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 September 30, 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.
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(Exact name of registrant as specified in its charter)
Maryland 22-3297339
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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 November 3, 2006, there were issued and outstanding 12,836,822
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 - September 30, 2006 (unaudited) and June 30, 2006 3
Consolidated Statements of Income (unaudited) - For the three months ended September 30, 2006
and 2005 4
Consolidated Statements of Comprehensive Income (unaudited) - For the three months ended
September 30, 2006 and 2005 5
Consolidated Statements of Changes in Stockholders' Equity (unaudited) - For the three months ended
September 30, 2006 and 2005 6
Consolidated Statements of Cash Flows (unaudited) - For the three months ended September 30, 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 12
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 1A. - Risk Factors 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 - Certifications Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Executive Officer) 29
Exhibit 31.2 - Certifications 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
September 30, June 30,
2006 2006
------------- -----------
(unaudited)
(Dollars in thousands)
ASSETS
Cash and cash equivalents ................................................... $ 18,645 $ 16,614
Investment securities available for sale, at market value, amortized cost of
$5,110 and $5,053 at September 30, 2006 and June 30, 2006 ............. 5,114 4,936
Investment securities held to maturity, at amortized cost, market value of
$431,542 and $420,663 at September 30, 2006 and June 30, 2006 ......... 440,328 440,360
Mortgage-backed securities held to maturity, at amortized cost, market value
of $59,319 and $60,893 at September 30, 2006 and June 30, 2006 ........ 60,293 62,963
Loans held for sale ......................................................... 285 217
Loans receivable, net of allowance for loan losses of $5,865 and $5,888
at September 30, 2006 and June 30, 2006 ............................... 1,713,001 1,684,007
Premises and equipment, net ................................................. 19,301 20,415
Federal Home Loan Bank of New York stock, at cost ........................... 26,511 27,714
Accrued interest receivable, net ............................................ 11,557 11,145
Bank owned life insurance ("BOLI") .......................................... 31,466 31,168
Other assets ................................................................ 7,761 6,971
------------- -----------
$ 2,334,262 $ 2,306,510
============= ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits .............................................................. $ 1,501,806 $ 1,414,588
Federal Home Loan Bank of New York advances ........................... 465,000 465,465
Other borrowings ...................................................... 179,164 240,193
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $1,162 and $1,174 at September 30, 2006 and
June 30, 2006 ....................................................... 42,138 42,126
Mortgage escrow funds ................................................. 11,727 11,877
Accounts payable and other liabilities ................................ 10,045 8,840
------------- -----------
Total liabilities ..................................................... 2,209,880 2,183,089
------------- -----------
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, 12,836,722
and 12,864,047 shares issued and outstanding at September 30, 2006
and June 30, 2006 ................................................ 129 129
Additional paid-in capital ............................................ 38,387 38,325
Retained earnings ..................................................... 85,864 85,036
Accumulated other comprehensive income (loss), net of taxes ........... 2 (69)
------------- -----------
Total stockholders' equity ............................................ 124,382 123,421
------------- -----------
$ 2,334,262 $ 2,306,510
============= ===========
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
Three months ended September 30,
--------------------------------
2006 2005
----------- ------------
(Dollars in thousands, except
per share amounts)
Interest and Dividend Income:
Interest and fees on loans ....................... $ 23,705 $ 20,456
Interest and dividends on investment securities .. 6,743 6,263
Interest on mortgage-backed securities ........... 795 964
----------- ------------
31,243 27,683
----------- ------------
Interest Expense:
Deposits ......................................... 13,694 9,257
Borrowed funds ................................... 9,016 7,375
Junior subordinated deferrable interest debentures 1,005 859
----------- ------------
23,715 17,491
----------- ------------
Net Interest and Dividend Income Before Provision
for Loan Losses .................................. 7,528 10,192
Provision for Loan Losses .............................. -- --
----------- ------------
Net Interest and Dividend Income After Provision
for Loan Losses .................................. 7,528 10,192
----------- ------------
Non-Interest Income:
Fees and service charges ......................... 725 3,470
Income on BOLI ................................... 298 216
Net gain on sales of loans ....................... 9 122
Net gain (loss) from real estate owned ........... 22 (3)
Other ............................................ 418 181
----------- ------------
1,472 3,986
----------- ------------
Non-Interest Expenses:
Compensation and employee benefits ............... 2,990 3,259
Equipment ........................................ 593 971
Net occupancy expense ............................ 587 585
Extinguishment of debt ........................... -- 1,351
Advertising ...................................... 120 134
Federal deposit insurance premium ................ 43 42
Other ............................................ 1,252 1,411
----------- ------------
5,585 7,753
----------- ------------
Income Before Income Taxes ............................. 3,415 6,425
Income Tax Expense ..................................... 1,151 2,293
----------- ------------
Net Income ............................................. $ 2,264 $ 4,132
=========== ============
Weighted average number of common shares outstanding:
Basic ............................................ 12,861,988 13,263,506
=========== ============
Diluted .......................................... 13,177,415 13,700,349
=========== ============
Net income per common share:
Basic ............................................ $ 0.18 $ 0.31
=========== ============
Diluted .......................................... $ 0.17 $ 0.30
=========== ============
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
Three months ended September 30,
--------------------------------
2006 2005
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(In thousands)
Net income .................................................. $ 2,264 $ 4,132
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period on
investment securities available for sale, net of tax .... 71 (54)
------- -------
Comprehensive income ........................................ $ 2,335 $ 4,078
======= =======
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
