been recognized in
the Company's consolidated financial statements or tax returns. Fluctuations in
the actual tax effects in future years could have an impact on the Company's
consolidated financial condition or results of operations.
11
Forward-Looking Statements
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in laws and regulations and in policies of
regulatory agencies, fluctuations in interest rates and demand for loans in the
Company's market area, the credit risks of lending activities, including changes
in the level and direction of loan delinquencies and write-offs and changes in
estimates of the adequacy of the allowance for loan losses, the Company's
ability to attract and retain depositors and to obtain cost-effective funding,
the relationship of short-term interest rates to long-term interest rates and
the Company's ability to manage its interest rate risk, competition and
terrorist acts that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above, as well as other factors, could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Company will not undertake - and specifically declines any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
these statements or to reflect the occurrence of anticipated or unanticipated
events.
Overview
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 has 25 full service branch offices
located in New Jersey. The Company attracts deposits from the general public and
uses these deposits, together with borrowings and other funds, to originate and
purchase one- to four-family residential mortgage loans, and, to a lesser
extent, to originate commercial and multi-family real estate and consumer loans.
The Company also invests in mortgage-backed securities secured by one- to
four-family residential mortgages and U.S. government agency obligations.
Through a relationship with an unaffiliated third party, the Company offers
insurance and uninsured non-deposit investment products to the Company's
customers and members of the general public. A wholly-owned subsidiary of the
Company participates in the ownership of a title insurance agency.
The Company's loan portfolio growth is dependent primarily on its ability to
provide the products and services that meet the needs of the customers in its
market area. The Company offers fixed rate, adjustable rate and balloon mortgage
loans for residential and commercial purposes, as well as home equity, consumer
loans and non-mortgage business loans, with a variety of terms. Residential
first mortgage loans are the largest part of the portfolio, representing
approximately 78.4% at December 31, 2005. The level of interest rates also has a
significant impact on the ability of the Company to originate loans and on the
amount of prepayment activity experienced by the Company. Since June 30, 2005,
the Company's net loans receivable and loans held for sale increased $97.8
million. This increase was primarily attributable to strong origination levels
in one- to four-family residential and consumer loans and the absence of
accelerated prepayments experienced in prior periods when market interest rates
were declining. During the six months ended December 31, 2005, the Company sold
$28.2 million of fixed rate loans as a means to assist in the management of
interest rate risk.
The retention and the recruitment of profitable deposit customers are vital to
PennFed's ability to generate liquid funds and to support the growth of
non-interest income. The number of deposit accounts at December 31, 2005 was
relatively the same as the number of accounts at June 30, 2005; however, the
average deposit balance per account, excluding wholesale certificates of
deposit, has increased 3.6% since June 30, 2005. The Company offers a number of
different deposit products and uses this product mix along with a strong focus
on customer service to attract customers and to build depositor relationships.
The level of interest rates also significantly affects the level of the
Company's deposits. Since June 30, 2005, deposits increased $46.9 million,
primarily due to a $57.2 million increase in retail certificates of deposit
partially offset by a $10.4 million decrease in core deposits (checking, money
market and savings accounts). Checking and money market account balances
increased $39.6 million since June 30, 2005, while savings accounts decreased
$50.0 million. The decrease in savings accounts since June 30, 2005 was
attributable to a rise in short term interest rates, which has shifted
temporarily "parked" savings account funds to higher yielding deposit
12
alternatives. This shift in temporarily "parked" savings accounts has also led
to a portion of the increase in checking and money market accounts, as these
accounts are more liquid.
The Company's future loan and deposit growth is, to a large extent, directly
tied to the level of interest rates. If long-term interest rates rise,
origination levels may be reduced from the prior periods. Growth in the loan
pipeline will depend on the Company's ability to successfully seek out customers
in spite of the higher cost of borrowing for the customer. Loan growth driven by
borrower demand will also depend on the strength of the economy in the Company's
market area. With rising interest rates and/or deteriorating economic
conditions, loan origination volumes would likely be lower than recent periods
and a reduction in the prepayment of loans currently in portfolio would be
expected. The Company has continued its loan sale strategy with respect to new
fixed rate residential loan product in order to assist in the management of
interest rate risk associated with keeping longer-term loans on the balance
sheet. With respect to deposits, while an increase in interest rates would
increase the Company's cost of funds, it would also provide the Company with an
additional opportunity for attracting depositors, some of whom may have sought
higher returns with mutual funds and other non-deposit investment products when
market rates were lower. The Company remains confident that by offering
competitively priced products and by striving for superior service, it will be
able to maintain profitable levels of loans and deposits.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan,
mortgage-backed securities and investment portfolios and its cost of funds,
consisting of the interest paid on deposits and borrowings. General economic and
competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities, also significantly affect the
Company's results of operations. Future changes in applicable laws, regulations
or government policies may also have a material impact on the Company.
Growth in the loan portfolio at a lower average yield, combined with a higher
cost of funds on increased deposits and other borrowings contributed to a
compression in the net interest margin for the six months ended December 31,
2005, when compared to the prior year period. However, compared to the six
months ended December 31, 2004, the lower level of loan prepayments and greater
amount of loan originations during the six months ended December 31, 2005
positively impacted the Company's interest income by increasing the average
balance of loans outstanding. Interest income for the six months ended December
31, 2005 increased $4.2 million, compared to the prior year period. The
Company's interest income is primarily driven by interest earned on residential
first mortgage loans, which increased $3.1 million for the six months ended
December 31, 2005, when compared to the same period in the prior year. Higher
cost of funds on deposits and other borrowings, due to the short term interest
rate environment, combined with an increase in the average balance of deposits
and other borrowings, were the primary factors responsible for an increase of
$6.4 million in interest expense on deposits and borrowings for the current year
period, when compared to the six months ended December 31, 2004. Overall, net
interest income decreased $2.2 million and the net interest margin decreased
from 2.35% to 1.97% during the six months ended December 31, 2005 compared to
the prior year period.
