SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-51093
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KEARNY FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
UNITED STATES 22-3803741
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
120 Passaic Ave., Fairfield, New Jersey 07004-3510
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 973-244-4500
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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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: November 11, 2005.
$0.10 par value common stock - 72,737,500 shares outstanding
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition
at September 30, 2005 and June 30, 2005 (Unaudited) 1
Consolidated Statements of Income for the Three Months Ended
September 30, 2005 and 2004 (Unaudited) 2-3
Consolidated Statements of Comprehensive Income for the Three
Months Ended September 30, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2005 and 2004 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
Item 3: Quantitative and Qualitative Disclosure About Market Risk 15-16
Item 4: Controls and Procedures 17
PART II - OTHER INFORMATION 18
SIGNATURES 19
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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(In Thousands, Except Share and Per Share Data, Unaudited)
September 30, June 30,
Assets 2005 2005
------ ----------- -----------
Cash and amounts due from depository institutions $ 19,716 $ 16,683
Interest-bearing deposits in other banks 65,572 123,182
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Cash and cash equivalents 85,288 139,865
Securities available for sale 25,534 33,591
Investment securities held to maturity 463,551 470,098
Loans receivable, including net deferred loan costs of $898 and $815 602,985 563,434
Less: Allowance for loan losses (5,485) (5,416)
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Net loans receivable 597,500 558,018
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Mortgage-backed securities held to maturity 746,193 758,121
Premises and equipment 35,479 34,977
Federal Home Loan Bank of New York stock ("FHLB") 11,361 11,361
Interest receivable 9,617 10,430
Goodwill 82,263 82,263
Bank Owned Life Insurance ("BOLI") 13,679 3,981
Other assets 5,494 4,300
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Total assets $ 2,075,959 $ 2,107,005
=========== ===========
Liabilities and stockholders' equity
------------------------------------
Liabilities
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Deposits:
Non-interest bearing $ 54,912 $ 56,142
Interest bearing 1,441,832 1,472,635
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Total deposits 1,496,744 1,528,777
Advances from FHLB 61,544 61,687
Advance payments by borrowers for taxes 4,662 4,627
Other liabilities 6,963 6,432
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Total liabilities 1,569,913 1,601,523
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Stockholders' equity
--------------------
Preferred stock $0.10 par value, 25,000,000 shares authorized; none
issued and outstanding - -
Common stock $0.10 par value, 75,000,000 shares authorized;
72,737,500 issued and outstanding 7,274 7,274
Paid in capital 207,914 207,838
Retained earnings - substantially restricted 302,857 301,857
Unearned Employee Stock Ownership Plan ("ESOP") shares (16,608) (16,972)
Accumulated other comprehensive income 4,609 5,485
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Total stockholders' equity 506,046 505,482
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Total liabilities and stockholders' equity $ 2,075,959 $ 2,107,005
=========== ===========
See notes to consolidated financial statements.
-1-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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(In Thousands, Except Share and Per Share Data, Unaudited)
Three Months Ended
September 30,
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2005 2004
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Interest income:
Loans $ 8,121 $ 7,132
Mortgage-backed securities 8,568 8,649
Investment and available for sale
securities 4,363 4,011
Other interest earning assets 919 115
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Total interest income 21,971 19,907
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Interest expense:
Deposits 8,287 6,112
Borrowings 871 991
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Total interest expense 9,158 7,103
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Net interest income 12,813 12,804
Provision for loan losses 75 151
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Net interest income after provision
for loan losses 12,738 12,653
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Non-interest income:
Fees and service charges 277 177
Gain on the sale of available for
sale securities 86 -
Miscellaneous 230 317
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Total non-interest income 593 494
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Non-interest expense:
Salaries and employee benefits 5,603 4,652
Net occupancy expense of
premises 896 647
Equipment 1,052 874
Advertising 325 281
Federal insurance premium 134 140
Amortization of intangible assets 159 159
Directors' fees 230 217
Miscellaneous 979 819
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Total non-interest expense 9,378 7,789
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Income before income taxes 3,953 5,358
Income taxes 989 1,562
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Net income $ 2,964 $ 3,796
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See notes to consolidated financial statements.