For the Three Months Ended September 30, 2006 and 2005
------------------------------------------------------
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, 2005 ......... $ -- $ 133 $ 39,092 $ 84,734 $ 95 $ 124,054
Repurchase of 70,600
outstanding shares ............. (1) (176) (1,183) (1,360)
Issuance of 1,818 shares of
stock for options exercised and
Dividend Reinvestment Plan
("DRP") ........................ 5 1 6
Cash dividends of $0.07 per
common share ................... (908) (908)
Unrealized holding losses on
investment securities available
for sale, net of income taxes
of $(38) ....................... (54) (54)
Net income for the three months
ended September 30, 2005 ....... 4,132 4,132
---------- ---------- ----------- ----------- -------------- ----------
Balance at September 30, 2005 .... $ -- $ 132 $ 38,921 $ 86,776 $ 41 $ 125,870
========== ========== =========== =========== ============== ==========
Balance at June 30, 2006 ......... $ -- $ 129 $ 38,325 $ 85,036 $ (69) $ 123,421
Repurchase of 44,800
outstanding shares ............. (112) (651) (763)
Issuance of 17,475 shares of
stock for options exercised and
DRP ............................. 44 95 139
Tax benefit from stock option plan 130 130
Cash dividends of $0.07 per
common share ................... (880) (880)
Unrealized holding gains on
investment securities available
for sale, net of income taxes
of $50 ......................... 71 71
Net income for the three months
ended September 30, 2006 ....... 2,264 2,264
---------- ---------- ----------- ----------- -------------- ----------
Balance at September 30, 2006 .... $ -- $ 129 $ 38,387 $ 85,864 $ 2 $ 124,382
========== ========== =========== =========== ============== ==========
See notes to consolidated financial statements.
6
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
Three months ended September 30,
--------------------------------
2006 2005
-------- --------
(In thousands)
Cash Flows from Operating Activities:
Net income ............................................................. $ 2,264 $ 4,132
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans ............................................ (9) (122)
Proceeds from sales of loans originated for sale ...................... 862 2,463
Originations of loans held for sale ................................... (927) (2,389)
Net gain on sales of real estate owned ................................ (22) --
Net gain on sales of premises and equipment ........................... (219) --
Amortization of investment and mortgage-backed securities premium, net 36 184
Depreciation and amortization ......................................... 482 864
Tax benefit related to stock options .................................. (130) --
Amortization of premiums on loans and loan fees ....................... 491 538
Amortization of junior subordinated debentures issuance costs ......... 12 11
Income on BOLI ........................................................ (298) (216)
(Increase) decrease in accrued interest receivable, net of accrued
interest payable .................................................... 1,129 (136)
(Increase) decrease in other assets ................................... (790) 385
Increase (decrease) in accounts payable and other liabilities ......... 1,285 (3,372)
Increase (decrease) in mortgage escrow funds .......................... (150) 26
-------- --------
Net cash provided by operating activities ............................. 4,016 2,368
-------- --------
Cash Flows from Investing Activities:
Proceeds from sales of premises and equipment ......................... 1,145 --
Purchases of investment securities held to maturity ................... -- (14,976)
Purchases of investment securities available for sale ................. (57) (48)
Proceeds from principal repayments of mortgage-backed securities
held to maturity ................................................... 2,666 4,776
Net outflow from loan originations net of principal repayments of loans (26,021) (77,249)
Proceeds from loans sold .............................................. 1,969 18,516
Purchases of loans .................................................... (5,427) --
Purchases of premises and equipment ................................... (294) (311)
Net inflow from real estate owned activity ............................ 22 116
(Purchases) redemptions of Federal Home Loan Bank of New York stock .... 1,203 (2,195)
-------- --------
Net cash used in investing activities ................................. (24,794) (71,371)
-------- --------
Cash Flows from Financing Activities:
Net increase in deposits .............................................. 85,677 23,701
Proceeds from advances from the Federal Home Loan Bank of New York
and other borrowings ............................................... 30,000 55,000
Repayment of advances from the Federal Home Loan Bank of New
York and other borrowings ........................................... (39,940) (45,000)
Increase (decrease) in other short term borrowings .................... (51,554) 40,182
Cash dividends paid ................................................... (880) (908)
Repurchases of outstanding shares, net of reissuances ................. (624) (1,354)
Tax benefit related to stock options .................................. 130 --
-------- --------
Net cash provided by financing activities ............................. 22,809 71,621
-------- --------
Net Increase in Cash and Cash Equivalents ................................... 2,031 2,618
Cash and Cash Equivalents, Beginning of Period .............................. 16,614 15,220
-------- --------
Cash and Cash Equivalents, End of Period .................................... $ 18,645 $ 17,838
======== ========
7
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued) (unaudited)
Three months ended September 30,
--------------------------------
2006 2005
-------- --------
(In thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest ...................................................................... $ 21,586 $ 16,363
======== ========
Income taxes .................................................................. $ 24 $ 665
======== ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at lower of cost or market $ 1,963 $ 14,578
======== ========
Transfer of loans receivable to real estate owned, net ........................ $ -- $ 477
======== ========
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 consolidated financial statements have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. 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, 2006. 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. The interim
results of operations presented are not necessarily indicative of the results
for the full year. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses during the reporting
period and disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
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 September 30,
2006, the benefit obligations of $2,923,000 are included in Accounts payable and
other liabilities in the Consolidated Statements of Financial Condition. At
September 30, 2006, the assumptions used in calculating the benefit obligations
included a 4% compensation increase rate and a discount rate of 6%. At September
30, 2005, the assumptions used in calculating the benefit obligation included a
4% compensation increase rate and a discount rate of 5%. 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, 2007.