Non-interest income during the current year period increased $2.6 million, when
compared to the level in the prior year period. During the six months ended
December 31, 2005, increases in fees and service charges, net gain on sales of
loans and income on BOLI were partially offset by a decrease in net gain (loss)
from real estate operations and other non-interest income, when compared to the
prior year period. Fees and service charges, primarily loan fees, accounted for
the largest variance between the current and prior year periods. This variance
was primarily due to a $2.7 million prepayment premium on a large-balance
commercial real estate loan that was received during the three months ended
September 30, 2005.
Non-interest expenses increased $841,000 during the six months ended December
31, 2005, compared to the prior year period. Included in non-interest expenses
for the six months ended December 31, 2005 was a $1.4 million prepayment penalty
on certain Federal Home Loan Bank ("FHLB") of New York advances prepaid. $35.0
million of FHLB of New York advances with a weighted average interest rate of
5.95% and a weighted average remaining term of 28 months were replaced with
$35.0 million of new FHLB of New York advances with a weighted average interest
rate of 4.20% and a weighted average remaining term of 43 months. In addition,
current period expenses not occurring during the six months ended December 31,
2004 included acceleration of depreciation on branch automation system software
no longer utilized, an increase in the Company's obligation under certain
long-term benefit plans and continued costs associated with Sarbanes-Oxley
compliance.
The Company's future earnings are inherently tied to the level of interest rates
prevailing in the economic environment in which the Company operates. If
interest rates increase, the Company's interest expense on deposits and
wholesale borrowings will increase at a faster pace than the effects that will
be seen in the Company's interest income on loans, investment securities and
mortgage-backed securities. This effect on interest expense is due to the
short-term
13
repricing characteristics of a portion of the Company's deposit and
borrowing portfolios. As for interest income, loan commitments, generally locked
in at issuance, will result in loans closed at below-market rates if rates
continue to rise. As interest rates rise, a decline in loan prepayments and in
prepayments on mortgage-backed securities will reduce cashflows available for
reinvestment at higher rates. By emphasizing the origination of adjustable rate
and biweekly loan products and continuing the sale of long-term fixed rate
residential loans, while also focusing on increasing the balance of core
deposits and longer term certificates of deposit and borrowings, the Company
will endeavor to better position itself to mitigate the effects of rising
interest rates.
Financial Condition
Assets. Total assets increased $110.7 million to $2.161 billion at December 31,
2005 from $2.051 billion at June 30, 2005. This increase was primarily due to a
$102.4 million increase in net loans receivable, reflecting strong loan
origination levels and the absence of accelerated loan prepayment activity, and
a $14.9 million increase in investment securities held to maturity partially
offset by a $9.2 million decrease in mortgage-backed securities held to
maturity.
Liabilities. Deposits increased $46.9 million to $1.386 billion at December 31,
2005 from $1.339 billion at June 30, 2005. This increase was primarily due to a
$57.2 million increase in retail certificates of deposit partially offset by a
$10.4 million decrease in core deposits (checking, money market and savings
accounts). At December 31, 2005, checking and money market accounts increased
$39.6 million while savings accounts decreased $50.0 million, when compared to
June 30, 2005. At December 31, 2005, FHLB of New York advances and other
borrowings totaled $592.2 million, reflecting a $68.8 million increase from
$523.4 million at June 30, 2005.
Stockholders' Equity. Stockholders' equity at December 31, 2005 totaled $124.2
million compared to $124.1 million at June 30, 2005. The increase primarily
reflects the net income recorded for the six months ended December 31, 2005 and
the exercise of stock options, including the related tax effect, partially
offset by the repurchase of 327,200 shares of the Company's outstanding stock at
an average price of $18.80 per share and the declaration of cash dividends.
Results of Operations
General. For the three months ended December 31, 2005, net income was $3.5
million, or $0.26 per diluted share, compared to net income of $4.0 million, or
$0.28 per diluted share, for the comparable prior year period. For the six
months ended December 31, 2005, net income was $7.6 million, or $0.56 per
diluted share. These results compare to net income of $7.8 million, or $0.55 per
diluted share, for the six months ended December 31, 2004.
Interest and Dividend Income. Interest and dividend income for the three and six
months ended December 31, 2005 increased to $28.4 million and $56.0 million,
respectively, from $26.0 million and $51.8 million for the three and six months
ended December 31, 2004. In general, the increases in interest and dividend
income reflect a higher level of interest-earning assets due to strong loan
originations of one- to four-family residential and consumer loans and the
slowdown in prepayments in the Company's loan and mortgage-backed securities
portfolios during the current year periods compared to the prior year periods.
Average interest-earning assets were $2.067 billion and $2.042 billion for the
three and six months ended December 31, 2005, compared to $1.901 billion and
$1.891 billion for the three and six months ended December 31, 2004,
respectively. The average yield earned on interest-earning assets increased
slightly to 5.46% and 5.47% for the three and six months ended December 31, 2005
from 5.45% and 5.46% for the three and six months ended December 31, 2004.
Interest income on residential one- to four-family mortgage loans for the three
and
14
six months ended December 31, 2005 increased $1.6 million and $3.1 million,
respectively, when compared to the prior year periods. The increases in interest
income on residential one- to four-family mortgage loans for the three and six
months ended December 31, 2005 were due to increases in the average balance of
residential one- to four-family mortgage loans outstanding of $141.0 million and
$135.6 million, respectively, as the result of strong origination levels and a
slowdown in prepayments during the current year periods. For the three and six
months ended December 31, 2005, the residential one- to four-family mortgage
loan portfolio averaged $1.215 billion and $1.194 billion, respectively,
compared to $1.074 billion and $1.059 billion for the prior year periods.
