UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- ----------------------
Commission File Number: 0-24040
--------------------------------------------------------
PENNFED FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 22-3297339
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
622 Eagle Rock Avenue, West Orange, New Jersey 07052-2989
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 669-7366
--------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X. NO .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X . NO .
--- ---
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 January 31, 2005, there were issued and outstanding 13,638,966
shares of the Registrant's Common Stock.
PennFed Financial Services, Inc. and Subsidiaries
Form 10-Q
Contents of Report
Page
Number
------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. - Financial Statements
Consolidated Statements of Financial Condition - December 31, 2004 (Unaudited) and June 30, 2004 3
Consolidated Statements of Income (Unaudited) - For the three and six months ended December 31,
2004 and 2003 4
Consolidated Statements of Comprehensive Income (Unaudited) - For the three and six months ended
December 31, 2004 and 2003 5
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - For the six months ended
December 31, 2004 and 2003 6
Consolidated Statements of Cash Flows (Unaudited) - For the six months ended December 31, 2004 and
2003 7
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. - Controls and Procedures 24
PART II - OTHER INFORMATION
- ---------------------------
Item 1. - Legal Proceedings 26
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. - Defaults Upon Senior Securities 26
Item 4. - Submission of Matters to a Vote of Security Holders 26
Item 5. - Other Information 26
Item 6. - Exhibits 26
SIGNATURES 27
- ----------
EXHIBITS
- --------
Exhibit Index 28
Exhibit 31.1 - Certification Required by Securities Exchange Act of 1934 Rule 13a -14 (a)
(Chief Executive Officer) 30
Exhibit 31.2 - Certification Required by Securities Exchange Act of 1934 Rule 13a -14 (a)
(Chief Financial Officer) 31
Exhibit 32 - Certifications Required by Section 1350 of Title 18 of the United States Code 32
2
PART I - Financial Information
Item 1. Financial Statements
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, June 30,
2004 2004
------------- ----------
(unaudited) (audited)
(Dollars in thousands)
ASSETS
Cash and amounts due from depository institutions .......................... $ 14,829 $ 14,859
Federal funds sold ......................................................... -- --
------------- ----------
Cash and cash equivalents ............................................ 14,829 14,859
Investment securities available for sale, at market value, amortized cost of
$4,758 and $4,672 at December 31, 2004 and June 30, 2004 ............. 4,882 4,720
Investment securities held to maturity, at amortized cost, market value of
$415,545 and $413,215 at December 31, 2004 and June 30, 2004 ......... 417,277 420,260
Mortgage-backed securities held to maturity, at amortized cost, market value
of $89,380 and $100,644 at December 31, 2004 and June 30, 2004 ....... 87,879 100,079
Loans held for sale ........................................................ 2,580 --
Loans receivable, net of allowance for loan losses of $6,064 and $6,249
at December 31, 2004 and June 30, 2004 ............................... 1,370,192 1,287,473
Premises and equipment, net ................................................ 21,181 21,690
Real estate owned, net ..................................................... -- --
Federal Home Loan Bank of New York stock, at cost .......................... 22,102 23,773
Accrued interest receivable, net ........................................... 10,134 10,195
Other intangible assets .................................................... 454 1,361
Bank owned life insurance ("BOLI") ......................................... 22,761 12,512
Other assets ............................................................... 5,217 5,364
------------- ----------
$ 1,979,488 $1,902,286
============= ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits ............................................................. $ 1,253,454 $1,188,100
Federal Home Loan Bank of New York advances .......................... 425,465 475,465
Other borrowings ..................................................... 122,624 59,346
Junior Subordinated Deferrable Interest Debentures, net of unamortized
issuance expenses of $1,241 and $1,263 at December 31, 2004 and
June 30, 2004 ...................................................... 42,059 42,037
Mortgage escrow funds ................................................ 7,017 9,739
Accounts payable and other liabilities ............................... 5,534 9,200
------------- ----------
Total liabilities .................................................... 1,856,153 1,783,887
------------- ----------
Stockholders' Equity:
Serial preferred stock, $.01 par value, 7,000,000 shares authorized,
no shares issued ................................................. -- --
Common stock, $.01 par value, 15,000,000 shares authorized, 13,648,966
and 13,576,060 shares issued and outstanding at December 31, 2004
and June 30, 2004 ............................................... 137 9
Additional paid-in capital ........................................... 45,885 42,839
Retained earnings, partially restricted .............................. 77,239 75,523
Accumulated other comprehensive income, net of taxes ................. 74 28
------------- ----------
Total stockholders' equity ........................................... 123,335 118,399
------------- ----------
$ 1,979,488 $1,902,286
============= ==========
See notes to consolidated financial statements.
3
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
Interest and Dividend Income:
Interest and fees on loans ....................... $ 18,820 $ 16,860 $ 37,297 $ 34,120
Interest on federal funds sold ................... -- 79 -- 150
Interest and dividends on investment securities .. 6,023 5,429 12,121 10,711
Interest on mortgage-backed securities ........... 1,156 1,290 2,386 2,418
----------- ----------- ----------- -----------
25,999 23,658 51,804 47,399
----------- ----------- ----------- -----------
Interest Expense:
Deposits ......................................... 7,312 6,635 14,324 13,225
Borrowed funds ................................... 7,008 7,312 14,022 14,844
Junior subordinated deferrable interest debentures 740 673 1,448 1,355
----------- ----------- ----------- -----------
15,060 14,620 29,794 29,424
----------- ----------- ----------- -----------
Net Interest and Dividend Income Before Provision
for Loan Losses .................................. 10,939 9,038 22,010 17,975
Provision for Loan Losses .............................. -- -- -- --
----------- ----------- ----------- -----------
Net Interest and Dividend Income After Provision
for Loan Losses .................................. 10,939 9,038 22,010 17,975
----------- ----------- ----------- -----------
Non-Interest Income:
Service charges .................................. 867 871 1,593 2,174
Net gain from real estate operations ............. 157 1 157 1
Net gain on sales of loans ....................... 70 363 94 697
Other ............................................ 261 329 611 702
----------- ----------- ----------- -----------
1,355 1,564 2,455 3,574
----------- ----------- ----------- -----------
Non-Interest Expenses:
Compensation and employee benefits ............... 3,079 3,616 6,272 6,940
Net occupancy expense ............................ 559 480 1,098 903
Equipment ........................................ 543 498 1,078 984
Advertising ...................................... 227 78 394 134
Amortization of intangibles ...................... 454 454 907 909
Federal deposit insurance premium ................ 43 41 84 85
Other ............................................ 1,276 1,090 2,467 2,001
----------- ----------- ----------- -----------
6,181 6,257 12,300 11,956
----------- ----------- ----------- -----------
Income Before Income Taxes ............................. 6,113 4,345 12,165 9,593
Income Tax Expense ..................................... 2,133 1,464 4,397 3,339
----------- ----------- ----------- -----------
Net Income ............................................. $ 3,980 $ 2,881 $ 7,768 $ 6,254
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic ............................................ 13,718,508 13,628,312 13,727,069 13,575,296
=========== =========== =========== ===========
Diluted .......................................... 14,114,728 14,487,888 14,187,618 14,479,658
=========== =========== =========== ===========
Net income per common share:
Basic ............................................ $ 0.29 $ 0.21 $ 0.57 $ 0.46
=========== =========== =========== ===========
Diluted .......................................... $ 0.28 $ 0.20 $ 0.55 $ 0.43
=========== =========== =========== ===========
See notes to consolidated financial statements.