Net periodic pension cost for the Company's SERP and DP included the following
components:
Three months ended September 30,
---------------------------------------
2006 2005
----------------- -----------------
SERP DP SERP DP
---- ---- ---- ----
(In thousands)
Service cost ..................... $ 36 $ -- $273 $ 33
Interest cost .................... 40 6 16 2
Amortization of prior service cost 28 7 6 1
Loss recognized .................. 1 -- -- --
---- ---- ---- ----
Net periodic pension expense ..... $105 $ 13 $295 $ 36
==== ==== ==== ====
9
3. Computation of Earnings Per Share ("EPS")
The computation of EPS is presented in the following table.
Three months ended September 30,
--------------------------------
2006 2005
----------- -----------
(Dollars in thousands, except
per share amounts)
Net income ................................... $ 2,264 $ 4,132
=========== ===========
Number of shares outstanding:
Weighted average shares issued and outstanding 12,861,988 13,263,506
Plus: Average common stock equivalents ....... 315,427 436,843
----------- -----------
Average diluted shares ....................... 13,177,415 13,700,349
=========== ===========
Earnings per common share:
Basic ................................ $ 0.18 $ 0.31
=========== ===========
Diluted .............................. $ 0.17 $ 0.30
=========== ===========
4. Stockholders' Equity and Regulatory Capital
During the three months ended September 30, 2006, the Company repurchased 44,800
shares of its outstanding common stock at prices ranging from $16.19 to $17.79
per share, for a total cost of $763,000.
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 September 30, 2006
Tangible capital, and ratio to
adjusted total assets .......... $167,302 7.17% $ 35,001 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets .......... $167,302 7.17% $ 93,337 4.00% $116,671 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ........... $167,302 12.98% N/A N/A $ 77,353 6.00%
Risk-based capital, and ratio to
risk-weighted assets ........... $173,170 13.43% $103,138 8.00% $128,922 10.00%
As of June 30, 2006
Tangible capital, and ratio to
adjusted total assets .......... $168,746 7.33% $ 34,535 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets .......... $168,746 7.33% $ 92,094 4.00% $115,117 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ........... $168,746 13.34% N/A N/A $ 75,871 6.00%
Risk-based capital, and ratio to
risk-weighted assets ........... $174,633 13.81% $101,161 8.00% $126,451 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 September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements but does not
require new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company does not expect the adoption of
SFAS 157 to have a material impact on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" ("SFAS 158"). SFAS 158 requires employers to recognize on
the balance sheet the funded status of pension and other postretirement benefit
plans. SFAS 158 will also require fiscal year end measurements of plan assets
and benefit obligations, eliminating the use of earlier measurement dates
currently permissible; however, the measurement date requirement will not be
effective until fiscal years beginning after December 15, 2008. SFAS 158 amends
FASB Statements No. 87, 88, 106 and 132(R) but retains most of their measurement
and disclosure guidance and will not change the amounts recognized in the income
statement as net periodic benefit cost. Recognition on the balance sheet of the
funded status of plans and the related disclosure provisions as required by SFAS
158 are effective as of the end of the fiscal year ending after December 15,
2006. The Company does not expect the adoption of SFAS 158 to have a material
impact on its consolidated financial statements.
In September 2006, the SEC released SEC Staff Accounting Bulletin No. 108 ("SAB
108"), "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB 108 addresses how
uncorrected errors in previous years should be considered when quantifying
errors in current year financial statements. SAB 108 requires registrants to
consider the effect of all carry over and reversing effects of prior year
misstatements when quantifying errors in current year financial statements, but
does not change the SEC staff's previous guidance on evaluating the materiality
of misstatements. The financial statements of a registrant would require
adjustment if either approach resulted in a misstatement that is material,
considering all relevant quantitative and qualitative factors. SAB 108 allows
registrants to record the effect of adopting the guidance as a one-time
cumulative effect adjustment to beginning of the year retained earnings. SAB 108
is effective in the first fiscal year ending after November 15, 2006. The
Company does not expect the adoption of SAB 108 to have a material impact on its
consolidated financial statements.
In September 2006, the Emerging Issues Task Force ("EITF") of the FASB discussed
public comments received on EITF Issue No. 06-4, "Accounting for Deferred
Compensation and Post-Retirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements." On September 7, 2006, the EITF agreed to clarify
certain points based on public comments. The EITF reached a consensus that an
employer should recognize a liability for future benefits under FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," or APB Opinion No. 12, "Omnibus Opinion - 1967," for an endorsement
split-dollar life insurance arrangement subject to EITF Issue No. 06-4. This
liability is to be based on the substantive agreement with the employee. The
consensus is effective for fiscal years beginning after December 15, 2007. Early
adoption is permitted as of the beginning of an entity's fiscal year. Entities
should recognize the effects of applying the consensus on this issue as a change
in accounting principle through a cumulative-effect adjustment to retained
earnings or to other components of equity or net assets in the statement of
financial position as of the beginning of the year of adoption. Retrospective
application to all prior periods is permitted. The Company is currently
evaluating the impact of the adoption of EITF Issue No. 06-4 on its consolidated
financial statements.
