UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
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or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-24040
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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
incorporation or organization) Identification No.)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
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(Address of principal executive offices) (Zip Code)
(973) 669-7366
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(Registrant's telephone number, including area code)
N/A
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(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 [_].
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [_]. NO [X].
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 May 5, 2006, there were issued and outstanding 12,967,918 shares of
the Registrant's Common Stock.
1
PennFed Financial Services, Inc. and Subsidiaries
Form 10-Q
Contents of Report
Page
Number
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PART I - FINANCIAL INFORMATION
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Item 1. - Financial Statements
Consolidated Statements of Financial Condition - March 31, 2006 (unaudited) and June 30, 2005 3
Consolidated Statements of Income (unaudited) - For the three and nine months ended March 31, 2006
and 2005 4
Consolidated Statements of Comprehensive Income (unaudited) - For the three and nine months ended
March 31, 2006 and 2005 5
Consolidated Statements of Changes in Stockholders' Equity (unaudited) - For the nine months ended
March 31, 2006 and 2005 6
Consolidated Statements of Cash Flows (unaudited) - For the nine months ended March 31, 2006
and 2005 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
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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 25
SIGNATURES 26
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EXHIBITS
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Exhibit Index 27
Exhibit 31.1 - Certification Required by Securities Exchange Act of 1934 Rule 13a -14 (a)
(Chief Executive Officer) 29
Exhibit 31.2 - Certification Required by Securities Exchange Act of 1934 Rule 13a -14 (a)
(Chief Financial Officer) 30
Exhibit 32 - Certifications Required by Section 1350 of Title 18 of the United States Code 31
2
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
March 31, June 30,
2006 2005
----------- -----------
(unaudited) (audited)
(Dollars in thousands)
ASSETS
Cash and cash equivalents ................................................. $ 17,393 $ 15,220
Investment securities available for sale, at market value, amortized cost
of $4,999 and $4,849 at March 31, 2006 and June 30, 2005 ............. 4,944 5,011
Investment securities held to maturity, at amortized cost, market value of
$426,258 and $406,726 at March 31, 2006 and June 30, 2005 ............ 440,388 405,498
Mortgage-backed securities held to maturity, at amortized cost, market
value of $64,289 and $79,109 at March 31, 2006 and June 30, 2005 ..... 65,749 78,201
Loans held for sale ....................................................... 520 4,826
Loans receivable, net of allowance for loan losses of $5,898 and $6,050
at March 31, 2006 and June 30, 2005 .................................. 1,613,336 1,460,654
Premises and equipment, net ............................................... 20,242 20,903
Federal Home Loan Bank of New York stock, at cost ......................... 26,261 22,391
Accrued interest receivable, net .......................................... 11,072 9,808
Bank owned life insurance ("BOLI") ........................................ 30,876 23,202
Other assets .............................................................. 6,565 4,837
----------- -----------
$ 2,237,346 $ 2,050,551
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits ............................................................. $ 1,372,159 $ 1,339,491
Federal Home Loan Bank of New York advances .......................... 465,465 415,465
Other borrowings ..................................................... 214,334 107,952
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $1,185 and $1,218 at March 31, 2006 and
June 30, 2005 ...................................................... 42,115 42,082
Mortgage escrow funds ................................................ 11,498 10,398
Accounts payable and other liabilities ............................... 8,190 11,109
----------- -----------
Total liabilities .................................................... 2,113,761 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, 12,891,478
and 13,280,038 shares issued and outstanding at March 31, 2006
and June 30, 2005 ............................................... 129 133
Additional paid-in capital ........................................... 38,394 39,092
Retained earnings .................................................... 85,095 84,734
Accumulated other comprehensive income (loss), net of taxes .......... (33) 95
----------- -----------
Total stockholders' equity ........................................... 123,585 124,054
----------- -----------
$ 2,237,346 $ 2,050,551
=========== ===========
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Nine months ended
March 31, March 31,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans ....................... $ 21,581 $ 18,995 $ 63,149 $ 56,292
Interest and dividends on investment securities .. 6,529 6,076 19,121 18,198
Interest on mortgage-backed securities ........... 863 1,096 2,736 3,481
------------ ------------ ------------ ------------
28,973 26,167 85,006 77,971
------------ ------------ ------------ ------------
Interest Expense:
Deposits ......................................... 10,626 7,583 30,081 21,907
Borrowed funds ................................... 8,206 6,939 23,200 20,961
Junior subordinated deferrable interest debentures 930 778 2,687 2,226
------------ ------------ ------------ ------------
19,762 15,300 55,968 45,094
------------ ------------ ------------ ------------
Net Interest and Dividend Income Before Provision