4
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended Six months ended
December 31, December 31,
--------------------- --------------------
2004 2003 2004 2003
------- ------- ------ -------
(unaudited) (unaudited)
(In thousands)
Net income .................................................. $ 3,980 $ 2,881 $7,768 $ 6,254
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period on
investment securities available for sale, net of tax .... (8) (56) 46 (111)
------- ------- ------ -------
Comprehensive income ........................................ $ 3,972 $ 2,825 $7,814 $ 6,143
======= ======= ====== =======
See notes to consolidated financial statements.
5
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended December 31, 2004 and 2003
---------------------------------------------------
(unaudited)
Employee
Stock Accumulated
Serial Additional Ownership Other
Preferred Common Paid-In Plan Trust Retained Comprehensive Treasury
Stock Stock Capital Debt Earnings Income Stock Total
--------- -------- ---------- ---------- -------- ------------- -------- --------
(Dollars in thousands, except per share amounts)
Balance at June 30, 2003 .......... $ -- $ 60 $ 65,689 $ (644) $124,797 $ 177 $(73,244) $116,835
Allocation of Employee Stock
Ownership Plan ("ESOP") stock ... 322 322
ESOP adjustment ................... 1,453 1,453
Purchase of 240,000 shares of
treasury stock ................. (3,544) (3,544)
Issuance of 309,144 shares of
treasury stock for options
exercised and Dividend
Reinvestment Plan ("DRP") ......... (1,372) 2,258 886
Cash dividends of $0.10 per
common share .................... (1,331) (1,331)
Decrease in unrealized gain on
investment securities available
for sale, net of income taxes
of $(52) ........................ (111) (111)
Net income for the six months
ended December 31, 2003 ......... 6,254 6,254
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2003 ...... $ -- $ 60 $ 67,142 $ (322) $128,348 $ 66 $(74,530) $120,764
======== ======== ======== ======== ======== ======== ======== ========
Balance at June 30, 2004 .......... $ -- $ 9 $ 42,839 $ -- $ 75,523 $ 28 $ -- $118,399
Repurchase of 359,400
outstanding shares .............. (2) (896) (4,828) (5,726)
Issuance of 432,306 shares of
stock for options exercised and
DRP ............................ 2 1,079 247 1,328
Stock options tax adjustment ...... 2,863 2,863
Cash dividends of $0.10 per
common share .................... (1,343) (1,343)
Increase in unrealized gain on
investment securities available
for sale, net of income taxes
of $31 .......................... 46 46
Declaration of two-for-one split
in the form of a 100% stock
dividend ........................ 128 (128) --
Net income for the six months
ended December 31, 2004 ......... 7,768 7,768
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2004 ...... $ -- $ 137 $ 45,885 $ -- $ 77,239 $ 74 $ -- $123,335
======== ======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
6
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended December 31,
2004 2003
----------- -----------
(unaudited) (unaudited)
(In thousands)
Cash Flows from Operating Activities:
Net income ....................................................... $ 7,768 $ 6,254
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of loans ....................................... (94) (697)
Proceeds from sales of loans held for sale ....................... 2,771 46,860
Originations of loans held for sale .............................. (5,333) (41,410)
Net gain on sales of real estate owned ........................... (157) --
Amortization of investment and mortgage-backed securities
premium, net ................................................... 138 330
Depreciation and amortization .................................... 906 849
Amortization of cost of stock plans .............................. -- 1,775
Tax benefit related to stock options ............................. 2,863 --
Amortization of intangibles ...................................... 907 909
Amortization of premiums on loans and loan fees .................. 900 1,818
Amortization of junior subordinated debentures issuance costs .... 22 17
Income on BOLI ................................................... (249) (224)
Increase in accrued interest receivable, net of accrued
interest payable ............................................... (855) (1,919)
Decrease in other assets ......................................... 147 219
Decrease in accounts payable and other liabilities ............... (3,697) (13,150)
Decrease in mortgage escrow funds ................................ (2,722) (1,647)
Other, net ....................................................... 5 --
-------- ---------
Net cash provided by (used in) operating activities .............. 3,320 (16)
-------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities held to maturity 12,929 31,320
Purchases of investment securities held to maturity .............. (10,000) (105,203)
Purchases of investment securities available for sale ............ (85) (85)
Proceeds from principal repayments of mortgage-backed securities . 12,117 33,380
Purchases of mortgage-backed securities .......................... -- (44,884)
Net proceeds (outflow) from principal repayments of loans and loan
originations ................................................. (90,520) 41,783
Proceeds from loans sold ......................................... 6,502 37,568
Purchases of loans ............................................... -- (14,959)
Purchases of premises and equipment .............................. (401) (1,541)
Net inflow from real estate owned activity ....................... 630 --
Purchases of BOLI ................................................ (10,000) (12,000)
Redemptions of Federal Home Loan Bank of New York stock .......... 1,671 950
-------- ---------
Net cash used in investing activities ............................ (77,157) (33,671)
-------- ---------
Cash Flows from Financing Activities:
Net increase in deposits ......................................... 66,270 13,893
Proceeds from advances from the Federal Home Loan Bank of New York
and other borrowings .......................................... 29,475 --
Repayment of advances from the Federal Home Loan Bank of New
York and other borrowings ..................................... (50,000) (19,000)
Increase (decrease) in other short term borrowings ............... 33,803 (3,526)
Cash dividends paid .............................................. (1,343) (1,331)
Repurchases of outstanding shares, net of reissuances ............ (4,398) (2,658)
-------- ---------
Net cash provided by (used in) financing activities .............. 73,807 (12,622)
-------- ---------
Net Decrease in Cash and Cash Equivalents .............................. (30) (46,309)
Cash and Cash Equivalents, Beginning of Period ......................... 14,859 83,046
-------- ---------
Cash and Cash Equivalents, End of Period ............................... $ 14,829 $ 36,737
======== =========
7
PennFed Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Six months ended December 31,
2004 2003
----------- -----------
(unaudited) (unaudited)
(In thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest ............................................................... $ 30,856 $ 30,918
======== ========
Income taxes ........................................................... $ 384 $ 2,766
======== ========
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale, at lower of cost or
market ............................................................. $ 6,428 $ 31,191
======== ========
Transfer of loans receivable to real estate owned, net ................. $ 472 $ --
======== ========
See notes to consolidated financial statements.
8
PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim consolidated financial statements of PennFed Financial Services,
Inc. ("PennFed") and subsidiaries (with its subsidiaries, the "Company") include
the accounts of PennFed and its subsidiaries (including Penn Federal Savings
Bank (the "Bank")). These interim consolidated financial statements included
herein should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended June 30, 2004. The interim consolidated financial
statements reflect all normal and recurring adjustments which are, in the
opinion of management, considered necessary for a fair presentation of the
financial condition and results of operations for the periods presented. There
were no adjustments of a non-recurring nature recorded during the six months
ended December 31, 2004 and 2003. The interim results of operations presented
are not necessarily indicative of the results for the full year.
Stock Option Plans. All options previously granted under the Company's 1994
Stock Option and Incentive Plan were accounted for in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense has been recognized for the
stock options. Pro forma net income and earnings per share calculated as if the
Company had accounted for employee stock options and other stock based
compensation under the fair value method would equal the amounts presented
within the consolidated statements of income for the three and six months ended
December 31, 2004 and 2003, as all grants had fully vested prior to the
beginning of all periods presented.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which requires entities to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). The cost is
recognized as an expense over the period during which the employee is required
to provide service in exchange for the award, which is usually the vesting
period. As a result of SFAS No. 123R, the Company will recognize the grant-date
fair value of options as compensation expense on a straight-line basis over the
applicable vesting period. This accounting treatment differs significantly from
the previous accounting for fixed stock options under APB Opinion No. 25, which
generally required expense recognition only when the exercise price of the
option was less than the market price of the underlying stock on the grant date.