6. Subsequent Event - Merger Agreement
On November 2, 2006, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with New York Community Bancorp, Inc. ("NYCB"),
pursuant to which the Company will be merged into NYCB (the "Merger"). It is
expected that concurrent with or immediately after the Merger, the Bank will be
merged into New York Community Bank, a wholly owned subsidiary of NYCB. Upon
completion of the Merger, the holders of the Company's common stock will be
entitled to receive, for each share of Company common stock held, 1.222 shares
of NYCB common stock, with cash paid in lieu of fractional NYCB shares. The
Merger is subject to the approval of the Company's stockholders, the receipt of
regulatory approvals and the satisfaction of other customary closing conditions.
It is currently expected that the Merger will be completed late in the quarter
ending March 31, 2007.
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 consolidated
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated 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 as problematic 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 may have to be made as a 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 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.
Asset Impairment Judgments - The Company periodically performs analyses to test
for impairment of various assets.
12
When necessary, valuation allowances are established to recognize impairment of
assets. In addition to the impairment analyses related to loans, additional
impairment analysis is conducted as it relates to the value of other than
temporary declines in the value of the investment and mortgage-backed securities
portfolios.
Investments securities available for sale are carried at market value, with
unrealized gains and losses, net of taxes, reported as accumulated other
comprehensive income (loss) in stockholders' equity. Investment and
mortgage-backed securities held to maturity are carried at amortized cost as the
Company has both the ability and intent to hold the securities to maturity. The
Company conducts a periodic review and evaluation of the investment and
mortgage-backed securities portfolios to determine if the value of any security
has declined below its carrying value and whether such decline is other than
temporary.
If such decline is deemed other than temporary, the carrying amount of the
security would be adjusted by writing down the security to fair market value
through a charge to current period operations. The market values of the
Company's investment and mortgage-backed securities are significantly affected
by changes in interest rates. In general, as interest rates rise, the market
value of fixed-rate securities will decrease; as interest rates fall, the market
value of fixed-rate securities will increase. With significant changes in
interest rates, the Company evaluates the intent and ability to hold the
security to maturity or for a sufficient time to recover the recorded principal
balance. Estimated fair values for securities are based on quoted dealer market
prices or subscribed pricing services.
Forward-Looking Statements
When used in this Form 10-Q and in future filings by the Company with 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, the
possibility that the Merger with NYCB will occur later than currently
anticipated or not at all, 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 does 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 24 full service branch
offices located in New Jersey. The Company attracts deposits from the general
public and uses these deposits, together with brokered deposits, 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 sponsored 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
13
approximately 77.1% at September 30, 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, 2006,
the Company's net loans receivable and loans held for sale increased $29.1
million. This increase was primarily attributable to lower levels of prepayments
and the consistent level of consumer loan originations, when compared to the
prior year period. During the three months ended September 30, 2006, the Company
sold $2.8 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 is vital to
PennFed's ability to generate liquid funds and to generate non-interest income.
The number of deposit accounts at September 30, 2006 was relatively the same as
the number of deposit accounts at June 30, 2006; however, the average deposit
balances per account, excluding wholesale certificates of deposit, has increased
6.1% since June 30, 2006. 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, 2006, deposits increased $87.2 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 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 also will 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 its
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 would also 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
and the relationship of short to long term 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. As interest
rates rise, a decline in loan prepayments and in prepayments on mortgage-backed
securities will reduce cashflows available for reinvestment at higher rates. By
emphasizing the origination of adjustable rate and biweekly loan products and
continuing the sale of 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.
Financial Condition
Assets. Total assets increased $27.8 million to $2.334 billion at September 30,
2006 from total assets of $2.307 billion at June 30, 2006. The increase at
September 30, 2006 was primarily due to a $29.1 million increase in net loans
receivable and loans held for sale, reflecting strong consumer loan origination
levels and the lower levels of loan prepayments due to higher long term interest
rates.
Liabilities. Deposits increased $87.2 million to $1.502 billion at September 30,
2006 from $1.415 billion at June 30, 2006. The increase was attributable to an
increase in certificates of deposit of $104.8 million and an increase of $2.6
million in checking and money market accounts partially offset by a decrease of
$20.2 million in savings accounts since June 30,
14
2006. Higher levels of short term interest rates, when compared to prior year
periods, has resulted in a shift of funds to higher yielding certificates of
deposit. The increase in certificates of deposits at September 30, 2006 included
an $84.2 million increase in municipal certificates of deposit and the addition
of $21.0 million of wholesale certificates of deposit. At September 30, 2006,
FHLB of New York advances and other borrowings totaled $644.2 million,
reflecting a $61.5 million decrease from $705.7 million at June 30, 2006, as a
result of the increase in deposits as the primary source of funds during the
current year period.
Stockholders' Equity. Stockholders' equity at September 30, 2006 totaled $124.4
million compared to $123.4 million at June 30, 2006. The increase in equity
reflects the net income recorded for the three months ended September 30, 2006,
the exercise of stock options, including the related tax effect, and unrealized
holding gains on investment securities available for sale, net of taxes,
partially offset by the repurchase of 44,800 shares of the Company's outstanding
stock at an average price of $17.05 per share and the declaration of a cash
dividend.
Results of Operations
General. For the three months ended September 30, 2006, net income was $2.3
million, or $0.17 per diluted share, compared to net income of $4.1 million, or
$0.30 per diluted share, for the comparable prior year period.