-2-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Cont'd)
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(In Thousands, Except Share and Per Share Data, Unaudited)
Three Months Ended
September 30,
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2005 2004
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Net income per common share:
Basic $ 0.04 $ 379.60
Diluted 0.04 379.60
Weighted average number of
common shares outstanding:
Basic 71,052,679 10,000
Diluted 71,052,679 10,000
See notes to consolidated financial statements.
-3-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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(In Thousands, Unaudited)
Three Months Ended
September 30,
---------------------------
2005 2004
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Net income $ 2,964 $ 3,796
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Other comprehensive income (loss),
net of income taxes:
Gross realized holdings (gain) on
securities available for sale (86) -
Income tax expense 30 -
Gross unrealized holdings gain
(loss) on securities available
for sale (1,261) 770
Deferred income tax benefit
(expense) 441 (269)
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Other comprehensive income (loss) (876) 501
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Comprehensive income $ 2,088 $ 4,297
======== ========
See notes to consolidated financial statements.
-4-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In Thousands, Unaudited)
Three Months Ended
September 30,
----------------------
2005 2004
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Cash flows from operating activities:
Net income $ 2,964 $ 3,796
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 452 316
Net amortization of premiums, discounts and loan fees and costs 202 307
Deferred income taxes (214) (582)
Amortization of intangible assets 159 159
Provision for loan losses 75 151
Realized gain on sale of securities available for sale (86) (71)
Decrease (increase) in interest receivable 813 1,000
Decrease (increase) in other assets (1,239) 2,854
Realized loss on sale of real estate owned 35 -
Increase (decrease) in interest payable 12 37
Increase (decrease) in other liabilities (87) 649
Increase in cash surrender value of bank owned life insurance (73) (39)
ESOP expenses 437 -
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Net cash provided by operating activities 3,450 8,616
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Cash flows from investing activities:
Purchases of securities available for sale (67) (43)
Proceeds from sale of securities available for sale 6,864 1,115
Purchases of investment securities held to maturity (4,000) (14,051)
Proceeds from calls and maturities of investment securities held to
maturity 9,204 3,109
Proceeds from repayments of investment securities held to maturity 1,348 1,048
Purchase of loans (8,819) -
Net (increase) decrease in loans receivable (30,694) (9,592)
Proceeds from sale of real estate owned 65 -
Purchases of mortgage-backed securities held to maturity (41,900) (1,308)
Principal repayments on mortgage-backed securities held to maturity 53,576 47,511
Additions to premises and equipment (954) (2,051)
Purchase of bank owned life insurance (9,625) -
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Net cash provided by (used in) investing activities (25,002) 25,738
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Cash flows from financing activities:
Net (decrease) increase in deposits (32,047) (26,709)
Repayment of FHLB advances (143) (134)
Net change in short-term borrowings from FHLB - (10,000)
Increase (decrease) in advance payments by borrowers for taxes 35 (136)
Refund of common stock offering expenses 3 -
Dividends paid to minority stockholders of Kearny Financial Corp. (873) -
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Net cash (used in) provided by financing activities (33,025) (36,979)
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Net (decrease) increase in cash and cash equivalents (54,577) (2,625)
Cash and cash equivalents - beginning 139,865 39,488
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Cash and cash equivalents - ending $ 85,288 $ 36,863
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See notes to consolidated financial statements.
-5-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
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(In Thousands, Unaudited)
Three Months Ended
September 30,
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2005 2004
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Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes, net of refunds $ 4,076 $ (1,981)
========= =========
Interest $ 9,146 $ 7,066
========= =========
Supplemental disclosure of non-cash transactions:
Cash dividend declared $ 1,091 $ -
========= =========
See notes to consolidated financial statements.
-6-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. PRINCIPLES OF CONSOLIDATION
-------------------------------
The consolidated financial statements include the accounts of Kearny Financial
Corp. (the "Company"), its wholly owned subsidiaries, Kearny Federal Savings
Bank (the "Bank") and Kearny Financial Securities, Inc., and the Bank's wholly
owned subsidiaries, KFS Financial Services, Inc. and Kearny Federal Investment
Corp. The Company conducts its business principally through the Bank. Management
eliminated all significant inter-company accounts and transactions during
consolidation.