for Loan Losses .................................. 9,211 10,867 29,038 32,877
Provision for Loan Losses ............................. -- -- -- --
------------ ------------ ------------ ------------
Net Interest and Dividend Income After Provision
for Loan Losses .................................. 9,211 10,867 29,038 32,877
------------ ------------ ------------ ------------
Non-Interest Income:
Fees and service charges ......................... 778 703 4,952 2,296
Income on BOLI ................................... 239 217 674 466
Net gain on sales of loans ....................... -- 172 143 266
Net gain (loss) from real estate operations ...... (3) -- (4) 157
Other ............................................ 201 152 535 514
------------ ------------ ------------ ------------
1,215 1,244 6,300 3,699
------------ ------------ ------------ ------------
Non-Interest Expenses:
Compensation and employee benefits ............... 3,134 3,135 9,460 9,407
Extinguishment of debt ........................... -- -- 1,351 --
Equipment ........................................ 530 516 2,039 1,594
Net occupancy expense ............................ 664 643 1,843 1,741
Advertising ...................................... 168 155 467 549
Federal deposit insurance premium ................ 45 44 132 128
Amortization of intangible assets ................ -- 454 -- 1,361
Other ............................................ 1,119 1,196 3,509 3,663
------------ ------------ ------------ ------------
5,660 6,143 18,801 18,443
------------ ------------ ------------ ------------
Income Before Income Taxes ............................ 4,766 5,968 16,537 18,133
Income Tax Expense .................................... 1,717 2,114 5,902 6,511
------------ ------------ ------------ ------------
Net Income ............................................ $ 3,049 $ 3,854 $ 10,635 $ 11,622
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic ............................................ 12,966,518 13,590,180 13,106,655 13,682,105
============ ============ ============ ============
Diluted .......................................... 13,349,234 13,959,738 13,520,805 14,099,360
============ ============ ============ ============
Net income per common share:
Basic ............................................ $ 0.24 $ 0.28 $ 0.81 $ 0.85
============ ============ ============ ============
Diluted .......................................... $ 0.23 $ 0.28 $ 0.79 $ 0.82
============ ============ ============ ============
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended Nine months ended
March 31, March 31,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
(unaudited) (unaudited)
(In thousands)
Net income .................................................. $ 3,049 $ 3,854 $ 10,635 $ 11,622
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period on
investment securities available for sale, net of tax .... (57) (38) (128) 8
-------- -------- -------- --------
Comprehensive income ........................................ $ 2,992 $ 3,816 $ 10,507 $ 11,630
======== ======== ======== ========
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended March 31, 2006 and 2005
-------------------------------------------------
(unaudited)
Accumulated
Serial Additional Other
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income (Loss) Total
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
Balance at June 30, 2004 ........... $ -- $ 9 $ 42,839 $ 75,523 $ 28 $ 118,399
Repurchase of 510,300
outstanding shares ............... (4) (1,271) (6,806) (8,081)
Issuance of 433,318 shares of
stock for options exercised and
Dividend Reinvestment Plan
("DRP") .......................... 2 1,081 244 1,327
Tax benefit from stock option plan . 2,962 2,962
Cash dividends of $0.15 per
common share ..................... (2,008) (2,008)
Unrealized holding gains on
investment securities available
for sale, net of income taxes
of $5 ............................ 8 8
Two-for-one split in the form of
a 100% stock dividend ............ 128 (128) --
Net income for the nine months
ended March 31, 2005 ............. 11,622 11,622
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2005 .......... $ -- $ 135 $ 45,611 $ 78,447 $ 36 $ 124,229
============ ============ ============ ============ ============ ============
Balance at June 30, 2005 ........... $ -- $ 133 $ 39,092 $ 84,734 $ 95 $ 124,054
Repurchase of 490,300
outstanding shares ............... (5) (1,221) (7,940) (9,166)
Issuance of 101,740 shares of
stock for options exercised and
DRP .............................. 1 254 357 612
Tax benefit from stock option plan . 269 269
Cash dividends of $0.21 per
common share ..................... (2,691) (2,691)
Unrealized holding losses on
investment securities available
for sale, net of income taxes
of $(88) ......................... (128) (128)
Net income for the nine months
ended March 31, 2006 ............. 10,635 10,635
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2006 .......... $ -- $ 129 $ 38,394 $ 85,095 $ (33) $ 123,585
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
6
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended March 31,
---------------------------
2006 2005
--------- ---------
(unaudited) (unaudited)
(In thousands)
Cash Flows from Operating Activities:
Net income ........................................................... $ 10,635 $ 11,622
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans ........................................... (143) (266)
Proceeds from sales of loans originated for sale ..................... 5,538 6,013
Originations of loans held for sale .................................. (5,037) (5,966)
Net (gain) loss on sales of real estate owned ........................ 4 (157)
Amortization of investment and mortgage-backed securities
premium, net ....................................................... 257 192
Depreciation and amortization ........................................ 1,736 1,350
Tax benefit related to stock options ................................. 269 2,962
Amortization of intangible assets .................................... -- 1,361
Amortization of premiums on loans and loan fees ...................... 1,398 1,324