Interest and Dividend Income. Interest and dividend income for the three months
ended September 30, 2006 increased to $31.2 million from $27.7 million for the
three months ended September 30, 2005. In general, the increase in interest and
dividend income reflects a higher level of interest-earning assets due to
consistently sustained loan origination levels over most of the past twelve
months, particularly in consumer loans, coupled with the lower levels of
prepayments in the Company's loan and mortgage-backed securities portfolios.
Average interest-earning assets were $2.238 billion for the three months ended
September 30, 2006, compared to $2.017 billion for the comparable prior year
period. The average yield earned on interest-earning assets increased to 5.56%
for the three months ended September 30, 2006 from 5.47% for the three months
ended September 30, 2005, primarily reflective of the increase in the yield
earned on consumer loans and investment securities.
Interest income on residential one- to four-family mortgage loans for the three
months ended September 30, 2006 increased $2.1 million when compared to the
prior year period. The increase in interest income on residential one- to
four-family mortgage loans was partially attributable to an increase in the
average balance of residential one- to four-family mortgage loans outstanding of
$142.8 million to $1.317 billion for the three months ended September 30, 2006,
compared to $1.174 billion for the prior year period, due to strong loan
origination levels over most of the past twelve month period coupled with lower
levels of prepayments. Additionally, the increase in interest income on
residential one- to four-family mortgage loans was also due to an increase in
the average yield earned on this loan portfolio to 5.31% for the three months
ended September 30, 2006, from 5.24% for the three months ended September 30,
2005, reflecting the increase in long-term interest rates over the last twelve
months.
Interest income on commercial and multi-family real estate loans decreased
$21,000 for the three months ended September 30, 2006, when compared to the
prior year period. The decrease in interest income on commercial and
multi-family real estate loans was primarily attributable to a decrease in the
average yield earned on these loans to 6.65% for the three months ended
September 30, 2006 from 6.82% for the three months ended September 30, 2005. The
payoff of higher yielding loans and the origination of loans at relatively lower
market interest rates resulted in a decline in the yield on the commercial and
multi-family real estate loan portfolio. Somewhat offsetting the decrease in the
average yield earned on commercial and multi-family real estate loans was an
increase in the average balance outstanding on this loan portfolio of $3.0
million to $169.6 million for the three months ended September 30, 2006,
compared to $166.6 million for the comparable prior year period.
Interest income on consumer loans increased $1.2 million for the three months
ended September 30, 2006, when compared to the prior year period. The increase
in interest income on consumer loans for the three months ended September 30,
2006 was partially attributable to an increase in the average balance
outstanding of this loan portfolio of $63.8 million, when compared to the three
months ended September 30, 2005, due primarily to higher origination levels and
reduced prepayments. Also contributing to the increase in interest income on
consumer loans for the three months ended September 30, 2006 was an increase in
the average yield earned on these loans to 6.11% from 5.61% for the comparable
prior year period, as a result of the strong loan origination levels at higher
market interest rates.
Interest income on investment securities and other interest-earning assets
increased $480,000 for the three months ended September 30, 2006, when compared
to the prior year period. The increase in interest income on these securities
was partially attributable to a $24.8 million increase in the average balance
outstanding for the three months ended
15
September 30, 2006, when compared to the prior year period, due to the absence
of callable securities being called before maturity as a result of the increase
in interest rates. Additionally, the increase in interest income on investment
securities and other interest-earning assets was partially attributable to an
increase in the average yield earned on these securities to 5.68% for the three
months ended September 30, 2006, compared to 5.56% for the three months ended
September 30, 2005.
Interest income on the mortgage-backed securities portfolio decreased $169,000
for the three months ended September 30, 2006, compared to the prior year
period. The decrease in interest income on mortgage-backed securities for the
three months ended September 30, 2006 was primarily due to a decrease in the
average balance outstanding of $14.2 million, when compared to the three months
ended September 30, 2005. Somewhat offsetting the decrease in the average
balance outstanding on mortgage-backed securities was an increase in the average
yield earned on this portfolio to 5.15% for the three months ended September 30,
2006 from 5.07% for the three months ended September 30, 2005.
Interest Expense. Interest expense increased to $23.7 million for the three
months ended September 30, 2006 from $17.5 million for the comparable prior year
period. A significant rise in short term interest rates combined with 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 in the current year period when compared to the prior year period. The
average rate on deposits and borrowings was 4.31% for the three months ended
September 30, 2006, an increase from 3.55% for the prior year period. Total
average deposits and borrowings increased $227.5 million for the three months
ended September 30, 2006, when compared to the three months ended September 30,
2005.
For the three months ended September 30, 2006, the average rate paid on deposits
increased to 3.70% from 2.74% for the three months ended September 30, 2005,
reflecting the effect of a rise in short term market interest rates and the
highly competitive New Jersey market. Average deposit balances increased $126.5
million to $1.468 billion for the three months ended September 30, 2006 from
$1.342 billion for the comparable prior year period.
The average cost of FHLB of New York advances for the three months ended
September 30, 2006 decreased to 5.47% from 5.74% for the three months ended
September 30, 2005, primarily due to the addition of new advances and the
replacement of maturing or called advances at relatively lower rates. The
average balance of FHLB of New York advances increased $48.2 million for the
three months ended September 30, 2006, when compared to the prior year period.
For the three months ended September 30, 2006, the average balance of other
borrowings increased $52.8 million, when compared to the three months ended
September 30, 2005. The average rate paid on other borrowings increased to 5.08%
for the three months ended September 30, 2006 from 3.50% for the comparable
prior year period, since the vast majority of other borrowings had maturities
within one year, reflecting the higher levels of short term interest rates.