As required by SFAS No. 123R, the Company will estimate the fair value of stock
options on each grant date, using an appropriate valuation approach such as the
Black-Scholes option pricing model.
SFAS No. 123R applies to all awards granted after its effective date and to
awards modified, repurchased, or cancelled after that date. SFAS No. 123R is
effective as of the beginning of the first interim or annual reporting period
beginning after June 15, 2005 (i.e., the quarter beginning July 1, 2005). The
standard permits different transition methods. The Company expects to adopt SFAS
No. 123R by recognizing compensation expense for (i) any new awards granted
after July 1, 2005 and (ii) the portion of any outstanding awards for which the
requisite service has not been rendered as of July 1, 2005, based on the
grant-date fair value of those awards calculated for purposes of SFAS No. 123R
pro forma disclosures. At December 31, 2004, the Company had no stock options
outstanding for which compensation expense would be recognized after adoption of
SFAS No. 123R.
2. Supplemental Executive Retirement Plan and Director's Retirement Plan
The Company currently provides for a Supplemental Executive Retirement Plan
("SERP") and a Director's Retirement Plan ("DP") for certain key executive
employees and directors. Benefits provided are based primarily on years of
service and compensation or fees. Both plans are unfunded and at December 31,
2004, the benefit obligation of $541,000 was included in accounts payable and
other liabilities in the Consolidated Statements of Financial Condition. The
assumptions used in calculating the benefit obligation included a 4%
compensation increase rate and a discount rate of 7%. The accounting for these
postretirement benefits is in accordance with Statement of Financial Accounting
Standards No. 87 "Employer's Accounting for Pensions." The Company does not
expect to make any contributions to these plans during the fiscal year ending
June 30, 2005.
9
Net periodic pension cost for the Company's SERP and DP included the following
components:
Three months ended December 31,
-------------------------------------
2004 2003
--------------- ---------------
SERP DP SERP DP
---- ---- ---- ----
(In thousands)
Service cost ..................... $ 61 $ 11 $ 57 $ 10
Interest cost .................... 7 1 2 1
Amortization of prior service cost (2) (1) (1) (1)
---- ---- ---- ----
Net periodic pension expense ..... $ 66 $ 11 $ 58 $ 10
==== ==== ==== ====
Six months ended December 31,
-------------------------------------
2004 2003
--------------- ---------------
SERP DP SERP DP
---- ---- ---- ----
(In thousands)
Service cost ..................... $122 $ 22 $114 $ 20
Interest cost .................... 14 2 4 2
Amortization of prior service cost (4) (2) (2) (2)
---- ---- ---- ----
Net periodic pension expense ..... $132 $ 22 $116 $ 20
==== ==== ==== ====
3. Computation of Earnings Per Share ("EPS")
The computation of EPS is presented in the following table. All share and share
related amounts reflect the effect of a stock dividend described in Note 5.
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Net income ..................................... $ 3,980 $ 2,881 $ 7,768 $ 6,254
=========== =========== =========== ===========
Number of shares outstanding:
Weighted average shares issued and outstanding . 13,718,508 13,757,142 13,727,069 13,736,332
Less: Average shares held by the ESOP .......... -- 1,904,000 -- 1,904,000
Plus: ESOP shares released or committed to be
released ............................ -- 1,775,170 -- 1,742,964
----------- ----------- ----------- -----------
Average basic shares ........................... 13,718,508 13,628,312 13,727,069 13,575,296
Plus: Average common stock equivalents ......... 396,220 859,576 460,549 904,362
----------- ----------- ----------- -----------
Average diluted shares ......................... 14,114,728 14,487,888 14,187,618 14,479,658
=========== =========== =========== ===========
Earnings per common share:
Basic .................................. $ 0.29 $ 0.21 $ 0.57 $ 0.46
=========== =========== =========== ===========
Diluted ................................ $ 0.28 $ 0.20 $ 0.55 $ 0.43
=========== =========== =========== ===========
10
4. Stockholders' Equity and Regulatory Capital
During the three months ended December 31, 2004, the Company repurchased 181,600
shares of its outstanding common stock at prices ranging from $15.23 to $17.25
per share, for a total cost of $3,010,000.
The Bank's regulatory capital amounts and ratios are presented in the following
table.
To Be Well
For Minimum Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
As of December 31, 2004
Tangible capital, and ratio to
adjusted total assets .......... $169,340 8.56% $ 29,671 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets .......... $169,340 8.56% $ 79,123 4.00% $ 98,903 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ........... $169,340 16.00% N/A N/A $ 63,491 6.00%
Risk-based capital, and ratio to
risk-weighted assets ........... $175,440 16.58% $ 84,655 8.00% $105,819 10.00%
As of June 30, 2004
Tangible capital, and ratio to
adjusted total assets .......... $163,676 8.61% $ 28,509 1.50% N/A N/A
Tier I (core) capital, and ratio to
adjusted total assets .......... $163,676 8.61% $ 76,024 4.00% $ 95,029 5.00%
Tier I (core) capital, and ratio to
risk-weighted assets ........... $163,676 16.24% N/A N/A $ 60,468 6.00%
Risk-based capital, and ratio to
risk-weighted assets ........... $169,926 16.86% $ 80,624 8.00% $100,781 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.
5. Stock Dividend
On September 29, 2004, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend, payable on October 29, 2004 to
common stockholders of record as of October 15, 2004. All share and share
related amounts reflect the effect of the stock dividend.
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 accounting
principles generally accepted in the United States of America. 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
observed or probable credit weakness. For example, reserves may be specifically
assigned for loans that are 90 days or more past due, loans where the borrower
has filed for bankruptcy or loans identified by the Company's internal loan
review process. Reserves are based upon management's estimate of the borrower's
ability to repay the loan given the availability of collateral, other sources of
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 conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates and demand for loans in the Company's market
area, the Company's ability to attract and retain depositors, the relationship
of short-term interest rates to long-term interest rates and the Company's
ability to manage its interest rate risk, competition and terrorist acts that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company wishes to caution readers
not to place undue reliance on any forward-looking statements, which speak only
as of the date made. The Company wishes to advise readers that the factors
listed above, as well as other factors, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company will not undertake - and specifically declines any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
these statements or to reflect the occurrence of anticipated or unanticipated
events.
Overview
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company has 24 full service branch offices in
New Jersey, with another branch scheduled to open shortly. 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 78.7% at December 31, 2004. 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, 2004,
the Company's net loans receivable increased $82.7 million. This increase was
primarily attributable to strong loan origination levels and a slowdown in
prepayments. During the six months ended December 31, 2004, the Company sold
$9.2 million of 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
the Company's ability to generate liquid funds and to support the growth of
non-interest income. 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, 2004, deposits increased $65.4 million, primarily due to a $41.2 million
increase in core deposits (checking, money market and savings accounts) and the
addition of $20.0 million of brokered certificates of deposit. The increase in
core deposits was accomplished through a combination of desirable product
features, focused marketing campaigns and competitive interest rates.
The Company's future loan and deposit growth is, to a large extent, directly
tied in to the level of interest rates. If long-term interest rates rise,
origination levels may be reduced from the prior period. Growth in the loan
pipeline will depend on the Company's ability to aggressively seek out customers
in spite of the higher cost of residential and commercial borrowing. With rising
interest rates, loan origination volumes would likely be lower than recent years
and a reduction in the prepayment of loans currently in portfolio would be
expected. The Company has reinstituted its loan sale strategy with respect to
new residential loan product in order to assist in the management of risk
associated with keeping longer term loans on the balance sheet. With respect to
deposits, while an increase in interest rates would increase the
13
Company's cost of funds, it also would provide the Company with an additional
opportunity for attracting depositors, some of whom may have sought higher
returns with mutual funds and other non-deposit investment products when market
rates were lower. The Company remains confident that by offering competitively
priced products and by striving for superior service, it will be able to
maintain profitable levels of loans and deposits during the current fiscal year.