Amortization of junior subordinated debentures issuance costs ........ 33 33
Income on BOLI ....................................................... (674) (466)
Increase in accrued interest receivable, net of accrued
interest payable ................................................... (1,124) (1,032)
(Increase) decrease in other assets .................................. (1,728) 1,584
Decrease in accounts payable and other liabilities ................... (2,831) (1,946)
Increase in mortgage escrow funds .................................... 1,100 76
Other, net ........................................................... -- 5
--------- ---------
Net cash provided by operating activities ............................ 9,433 16,689
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities held to maturity ... -- 20,551
Purchases of investment securities held to maturity .................. (34,976) (20,000)
Purchases of investment securities available for sale ................ (149) (130)
Proceeds from principal repayments of mortgage-backed securities
held to maturity ................................................. 12,281 16,889
Net outflow from loan originations net of principal repayments of loans (171,379) (128,053)
Proceeds from loans sold ............................................. 23,531 18,503
Purchases of loans ................................................... (2,761) --
Purchases of premises and equipment .................................. (1,075) (695)
Net inflow from real estate owned activity ........................... 473 630
Purchases of BOLI .................................................... (7,000) (10,000)
(Purchases) redemptions of Federal Home Loan Bank of New York stock .. (3,870) 2,040
--------- ---------
Net cash used in investing activities ................................ (184,925) (100,265)
--------- ---------
Cash Flows from Financing Activities:
Net increase in deposits ............................................. 32,528 96,523
Proceeds from advances from the Federal Home Loan Bank of New York
and other borrowings ............................................. 135,000 29,475
Repayment of advances from the Federal Home Loan Bank of New
York and other borrowings ....................................... (85,000) (50,000)
Increase in other short term borrowings .............................. 106,382 14,238
Cash dividends paid .................................................. (2,691) (2,008)
Repurchases of outstanding shares, net of reissuances ................ (8,554) (6,754)
--------- ---------
Net cash provided by financing activities ............................ 177,665 81,474
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ...................... 2,173 (2,102)
Cash and Cash Equivalents, Beginning of Period ............................ 15,220 14,859
--------- ---------
Cash and Cash Equivalents, End of Period .................................. $ 17,393 $ 12,757
========= =========
7
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Nine months ended March 31,
---------------------------
2006 2005
--------- ---------
(unaudited) (unaudited)
(In thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest .............................................................. $ 55,237 $ 45,020
========= =========
Income taxes .......................................................... $ 6,779 $ 1,137
========= =========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at lower of cost or
market ........................................................... $ 19,583 $ 18,284
========= =========
Transfer of loans receivable to real estate owned, net ................ $ 477 $ 473
========= =========
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 nine months
ended March 31, 2006 and 2005. 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 March 31, 2006,
the benefit obligation of $1,171,000 was included in Accounts payable and other
liabilities in the Consolidated Statements of Financial Condition. At March 31,
2006, the assumptions used in calculating the benefit obligation included a 4%
compensation increase rate and a discount rate of 5%. At March 31, 2005, 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 March 31,
---------------------------------
2006 2005
-------------- ---------------
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
===== ===== ===== =====
Nine months ended March 31,
---------------------------------
2006 2005
-------------- ---------------
SERP DP SERP DP
----- ----- ----- -----
(In thousands)
Service cost ............................. $ 354 $ 49 $ 183 $ 33
Interest cost ............................ 43 6 21 3
Amortization of prior service cost ....... 19 2 (6) (3)
----- ----- ----- -----
Net periodic pension expense ............. $ 416 $ 57 $ 198 $ 33
===== ===== ===== =====
9
3. Computation of Earnings Per Share ("EPS")
The computation of EPS is presented in the following table.
Three months ended Nine months ended
March 31, March 31,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Net income ................................... $ 3,049 $ 3,854 $ 10,635 $ 11,622
=========== =========== =========== ===========
Number of shares outstanding:
Weighted average shares issued and outstanding 12,966,518 13,590,180 13,106,655 13,682,105
Plus: Average common stock equivalents ....... 382,716 369,558 414,150 417,255
----------- ----------- ----------- -----------
Average diluted shares ....................... 13,349,234 13,959,738 13,520,805 14,099,360
=========== =========== =========== ===========
Earnings per common share:
Basic ................................ $ 0.24 $ 0.28 $ 0.81 $ 0.85
=========== =========== =========== ===========
Diluted .............................. $ 0.23 $ 0.28 $ 0.79 $ 0.82
=========== =========== =========== ===========
4. Stockholders' Equity and Regulatory Capital
During the three months ended March 31, 2006, the Company repurchased 163,100
shares of its outstanding common stock at prices ranging from $17.90 to $19.13
per share, for a total cost of $3,014,000. During the nine months ended March
31, 2006, the Company repurchased 490,300 shares of its outstanding common stock
at prices ranging from $17.10 to $19.75 per share, for a total cost of
$9,166,000.