Interest expense on junior subordinated debentures increased $146,000 for the
three months ended September 30, 2006, when compared to the prior year period.
The increase in interest expense was primarily due to an increase in the average
cost of these borrowings to 9.40% for the three months ended September 30, 2006
from 8.05% for the prior year period. The average balance of junior subordinated
debentures increased $45,000 during the three months ended September 30, 2006,
when compared to the three months ended September 30, 2005.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three months ended September 30, 2006 was $7.5
million compared to $10.2 million recorded in the prior year period. For the
three months ended September 30, 2006, average net interest-earning assets
decreased $7.3 million when compared to the three months ended September 30,
2005. The net interest rate spread and net interest margin for the three months
ended September 30, 2006 were 1.25% and 1.38%, respectively, a decrease from
1.92% and 2.05% for the three months ended September 30, 2005. The decline in
the net interest margin during the current year period has been the result of
the prolonged flat and at times inverted yield curve, with longer term interest
rates reflecting minimal movement but with continual increases in shorter term
interest rates. As a result, the Company's deposit and borrowing costs rose at a
significantly 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 months ended September 30, 2006 and 2005, reflecting the Company's
historically low levels of non-accruing loans and loan chargeoffs. Management
believes that the allowance for loan losses at both dates was adequate to absorb
probable losses on existing loans that may become uncollectible. The allowance
for loan losses of $5.9 million at September 30, 2006 remained relatively
unchanged from the allowance for loan losses at June 30, 2006. However, the
allowance for loan losses as a percentage of non-accruing loans was 274.07% at
September 30, 2006, compared to 330.79% at June 30, 2006. Non-
16
accruing loans were $2.1 million at September 30, 2006 compared to $1.8 million
at June 30, 2006. The allowance for loan losses as a percentage of total gross
loans at September 30, 2006 was 0.34% compared to 0.35% at June 30, 2006,
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."
17
Analysis of Net Interest Income
The following table sets forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income for the three months ended September 30, 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 September 30,
---------------------------------------------------------------------------
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 ............................. $ 1,316,981 $ 17,530 5.31% $ 1,174,141 $ 15,429 5.24%
Commercial and multi-family real
estate loans ...................... 169,559 2,880 6.65 166,557 2,901 6.82
Consumer loans ........................ 214,139 3,295 6.11 150,354 2,126 5.61
----------- -------- ----------- --------
Total loans receivable ............ 1,700,679 23,705 5.54 1,491,052 20,456 5.46
Investment securities and other ....... 475,159 6,743 5.68 450,404 6,263 5.56
Mortgage-backed securities ............ 61,797 795 5.15 76,028 964 5.07
----------- -------- ----------- --------
Total interest-earning assets ..... 2,237,635 $ 31,243 5.56 2,017,484 $ 27,683 5.47
======== ========
Non-interest earning assets ............... 78,673 69,777
----------- -----------
Total assets ...................... $ 2,316,308 $ 2,087,261
=========== ===========
Deposits and borrowings:
Money market and demand deposits ...... $ 312,857 $ 2,048 2.60% $ 229,677 $ 678 1.17%
Savings deposits ...................... 288,904 1,940 2.66 376,191 2,422 2.55
Certificates of deposit ............... 866,542 9,706 4.44 735,938 6,157 3.32
----------- -------- ----------- --------
Total deposits .................... 1,468,303 13,694 3.70 1,341,806 9,257 2.74
FHLB of New York advances ............. 465,362 6,501 5.47 417,185 6,117 5.74
Other borrowings ...................... 193,600 2,515 5.08 140,846 1,258 3.50
Junior subordinated debentures ........ 42,132 1,005 9.40 42,087 859 8.05
----------- -------- ----------- --------
Total deposits and borrowings ..... 2,169,397 $ 23,715 4.31 1,941,924 $ 17,491 3.55
======== ========
Other liabilities ......................... 23,168 19,330
----------- -----------
Total liabilities ................. 2,192,565 1,961,254
Stockholders' equity ...................... 123,743 126,007
----------- -----------
Total liabilities and stockholders'
equity ........................ $ 2,316,308 $ 2,087,261
=========== ===========
Net interest income and net
interest rate spread .................. $ 7,528 1.25% $ 10,192 1.92%
======== ==== ======== ====
Net interest-earning assets and net
interest margin ....................... $ 68,238 1.38% $ 75,560 2.05%
=========== ==== =========== ====
Ratio of interest-earning assets to
deposits and borrowings ............... 103.15% 103.89%
====== ======
(1) Annualized.
18
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.