2. BASIS OF PRESENTATION
-------------------------
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and Regulation S-X and do not include
information or footnotes necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, all
adjustments (consisting of normal adjustments) necessary for a fair presentation
of the consolidated financial statements have been included. The results of
operations for the three-month period ended September 30, 2005, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other period.
3. NET INCOME PER COMMON SHARE
-------------------------------
Weighted average number of common shares actually outstanding provides the basis
for calculation of basic net income per common share. Adjusting the weighted
average number of shares of common stock outstanding to include the effect of
contracts or securities exercisable or which could be converted into common
stock, if dilutive, using the treasury stock method, provides the basis for
calculating diluted net income per share. Though the effective date of the
Company's initial public offering was February 23, 2005, the presentation of
basic and diluted net income per share assumes the effective date of the
transaction was July 1, 2004. The calculation of basic and diluted net income
per share includes the 30% of the outstanding shares sold to the public as well
as the 70% of the outstanding shares held by Kearny MHC and excludes Kearny
Federal Savings Bank Employee Stock Ownership Plan (the "ESOP") shares that have
not been previously allocated to participants or have not been committed to be
released for allocation to participants.
4. DIVIDEND WAIVER
-------------------
During the three months ended September 30, 2005, the federally chartered mutual
holding company of the Company (Kearny MHC), waived its right, upon
non-objection from the Office of Thrift Supervision, to receive cash dividends
of $2,037,000 paid during the quarter and cash dividends of $2,546,000 declared
during the quarter, on the shares of Company common stock it owns.
-7-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Forward-Looking Statements
This Form 10-Q may include certain forward-looking statements based on current
management expectations. The actual results of Kearny Financial Corp. (the
"Company") could differ materially from those management expectations. Factors
that could cause future results to vary from current management expectations
include, but are not limited to, general economic conditions, legislative and
regulatory changes, monetary and fiscal policies of the federal government,
changes in tax policies, rates and regulations of federal, state and local tax
authorities. Additional potential factors include changes in interest rates,
deposit flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of loan and
investment portfolios of Kearny Federal Savings Bank, the Company's wholly-owned
subsidiary, (the "Bank"). Other factors that could cause future results to vary
from current management expectations include changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. Further description of the risks and uncertainties to the
business are included in the Company's other filings with the Securities and
Exchange Commission.
Comparison of Financial Condition at September 30, 2005 and June 30, 2005
Total assets decreased by $31.0 million, or 1.5%, to $2.08 billion at September
30, 2005, from $2.11 billion at June 30, 2005, due primarily to decreases in
cash and cash equivalents, investment securities held to maturity and
mortgage-backed securities held to maturity partially offset by an increase in
loans receivable, net, and bank owned life insurance. Generally, cash and cash
equivalents and cash flows from the securities portfolio funded loan
originations and deposit outflows during the quarter.
Cash and cash equivalents decreased $54.6 million, or 39.0%, to $85.3 million at
September 30, 2005, from $139.9 million at June 30, 2005. The Company continued
to deploy the proceeds from its initial public offering completed in February
2005, primarily reinvesting cash and cash equivalents in the loan portfolio,
purchasing additional bank owned life insurance and funding deposit outflows.
The carrying value of securities available for sale decreased $8.1 million, or
24.1%, to $25.5 million at September 30, 2005, from $33.6 million at June 30,
2005. The decrease was due primarily to the sale of a $6.9 million government
income fund acquired during an earlier merger, and mark-to-market adjustments to
other investments in the available for sale portfolio.
Investment securities held to maturity decreased $6.5 million, or 1.4%, to
$463.6 million at September 30, 2005, from $470.1 million at June 30, 2005. The
decrease came primarily in the government agency notes category, with the
proceeds from maturing notes funding loan originations and deposit outflows
during the quarter.
Loans receivable, net of deferred fees and the allowance for loan losses,
increased $39.5 million, or 7.1%, to $597.5 million at September 30, 2005, from
$558.0 million at June 30, 2005. The ratio of loans to deposits improved to
39.9% at September 30, 2005, from 36.5% at June 30, 2005. The increase came in
one-to-four family mortgage loans, particularly first mortgages, home equity
loans and home equity lines of credit, and, to a lesser extent, in
non-residential mortgage loans and construction loans, offset by nominal
decreases in multi-family mortgages and commercial business loans.