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.
A slowdown in loan prepayments, growth in the loan portfolio and the repricing
of certain deposits and other borrowings contributed to an expansion in the net
interest margin. The lower level of prepayments experienced during the six
months ended December 31, 2004 positively impacted the Company's interest income
and contributed to growth in the average balance of loans outstanding, when
compared to the prior year period. The Company's interest income is primarily
driven by interest earned on residential first mortgage loans, which increased
$3.4 million in the six months ended December 31, 2004 compared to the same
period in the prior year. The strong origination levels and the significant
slowdown in the amount of prepayments, relative to the prior year period, have
contributed to the increase in residential first mortgage interest income.
Overall, net interest income increased $4.0 million during the current year six
month period compared to the prior year period and the net interest margin
increased from 2.12% for the six months ended December 31, 2003 to 2.35% during
the six months ended December 31, 2004. Lower cost of funds on other borrowings
due to the interest rate environment and the maturity of FHLB of New York
advances were the primary factors responsible for a decrease of $822,000 in
interest expense on FHLB of New York advances and other borrowings for the
current year six month period compared to the prior year period.
With a slowdown in refinance activity, non-interest income has decreased
compared to the level seen in the prior year six month period. Loan service fees
related to modifications and prepayments were not at the levels seen in the six
months ended December 31, 2003, when interest rates caused many customers to
refinance their loans or modify to reduce the interest rate of their loans.
While non-interest expenses for the six months ended December 31, 2004 reflected
the end, in fiscal 2004, of costs associated with funding the Company's Employee
Stock Ownership Plan (shares became fully allocated in the 2004 fiscal year),
current expenses included a much less expensive replacement benefit plan
(essentially an increase in the 401(k) match) as well as costs associated with
the three branches opened during or since September 2003. In addition, costs
associated with regulatory burden, especially compliance with Sarbanes-Oxley
Section 404 on internal control reporting, continue to require significant
additional expenditures.
The Company's future earnings are inherently tied to the level of interest rates
prevailing in the economic environment in which the Company operates. If
interest rates increase, the Company's interest expense on deposits and
wholesale borrowings will increase at a faster pace than the effects will be
seen in the Company's interest income on loans. This effect on interest expense
is due to the short-term repricing characteristics of a portion of the Company's
deposit and borrowing portfolios. As for interest income, loan commitments,
generally locked in at receipt, will result in loans closed at below-market
rates should rates continue to rise. As interest rates rise, a decline in loan
prepayments will reduce cashflows available for reinvestment at higher rates. By
emphasizing the origination of adjustable rate and biweekly loan products and
reinstituting the sale of long-term fixed rate residential loans, while also
focusing on increasing the balance of core deposits and longer term certificates
of deposit and borrowings, the Company can better position itself to mitigate
the effects of rising interest rates.
Financial Condition
Assets. Total assets increased $77.2 million to $1.979 billion at December 31,
2004 from $1.902 billion at June 30, 2004. This increase was primarily due to an
$82.7 million increase in net loans receivable, reflecting strong loan
origination levels and a slowdown in loan prepayment activity.
Liabilities. Deposits increased $65.4 million to $1.253 billion at December 31,
2004 from $1.188 billion at June 30, 2004. An increase in core deposits
(checking, money market and savings accounts) of $41.2 million and the addition
of $20.0 million of wholesale certificates of deposit, as well as modest growth
in medium-term retail certificates of deposit, accounted for the increase. At
December 31, 2004, Federal Home Loan Bank ("FHLB") of New York advances and
14
other borrowings totaled $548.1 million, reflecting a $13.3 million increase
from the $534.8 million at June 30, 2004.
Stockholders' Equity. Stockholders' equity at December 31, 2004 totaled $123.3
million compared to $118.4 million at June 30, 2004. The increase primarily
reflects the net income recorded for the six months ended December 31, 2004 and
the exercise of stock options, including the related tax effect, partially
offset by the repurchase of 359,400 shares of the Company's outstanding stock at
an average price of $15.93 per share and the declaration of cash dividends.
Results of Operations
General. For the three months ended December 31, 2004, net income was $4.0
million, or $0.28 per diluted share, compared to net income of $2.9 million, or
$0.20 per diluted share, for the comparable prior year period. For the six
months ended December 31, 2004, net income was $7.8 million, or $0.55 per
diluted share. These results compare to net income of $6.3 million, or $0.43 per
diluted share, for the six months ended December 31, 2003. Earnings per share
amounts reflect the effect of the 100% stock dividend described in Note 5. -
Stock Dividend, in the Notes to Consolidated Financial Statements.
Interest and Dividend Income. Interest and dividend income for the three and six
months ended December 31, 2004 increased to $26.0 million and $51.8 million,
respectively, from $23.7 million and $47.4 million for the three and six months
ended December 31, 2003. In general, the increases in interest and dividend
income reflect a higher level of interest-earning assets due to strong
originations and the slowdown in prepayments in the Company's loan and
mortgage-backed securities portfolios during the current year periods. The
effect of the increases were slightly offset by a lower yield earned on assets
as a result of prepayments of higher yielding loans and the origination of loans
at lower market interest rates during the last year. Average interest-earning
assets were $1.901 billion and $1.891 billion for the three and six months ended
December 31, 2004, compared to $1.716 billion for both of the comparable prior
year periods. The average yield earned on interest-earning assets decreased to
5.45% and 5.46% for the three and six months ended December 31, 2004 from 5.50%
for both the three and six months ended December 31, 2003.
Interest income on residential one- to four-family mortgage loans for the three
and six months ended December 31, 2004 increased $2.0 million and $3.4 million,
respectively, when compared to the prior year periods. The increases in interest
income on residential one- to four-family mortgage loans were due to increases
in the average balance of residential one- to four-family mortgage loans
outstanding, as the result of strong origination levels and a slowdown in
prepayments during the current year periods. For the three and six months ended
December 31, 2004, the residential one- to four-family mortgage loan portfolio
averaged $1.074 billion and $1.059 billion, respectively, compared to $889
million and $908 million 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 5.31%
and 5.32% for the three and six months ended December 31, 2004, respectively,
from 5.52% and 5.45% 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
$66,000 and $144,000 for the three and six months ended December 31, 2004,
respectively, when compared to the prior year periods. The decreases in interest
income on commercial and multi-family real estate loans were attributable to
decreases in the average yield earned on these loans. The average yield
decreased to 6.85% and 6.87% for the three and six months ended December 31,
2004, respectively, when compared to 7.28% and 7.38% for the three and six
months ended December 31, 2003, respectively. As with other loans, the payoff of
higher yielding loans and the origination of loans at lower market interest
rates has resulted in a decline in the yield of the commercial and multi-family
real estate loan portfolio. The decreases in interest income for this portfolio
were partially offset by increases in the average outstanding balance of
commercial and multi-family real estate loans of $6.7 million and $8.1 million
for the three and six months ended December 31, 2004, respectively, when
compared to the prior year periods.
For the three months ended December 31, 2004, interest income on consumer loans
increased $26,000 when compared to the prior year period. For six months ended
December 31, 2004, interest income on consumer loans decreased $69,000 when
compared to the prior year period. The average yield earned on consumer loans
decreased to 5.31% and 5.26% for the three and six months ended December 31,
2004, respectively, from 5.51% and 5.58% for the comparable prior year periods.
The effects of the lower average yield were offset or nearly offset by increases
of $6.2 million and $4.5 million in the average balance outstanding for the
three and six months ended December 31, 2004, respectively, when compared to the
prior year periods.