Three Months Ended September 30, 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 .......... $ 1,871 $ 205 $ 25 $ 2,101
Commercial and multi-family real estate loans 51 (71) (1) (21)
Consumer loans .............................. 901 188 80 1,169
--------- --------- --------- ---------
Total loans receivable ............... 2,823 322 104 3,249
Investment securities and other ............. 338 135 7 480
Mortgage-backed securities .................. (181) 15 (3) (169)
--------- --------- --------- ---------
Total interest-earning assets ........ $ 2,980 $ 472 $ 108 $ 3,560
========= ========= ========= =========
Deposits and borrowings:
Money market and demand deposits ............ $ 243 $ 830 $ 297 $ 1,370
Savings deposits ............................ (561) 103 (24) (482)
Certificates of deposit ..................... 1,084 2,099 366 3,549
--------- --------- --------- ---------
Total deposits ....................... 766 3,032 639 4,437
FHLB of New York advances ................... 699 (282) (33) 384
Other borrowings ............................ 462 587 208 1,257
Junior subordinated debentures .............. 1 145 -- 146
--------- --------- --------- ---------
Total deposits and borrowings ........ $ 1,928 $ 3,482 $ 814 $ 6,224
========= ========= ========= =========
Net change in net interest income ................ $ 1,052 $ (3,010) $ (706) $ (2,664)
========= ========= ========= =========
Non-Interest Income. For the three months ended September 30, 2006, non-interest
income was $1.5 million compared to $4.0 million for the prior year period. The
decrease in non-interest income for the three months ended September 30, 2006
was primarily due to a decrease in fees and service charges as compared to the
three months ended September 30, 2005.
Fees and service charges for the three months ended September 30, 2006 were
$725,000, reflecting a decrease of $2.7 million from the $3.5 million recorded
for the prior year period. Fees and service charges for the three months ended
September 30, 2005 included a prepayment premium of $2.7 million earned on the
payoff of a large-balance commercial real estate loan.
During the three months ended September 30, 2006, the net gain on sales of loans
was $9,000 compared to $122,000 for the three months ended September 30, 2005.
Approximately $800,000 and $2.0 million of primarily fixed rate one- to
four-family residential mortgage loans were sold into the secondary market and
to other financial institutions, respectively, during the three months ended
September 30, 2006. Approximately $2.4 million and $18.4 million of fixed rate
one- to four-family residential mortgage loans were sold into the secondary
market and to other financial institutions, respectively, during the three
months ended September 30, 2005. The reduction in loan sales during the current
period when compared to the prior year period, can be partially 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.
Other non-interest income for the three months ended September 30, 2006 was
$418,000, an increase of $237,000 compared to the $181,000 recorded for the
three months ended September 30, 2005. The increase in other non-interest
19
income was primarily due to a gain of $219,000 recorded during the three months
ended September 30, 2006 on the sale of the Bloomfield Avenue branch property in
Montclair, New Jersey.
Non-Interest Expenses. Non-interest expenses for the three months ended
September 30, 2006 were $5.6 million, or 0.96% of average assets. For the
comparable prior year period, non-interest expenses were $7.8 million, or 1.49%
of average assets. Prior period expenses reflected a $1.4 million prepayment
penalty on certain FHLB of New York advances, $259,000 of increased obligations
under certain long-term benefit plans and $372,000 of accelerated depreciation
expense for branch automation system software that was no longer used.
Income Tax Expense. Income tax expense for the three months ended September 30,
2006 was $1.2 million compared to $2.3 million for the three months ended
September 30, 2005. The effective tax rate for the three months ended September
30, 2006 was 33.7% compared to 35.7% for the three months ended September 30,
2005.
20
Non-Performing Assets
The table below sets forth the Company's amounts and categories of
non-performing assets and restructured loans. Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more than
90 days. There are no loans delinquent more than 90 days which are still
accruing interest. Real estate owned represents assets acquired in the
settlement of loans (generally through foreclosure or a deed in lieu) and is
shown net of valuation allowances.
September 30, June 30,
2006 2006
------------- -------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ........................... $ 963 $1,025
Commercial and multi-family ................... 1,177 731
Consumer ...................................... -- 24
------ ------
Total non-accruing loans ................. 2,140 1,780
Real estate owned, net .............................. -- --
------ ------
Total non-performing assets .............. $2,140 $1,780
------ ------
Restructured loans .................................. 61 61
------ ------
Total risk elements ...................... $2,201 $1,841
====== ======
Non-accruing loans as a percentage of total loans ... 0.12% 0.11%
====== ======
Non-performing assets as a percentage of total assets 0.09% 0.08%
====== ======
Total risk elements as a percentage of total assets . 0.09% 0.08%
====== ======
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 September 30, 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 $621.9 million, representing a one year negative
gap of 26.64% of total assets, compared to a one year negative gap of $622.8
million, or 27.02%, of total assets at June 30, 2006. The Company's overall gap
position was relatively unchanged from June 30, 2006. Growth in the estimated
cash flows of the Company's short-term interest-bearing liabilities, due to an
increase in retail and wholesale funding balances maturing within one year, was
balanced by growth in short-term interest-earning asset cash flows. A decline in
longer-term market rates during the quarter resulted in an increase in loan
related prepayment estimates and in the projected early redemption of certain
callable U.S. government agency securities.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of interest rate gap
21
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 may indicate 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 September 30, 2006, the Bank's internally generated initial NPV ratio was
8.55%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 5.13%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 3.42%. As of September 30, 2006, the Company's internally generated
initial NPV ratio was 8.47%, the Post-Shock ratio was 4.98%, and the Sensitivity
Measure was negative 3.49%. As of June 30, 2006, the Bank's Post-Shock NPV ratio
and Sensitivity Measure were 5.02% and negative 3.64%, respectively, and the
Company's Post-Shock NPV ratios and Sensitivity Measures were 4.34% and negative
4.13%, respectively. Both the Post-Shock NPV ratio and the Sensitivity Measure
improved from June 30, 2006. The improvements are primarily attributed to a
decline in asset duration. Lower longer-term market interest rates resulted in
an increase in estimated loan related prepayments and the early redemption of
certain callable U.S. government agency securities. Liability duration was
relatively unchanged from June 30, 2006, as a decline in short-term market
interest rates, which lengthens liability duration, was primarily offset by
growth in short-term funding balances. 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
June 30, 2006 (the latest date for which information is available), the Bank's
initial NPV ratio, as measured by the OTS, was 7.24%, the Bank's Post-Shock
ratio was 2.93% and the Sensitivity Measure was negative 4.31%, placing the
Bank's IRR profile in the "high risk" category under OTS guidelines.