-8-
Mortgage-backed securities held to maturity decreased $11.9 million, or 1.6%, to
$746.2 million at September 30, 2005, from $758.1 million at June 30, 2005. Cash
flows from monthly principal and interest payments funded loan originations and
deposit outflows during the quarter.
Bank owned life insurance ("BOLI") increased $9.7 million to $13.7 million at
September 30, 2005, from $4.0 million at June 30, 2005. Of the $9.7 million
increase, $9.6 million resulted from the purchase of additional policies. The
contract calls for the payment of an additional $400,000 to bring the Bank's
total BOLI investment to $10.0 million.
Deposits decreased $32.1 million, or 2.1%, to $1.50 billion at September 30,
2005, from $1.53 billion at June 30, 2005. The decrease was primarily in
certificates of deposit. After reacting to competitive pressures in the market
place by raising short-term interest rates during the previous quarter, which
attracted new deposits, the Bank pulled back from that strategy during the
current quarter to slow the increase in the cost of funds. During the quarter
ended June 30, 2005, deposits increased $77.8 million. The increase was
primarily in certificates of deposit.
Federal Home Loan Bank advances decreased $143,000, to $61.5 million at
September 30, 2005, from $61.7 million at June 30, 2005. The decreased resulted
from scheduled monthly principal payments on amortizing advances.
Stockholders' equity increased $564,000, to $506.0 million at September 30,
2005, from $505.5 million at June 30, 2005. The increase resulted from net
income recorded during the quarter plus the release of ESOP shares offset by a
decrease in accumulated other comprehensive income and a cash dividend of $0.04
paid during the quarter and a cash dividend of $0.05 declared during the
quarter. The decrease in accumulated other comprehensive income resulted from a
reduction in the carrying value, net of taxes, of the Company's available for
sale portfolio.
Comparison of Operating Results for the Three Months Ended September 30, 2005
and 2004
General. Net income for the three months ended September 30, 2005 was $3.0
million, a decrease of $832,000, or 21.9%, from $3.8 million for the three
months ended September 30, 2004. The decrease in net income resulted from an
increase in non-interest expense, particularly salaries and employee benefits
and the cost of office occupancy and equipment, with virtually no change in net
interest income to help offset the increase in non-interest expense.
Net Interest Income. Net interest income remained unchanged at $12.8 million for
the three months ended September 30, 2005 and the three months ended September
30, 2004. Despite decreases in interest rate spread and net interest margin, a
substantial increase in the ratio of average interest-earning assets to average
interest-bearing liabilities helped interest income to keep pace with interest
expense, year-over-year.
Interest rate spread decreased 54 basis points to 2.11% for the three months
ended September 30, 2005, from 2.65% for the three months ended September 30,
2004. Presently, interest-bearing liabilities are repricing faster than
interest-earning assets. The cost of average interest-bearing liabilities
increased 58 basis points, from 1.82% for the three months ended September 30,
2004, to 2.40% for the three months ended September 30, 2005. Over the same
period, the yield on average interest-earning assets increased four basis
points, to 4.51% for the three months ended September 30, 2005, from 4.47% for
the three months ended September 30, 2004. Net interest margin decreased 24
basis points to 2.63% for the three months ended September 30, 2005, compared
with 2.87% for the three months ended September 30, 2004.
-9-
The ratio of average interest-earning assets to average interest-bearing
liabilities increased from 114.31% for the three months ended September 30,
2004, to 127.71% for the three months ended September 30, 2005. The primary
reason for the increase in the ratio was the infusion of cash resulting from the
Company's initial public offering completed in February 2005. The Company
continues to deploy the proceeds from the initial public offering, primarily
into loans receivable, which is expected to help mitigate the increase in the
cost of funds.