Somewhat offsetting the increases in the average balances of residential one- to
four-family mortgage loans were decreases in the average yield earned on this
loan portfolio to 5.23% for both the three and six months ended December 31,
2005, respectively, from 5.31% and 5.32% for the comparable prior year periods,
reflecting the payoff or refinance of higher yielding loans and the origination
of lower yielding loans over the last twelve months.
Interest income on commercial and multi-family real estate loans decreased
$57,000 and $144,000 for the three and six months ended December 31, 2005,
respectively, when compared to the prior year periods. The decreases in interest
income on commercial and multi-family real estate loans were partially
attributable to decreases in the average outstanding balance of these loans of
$666,000 and $2.4 million for the three and six months ended December 31, 2005,
respectively, when compared to the prior year periods. In addition, the average
yield earned on commercial and multi-family real estate loans decreased to 6.71%
and 6.77% for the three and six months ended December 31, 2005, respectively,
when compared to 6.85% and 6.87% for the three and six months ended December 31,
2004. As with other loans, the payoff of higher yielding loans and the
origination of loans at lower market interest rates resulted in declines in the
yield of the commercial and multi-family real estate loan portfolio.
Interest income on consumer loans increased $724,000 and $1.3 million for the
three and six months ended December 31, 2005, respectively, when compared to the
prior year periods. The increases in interest income on consumer loans were
partially attributable to increases in the average outstanding balance on these
loans. The average outstanding balance increased $40.0 million and $35.4 million
for the three and six months ended December 31, 2005, respectively, when
compared to the prior year periods, due primarily to higher origination levels
and reduced prepayments. Also contributing to the increase in interest income on
consumer loans is an increase in the average yield earned on these loans. The
average yield earned on consumer loans increased to 5.78% and 5.70% for the
three and six months ended December 31, 2005, respectively, from 5.31% and 5.26%
for the comparable prior year periods.
Interest income on investment securities and other interest-earning assets
increased $306,000 and $471,000 for the three and six months ended December 31,
2005, respectively, when compared to the prior year periods. The increases in
interest income on investment securities and other interest-earning assets for
the three and six months ended December 31, 2005 were partially due to increases
of $5.0 million and $2.5 million in the average balance outstanding,
respectively, when compared to the prior year periods. Further adding to the
increases in interest income on investment securities and other interest-earning
assets were increases in the average yield earned on these securities and other
interest-earning assets. The average yield increased to 5.59% and 5.58% for the
three and six months ended December 31, 2005, respectively, compared to 5.38%
and 5.40% for the three and six months ended December 31, 2004.
Interest income on the mortgage-backed securities portfolio decreased $247,000
and $513,000 for the three and six months ended December 31, 2005, respectively,
when compared to the prior year periods. The decreases in interest income on
mortgage-backed securities were primarily due to decreases in the average
outstanding balance of these securities. The average outstanding balance on
mortgage-backed securities decreased $19.4 million and $19.9 million for the
three and six months ended December 31, 2005, respectively, compared to the
three and six months ended December 31, 2004. The average yield earned on
mortgage-backed securities remained relatively unchanged from the prior year
periods at 5.10% and 5.09% for the three and six months ended December 31, 2005,
respectively, compared to 5.10% for both the three and six months ended December
31, 2004.
Interest Expense. Interest expense increased $3.7 million and $6.4 million for
the three and six months ended December 31, 2005, respectively, when compared to
the prior year periods. For the three and six months ended December 31, 2005,
the Company's cost of funds increased, as well as the balance of total average
deposits and borrowings, when compared to the prior year periods. The average
rate on deposits and borrowings was 3.70% and 3.63% for the three and six months
ended December 31, 2005, respectively, an increase from 3.25% and 3.23% for the
prior year periods, as a result of a rise in short-term market interest rates.
Total average deposits and borrowings increased $166.4 million and $151.5
million for the three and six months ended December 31, 2005, respectively, when
compared to the three and six months ended December 31, 2004.
For the three and six months ended December 31, 2005, the average rate paid on
deposits increased to 2.95% and 2.85%, respectively, from 2.33% and 2.32% for
the three and six months ended December 31, 2004. Average deposit balances
increased $126.8 million and $130.8 million to $1.370 billion and $1.356 billion
for the three and six months ended December 31, 2005, respectively, from $1.243
billion and $1.225 billion for the comparable prior year periods. The growth in
deposits is partially reflective of the interest rate environment, the addition
of the three new branches opened since January 2004 and the increase in
wholesale certificates of deposit. In addition, deposit growth reflects the
offering of attractive and competitive deposit products, which are promoted
through various marketing strategies.
The average cost of FHLB of New York advances for the three and six months ended
December 31, 2005 decreased to 5.57% and 5.65%, respectively, from 5.72% for
both the three and six months ended December 31, 2004 due to the addition of
lower costing advances. For the three months ended December 31, 2005, the
average balance of FHLB of New York advances increased $3.1 million when
compared to the three months ended December 31, 2004. For the six months ended
December 31, 2005, the average balance of FHLB of New York advances decreased
$6.4 million when
15
compared to the six months ended December 31, 2004. To offset
the decline in FHLB of New York advances and slower loan prepayment cashflows,
the average balance of other borrowings increased $36.5 million and $27.0
million for the three and six months ended December 31, 2005, respectively, when
compared to the three and six months ended December 31, 2004. The average rate
paid on other borrowings increased to 3.84% and 3.68% for the three and six
months ended December 31, 2005, respectively, from 2.63% and 2.42% for the
comparable prior year periods as a result of higher market interest rates.