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 March 31, 2006
Tangible capital, and ratio to
adjusted total assets .......... $169,304 7.57% $ 33,534 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets .......... $169,304 7.57% $ 89,425 4.00% $111,781 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ........... $169,304 13.91% N/A N/A $ 73,032 6.00%
Risk-based capital, and ratio to
risk-weighted assets ........... $175,202 14.39% $ 97,376 8.00% $121,720 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
5. Recently Issued Accounting Standards
In March 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 156, "Accounting for Servicing of
Financial Assets." SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," establishes, among other
things, the accounting for all separately recognized servicing assets and
servicing liabilities. SFAS No. 156 amends SFAS No. 140 to require that all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable. SFAS No. 156 permits, but does not
require, the subsequent measurement of separately recognized servicing assets
and servicing liabilities at fair value. An entity that uses derivative
instruments to mitigate the risks inherent in servicing assets and servicing
liabilities is required to account for those derivative instruments at fair
value. Under SFAS No. 156, an entity can elect subsequent fair value measurement
to account for its separately recognized servicing assets and servicing
liabilities. By electing that option, an entity may simplify its accounting
because SFAS No. 156 permits income statement recognition of the potential
offsetting changes in fair value of those servicing assets and servicing
liabilities and derivative instruments in the same accounting period. SFAS No.
156 is effective in the first fiscal year beginning after September 15, 2006
with earlier adoption permitted. The Company does not expect the adoption of
SFAS No. 156 to have a material impact on its consolidated financial condition,
results of operations or cash flows.
11
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.
12
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 and
competitive conditions in the Company's market area, changes in laws and
regulations and in policies by 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 currently 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 78.1% at March 31, 2006. 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 $148.4
million. This increase was primarily attributable to strong loan origination
levels in one- to four-family residential and consumer loans and the lower
levels of prepayments when compared to prior periods when market interest rates
were declining. During the nine months ended March 31, 2006, the Company sold
$28.9 million of primarily 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 March 31, 2006 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 3.3% 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 $32.7 million,
primarily due to an increase in certificates of deposit as well as an increase
in checking and money market accounts partially offset by a decrease in savings
accounts.
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, loan
origination levels may decline. Growth in the loan pipeline will depend on the
Company's
13
ability to successfully seek out customers in spite of the higher cost of
borrowing for the customer and competition from other lenders. 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
longer term, 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 also would provide the Company
with an additional opportunity to attract 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 appropriately priced products and by striving to deliver 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.
The Company's future earnings are inherently tied to the level of interest
rates. 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 repricing characteristics of a portion of the Company's deposits and
borrowings. 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. If 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 longer 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.
On February 27, 2006, the Company notified its customers of its planned May 31,
2006 closing of its branch located at 493 Bloomfield Avenue in Montclair, New
Jersey. The decision to close the branch was principally due to economies of
scale. Deposits will be transferred to a branch located less than two miles from
the branch to be closed.
Financial Condition
Assets. Total assets increased $186.8 million to $2.237 billion at March 31,
2006 from $2.051 billion at June 30, 2005. This increase was primarily due to a
$152.7 million increase in net loans receivable, reflecting strong loan
origination levels and the lower levels of loan prepayment activity, and a $34.9
million increase in investment securities held to maturity partially offset by a
$12.5 million decrease in mortgage-backed securities held to maturity.
Liabilities. Deposits increased $32.7 million to $1.372 billion at March 31,
2006 from $1.339 billion at June 30, 2005. An increase in certificates of
deposit of $36.6 million partially offset by a $3.9 million decrease in core
deposits (checking, money market and savings accounts) accounted for the change
in deposits. Checking and money market account balances increased $62.6 million
since June 30, 2005, while savings accounts decreased $66.5 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 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. At March 31, 2006,
FHLB of New York advances and other borrowings totaled $679.8 million,
reflecting a $156.4 million increase from $523.4 million at June 30, 2005.
Stockholders' Equity. Stockholders' equity at March 31, 2006 totaled $123.6
million compared to $124.1 million at June 30, 2005. The change in equity
reflects the repurchase of 490,300 shares of the Company's outstanding stock at
an average price of $18.69 per share, the declaration of cash dividends and
unrealized holding losses on investment securities available for sale, net of
taxes, partially offset by the net income recorded for the nine months ended
March 31, 2006 and the exercise of stock options, including the related tax
effect.
14
Results of Operations
General. For the three months ended March 31, 2006, net income was $3.0 million,
or $0.23 per diluted share, compared to net income of $3.9 million, or $0.28 per
diluted share, for the comparable prior year period. For the nine months ended
March 31, 2006, net income was $10.6 million, or $0.79 per diluted share. These
results compare to net income of $11.6 million, or $0.82 per diluted share, for
the comparable prior year period.
Interest and Dividend Income. Interest and dividend income for the three and
nine months ended March 31, 2006 increased to $29.0 million and $85.0 million,
respectively, from $26.2 million and $78.0 million for the three and nine months
ended March 31, 2005. 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 $2.111 billion and $2.065 billion for the
three and nine months ended March 31, 2006, compared to $1.913 billion and
$1.898 billion for the three and nine months ended March 31, 2005, respectively.
The average yield earned on interest-earning assets increased slightly to 5.51%
and 5.48% for the three and nine months ended March 31, 2006 from 5.48% and
5.47% for the three and nine months ended March 31, 2005.