Interest income on investment securities and other interest-earning assets
increased $594,000 and $1.4 million for the
15
three and six months ended December 31, 2004, respectively, when compared to the
prior year periods. The increases in interest income on investment securities
and other interest-earning assets for the three and six months ended December
31, 2004 were due to increases of $30.6 million and $44.4 million in the average
balance outstanding, when compared to the prior year periods. Further adding to
the increases in interest income on investment securities and other
interest-earning assets for the three and six months ended December 31, 2004
were increases in the average yield earned on these securities and other
interest-earning assets. The average yield increased to 5.38% and 5.40% for the
three and six months ended December 31, 2004, respectively, compared to 5.20%
and 5.29% for the three and six months ended December 31, 2003.
Interest income on the mortgage-backed securities portfolio decreased $134,000
and $32,000 for the three and six months ended December 31, 2004, respectively,
when compared to the prior year periods. The average balance outstanding of
mortgage-backed securities decreased $11.1 million and $2.0 million for the
three and six months ended December 31, 2004, respectively, compared to the
three and six months ended December 31, 2003. The decreases in interest income
on mortgage-backed securities were partially offset by a slight increase in the
average yield earned on this securities portfolio to 5.10% for both the three
and six months ended December 31, 2004, compared to 5.08% and 5.06% for the
three and six months ended December 31, 2003, respectively.
Interest Expense. Interest expense increased $440,000 and $370,000 for the three
and six months ended December 31, 2004, respectively, when compared to the prior
year periods. While the Company's cost of funds decreased, total average
deposits and borrowings increased. The average rate on deposits and borrowings
was 3.25% and 3.23% for the three and six months ended December 31, 2004,
respectively, down from 3.50% and 3.53% for the prior year periods, as a result
of lower market interest rates. Total average deposits and borrowings increased
$181.7 million and $172.1 million for the three and six months ended December
31, 2004, respectively, when compared to the three and six months ended December
31, 2003.
For the three and six months ended December 31, 2004, the average rate paid on
deposits decreased to 2.33% and 2.32%, respectively, from 2.40% and 2.42% for
the three and six months ended December 31, 2003. Average deposit balances
increased $147.2 million and $140.0 million to $1.243 billion and $1.225 billion
for the three and six months ended December 31, 2004, respectively, from $1.096
billion and $1.085 billion for the comparable prior year periods. The growth in
deposits is partially reflective of the addition of three new branches opened
during or since September 2003 and the addition of wholesale certificates of
deposit.
The average cost of FHLB of New York advances for the three and six months ended
December 31, 2004 increased to 5.72% for both periods from 5.68% and 5.67% for
the three and six months ended December 31, 2003, respectively. However, the
average balance of FHLB of New York advances decreased $60.5 million and $65.2
million for the three and six months ended December 31, 2004, respectively, when
compared to the prior year periods. As a result of maturing FHLB of New York
advances and the slowdown in prepayments on loans, the average balance of other
borrowings increased $95.0 million and $97.3 million for the three and six
months ended December 31, 2004, respectively, when compared to the three and six
months ended December 31, 2003. The average rate paid on other borrowings
decreased significantly to 2.63% and 2.42% for the three and six months ended
December 31, 2004, respectively, from 4.55% and 4.52% for the comparable prior
year periods.
Net Interest and Dividend Income. Net interest and dividend income before
provision for loan losses for the three and six months ended December 31, 2004
was $10.9 million and $22.0 million, respectively, compared to $9.0 million and
$18.0 million recorded in the prior year periods. Average net interest-earning
assets increased $3.5 million and $3.1 million for the three and six months
ended December 31, 2004, respectively, when compared to the prior year periods.
The net interest rate spread and net interest margin for the three months ended
December 31, 2004 were 2.20% and 2.33%, respectively, an increase from 2.00% and
2.14% for the three months ended December 31, 2003. For the six months ended
December 31, 2004, the net interest rate spread and net interest margin were
2.23% and 2.35%, respectively, an increase from 1.97% and 2.12% for the six
months ended December 31, 2003. The net interest margin expanded during the
current year periods when compared to the prior year periods principally due to
a slowdown in loan prepayments, growth in the loan portfolio and the repricing
of certain deposits and other borrowings.
Provision for Loan Losses. There was no provision for loan losses recorded for
the three and six months ended December 31, 2004, which is consistent with the
continuation of 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 the current allowance for
loan losses is adequate to absorb probable losses on existing loans that may
become uncollectible. The allowance for loan losses at December 31, 2004 was
$6.1 million compared to $6.2 million at June 30, 2004. The allowance for loan
losses as a percentage of non-accruing loans was 341.44% at
16
December 31, 2004, compared to 286.39% at June 30, 2004. Non-accruing loans were
$1.8 million at December 31, 2004 compared to $2.2 million at June 30, 2004. The
allowance for loan losses as a percentage of total loans at December 31, 2004
was 0.44% compared to 0.48% at June 30, 2004, primarily due to the increase in
the balance of the overall loan portfolio. See the discussion on the allowance
for loan losses in this Form 10-Q under "Critical Accounting Policies".
Non-Interest Income. For the three and six months ended December 31, 2004,
non-interest income was $1.4 million and $2.5 million, respectively, compared to
$1.6 million and $3.6 million for the prior year periods. The decreases in
non-interest income for the three and six months ended December 31, 2004 were
generally due to decreases in service charges and net gain on sales of loans,
when compared to the prior year periods.
Service charge income for the three months ended December 31, 2004 was $867,000,
reflecting a decrease of $4,000 from the $871,000 recorded for the prior year
period. For the six months ended December 31, 2004, service charge income was
$1.6 million, reflecting a decrease of $581,000 from the $2.2 million recorded
for the prior year period. Service charges decreased during the three and six
months ended December 31, 2004 principally due to a decline in fees associated
with various loan prepayments and/or modifications.
During the three and six months ended December 31, 2004, the net gain on sales
of loans was $70,000 and $94,000, respectively, compared to $363,000 and
$697,000 for the three and six months ended December 31, 2003. Approximately
$4.7 million and $9.2 million of fixed rate one- to four-family residential
mortgage loans were sold into the secondary market and to other financial
institutions during the three and six months ended December 31, 2004,
respectively. During the three and six months ended December 31, 2003,
approximately $24.3 million and $80.5 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 can be
attributed to a reduction in origination volumes coupled with borrowers'
increased interest in adjustable rate and biweekly loans, which are retained in
portfolio. In addition, during the three months ended December 31, 2003, a $3.0
million commercial real estate loan participation was sold as a means to reduce
the Company's credit exposure on a large commercial real estate loan
relationship.
Non-Interest Expenses. Non-interest expenses for the three and six months ended
December 31, 2004 were $6.2 million and $12.3 million, respectively, or 1.26% of
average assets for both periods. For the comparable prior year periods,
non-interest expenses were $6.3 million and $12.0 million, or 1.40% and 1.34% of
average assets, respectively. While current period expense levels reflect the
end of costs associated with funding the Company's Employee Stock Ownership Plan
("ESOP"), expenses in the current year periods include a much less expensive
replacement benefit plan for the ESOP, increased advertising expense and costs
associated with the three branches opened during or since September 2003. In
addition, costs associated with regulatory burden, especially compliance with
Sarbanes-Oxley Section 404, continue to require significant additional
expenditures and are expected to be higher in the second half of fiscal 2005.
The opening of a new branch in February 2005 will also add to future
non-interest expense, particularly in the net occupancy and advertising expense
categories.
Income Tax Expense. Income tax expense was $2.1 million and $4.4 million for the
three and six months ended December 31, 2004, respectively, compared to $1.5
million and $3.3 million for the three and six months ended December 31, 2003.