Interest Income. Total interest income increased $2.1 million, or 10.6%, to
$22.0 million for the three months ended September 30, 2005, from $19.9 million
for the three months ended September 30, 2004. Average interest-earning assets
increased $165.1 million, or 9.3%, to $1.95 billion for the three months ended
September 30, 2005, from $1.78 billion for the three months ended September 30,
2004. The increase in average interest-earning assets was significantly more
important to the increase in interest income than the four basis point increase
in the yield on average interest-earning assets. Management attributes the
increase in average interest-earning assets primarily to the proceeds from the
Company's initial public offering.
Interest income on loans receivable increased $989,000, or 13.9%, to $8.1
million for the three months ended September 30, 2005, from $7.1 million for the
three months ended September 30, 2004. The average balance of loans receivable
increased $66.1 million, or 12.9%, to $576.8 million for the three months ended
September 30, 2005, from $510.7 million for the three months ended September 30,
2004. A four basis point increase in the yield on average loans receivable to
5.63% from 5.59%, year-over-year, also contributed to the increase in interest
income. A major marketing effort contributed to the increase in the average
balance of loans receivable. The slighter higher yield reflects rising rates on
loan originations and upward rate adjustments on adjustable rate and floating
rate loans.
Interest income on mortgage-backed securities held to maturity decreased
$81,000, virtually unchanged at $8.6 million for the three months ended
September 30, 2005 and the three months ended September 30, 2004. There was an
increase of $2.5 million in the average balance of mortgage-backed securities,
to $757.5 million for the three months ended September 30, 2005, from $755.0
million for the three months ended September 30, 2004. The yield on average
mortgage-backed securities decreased to 4.52% for the three months ended
September 30, 2005, from 4.58% for the three months ended September 30, 2004.
The relatively stable average balance of mortgage-backed securities,
year-over-year, resulted from reinvestment of monthly principal and interest
payments into new mortgage-backed securities. The decrease in yield resulted
from maturing higher yielding securities being reinvested in new purchases,
which occurred in a lower interest rate environment. Additionally, most
mortgage-backed securities purchased during the year were adjustable rate,
sacrificing higher yields on fixed rate securities in the short-term, for some
interest rate risk protection in the future.
Interest income on investment securities available for sale and held to maturity
increased $352,000, or 8.8%, to $4.4 million for the three months ended
September 30, 2005, from $4.0 million for the three months ended September 30,
2004. The increase in interest income resulted from an increase of $19.7
million, or 4.1%, in the average balance of investment securities to $501.7
million for the three months ended September 30, 2005, from $482.0 million for
the three months ended September 30, 2004, and an increase in the yield on
average investment securities. The yield improved from 3.33% for the three
months ended September 30, 2004, to 3.48% for the three months ended September
30, 2005. The growth in the average balance of the investment securities
portfolio resulted from the redeployment of cash and cash equivalents, and came
primarily in the tax-exempt category. The higher yield resulted from maturing
short-term government agency notes being reinvested in tax-exempt municipal
bonds featuring nominally higher coupons as well as higher tax equivalent
yields.
-10-
Interest income on other interest-earning assets increased to $919,000 for the
three months ended September 30, 2005, from $115,000 for the three months ended
September 30, 2004. This was a result of a $76.8 million increase in the average
balance of other interest-earning assets to $111.4 million for the three months
ended September 30, 2005, from $34.6 million for the three months ended
September 30, 2004. The average balance of other interest-earning assets
increased due to the increase in interest-earning deposits, the primary
component of other interest-earning assets. Interest-earning deposits increased
due to the proceeds from the initial public offering completed in February 2005.
There was a 197 basis point increase in the yield on average other
interest-earning assets to 3.30% for the three months ended September 30, 2005,
from 1.33% for the three months ended September 30, 2004, due to rising
short-term interest rates.
Interest Expense. Total interest expense increased $2.1 million, or 29.6%, to
$9.2 million for the three months ended September 30, 2005, from $7.1 million
for the three months ended September 30, 2004. The increase resulted primarily
from an increase in the cost of average interest-bearing liabilities, nominally
offset by a decrease in the average balance of interest-bearing liabilities.
There was a 58 basis point increase in the cost of average interest-bearing
liabilities to 2.40% for the three months ended September 30, 2005, from 1.82%
for the three months ended September 30, 2004. The average balance of
interest-bearing liabilities decreased $34.3 million, or 2.2%, to $1.52 billion
for the three months ended September 30, 2005, from $1.56 billion for the three
months ended September 30, 2004.