Interest expense on junior subordinated debentures increased $158,000 and
$309,000 for the three and six months ended December 31, 2005, respectively,
when compared to the prior year periods. The increases in interest expense were
primarily due to increases in the average cost of these borrowings to 8.41% and
8.23% for the three and six months ended December 31, 2005, respectively, from
6.96% and 6.81% for the three and six months ended December 31, 2004. The
average balance of junior subordinated debentures increased $44,000 and $45,000
for the three and six months ended December 31, 2005, respectively, when
compared to the prior year periods.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three and six months ended December 31, 2005
was $9.6 million and $19.8 million, respectively, compared to $10.9 million and
$22.0 million recorded in the comparable prior year periods. Average net
interest-earning assets decreased $461,000 and $361,000 for the three and six
months ended December 31, 2005, respectively, when compared to the prior year
periods. The net interest rate spread and net interest margin for the three
months ended December 31, 2005 were 1.76% and 1.89%, respectively, a decrease
from 2.20% and 2.33% for the three months ended December 31, 2004. For the six
months ended December 31, 2005, the net interest rate spread and net interest
margin were 1.84% and 1.97%, respectively, a decrease from 2.23% and 2.35% for
the six months ended December 31, 2004. The net interest margin compressed
during the current year periods when compared to the prior year periods
principally due to growth in the loan portfolio at relatively lower returns
coupled with the upward repricing of certain deposits and borrowings. Declines
in net interest margins have been the result of the flattening yield curve, with
longer term interest rates reflecting minimal movement but with continual
increases in shorter term rates. As a result, the Company's deposit and
borrowing costs continued to rise at a faster pace than interest rates offered
on real estate mortgage loans within the Company's lending market.
Provision for Loan Losses. There was no provision for loan losses recorded for
the three and six months ended December 31, 2005, reflecting the Company's
historically low levels of non-accruing loans and loan chargeoffs. There was
also no loan loss provision recorded in the comparable prior year periods.
Management believes that the current allowance for loan losses is adequate to
absorb probable losses on existing loans that may become uncollectible. The
allowance for loan losses at December 31, 2005 was $5.9 million compared to $6.1
million at June 30, 2005. The allowance for loan losses as a percentage of
non-accruing loans was 217.55% at December 31, 2005, compared to 231.00% at June
30, 2005. Non-accruing loans were $2.7 million at December 31, 2005 compared to
$2.6 million at June 30, 2005. The allowance for loan losses as a percentage of
total loans at December 31, 2005 was 0.38% compared to 0.41% at June 30, 2005,
primarily due to the increase in the balance of the overall loan portfolio. See
the discussion on the allowance for loan losses in this Form 10-Q under
"Critical Accounting Policies".
Non-Interest Income. For the three and six months ended December 31, 2005,
non-interest income was $1.1 million and $5.1 million, respectively, compared to
$1.4 million and $2.5 million for the prior year periods. The decrease in
non-interest income for the three months ended December 31, 2005 was primarily
due to a decrease in fees and service charges and in the net gain from real
estate operations, when compared to the prior year period. The increase in
non-interest income for the six months ended December 31, 2005 was primarily due
to an increase in fees and service charges, when compared to the prior year
period.
Fee and service charge income for the three months ended December 31, 2005 was
$704,000, reflecting a decrease of $163,000 from the $867,000 recorded for the
prior year period. The decrease in the current three month period was primarily
due to a decline in fees associated with various loan prepayments and/or
modifications, when compared to the three months ended December 31, 2004. For
the six months ended December 31, 2005, fee and service charge income was $4.2
million, reflecting an increase of $2.6 million from the $1.6 million recorded
for the prior year period. Fees and service charges increased during the six
months ended December 31, 2005 primarily due to a prepayment premium of $2.7
million earned on the payoff of a large-balance commercial real estate loan.
During the three and six months ended December 31, 2005, the net gain on sales
of loans was $21,000 and $143,000, respectively, compared to $70,000 and $94,000
for the three and six months ended December 31, 2004. Approximately $7.4 million
and $28.2 million of primarily fixed rate one- to four-family residential
mortgage loans were sold into the secondary market and to other financial
institutions during the three and six months ended December 31,
16
2005, respectively. During the three and six months ended December 31, 2004,
approximately $4.7 million and $9.2 million of fixed rate one- to four-family
residential mortgage loans were sold into the secondary market and to other
financial institutions, respectively.
Non-Interest Expenses. Non-interest expenses for the three and six months ended
December 31, 2005 were $5.4 million and $13.1 million, or 1.01% and 1.24% of
average assets, respectively. For the comparable prior year periods,
non-interest expenses were $6.2 million and $12.3 million, or 1.26% of average
assets for both periods. The current six month period expense level reflects
$1.4 million of penalties associated with prepaying $35.0 million of FHLB of New
York advances, $259,000 of increased obligations under certain long-term
benefits plans and $372,000 of accelerated depreciation expense for branch
automation system software that is no longer used. In addition, costs associated
with regulatory burden, especially compliance with Sarbanes-Oxley Section 404,
continue to require additional expenditures.
Income Tax Expense. Income tax expense was $1.9 million and $4.2 million for the
three and six months ended December 31, 2005, respectively, compared to $2.1
million and $4.4 million for the three and six months ended December 31, 2004.
The effective tax rate for the three and six months ended December 31, 2005 was
35.4% and 35.6%, respectively, compared to 34.9% and 36.1% for the three and six
months ended December 31, 2004. The slightly higher effective tax rate for the
prior year six month period was primarily due to adjustments in the valuation
allowances established against state deferred tax assets.
17
Analysis of Net Interest Income
The following tables set forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income for the three and six months ended December 31, 2005 and 2004 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.