Interest income on residential one- to four-family mortgage loans for the three
and nine months ended March 31, 2006 increased $1.9 million and $5.0 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 nine
months ended March 31, 2006 were due to increases in the average balance of
residential one- to four-family mortgage loans outstanding of $150.7 million and
$140.6 million, respectively, primarily as the result of strong origination
levels and a slowdown in prepayments during the current year periods. For the
three and nine months ended March 31, 2006, the residential one- to four-family
mortgage loan portfolio averaged $1.240 billion and $1.209 billion,
respectively, compared to $1.089 billion and $1.069 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 5.28% and 5.25% for the three and nine
months ended March 31, 2006, respectively, from 5.30% and 5.31% 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
$105,000 and $248,000 for the three and nine months ended March 31, 2006,
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
$2.1 million and $2.3 million for the three and nine months ended March 31,
2006, respectively, when compared to the prior year periods. In addition, the
average yield earned on commercial and multi-family real estate loans decreased
to 6.69% and 6.74% for the three and nine months ended March 31, 2006,
respectively, when compared to 6.86% and 6.85% for the three and nine months
ended March 31, 2005. As with other loans, the payoff of higher yielding loans
and the origination of loans at lower market interest rates has resulted in
declines in the yield of the commercial and multi-family real estate loan
portfolio.
Interest income on consumer loans increased $797,000 and $2.1 million for the
three and nine months ended March 31, 2006, 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 of these
loans. The average outstanding balance increased $45.4 million and $38.7 million
for the three and nine months ended March 31, 2006, respectively, when compared
to the prior year periods, due primarily to higher origination levels and
reduced prepayments. Also contributing to the increases in interest income on
consumer loans were increases in the average yield earned on these loans. The
average yield earned on consumer loans increased to 5.89% and 5.76% for the
three and nine months ended March 31, 2006, respectively, from 5.45% and 5.32%
for the three and nine months ended March 31, 2005.
Interest income on investment securities and other interest-earning assets
increased $453,000 and $923,000 for the three and nine months ended March 31,
2006, 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 nine months ended March 31, 2006 were partially due to increases
of $21.8 million and $8.9 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 5.62% and 5.59% for the
three and nine months ended March 31, 2006, respectively, compared to 5.48% and
5.43% for the three and nine months ended March 31, 2005.
Interest income on the mortgage-backed securities portfolio decreased $233,000
and $745,000 for the three and nine months ended March 31, 2006, respectively,
when compared to the prior year periods. The decreases in interest
15
income on mortgage-backed securities were primarily due to decreases in the
average outstanding balance of these securities. The average outstanding balance
of mortgage-backed securities decreased $17.9 million and $19.3 million for the
three and nine months ended March 31, 2006, respectively, compared to the three
and nine months ended March 31, 2005. The average yield earned on
mortgage-backed securities decreased to 5.12% and 5.10% for the three and nine
months ended March 31, 2006, respectively, when compared to 5.14% and 5.11% for
the three and nine months ended March 31, 2005.
Interest Expense. Interest expense for the three and nine months ended March 31,
2006 increased to $19.8 million and $56.0 million, respectively, from $15.3
million and $45.1 million for the comparable prior year periods. The higher cost
of funds on deposits and other borrowings, due to the short term interest rate
environment, and, to a lesser extent, an increase in the average balance of
deposits, FHLB of New York advances and other borrowings, were the primary
factors responsible for the increase in interest expense on deposits and
borrowings in the current year periods, when compared to the prior year periods.
The average rate on deposits and borrowings was 3.90% and 3.72% for the three
and nine months ended March 31, 2006, respectively, an increase from 3.34% and
3.27% for the prior year periods. Total average deposits and borrowings
increased $195.2 million and $166.1 million for the three and nine months ended
March 31, 2006, respectively, when compared to the three and nine months ended
March 31, 2005.
For the three months and nine months ended March 31, 2006, the average rate paid
on deposits increased to 3.16% and 2.95%, respectively, from 2.43% and 2.36% for
the three and nine months ended March 31, 2005. Average deposit balances
increased $97.4 million and $119.7 million to $1.363 billion and $1.358 billion
for the three and nine months ended March 31, 2006, respectively, from $1.265
billion and $1.238 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 appropriately priced deposit products, which are
promoted through various marketing strategies.
The average cost of FHLB of New York advances for the three and nine months
ended March 31, 2006 decreased to 5.52% and 5.61%, respectively, from 5.72% for
both the three and nine months ended March 31, 2005 due to the addition of lower
costing advances. The average balance of FHLB of New York advances increased
$24.3 million and $3.8 million for the three and nine months ended March 31,
2006, respectively, when compared to the three and nine months ended March 31,
2005. To offset the slower loan prepayment cashflows and to take advantage of
favorable rates on other borrowings as compared to rates on deposits, the
average balance of other borrowings increased $73.5 million and $42.5 million
for the three and nine months ended March 31, 2006, respectively, when compared
to the three and nine months ended March 31, 2005. The average rate paid on
other borrowings increased to 4.25% and 3.89% for the three and nine months
ended March 31, 2006, respectively, from 3.00% and 2.60% for the comparable
prior year periods as a result of higher market interest rates.