Interest expense on deposits increased $2.2 million, or 36.1%, to $8.3 million
for the three months ended September 30, 2005, from $6.1 million for the three
months ended September 30, 2004. The increase resulted primarily from an
increase in the cost of average interest-bearing deposits, which more than
offset a nominal decrease in the average balance of interest-bearing deposits.
The cost of average interest-bearing deposits increased 61 basis points to 2.27%
for the three months ended September 30, 2005, from 1.66% for the three months
ended September 30, 2004. The average balance of interest-bearing deposits
decreased $11.0 million, to $1.46 billion for the three months ended September
30, 2005, from $1.47 billion for the three months ended September 30, 2004.
Management found it necessary to begin raising certificate of deposit interest
rates, reacting to rising short-term interest rates during the months between
reporting periods, to address deposit outflows.
Interest expense on Federal Home Loan Bank advances decreased $120,000, or
12.1%, to $871,000 for the three months ended September 30, 2005, from $991,000
for the three months ended September 30, 2004. The average balance decreased
$23.3 million, or 27.1%, to $62.8 million for the three months ended September
30, 2005, from $86.1 million for the three months ended September 30, 2004,
which was more than enough to offset an increase in the cost of average
borrowings. The cost of average borrowings increased 95 basis points to 5.55%
from 4.60%, year-over-year. The decrease in the average balance resulted from
the repayment of short-term advances obtained to fund the purchase of
securities, subsequently paid off with proceeds from the initial public offering
completed in February 2005. The cost of average borrowings increased due to the
repayment of the short-term, low cost advances, leaving mostly higher rate
long-term advances on the Company's books.
Provision for Loan Losses. The provision for loan losses decreased $76,000, or
50.3%, to $75,000 for the three months ended September 30, 2005, from $151,000
for the three months ended September 30, 2004. Total loans increased to $602.1
million at September 30, 2005, from $562.6 million at June 30, 2005.
Non-performing loans were $2.0 million, or 0.33% of total loans at September 30,
2005, as compared to $1.9 million, or 0.34% of total loans at June 30, 2005. The
allowance for loan losses as a percentage of gross loans outstanding was 0.91%
at September 30, 2005 and 0.96% at June 30, 2005, reflecting allowance balances
of $5.5 million and $5.4 million, respectively. The allowance for loan losses
was $5.3 million at September 30, 2004.
-11-
Management assesses the allowance for loan losses monthly. Management uses
available information to recognize losses on loans, however, additional loan
loss provisions may be necessary in the future, based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses and may
require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. We maintained
the allowance for loan losses as of September 30, 2005 at a level that
represented management's best estimate of losses in the loan portfolio to the
extent they were both probable and reasonably estimable.
Non-Interest Income. Non-interest income attributed to fees, service charges and
miscellaneous income increased $13,000, or 2.6%, to $507,000 for the three
months ended September 30, 2005, compared to $494,000 for the three months ended
September 30, 2004. The increase in non-interest income attributed to fees,
service charges and miscellaneous income was due primarily to income realized
from additional bank owned life insurance purchased during the quarter ended
September 30, 2005, offset by lower non-recurring loan fee income.
Non-interest income from gains on the sale of securities was $86,000 for the
quarter ended September 30, 2005, resulting from the sale of a $6.9 million
government income fund acquired during an earlier merger, and held in the
Company's available for sale portfolio. There was no income from gains on the
sale of securities during the quarter ended September 30, 2004.
Non-Interest Expense. Total non-interest expense increased $1.6 million, or
20.5%, to $9.4 million for the three months ended September 30, 2005, from $7.8
million for the three months ended September 30, 2004. The increase consisted
primarily of an increase in salaries and employee benefits, an increase in the
cost of office occupancy and equipment and an increase in miscellaneous
expenses.
Salaries and employee benefits increased $951,000, or 20.2%, to $5.6 million for
the three months ended September 30, 2005, compared to $4.7 million for the
three months ended September 30, 2004. The increase was the result of normal
salary increases, increased benefit costs and hiring of additional staff.