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 September 30, 2006, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 29.5% from the base case, or current market, as a result of an
immediate and sustained 2% increase in interest rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company sets rates on deposit products for selected terms and, when necessary,
has supplemented deposits with longer-term or less expensive alternative sources
of funds.
22
The Bank maintains appropriate levels of liquid assets. The Company's most
liquid assets are cash and cash equivalents, U.S. government sponsored 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 that the Company should require funds beyond its ability to
generate them internally, additional sources of funds are available through the
use of FHLB of New York advances, 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 three months ended September 30, 2006
included $2.8 million of proceeds from the sale of loans, an $85.7 million
increase in deposits (net of accrued interest payable), a $30.0 million increase
in FHLB of New York advances and principal repayments of loans and
mortgage-backed securities. During the three months ended September 30, 2006,
the cash provided was used to repay $91.5 million of maturing FHLB of New York
advances and other borrowings, including short term borrowings, and to fund
investing activities, which included the origination and purchase of loans.
The Company's cash inflows for the three months ended September 30, 2005
included $21.0 million of proceeds from the sale of loans, a $23.7 million
increase in deposits (net of accrued interest payable), a $95.2 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 three months ended September 30, 2005, the cash provided was used to
repay $45.0 million of maturing FHLB of New York advances and other borrowings
and to fund investing activities, which included the origination of loans and
the purchase of $15.0 million of investment securities.
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 September 30, 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
September 30, 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) as appropriate to allow timely decisions regarding
required disclosure and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls:
During the quarter ended September 30, 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 may be circumvented by the individual acts of some
persons, by collusion of two or more people, or
23
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 1A. Risk Factors
There have been no material changes in the Company's risk factors
from those previously disclosed in Part I, Item 1A of the Company's
Form 10-K for the year ended June 30, 2006.
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 September 30,
2006. All shares repurchased during the three months ended
September 30, 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
----------------------------
July 1 - July 31, 2006 ..... -- -- -- 414,700
Aug. 1 - Aug. 31, 2006 ..... 32,800 $ 16.84 32,800 381,900
Sept. 1 - Sept. 30, 2006 ... 12,000 17.62 12,000 369,900
------ ------- -------
Total repurchases .......... 44,800 $ 17.05 44,800
====== ======= =======
At September 30, 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. The Merger
Agreement between the Company and NYCB entered into on November 2,
2006 (see Note 6 of the Notes to Consolidated Financial Statements)
provides that the Company may not repurchase any shares of its
common stock prior to the Merger without the prior written consent
of NYCB.
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: November 9, 2006 By: /s/ Joseph L. LaMonica
-----------------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 9, 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 Agreement Plan of Merger, dated as of November 2, 2006 (the "Merger Agreement"),
between the Company and New York Community Bancorp, Inc. ("NYCB") (e)
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 Cancellation Agreement among the Company, NYCB and
Joseph L. LaMonica (e)
(iii) Employment Agreement Cancellation Agreement among the Company, NYCB and
Patrick D. McTernan (e)
(iv) Employment Agreement Cancellation Agreement among the Company, NYCB and
Jeffrey J. Carfora (e)
(v) Employment Agreement Cancellation Agreement among the Company, NYCB and
Claire M. Chadwick (e)
(vi) Employment Agreement Cancellation Agreement among the Company, NYCB and
Maria F. Magurno (e)
(vii) Retention Agreement between New York Community Bank and Joseph L. LaMonica (e)
(viii) Retention Agreement between New York Community Bank and Patrick D. McTernan (e)
(ix) Retention Agreement between New York Community Bank and Jeffrey J. Carfora (e)
(x) Retention Agreement between New York Community Bank and Claire M. Chadwick (e)
(xi) Retention Agreement between New York Community Bank and Maria F. Magurno (e)
(xii) Noncompetition Agreement between NYCB and Joseph L. LaMonica (e)
(xiii) Noncompetition Agreement between NYCB and Patrick D. McTernan (e)
(xiv) 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)
(xv) Amended and Restated Supplemental Executive Death Benefit Plan (h)
(xvi) Outside Directors' Retirement Plan (f)
(xvii) Form of Consulting Agreement (f)
(xviii) Description of Named Executive Officer Salary and Bonus Arrangements (i)
(xix) Description of Director Fees (i)
(xx) 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 Certifications Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Executive Officer) 31.1
31.2 Certifications 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
27
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, 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 and as further amended on Form
8-A/A-4 filed with the Securities and Exchange Commission on November 8,
2006. 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 and the Fifth
Amendment to the Stockholder 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 November 8, 2006. These documents
are hereby incorporated by reference in 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 November 8, 2006 (File No. 0-24040). Such previously filed
document is hereby incorporated by reference in accordance with Item 601
of Regulation S-K. The Retention Agreements and Noncompetition Agreements
were entered into on November 2, 2006 but are effective immediately
following the completion of the merger of the Company into NYCB pursuant
to the Merger Agreement.
(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 September 30, 2006 Form 10-Q.
28