Interest expense on junior subordinated debentures increased $152,000 and
$461,000 for the three and nine months ended March 31, 2006, 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 8.84% and
8.43% for the three and nine months ended March 31, 2006, respectively, from
7.39% and 7.00% for the three and nine months ended March 31, 2005. The average
balance of junior subordinated debentures increased $45,000 for both the three
and nine months ended March 31, 2006, 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 nine months ended March 31, 2006 was
$9.2 million and $29.0 million, respectively, compared to $10.9 million and
$32.9 million recorded in the comparable prior year periods. Average net
interest-earning assets increased $2.7 million and $659,000 for the three and
nine months ended March 31, 2006, respectively, when compared to the prior year
periods. The net interest rate spread and net interest margin for the three
months ended March 31, 2006 were 1.61% and 1.74%, respectively, a decrease from
2.14% and 2.26% for the three months ended March 31, 2005. For the nine months
ended March 31, 2006, the net interest rate spread and net interest margin were
1.76% and 1.89%, respectively, a decrease from 2.20% and 2.32% for the nine
months ended March 31, 2005. 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 nine months ended
16
March 31, 2006, 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 March 31, 2006 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 225.89% at March 31, 2006, compared to
231.00% at June 30, 2005. Non-accruing loans at March 31, 2006 were relatively
unchanged from the $2.6 million recorded at June 30, 2005. The allowance for
loan losses as a percentage of total loans at March 31, 2006 was 0.36% 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 nine months ended March 31, 2006,
non-interest income was $1.2 million and $6.3 million, respectively, compared to
$1.2 million and $3.7 million for the prior year periods. The increase in
non-interest income for the nine months ended March 31, 2006 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 March 31, 2006 was
$778,000, reflecting an increase of $75,000 from the $703,000 recorded for the
prior year period. The increase in the current three month period was primarily
due to an increase in fees associated with various loan prepayments, when
compared to the three months ended March 31, 2005. For the nine months ended
March 31, 2006, fee and service charge income was $5.0 million, reflecting an
increase of $2.7 million from the $2.3 million recorded for the prior year
period. Fees and service charges increased during the nine months ended March
31, 2006 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 months ended March 31, 2006, there was no net gain on sales of
loans compared to $172,000 during the three months ended March 31, 2005. During
the nine months ended March 31, 2006, the net gain on sales of loans was
$143,000 compared to $266,000 for the nine months ended March 31, 2005.
Approximately $678,000 and $28.9 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 nine months ended March 31,
2006, respectively. During the three and nine months ended March 31, 2005,
approximately $15.0 million and $24.2 million of fixed rate one- to four-family
residential mortgage loans were sold into the secondary market and to other
financial institutions, respectively. The reduction in loan sales for the
current three month period can be attributed to a reduction in the origination
of longer term fixed rate products, as borrowers have shown increased interest
in adjustable rate and bi-weekly loans, which are retained in portfolio.
Non-Interest Expenses. Non-interest expenses for the three and nine months ended
March 31, 2006 were $5.7 million and $18.8 million, or 1.04% and 1.17% of
average assets, respectively. For the comparable prior year periods,
non-interest expenses were $6.1 million and $18.4 million, or 1.24% and 1.25% of
average assets, respectively. Included in non-interest expense for the nine
months ended March 31, 2006 was a 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. The current nine month period
expense level also reflects $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. For the three and nine
months ended March 31, 2005, non-interest expenses included $454,000 and $1.4
million of amortization of intangible assets, respectively. At March 31, 2005,
these intangible assets were fully amortized.
Income Tax Expense. Income tax expense was $1.7 million and $5.9 million for the
three and nine months ended March 31, 2006, respectively, compared to $2.1
million and $6.5 million for the three and nine months ended March 31, 2005. The
effective tax rate for the three and nine months ended March 31, 2006 was 36.0%
and 35.7%, respectively, compared to 35.4% and 35.9% for the three and nine
months ended March 31, 2005.