Pension plan contribution expense for the three months ended September 30, 2005
was $636,000, as compared to $322,000 for the three months ended September 30,
2004. The increase is due to lower than expected investment returns on plan
assets and higher required contributions resulting from the incremental effect
of normal salary increases. The quarter ended September 30, 2005 contained
employee stock ownership plan ("ESOP") compensation expense of $436,000, while
the quarter ended September 30, 2004 did not include this expense category. The
Bank established the ESOP during the initial public offering completed in
February 2005 and purchased 1.7 million shares in the IPO.
Net occupancy expense of premises and equipment expense increased $427,000, or
28.5%, to $1.9 million for the three months ended September 30, 2005, from $1.5
million for the three months ended September 30, 2004. This increase primarily
reflects normal increases in the cost of office occupancy and equipment, as well
as operating expenses and depreciation expense attributed to the Company's new
53,000 square foot administrative headquarters building in Fairfield, New
Jersey. The administrative headquarters building was occupied during the quarter
ended December 31, 2004; therefore, the quarter ended September 30, 2004 does
not include expenses associated with its occupancy. The increase in equipment
expense resulted from higher depreciation expense and increased costs related to
data processing, ATM support and Internet banking, all of which are outsourced.
-12-
All other elements of non-interest expense totaled $1.8 million for the three
months ended September 30, 2005; an increase of $211,000, or 13.2%, from $1.6
million for the three months ended September 30, 2004. Miscellaneous expenses
increased $160,000, to $979,000 for the three months ended September 30, 2005,
as compared to $819,000 for the three months ended September 30, 2004.
Professional fees consisting of legal expense and audit and accounting services
expense increased $26,000 and $70,000, respectively, in large part due to
becoming a public company during the months between the reporting periods.
Provision for Income Taxes. The provision for income taxes decreased $573,000,
or 35.8%, to $989,000 for the three months ended September 30, 2005, from $1.6
million for the three months ended September 30, 2004. The effective income tax
rates were 25.0% for the three months ended September 30, 2005, as compared to
29.2% for the three months ended September 30, 2004. Management attributes the
decrease in income tax expense to a decrease in pre-tax income of $1.4 million,
or 25.9%, to $4.0 million for the three months ended September 30, 2005, from
$5.4 million for the three months ended September 30, 2004. Management
attributes the lower effective income tax rate to tax management strategies,
including investing in bank-qualified tax-exempt municipal bonds and
transferring investment securities held to maturity and mortgage-backed
securities held to maturity to a New Jersey investment company, Kearny Federal
Investment Corp., a wholly owned subsidiary of the Bank, which commenced
operations in July 2004.
Liquidity and Capital Resources
The Bank is required to have enough investments that qualify as liquid assets in
order to maintain sufficient liquidity to ensure a safe operation. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. The Bank attempts to
maintain liquid assets at levels believed to be adequate to meet the
requirements of normal operations, including potential deposit outflows. The
Bank reviews cash flow projections regularly and updates them to assure
maintenance of adequate but not excessive liquidity. Liquidity management is
both a daily and long-term function of business management.
The Bank's liquidity, represented by cash and cash equivalents, is a product of
its operating, investing and financing activities. The Bank's primary sources of
funds are deposits, amortization, prepayments and maturities of mortgage-backed
securities and outstanding loans, maturities of investment securities and funds
provided from operations. In addition, the Bank invests excess funds in
short-term interest-earning assets such as overnight deposits or U.S. agency
securities, which provide liquidity to meet lending requirements. While
scheduled payments from the amortization of loans and mortgage-backed securities
and maturing investment securities and short-term investments are relatively
predictable sources of funds, general interest rates, economic conditions and
competition greatly influence deposit flows and prepayments on loans and
mortgage-backed securities. The Bank also generates cash through borrowings. If
the Bank requires funds beyond its ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of New York (the
"FHLB") which provides an additional source of funds.