Three Months Ended December 31,
-----------------------------------------------------------------------------
2005 2004
------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans ............................. $1,214,725 $ 15,906 5.23% $1,073,730 $ 14,281 5.31%
Commercial and multi-family real
estate loans ...................... 167,177 2,865 6.71 167,843 2,922 6.85
Consumer loans ....................... 160,771 2,341 5.78 120,781 1,617 5.31
---------- ---------- ---------- ----------
Total loans receivable ............ 1,542,673 21,112 5.44 1,362,354 18,820 5.50
Investment securities and other ...... 452,996 6,329 5.59 448,040 6,023 5.38
Mortgage-backed securities ........... 71,246 909 5.10 90,608 1,156 5.10
---------- ---------- ---------- ----------
Total interest-earning assets ..... 2,066,915 $ 28,350 5.46 1,901,002 $ 25,999 5.45
========== ==========
Non-interest earning assets .............. 70,534 65,794
---------- ----------
Total assets ...................... $2,137,449 $1,966,796
========== ==========
Deposits and borrowings:
Money market and demand deposits ..... $ 255,958 $ 1,044 1.62% $ 179,959 $ 186 0.41%
Savings deposits ..................... 346,862 2,278 2.61 433,191 2,488 2.28
Certificates of deposit .............. 767,065 6,876 3.56 629,983 4,638 2.92
---------- ---------- ---------- ----------
Total deposits .................... 1,369,885 10,198 2.95 1,243,133 7,312 2.33
FHLB of New York advances ............ 428,530 6,100 5.57 425,465 6,215 5.72
Other borrowings ..................... 154,698 1,519 3.84 118,185 793 2.63
Junior subordinated debentures ....... 42,098 898 8.41 42,054 740 6.96
---------- ---------- ---------- ----------
Total deposits and borrowings ..... 1,995,211 $ 18,715 3.70 1,828,837 $ 15,060 3.25
========== ==========
Other liabilities ........................ 17,705 15,223
---------- ----------
Total liabilities ................. 2,012,916 1,844,060
Stockholders' equity ..................... 124,533 122,736
---------- ----------
Total liabilities and stockholders'
equity ........................ $2,137,449 $1,966,796
========== ==========
Net interest income and net
interest rate spread ................. $ 9,635 1.76% $ 10,939 2.20%
========== ========== ========== ==========
Net interest-earning assets and net
interest margin ...................... $ 71,704 1.89% $ 72,165 2.33%
========== ========== ========== ==========
Ratio of interest-earning assets to
deposits and borrowings .............. 103.59% 103.95%
========== ==========
(1) Annualized.
18
Six Months Ended December 31,
-----------------------------------------------------------------------------
2005 2004
------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans ............................. $1,194,433 $ 31,335 5.23% $1,058,857 $ 28,201 5.32%
Commercial and multi-family real
estate loans ...................... 166,868 5,766 6.77 169,223 5,910 6.87
Consumer loans ....................... 155,562 4,467 5.70 120,201 3,186 5.26
---------- ---------- ---------- ----------
Total loans receivable ............ 1,516,863 41,568 5.45 1,348,281 37,297 5.51
Investment securities and other ...... 451,700 12,592 5.58 449,202 12,121 5.40
Mortgage-backed securities ........... 73,636 1,873 5.09 93,573 2,386 5.10
---------- ---------- ---------- ----------
Total interest-earning assets ..... 2,042,199 $ 56,033 5.47 1,891,056 $ 51,804 5.46
========== ==========
Non-interest earning assets .............. 70,156 63,853
---------- ----------
Total assets ...................... $2,112,355 $1,954,909
========== ==========
Deposits and borrowings:
Money market and demand deposits ..... $ 242,817 $ 1,722 1.41% $ 173,602 $ 281 0.32%
Savings deposits ..................... 361,527 4,699 2.58 430,755 4,905 2.26
Certificates of deposit .............. 751,501 13,034 3.44 620,669 9,138 2.92
---------- ---------- ---------- ----------
Total deposits .................... 1,355,845 19,455 2.85 1,225,026 14,324 2.32
FHLB of New York advances ............ 422,858 12,217 5.65 429,228 12,529 5.72
Other borrowings ..................... 147,772 2,777 3.68 120,762 1,493 2.42
Junior subordinated debentures ....... 42,093 1,757 8.23 42,048 1,448 6.81
---------- ---------- ---------- ----------
Total deposits and borrowings ..... 1,968,568 $ 36,206 3.63 1,817,064 $ 29,794 3.23
========== ==========
Other liabilities ........................ 18,517 16,504
---------- ----------
Total liabilities ................. 1,987,085 1,833,568
Stockholders' equity ..................... 125,270 121,341
---------- ----------
Total liabilities and stockholders'
equity ........................ $2,112,355 $1,954,909
========== ==========
Net interest income and net
interest rate spread ................. $ 19,827 1.84% $ 22,010 2.23%
========== ========== ========== ==========
Net interest-earning assets and net
interest margin ...................... $ 73,631 1.97% $ 73,992 2.35%
========== ========== ========== ==========
Ratio of interest-earning assets to
deposits and borrowings .............. 103.74% 104.07%
========== ==========
(1) Annualized.
19
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.