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 nine months ended March 31, 2006 and 2005 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 March 31,
-----------------------------------------------------------------------------
2006 2005
------------------------------------- ------------------------------------
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 ............................. $1,239,555 $ 16,287 5.28% $1,088,821 $ 14,393 5.30%
Commercial and multi-family real
estate loans ...................... 165,799 2,775 6.69 167,911 2,880 6.86
Consumer loans ....................... 173,443 2,519 5.89 128,064 1,722 5.45
---------- ---------- ---------- ----------
Total loans receivable ............ 1,578,797 21,581 5.49 1,384,796 18,995 5.51
Investment securities and other ...... 464,917 6,529 5.62 443,113 6,076 5.48
Mortgage-backed securities ........... 67,469 863 5.12 85,365 1,096 5.14
---------- ---------- ---------- ----------
Total interest-earning assets ..... 2,111,183 $ 28,973 5.51 1,913,274 $ 26,167 5.48
========== ==========
Non-interest earning assets .............. 73,182 72,000
---------- ----------
Total assets ...................... $2,184,365 $1,985,274
========== ==========
Deposits and borrowings:
Money market and demand deposits ..... $ 263,610 $ 1,261 1.94% $ 205,417 $ 388 0.77%
Savings deposits ..................... 327,148 2,145 2.66 422,447 2,505 2.40
Certificates of deposit .............. 771,818 7,220 3.79 637,283 4,690 2.98
---------- ---------- ---------- ----------
Total deposits .................... 1,362,576 10,626 3.16 1,265,147 7,583 2.43
FHLB of New York advances ............ 449,726 6,210 5.52 425,465 6,081 5.72
Other borrowings ..................... 187,969 1,996 4.25 114,493 858 3.00
Junior subordinated debentures ....... 42,110 930 8.84 42,065 778 7.39
---------- ---------- ---------- ----------
Total deposits and borrowings ..... 2,042,381 $ 19,762 3.90 1,847,170 $ 15,300 3.34
========== ==========
Other liabilities ........................ 18,381 14,226
---------- ----------
Total liabilities ................. 2,060,762 1,861,396
Stockholders' equity ..................... 123,603 123,878
---------- ----------
Total liabilities and stockholders'
equity ........................ $2,184,365 $1,985,274
========== ==========
Net interest income and net
interest rate spread ................. $ 9,211 1.61% $ 10,867 2.14%
========== ========== ========== ==========
Net interest-earning assets and net
interest margin ...................... $ 68,802 1.74% $ 66,104 2.26%
========== ========== ========== ==========
Ratio of interest-earning assets to
deposits and borrowings .............. 103.37% 103.58%
========== ==========
(1) Annualized.
18
Nine Months Ended March 31,
----------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
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 ............................. $1,209,474 $ 47,621 5.25% $1,068,844 $ 42,594 5.31%
Commercial and multi-family real
estate loans ...................... 166,511 8,542 6.74 168,786 8,790 6.85
Consumer loans ....................... 161,522 6,986 5.76 122,822 4,908 5.32
---------- ---------- ---------- ----------
Total loans receivable ............ 1,537,507 63,149 5.46 1,360,452 56,292 5.50
Investment securities and other ...... 456,106 19,121 5.59 447,173 18,198 5.43
Mortgage-backed securities ........... 71,581 2,736 5.10 90,837 3,481 5.11
---------- ---------- ---------- ----------
Total interest-earning assets ..... 2,065,194 $ 85,006 5.48 1,898,462 $ 77,971 5.47
========== ==========
Non-interest earning assets .............. 71,164 66,569
---------- ----------
Total assets ...................... $2,136,358 $1,965,031
========== ==========
Deposits and borrowings:
Money market and demand deposits ..... $ 249,749 $ 2,982 1.59% $ 184,207 $ 669 0.48%
Savings deposits ..................... 350,067 6,844 2.60 427,986 7,410 2.31
Certificates of deposit .............. 758,273 20,255 3.56 626,207 13,828 2.94
---------- ---------- ---------- ----------
Total deposits .................... 1,358,089 30,081 2.95 1,238,400 21,907 2.36
FHLB of New York advances ............ 431,814 18,427 5.61 427,974 18,610 5.72
Other borrowings ..................... 161,171 4,773 3.89 118,672 2,351 2.60
Junior subordinated debentures ....... 42,098 2,687 8.43 42,053 2,226 7.00
---------- ---------- ---------- ----------
Total deposits and borrowings ..... 1,993,172 $ 55,968 3.72 1,827,099 $ 45,094 3.27
========== ==========
Other liabilities ........................ 18,472 15,745
---------- ----------
Total liabilities ................. 2,011,644 1,842,844
Stockholders' equity ..................... 124,714 122,187
---------- ----------
Total liabilities and stockholders'
equity ........................ $2,136,358 $1,965,031
========== ==========
Net interest income and net
interest rate spread ................. $ 29,038 1.76% $ 32,877 2.20%
========== ========== ========== ==========
Net interest-earning assets and net
interest margin ...................... $ 72,022 1.89% $ 71,363 2.32%
========== ========== ========== ==========
Ratio of interest-earning assets to
deposits and borrowings .............. 103.61% 103.91%
========== ==========
(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.
Nine Months Ended March 31, 2006 vs. 2005
--------------------------------------------
Increase (Decrease) Due to
--------------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
-------- -------- -------- --------
(In thousands)
Interest-earning assets:
One- to four-family mortgage loans .......... $ 5,571 $ (481) $ (63) $ 5,027
Commercial and multi-family real estate loans (117) (133) 2 (248)
Consumer loans .............................. 1,545 405 128 2,078
-------- -------- -------- --------
Total loans receivable ............... 6,999 (209) 67 6,857
Investment securities and other ............. 364 548 11 923
Mortgage-backed securities .................. (739) (7) 1 (745)
-------- -------- -------- --------
Total interest-earning assets ........ $ 6,624 $ 332 $ 79 $ 7,035
======== ======== ======== ========
Deposits and borrowings:
Money market and demand deposits ............ $ 236 $ 1,531 $ 546 $ 2,313
Savings deposits ............................ (1,328) 931 (169) (566)
Certificates of deposit ..................... 2,907 2,906 614 6,427
-------- -------- -------- --------
Total deposits .................... 1,815 5,368 991 8,174
FHLB of New York advances ................... 165 (345) (3) (183)
Other borrowings ............................ 829 1,182 411 2,422
Junior subordinated debentures .............. 2 459 -- 461
-------- -------- -------- --------
Total deposits and borrowings ...... $ 2,811 $ 6,664 $ 1,399 $ 10,874
======== ======== ======== ========
Net change in net interest income ............... $ 3,813 $ (6,332) $ (1,320) $ (3,839)
======== ======== ======== ========
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.