The effective tax rate for the three and six months ended December 31, 2004 was
34.9% and 36.1%, respectively, compared to 33.7% and 34.8% for the three and six
months ended December 31, 2003. The higher effective tax rates in the current
year periods were primarily due to an adjustment in the first quarter of fiscal
2005 in valuation allowances established against state deferred tax assets.
17
Analysis of Net Interest Income
The following tables set forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income for the three and six months ended December 31, 2004 and 2003 and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived from average daily
balances. The average balance of loans receivable includes non-accruing loans.
The yields and costs include fees which are considered adjustments to yields.
Three Months Ended December 31,
----------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
----------- -------- -------- ----------- -------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans ............................. $ 1,073,730 $ 14,281 5.31% $ 889,186 $ 12,281 5.52%
Commercial and multi-family real
estate loans ...................... 167,843 2,922 6.85 161,142 2,988 7.28
Consumer loans ........................ 120,781 1,617 5.31 114,548 1,591 5.51
----------- -------- ----------- --------
Total loans receivable ............ 1,362,354 18,820 5.50 1,164,876 16,860 5.76
Federal funds sold .................... -- -- -- 31,852 79 0.97
Investment securities and other ....... 448,040 6,023 5.38 417,399 5,429 5.20
Mortgage-backed securities ............ 90,608 1,156 5.10 101,665 1,290 5.08
----------- -------- ----------- --------
Total interest-earning assets ..... 1,901,002 $ 25,999 5.45 1,715,792 $ 23,658 5.50
======== ========
Non-interest earning assets ............... 65,794 65,976
----------- -----------
Total assets ...................... $ 1,966,796 $ 1,781,768
=========== ===========
Deposits and borrowings:
Money market and demand deposits ...... $ 179,959 $ 186 0.41% $ 168,666 $ 80 0.19%
Savings deposits ...................... 433,191 2,488 2.28 382,712 2,453 2.54
Certificates of deposit ............... 629,983 4,638 2.92 544,595 4,102 2.99
----------- -------- ----------- --------
Total deposits .................... 1,243,133 7,312 2.33 1,095,973 6,635 2.40
FHLB of New York advances ............. 425,465 6,215 5.72 486,003 7,043 5.68
Other borrowings ...................... 118,185 793 2.63 23,148 269 4.55
Junior subordinated debentures ........ 42,054 740 6.96 42,009 673 6.34
----------- -------- ----------- --------
Total deposits and borrowings ..... 1,828,837 $ 15,060 3.25 1,647,133 $ 14,620 3.50
======== ========
Other liabilities ......................... 15,223 15,225
----------- -----------
Total liabilities ................. 1,844,060 1,662,358
Stockholders' equity ...................... 122,736 119,410
----------- -----------
Total liabilities and stockholders'
equity ........................ $ 1,966,796 $ 1,781,768
=========== ===========
Net interest income and net
interest rate spread .................. $ 10,939 2.20% $ 9,038 2.00%
======== ======== ======== ========
Net interest-earning assets and
interest margin ....................... $ 72,165 2.33% $ 68,659 2.14%
=========== ======== =========== ========
Ratio of interest-earning assets to
deposits and borrowings ............... 103.95% 104.17%
======== ========
(1) Annualized.
18
Six Months Ended December 31,
----------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate (1) Balance Paid Rate (1)
----------- -------- -------- ----------- -------- --------
(Dollars in thousands)
Interest-earning assets:
One- to four-family mortgage
loans ............................. $ 1,058,857 $ 28,201 5.32% $ 908,463 $ 24,811 5.45%
Commercial and multi-family real
estate loans ...................... 169,223 5,910 6.87 161,089 6,054 7.38
Consumer loans ........................ 120,201 3,186 5.26 115,661 3,255 5.58
----------- -------- ----------- --------
Total loans receivable ............ 1,348,281 37,297 5.51 1,185,213 34,120 5.73
Federal funds sold .................... -- -- -- 30,298 150 0.97
Investment securities and other ....... 449,202 12,121 5.40 404,797 10,711 5.29
Mortgage-backed securities ............ 93,573 2,386 5.10 95,531 2,418 5.06
----------- -------- ----------- --------
Total interest-earning assets ..... 1,891,056 $ 51,804 5.46 1,715,839 $ 47,399 5.50
======== ========
Non-interest earning assets ............... 63,853 64,616
----------- -----------
Total assets ...................... $ 1,954,909 $ 1,780,455
=========== ===========
Deposits and borrowings:
Money market and demand deposits ...... $ 173,602 $ 281 0.32% $ 170,391 $ 167 0.19%
Savings deposits ...................... 430,755 4,905 2.26 371,553 4,742 2.53
Certificates of deposit ............... 620,669 9,138 2.92 543,124 8,316 3.04
----------- -------- ----------- --------
Total deposits .................... 1,225,026 14,324 2.32 1,085,068 13,225 2.42
FHLB of New York advances ............. 429,228 12,529 5.72 494,434 14,302 5.67
Other borrowings ...................... 120,762 1,493 2.42 23,419 542 4.52
Junior subordinated debentures ........ 42,048 1,448 6.81 42,004 1,355 6.38
----------- -------- ----------- --------
Total deposits and borrowings ..... 1,817,064 $ 29,794 3.23 1,644,925 $ 29,424 3.53
======== ========
Other liabilities ......................... 16,504 17,026
----------- -----------
Total liabilities ................. 1,833,568 1,661,951
Stockholders' equity ...................... 121,341 118,504
----------- -----------
Total liabilities and stockholders'
equity ........................ $ 1,954,909 $ 1,780,455
=========== ===========
Net interest income and net
interest rate spread .................. $ 22,010 2.23% $ 17,975 1.97%
======== ======== ======== ========
Net interest-earning assets and
interest margin ....................... $ 73,992 2.35% $ 70,914 2.12%
=========== ======== =========== ========
Ratio of interest-earning assets to
deposits and borrowings ............... 104.07% 104.31%
======== ========
(1) Annualized.
19
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and deposits and borrowings
have affected the Company's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (2) changes attributable to changes in rate (changes in rate multiplied
by prior volume), (3) changes attributable to changes in rate/volume (changes in
rate multiplied by changes in volume) and (4) the net change.
Six Months Ended December 31, 2004 vs. 2003
-------------------------------------------------
Increase (Decrease) Due to
-------------------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
--------- --------- --------- ----------
(In thousands)
Interest-earning assets:
One- to four-family mortgage loans .......... $ 4,079 $ (591) $ (98) $ 3,390
Commercial and multi-family real estate loans 300 (423) (21) (144)
Consumer loans .............................. 127 (189) (7) (69)
--------- --------- --------- ---------
Total loans receivable ............... 4,506 (1,203) (126) 3,177
Federal funds sold .......................... (150) (150) 150 (150)
Investment securities and other ............. 1,163 223 24 1,410
Mortgage-backed securities .................. (51) 19 -- (32)
--------- --------- --------- ---------
Total interest-earning assets ........ $ 5,468 $ (1,111) $ 48 $ 4,405
========= ========= ========= =========
Deposits and borrowings:
Money market and demand deposits ............ $ 3 $ 109 $ 2 $ 114
Savings deposits ............................ 745 (502) (80) 163
Certificates of deposit ..................... 1,195 (326) (47) 822
--------- --------- --------- ---------
Total deposits ..................... 1,943 (719) (125) 1,099
FHLB of New York advances ................... (1,881) 124 (16) (1,773)
Other borrowings ............................ 2,219 (246) (1,022) 951
Junior subordinated debentures .............. 1 92 -- 93
--------- --------- --------- ---------
Total deposits and borrowings ...... $ 2,282 $ (749) $ (1,163) $ 370
========= ========= ========= =========
Net change in net interest income ................ $ 3,186 $ (362) $ 1,211 $ 4,035
========= ========= ========= =========
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 were 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.