Six Months Ended December 31, 2005 vs. 2004
-------------------------------------------
Increase (Decrease) Due to
----------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
------- ------- ------- -------
(In thousands)
Interest-earning assets:
One- to four-family mortgage loans ..... $ 3,671 $ (476) $ (61) $ 3,134
Commercial and multi-family real
estate loans .......................... (81) (64) 1 (144)
Consumer loans ......................... 939 264 78 1,281
------- ------- ------- -------
Total loans receivable .......... 4,529 (276) 18 4,271
Investment securities and other ........ 67 402 2 471
Mortgage-backed securities ............. (509) (5) 1 (513)
------- ------- ------- -------
Total interest-earning assets ... $ 4,087 $ 121 $ 21 $ 4,229
======= ======= ======= =======
Deposits and borrowings:
Money market and demand deposits ....... $ 111 $ 953 $ 377 $ 1,441
Savings deposits ....................... (782) 687 (111) (206)
Certificates of deposit ................ 1,942 1,614 340 3,896
------- ------- ------- -------
Total deposits .................. 1,271 3,254 606 5,131
FHLB of New York advances .............. (164) (150) 2 (312)
Other borrowings ....................... 327 787 170 1,284
Junior subordinated debentures ......... 2 307 -- 309
------- ------- ------- -------
Total deposits and borrowings ... $ 1,436 $ 4,198 $ 778 $ 6,412
======= ======= ======= =======
Net change in net interest income .......... $ 2,651 $(4,077) $ (757) $(2,183)
======= ======= ======= =======
20
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets at the dates indicated. 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
(generally through foreclosure or a deed in lieu) and is shown net of valuation
allowances, if any.
December 31, June 30,
2005 2005
-------- --------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ............................... $ 1,205 $ 1,713
Commercial and multi-family ....................... 1,510 904
Consumer .......................................... 3 2
-------- --------
Total non-accruing loans ...................... 2,718 2,619
Real estate owned, net ................................. 502 --
-------- --------
Total non-performing assets ................... 3,220 2,619
-------- --------
Restructured loans ..................................... 61 --
-------- --------
Total risk elements ........................... $ 3,281 $ 2,619
======== ========
Non-accruing loans as a percentage of total loans ...... 0.17% 0.18%
======== ========
Non-performing assets as a percentage of total assets .. 0.15% 0.13%
======== ========
Total risk elements as a percentage of total assets .... 0.15% 0.13%
======== ========
Interest Rate Sensitivity
Interest Rate Sensitivity Gap. The interest rate risk inherent in assets and
liabilities may be determined by analyzing the extent to which such assets and
liabilities are "interest rate sensitive" and by measuring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a defined time period if it matures or reprices within
that period. The difference or mismatch between the amount of interest-earning
assets maturing or repricing within a defined period and the amount of
interest-bearing liabilities maturing or repricing within the same period is
defined as the interest rate sensitivity gap. An institution is considered to
have a negative gap if the amount of interest-bearing liabilities maturing or
repricing within a specified time period exceeds the amount of interest-earning
assets maturing or repricing within the same period. If more interest-earning
assets than interest-bearing liabilities mature or reprice within a specified
period, then the institution is considered to have a positive gap. Accordingly,
in a rising interest rate environment, in an institution with a negative gap,
the cost of its rate sensitive liabilities would theoretically rise at a faster
pace than the yield on its rate sensitive assets, thereby diminishing future net
interest income. In a falling interest rate environment, a negative gap would
indicate that the cost of rate sensitive liabilities would decline at a faster
pace than the yield on rate sensitive assets and improve net interest income.
For an institution with a positive gap, the reverse would be expected.
At December 31, 2005, 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 $425.0 million, representing a one year negative
gap of 19.66% of total assets, compared to a one year negative gap of $166.8
million, or 8.13%, of total assets at June 30, 2005. The Company's gap position
changed from June 30, 2005 as the estimated short-term cash flows for the
Company's interest-bearing liabilities increased, while the estimated short-term
cash flows from interest-earning assets declined. With respect to assets, the
rise in market rates resulted in an extension in the projected redemption of
certain callable U.S. government agency securities beyond one year, as well as a
decline in the short-term prepayment expectations on loans and mortgage-backed
securities. For liabilities, growth in short-term retail certificates of deposit
and other wholesale borrowings due within one year, the projected early
redemption of certain convertible FHLB of New York advances and a shift in core
deposit balances from longer duration savings accounts to shorter duration money
21
market accounts, each contributed to the increase in the negative gap.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap analysis must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates in the short-term and over the life of
the asset. Furthermore, in the event of a change in interest rates, prepayment
and early withdrawal levels may deviate significantly from those assumed in
calculating the gap position. Finally, the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through additional interest rate risk ("IRR") measures,
including an IRR "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity
Measure." A low Post-Shock NPV ratio indicates greater exposure to IRR. Greater
exposure can result from a high sensitivity to changes in interest rates. The
Sensitivity Measure is the change in the NPV ratio, in basis points, caused by a
2% increase or decrease in rates, whichever produces a larger decline. Office of
Thrift Supervision ("OTS") guidelines would characterize an institution with a
Post Shock ratio of less than 4% to have "high" interest rate risk if the
Sensitivity Measure is greater than 2%. At least quarterly, and generally
monthly, management models the change in net portfolio value ("NPV") over a
variety of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. An NPV ratio, in
any interest rate scenario, is defined as the NPV in that rate scenario divided
by the market value of assets in the same scenario. Assumptions used in
calculating interest rate sensitivity are periodically reviewed and modified as
appropriate.
As of December 31, 2005, the Bank's internally generated initial NPV ratio was
9.52%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 6.85%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 2.67%. As of December 31, 2005, the Company's internally generated
initial NPV ratio was 9.36%, the Post-Shock ratio was 6.47%, and the Sensitivity
Measure was negative 2.89%. As of June 30, 2005, the Bank's Post-Shock NPV ratio
and Sensitivity Measure were 8.33% and negative 1.86%, respectively, and the
Company's Post-Shock NPV ratio and Sensitivity Measure were 8.27% and negative
1.70%, respectively. Both the Post-Shock NPV ratio and the Sensitivity Measure
deteriorated since June 30, 2005. The deterioration in the Sensitivity Measure
is primarily attributable to a rise in the projected duration of assets, a shift
in core deposit balances from savings accounts to money market accounts and an
increase in the sensitivity of FHLB of New York convertible advances. With the
rise in market interest rates, the value of FHLB of New York convertible
advances has improved and their likelihood of being called, particularly in a
scenario of an immediate and sustained 2% increase in interest rates, has
increased. Asset duration increased principally due to a shift in the projected
redemption date of callable U.S. government agency securities to beyond one
year, as well as a decline in prepayment estimates that resulted from a rise in
longer term market rates. Higher market rates improved retail deposit and
wholesale borrowing values but reduced their average duration. Variances between
the Bank's and the Company's NPV ratios are attributable to balance sheet items
which are eliminated during consolidation, such as investments, intercompany
borrowings and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions, including discount and decay rates, and
generally result in lower levels of presumed interest rate risk than OTS
measurements indicate.