March 31, June 30,
2006 2005
--------- --------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ................................ $1,134 $1,713
Commercial and multi-family ........................ 1,477 904
Consumer ........................................... -- 2
------ ------
Total non-accruing loans ....................... 2,611 2,619
Real estate owned, net .................................. -- --
------ ------
Total non-performing assets .................... 2,611 2,619
------ ------
Restructured loans ...................................... 61 --
------ ------
Total risk elements ............................ $2,672 $2,619
====== ======
Non-accruing loans as a percentage of total loans ....... 0.16% 0.18%
====== ======
Non-performing assets as a percentage of total assets ... 0.12% 0.13%
====== ======
Total risk elements as a percentage of total assets ..... 0.12% 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 March 31, 2006, 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 $500.0 million, representing a one year negative
gap of 22.35% 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 March 31, 2006, the Bank's internally generated initial NPV ratio was
8.96%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 5.63%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 3.33%. As of March 31, 2006, the Company's internally generated
initial NPV ratio was 8.75%, the Post-Shock ratio was 5.52%, and the Sensitivity
Measure was negative 3.23%. 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, an
increase in short term wholesale fundings 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
December 31, 2005 (the latest date for which information is available), the
Bank's initial NPV ratio, as measured by the OTS, was 7.67%, the Bank's
Post-Shock ratio was 3.43% and the Sensitivity Measure was negative 4.24%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At March 31, 2006, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 25% 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 an inversion of the yield curve as the
22
rate spread between the 3-month U.S. treasury bill and the 10-year U.S. treasury
bond turns negative.
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 nine months ended March 31, 2006 included
$29.1 million of proceeds from the sale of loans, a $32.5 million increase in
deposits (net of accrued interest payable), a $241.4 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 nine
months ended March 31, 2006, the cash provided was used to repay $85.0 million
of maturing FHLB of New York advances and to fund investing activities, which
included the origination of loans, the purchase of $35.0 million of investment
securities and the funding of a $7.0 million investment in BOLI. In addition,
the cash provided was used to repurchase $8.6 million of outstanding common
shares, net of reissuances.
The Company's cash inflows for the nine months ended March 31, 2005 included
$24.5 million of proceeds from the sale of loans, a $96.5 million increase in
deposits (net of accrued interest payable), a $43.7 million increase in FHLB of
New York advances and other borrowings, including short term borrowings, $20.6
million from maturities of investment securities, and principal repayments of
loans and mortgage-backed securities. During the nine months ended March 31,
2005, 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 $20.0 million of investment
securities and the funding of a $10.0 million investment in BOLI. In addition,
the cash provided was used to repurchase $6.8 million of outstanding common
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 March 31, 2006 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 March
31, 2006, 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 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.
23
(b) Changes in Internal Controls:
During the quarter ended March 31, 2006, 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 March 31, 2006.
All shares repurchased during the three months ended March 31, 2006
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
-------------------------
Jan. 1 - Jan. 31, 2006.............. 63,800 $18.89 63,800 --
Feb. 1 - Feb. 28, 2006.............. 48,500 $18.11 48,500 601,500
Mar. 1 - Mar. 31, 2006.............. 50,800 $18.32 50,800 550,700
--------- ------ -------
Total repurchases................... 163,100 $18.48 163,100
========= ====== =======
At March 31, 2006, the Company had a repurchase plan under which it
had not yet completed all approved repurchases. This repurchase plan
was publicly announced January 25, 2006 and authorized the Company to
repurchase up to 5%, or 650,000, of its outstanding shares over the
following 18 months. During the three months ended March 31, 2006,
the Company completed a separate repurchase plan that was publicly
announced February 23, 2005. This repurchase plan authorized the
Company to repurchase up to 5%, or 675,000, of its outstanding shares
over an 18 month period.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: May 10, 2006 By: /s/ Joseph L. LaMonica
--------------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Principal Executive Officer)
Date: May 10, 2006 By: /s/ Claire M. Chadwick
--------------------------------------------
Claire M. Chadwick
Senior Executive Vice President,
Chief Financial Officer and
Controller
(Principal Financial and Accounting Officer)
26
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)
15 Letter re: unaudited interim financial information None
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
27
accordance with Item 601 of Regulation S-K.
(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 March 31, 2006 Form 10-Q.
28