December 31, June 30,
2004 2004
------------ --------
(Dollars in thousands)
Non-accruing loans:
One- to four-family ......................................... $1,763 $2,158
Commercial and multi-family ................................. -- --
Consumer .................................................... 13 24
------ ------
Total non-accruing loans ............................... 1,776 2,182
Real estate owned, net ............................................ -- --
------ ------
Total non-performing assets/risk elements .............. $1,776 $2,182
====== ======
Non-accruing loans as a percentage of total loans ................. 0.13% 0.17%
====== ======
Non-performing assets/risk elements as a percentage of total assets 0.09% 0.11%
====== ======
Interest Rate Sensitivity
Interest Rate Sensitivity Gap. The interest rate risk inherent in assets and
liabilities may be determined by analyzing the extent to which such assets and
liabilities are "interest rate sensitive" and by measuring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a defined time period if it matures or reprices within
that period. The difference or mismatch between the amount of interest-earning
assets maturing or repricing within a defined period and the amount of
interest-bearing liabilities maturing or repricing within the same period is
defined as the interest rate sensitivity gap. An institution is considered to
have a negative gap if the amount of interest-bearing liabilities maturing or
repricing within a specified time period exceeds the amount of interest-earning
assets maturing or repricing within the same period. If more interest-earning
assets than interest-bearing liabilities mature or reprice within a specified
period, then the institution is considered to have a positive gap. Accordingly,
in a rising interest rate environment, in an institution with a negative gap,
the cost of its rate sensitive liabilities would theoretically rise at a faster
pace than the yield on its rate sensitive assets, thereby diminishing future net
interest income. In a falling interest rate environment, a negative gap would
indicate that the cost of rate sensitive liabilities would decline at a faster
pace than the yield on rate sensitive assets and improve net interest income.
For an institution with a positive gap, the reverse would be expected.
At December 31, 2004, the Company's total deposits and borrowings maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing within one year by $140.4 million, representing a one year negative
gap of 7.09% of total assets, compared to a one year negative gap of $148.6
million, or 7.81%, of total assets at June 30, 2004. The Company's gap position
was not significantly different from June 30, 2004 as the short-term estimated
cash flows from the Company's interest-earning assets and interest-bearing
liabilities have remained relatively unchanged. With respect to assets, growth
in loans with faster cash flow characteristics, such as biweekly and adjustable
rate loan products, have offset the effect of a decline in prepayments. For
liabilities, growth was seen in medium term retail and wholesale certificates of
deposit, medium-term wholesale borrowings and core deposits. A decline was
experienced in retail certificates of deposit maturing within one year.
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.
21
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the gap position. Finally, the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase. The Company considers
all of these factors in monitoring its exposure to interest rate risk.
Net Portfolio Value. The Company's interest rate sensitivity is regularly
monitored by management through additional interest rate risk ("IRR") measures,
including an IRR "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity
Measure." A low Post-Shock NPV ratio 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. At least
quarterly, and generally monthly, management models the change in net portfolio
value ("NPV") over a variety of interest rate scenarios. NPV is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. An NPV ratio, in any interest rate scenario, is defined as the NPV in
that rate scenario divided by the market value of assets in the same scenario.
Assumptions used in calculating interest rate sensitivity are periodically
reviewed and modified as appropriate.
As of December 31, 2004, due to historically low interest rate levels, the
effect of a 2% decrease in interest rates could not be meaningfully simulated.
As of December 31, 2004, the Bank's internally generated initial NPV ratio was
10.91%. Following a 2% increase in interest rates, the Bank's Post-Shock NPV
ratio was 9.47%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative 1.44%. As of December 31, 2004, the Company's internally generated
initial NPV ratio was 10.50%, the Post-Shock ratio was 8.98%, and the
Sensitivity Measure was negative 1.52%. As of June 30, 2004, the Bank's
Post-Shock NPV ratio and Sensitivity Measure were 7.87% and negative 1.72%,
respectively, and the Company's Post-Shock NPV ratio and Sensitivity Measure
were 7.30% and negative 1.91%, respectively. Both the Post-Shock NPV ratio and
the Sensitivity Measure improved since June 30, 2004. The improvement in the
Sensitivity Measure is primarily attributable to a decline in the projected
duration of assets and a flattening of the Treasury yield curve. Higher
short-term market rates were favorable for retail deposits and wholesale
borrowing values. Asset duration decreased principally due to a moderate
increase in prepayment estimates due to a decline in longer term market rates
and growth in loan products with lower durations and faster cash flow
characteristics. Variances between the Bank's and the Company's NPV ratios are
attributable to balance sheet items which are adjusted during consolidation,
such as investments, intercompany borrowings and capital.
Internally generated NPV measurements are based on simulations which utilize
institution specific assumptions, including discount and decay rates, and
generally result in lower levels of presumed interest rate risk than Office of
Thrift Supervision ("OTS") measurements indicate.
The OTS measures the Bank's IRR on a quarterly basis using data from the
quarterly Thrift Financial Reports filed by the Bank with the OTS, coupled with
non-institution specific assumptions which are based on national averages. As of
September 30, 2004 (the latest date for which information is available), the
Bank's initial NPV ratio, as measured by the OTS, was 8.76%, the Bank's
Post-Shock ratio was 5.26% and the Sensitivity Measure was negative 3.50%.
In addition to monitoring NPV and gap, management also monitors the duration of
assets and liabilities and the effects on net interest income resulting from
parallel and non-parallel increases or decreases in rates.
At December 31, 2004, based on its internally generated simulation models, the
Company's consolidated net interest income projected for one year forward would
decrease 3.7% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest rates. Although interest rates are not
expected to rise 2% immediately, projections over the next year assume a rise in
interest rates and a tightening of the rate spread between the 3-month U.S.
treasury bill and the 10-year U.S. treasury bond. If short term rates rise more
quickly than long term rates, interest rate risk measures would be expected to
improve but earnings would likely be negatively affected.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and borrowings from the FHLB
of New York. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has competitively set rates on deposit products for selected terms and,
when necessary, has supplemented deposits with longer-term or less expensive
alternative sources of funds.
The Bank maintains appropriate levels of liquid assets. The Company's most
liquid assets are cash and cash equivalents, U.S. government agency securities
and mortgage-backed securities. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period.
22
In the event the Company should require funds beyond its ability to generate
them internally, additional sources of funds are available through the use of
FHLB of New York advances, reverse repurchase agreements and various overnight
repricing lines of credit. The Company uses its liquid resources principally to
fund maturing certificates of deposit and deposit withdrawals, to purchase loans
and securities, to fund existing and future loan commitments, and to meet
operating expenses. Management believes that loan repayments and other sources
of funds will be adequate to meet the Company's foreseeable liquidity needs.
Future liquidity requirements are not expected to be significantly different
from historical experience.
The Company's cash inflows for the six months ended December 31, 2004 included
$9.3 million of proceeds from the sale of loans, a $66.3 million increase in
deposits (net of accrued interest payable), a $63.3 million increase in other
borrowings, including short term borrowings, and principal repayments of loans
and mortgage-backed securities. During the six months ended December 31, 2004,
the cash provided was used to repay $50.0 million of maturing FHLB of New York
advances and other borrowings and to fund investing activities, which included
the origination of loans and to fund a $10.0 million investment in BOLI. In
addition, the cash provided was used to repurchase $4.4 million of outstanding
shares, net of reissuances. For the six months ended December 31, 2004, there
were no purchases of mortgage-backed securities.