The OTS measures the Bank's IRR on a quarterly basis using data from the
quarterly Thrift Financial Reports filed by the Bank with the OTS, coupled with
non-institution specific assumptions which are based on national averages. As of
September 30, 2005 (the latest date for which information is available), the
Bank's initial NPV ratio, as measured by the OTS, was 8.45%, the Bank's
Post-Shock ratio was 4.40% and the Sensitivity Measure was negative 4.05%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At December 31, 2005, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 8% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates. Although interest rates are not
expected to rise 2% immediately, projections over the next year assume a rise in
interest rates and a slight tightening followed by a slight
22
widening of the rate spread between the 3-month U.S. treasury bill and the
10-year U.S. treasury bond. If short term rates rise more quickly than long term
rates, interest rate risk measures would be expected to improve, but earnings
would likely be negatively affected.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
The Bank maintains appropriate levels of liquid assets. The Company's most
liquid assets are cash and cash equivalents, U.S. government agency securities
and mortgage-backed securities. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period.
In the event 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, reverse repurchase agreements and various overnight
repricing lines of credit. The Company uses its liquid resources principally to
fund maturing certificates of deposit and deposit withdrawals, to purchase loans
and securities, to fund existing and future loan commitments, and to meet
operating expenses. Management believes that loan repayments and other sources
of funds will be adequate to meet the Company's foreseeable liquidity needs.
Future liquidity requirements are not expected to be significantly different
from historical experience.
The Company's cash inflows for the six months ended December 31, 2005 included
$28.4 million of proceeds from the sale of loans, a $47.2 million increase in
deposits (net of accrued interest payable), a $133.8 million increase in FHLB of
New York advances and other borrowings, including short term borrowings, and
principal repayments of loans and mortgage-backed securities. During the six
months ended December 31, 2005, the cash provided was used to repay $65.0
million of maturing FHLB of New York advances and other borrowings and to fund
investing activities, which included the origination of loans and the purchase
of $15.0 million of investment securities. In addition, $5.9 million of the cash
provided was used to repurchase outstanding common shares, net of reissuances.
The Company's cash inflows for the six months ended December 31, 2004 included
$9.3 million of proceeds from the sale of loans, a $66.3 million increase in
deposits (net of accrued interest payable), a $63.3 million increase in FHLB of
New York advances and other borrowings, including short term borrowings, and
principal repayments of loans and mortgage-backed securities. In addition, the
cash inflows included $12.9 million of proceeds from the maturities of
investment securities. During the six months ended December 31, 2004, the cash
provided was used to repay $50.0 million of maturing FHLB of New York advances
and other borrowings and to fund investing activities, which included the
origination of loans, the purchase of $10.0 million of investment securities and
the funding of a $10.0 million investment in BOLI. In addition, the cash
provided was used to repurchase $4.4 million of outstanding shares, net of
reissuances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's most significant form of market risk is interest rate risk, as the
majority of its assets and liabilities are sensitive to changes in interest
rates. See the discussion in this Form 10-Q under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity."
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures:
An evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Act")) was
carried out as of December 31, 2005 under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
and several other members of the Company's senior management. The Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2005, the Company's disclosure controls and procedures were
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i) accumulated
23
and communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
(b) Changes in Internal Controls:
During the quarter ended December 31, 2005, no change occurred in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
The Company does not expect that its disclosure controls and procedures and
internal control over financial reporting will prevent all error and all fraud.
A control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met. Because of the inherent limitations in all control procedures, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by override of the control. The
design of any control procedure also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be detected.
24
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the Company's stock repurchase
activity for each month during the three months ended December 31,
2005. All shares repurchased during the three months ended December
31, 2005 were repurchased in the open market.
Total Number Maximum Number
Total Number Average of Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Repurchased Per Share Announced Plan Under the Plan
----------- --------- -------------- --------------
Repurchases for the Month
-------------------------
Oct. 1 - Oct. 31, 2005........ 84,500 $18.16 84,500 235,900
Nov. 1 - Nov. 30, 2005........ 96,100 $18.90 96,100 139,800
Dec. 1 - Dec. 31, 2005........ 76,000 $18.96 76,000 63,800
--------- ------ -------
Total repurchases............. 256,600 $18.67 256,600
========= ====== =======
At December 31, 2005, the Company had one repurchase plan under which
it had not yet completed all approved repurchases. This repurchase
plan was publicly announced February 23, 2005 and authorized the
Company to repurchase up to 5%, or 675,000, of its outstanding shares
over the following 18 months. On January 25, 2006, the Company
announced that it had completed all repurchases approved under this
plan, and that its Board of Directors had authorized a new repurchase
plan. The new repurchase plan authorizes the Company to repurchase up
to 5%, or 650,000, of its outstanding shares over the following 18
months.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders (Annual Meeting) was held on
October 28, 2005.
(b) Directors elected at the Annual Meeting:
Patrick D. McTernan
Marvin D. Schoonover
Directors whose terms continued after the Annual Meeting:
William C. Anderson
Amadeu L. Carvalho
Joseph L. LaMonica
Mario Teixeira, Jr.
(c) At the Annual Meeting, the stockholders considered:
(i) the election of two directors,
(ii) the ratification of the appointment of KPMG LLP as
independent auditors for the Company for the fiscal year
ending June 30, 2006.
The vote on the election of two directors was as follows:
FOR WITHHELD
---------- ---------
Patrick D. McTernan 10,005,699 1,636,723
Marvin D. Schoonover 10,005,578 1,636,844
There were no broker non-votes with respect to the proposal.
The vote on the ratification of the appointment of KPMG LLP as
independent auditors for the Company for the fiscal year ending
June 30, 2006 was as follows:
FOR AGAINST ABSTAIN
---------- ------- -------
11,503,512 93,924 44,986
There were no broker non-votes with respect to the proposal.
25
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
--------------------------------
Date: February 9, 2006 By: /s/ Joseph L. LaMonica
--------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Principal Executive Officer)
Date: February 9, 2006 By: /s/ Claire M. Chadwick
--------------------------------------
Claire M. Chadwick
Senior Executive Vice President,
Chief Financial Officer and
Controller
(Principal Financial and Accounting Officer)
27
EXHIBIT INDEX
Regulation Reference to
S-K Prior Filing
Exhibit or Exhibit
Number Document Number
- --------------------------------------------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3 (i) Articles of Incorporation (a)
3 (ii) Bylaws (a)
4 Instruments defining the rights of security holders, including indentures (b)
4 (i) Stockholder Protection Rights Agreement (c)
10 Material contracts:
(i) 1994 Amended and Restated Stock Option and Incentive Plan (d)
(ii) Employment Agreement with Joseph L. LaMonica (e)
(iii)Employment Agreement with Patrick D. McTernan (e)
(iv) Employment Agreement with Jeffrey J. Carfora (e)
(v) Employment Agreement with Claire M. Chadwick (e)
(vi) Employment Agreement with Maria F. Magurno (e)
(vii)Supplemental Executive Retirement Plan (f)
(a) First Amendment to the Supplemental Executive Retirement Plan (g)
(b) Second Amendment to the Supplemental Executive Retirement Plan (h)
(viii)Amended and Restated Supplemental Executive Death Benefit Plan (h)
(ix) Outside Directors' Retirement Plan (f)
(x) Form of Consulting Agreement (f)
(xi) Description of Named Executive Officer Salary and Bonus Arrangements (i)
(xii)Description of Director Fees (i)
(xiii)Description of Long-Term Care Insurance Program (i)
11 Statement re: computation of per share earnings (j)
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
22 Published report regarding matters submitted to vote of security holders None
23 Consents of independent registered public accounting firm and counsel None
24 Power of Attorney None
31.1 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Executive Officer) 31.1
31.2 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Financial Officer) 31.2
32 Certifications Required by Section 1350 of Title 18 of the United States Code 32
99 Additional Exhibits Not applicable
- ----------------
(a) Included as an appendix to the Company's definitive proxy statement
under the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on September 22, 2003 (File No. 0-24040). Such
previously filed document is hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
(b) The Company hereby agrees to furnish the Securities and Exchange
Commission, upon request, the instruments defining the rights of the
holders of each issue of the Company's long-term debt.
(c) Filed as an exhibit to the Company's Registration Statement on Form 8-A
under the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on March 28, 1996 as amended on Form 8-A/A (the
"Form 8-A/A") filed with the Securities and Exchange Commission on
February 11, 1998, as further amended on Form 8-A/A-2 (the "Form
8-A/A-2") filed with the Securities and Exchange Commission on October
14, 1998 and as further amended on Form 8-A/A-3 (the "Form 8-A/A-3")
filed with the Securities and Exchange Commission on March 1, 2004. The
First Amendment to the Stockholders Protection Rights Agreement is filed
as an exhibit to the Form 8-A/A, the Second Amendment to the
Stockholders Protection Rights Agreement is filed as an exhibit to the
Form 8-A/A-2, the Third Amendment to the Stockholders Protection Rights
Agreement is filed as an exhibit to the Current Report on Form 8-K filed
by the Company with the Securities and Exchange Commission on October
29, 2003 and the Fourth Amendment to the Stockholder Protection Rights
Agreement is filed as an exhibit to the Form 8-A/A-3. These documents
are hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
28
(d) Filed as an exhibit to the Company's Form 10-K under the Securities
Exchange Act of 1934, filed with the Securities and Exchange Commission
on September 24, 2001 (File No. 0-24040). Such previously filed document
is hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
(e) Filed as an exhibit to the Company's Current Report on Form 8-K under
the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on September 15, 2004 (File No. 0-24040). Such
previously filed document is hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
(f) Filed as an exhibit to the Company's Form 10-K under the Securities
Exchange Act of 1934, filed with the Securities and Exchange Commission
on September 22, 2003 (File No. 0-24040). Such previously filed document
is hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
(g) Filed as an exhibit to the Company's Form 10-Q under the Securities
Exchange Act of 1934, filed with the Securities and Exchange Commission
on February 17, 2004 (File No. 0-24040). Such previously filed document
is hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
(h) Filed as exhibits to the Company's Current Report on Form 8-K under the
Securities Exchange Act of 1934, filed with the Securities and Exchange
Commission on February 14, 2005 (File No. 0-24040). Such previously
filed document is hereby incorporated by reference in accordance with
Item 601 of Regulation S-K.
(i) Filed as an exhibit to the Company's Form 10-K under the Securities
Exchange Act of 1934, filed with the Securities and Exchange Commission
on September 13, 2005 (File No. 0-24040). Such previously filed document
is hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
(j) Refer to Footnote 3., "Computation of Earnings Per Share ("EPS")"
included in the December 31, 2005 Form 10-Q.
29