The Company's cash inflows for the six months ended December 31, 2003 included
$81.2 million from the sale of loans, $31.3 million of proceeds from maturities
of investment securities, principal repayments of loans and mortgage-backed
securities and a $13.9 million increase in deposits. During the six months ended
December 31, 2003, the cash provided was used to fund investing activities,
which included the origination and purchase of loans and the purchase of $150.1
million of investment and mortgage-backed securities, as well as for the
repayment of FHLB of New York advances and other borrowings. Additionally,
during the six months ended December 31, 2003, the cash provided was used to
fund a $12.0 million investment in BOLI.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's most significant form of market risk is interest rate risk, as the
majority of its assets and liabilities are sensitive to changes in interest
rates. See the discussion in this Form 10-Q under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity."
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures:
An evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Act")) was
carried out as of December 31, 2004 under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
and several other members of the Company's senior management. The Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2004, 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.
(b) Changes in Internal Controls:
During the quarter ended December 31, 2004, 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 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
23
acts of some persons, by collusion of two or more people, or by management
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.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate
and annually report on their systems of internal control over financial
reporting. In addition, our independent accountants must report on management's
evaluation. We are in the process of evaluating, documenting and testing our
system of internal control over financial reporting to provide the basis for our
report that will, for the first time, be a required part of our annual report on
Form 10-K for the fiscal year ending June 30, 2005. Due to the ongoing
evaluation and testing of our internal controls, there can be no assurance that
if any control deficiencies are identified they will be remediated before the
end of the 2005 fiscal year, or that there will not be significant deficiencies
or material weaknesses that would be required to be reported. As noted under
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations - Non-Interest Expenses," the costs of
complying with Section 404 have been significant and are expected to increase
during the second half of fiscal 2005. In addition, Section 404 compliance
continues to divert management resources from core business operations.
24
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the Company's stock repurchase activity
for each month during the three months ended December 31, 2004. All
shares repurchased during the three months ended December 31, 2004 were
repurchased in the open market. All share and per share amounts have
been adjusted for the two for one stock split in the form of a 100%
stock dividend paid by the Company on October 29, 2004.
Total Number Maximum Number
Total Number Average of Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Repurchased Per Share Announced Plan Under the Plan
----------- --------- -------------------- --------------------
Repurchases for the Month
-------------------------
Oct. 1 - Oct. 31, 2004 .. 37,600 $15.53 37,600 232,400
Nov. 1 - Nov. 30, 2004 .. 109,000 $16.98 109,000 123,400
Dec. 1 - Dec. 31, 2004 .. 35,000 $16.44 35,000 88,400
------- ------ -------
Total repurchases ....... 181,600 $16.57 181,600
======= ====== =======
At December 31, 2004, the Company had one repurchase plan under which it
had not yet completed all approved repurchases. This repurchase plan was
publicly announced February 27, 2004 and authorized the Company to
repurchase up to 5%, or 670,000, of its outstanding shares over the
following 18 months.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders (Annual Meeting) was held on
October 27, 2004.
(b) Directors elected at the Annual Meeting: Directors whose terms continued after
William C. Anderson the Annual Meeting:
Amadeu L. Carvalho Joseph L. LaMonica
Patrick D. McTernan
Marvin D. Schoonover
Mario Teixeira, Jr.
(c) At the Annual Meeting, the stockholders considered:
(i) the election of two directors,
(ii) the ratification of the appointment of KPMG LLP as
independent auditors for the Company for the fiscal year
ending June 30, 2005.
The vote on the election of two directors was as follows:
FOR WITHHELD
--------- --------
William C. Anderson 5,953,208 303,937
Amadeu L. Carvalho 5,949,139 308,006
There were no broker non-votes with respect to the
proposal.
The vote on the ratification of the appointment of KPMG LLP
as independent auditors for the Company for the fiscal year
ending June 30, 2005 was as follows:
FOR AGAINST ABSTAIN
--------- ------- -------
6,159,257 36,834 61,054
There were no broker non-votes with respect to the
proposal.
25
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNFED FINANCIAL SERVICES, INC.
Date: February 9, 2005 By: /s/ Joseph L. LaMonica
-----------------------------------------
Joseph L. LaMonica
President and Chief
Executive Officer
(Principal Executive Officer)
Date: February 9, 2005 By: /s/ Claire M. Chadwick
-----------------------------------------
Claire M. Chadwick
Executive Vice President,
Chief Financial Officer and Controller
(Principal Financial and Accounting
Officer)
27
EXHIBIT INDEX
Regulation Reference to
S-K Prior Filing
Exhibit or Exhibit
Number Document Number
- -------------------------------------------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3 (i) Articles of Incorporation (a)
3 (ii) Bylaws (a)
4 Instruments defining the rights of security holders, including indentures (b)
4 (i) Stockholder Protection Rights Agreement (c)
10 Material contracts:
(a) Employee Stock Ownership Plan (d)
(b) 1994 Amended and Restated Stock Option and Incentive Plan (e)
(c) Employment Agreement with Joseph L. LaMonica (f)
(d) Employment Agreement with Patrick D. McTernan (f)
(e) Employment Agreement with Jeffrey J. Carfora (f)
(f) Employment Agreement with Barbara A. Flannery (f)
(g) Employment Agreement with Claire M. Chadwick (f)
(h) Employment Agreement with Maria F. Magurno (f)
(i) Supplemental Executive Retirement Plan (g)
(a) First Amendment to the Supplemental Executive Retirement Plan (h)
(j) Supplemental Executive Death Benefit Plan (h)
(k) Outside Director's Retirement Plan (g)
(m) Form of Consulting Agreement (g)
11 Statement re: computation of per share earnings (i)
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
22 Published report regarding matters submitted to vote of security holders None
23 Consents of experts and counsel None
24 Power of Attorney None
31.1 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Executive Officer) 31.1
31.2 Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a)
(Chief Financial Officer) 31.2
32 Certifications Required by Section 1350 of Title 18 of the United States Code 32
99 Additional Exhibits Not applicable
- ---------------
(a) Included as an appendix to the Company's definitive proxy statement under
the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on September 22, 2003 (File No. 0-24040). Such
previously filed document is hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
(b) The Company hereby agrees to furnish the Securities and Exchange
Commission, upon request, the instruments defining the rights of the
holders of each issue of the Company's long-term debt.
(c) Filed as an exhibit to the Company's Registration Statement on Form 8-A
under the Securities Exchange Act of 1934, filed with the Securities and
Exchange Commission on March 28, 1996 as amended on Form 8-A/A (the "Form
8-A/A") filed with the Securities and Exchange Commission on February 11,
1998, as further amended on Form 8-A/A-2 (the "Form 8-A/A-2") filed with
the Securities and Exchange Commission on October 14, 1998 and as further
amended on Form 8-A/A-3 (the "Form 8-A/A-3") filed with the Securities and
Exchange Commission on March 1, 2004. The First Amendment to the
Stockholders Protection Rights Agreement is filed as an exhibit to the
Form 8-A/A, the Second Amendment to the Stockholders Protection Rights
Agreement is filed as an exhibit to the Form 8-A/A-2, the Third Amendment
to the Stockholders Protection Rights Agreement is filed as an exhibit to
the Current Report on Form 8-K filed by the Company with the Securities
and Exchange Commission on October 29, 2003 and the Fourth Amendment to
the Stockholder Protection Rights Agreement is filed as an exhibit to the
Form 8-A/A-3. These documents are hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
28
(d) Filed as an exhibit to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on March 25, 1994 (Registration No. 33-76854). 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 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.
(f) 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.
(g) 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.
(h) 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.
(i) Refer to Footnote 3., "Computation of Earnings Per Share ("EPS")" included
in the December 31, 2004 Form 10-Q.
29