The Bank uses its sources of funds primarily to meet ongoing commitments, to pay
maturing certificates of deposit and savings withdrawals, to fund loan
commitments and to maintain its portfolio of mortgage-backed securities and
investment securities. At September 30, 2005, the Bank has outstanding
commitments to originate loans of $81.0 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 2005, totaled $698.9
million. Management's policy is to maintain deposit rates at levels that are
competitive with other local financial institutions. Based on the competitive
rates and on historical experience, management believes that a significant
portion of maturing deposits will remain with the Bank. However, if the Bank's
loan originations remain strong and deposits continue to run off, the Bank may
find it necessary to increase its FHLB advances. At September 30, 2005, advances
from the FHLB amounted to $61.5 million.
-13-
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain its status as a
well-capitalized institution in accordance with regulatory standards. As of
September 30, 2005, Kearny Federal Savings Bank exceeded all capital
requirements of the Office of Thrift Supervision (the "OTS").
The following table sets forth the Bank's capital position at September 30,
2005, as compared to the minimum regulatory capital requirements:
September 30, 2005 (Unaudited)
------------------------------------------------------------------------------
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Action Provisions
------------------------ ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------
(In Thousands)
Total Capital
(to risk-weighted assets) $ 368,405 50.92% $ 57,877 8.00% $ 72,346 10.00%
Tier 1 Capital
(to risk-weighted assets) $ 359,730 49.72% - - $ 43,407 6.00%
Core (Tier 1) Capital
(to adjusted total assets) $ 359,730 18.49% $ 58,366 3.00% $ 97,276 5.00%
Tangible Capital
(to adjusted total assets) $ 359,730 18.49% $ 29,183 1.50% - -
-14-
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Qualitative Analysis. The ability to maximize net interest income is largely
dependent upon the achievement of a positive interest rate spread sustainable
during fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities, which either re-price or mature within a given
period. The difference, or the interest rate re-pricing "gap", provides an
indication of the extent changes in interest rates may affect an institution's
interest rate spread. A positive gap exists when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive liabilities, and
a negative gap exists when the amount of interest rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets. Generally, during a period
of rising interest rates, a negative gap within shorter maturities would
adversely affect net interest income, while a positive gap within shorter
maturities would result in an increase in net interest income. During a period
of falling interest rates, a negative gap within shorter maturities would result
in an increase in net interest income while a positive gap within shorter
maturities would result in a decrease in net interest income.
Because the Bank's interest-bearing liabilities, which mature or re-price within
short periods exceed its interest-earning assets with similar characteristics,
material and prolonged increases in interest rates generally would adversely
affect net interest income, while material and prolonged decreases in interest
rates generally would have a positive effect on net interest income.
The Bank's Board of Directors established an Interest Rate Risk Management
Committee comprised of members of the board and management. The committee meets
quarterly to address management of the Bank's assets and liabilities, including
review of its short term liquidity position; loan and deposit pricing and
production volumes and alternative funding sources; current investments; average
lives, durations and re-pricing frequencies of loans and securities; and a
variety of other asset and liability management topics. The committee reports
the results of its quarterly review to the full board, which adjusts interest
rate risk policy and strategies, as it considers necessary and appropriate.
Quantitative Analysis. Management using the OTS model, which estimates the
change in the Bank's net portfolio value (the "NPV") over a range of interest
rate scenarios, monitors the Bank's interest rate sensitivity. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. OTS defines the NPV ratio, under any interest rate scenario, as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces its analysis based upon data submitted on the Bank's
quarterly Thrift Financial Reports. The following table sets forth the Bank's
NPV as of June 30, 2005, the most recent date for which the Bank has received
the Bank's NPV as calculated by the OTS. Management does not believe that there
has been a material adverse change in the Bank's interest rate risk during the
three months ended September 30, 2005.
At June 30, 2005
---------------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
------------------------ ---------------------------------------
Net Portfolio Basis Point
Changes in Rates $ Amount $ Change % Change Value Ratio Change
---------------- -------- -------- -------- ----------- ------
(In Thousands)
+300 bp 270,156 -138,711 -34% 14.46% -570 bp
+200 bp 317,332 -91,535 -22% 16.52% -365 bp
+100 bp 364,231 -44,635 -11% 18.44% -173 bp
0 bp 408,866 - - 20.17% -
-100 bp 438,355 +29,488 +7% 21.23% +106 bp
-200 bp 455,020 +46,154 +11% 21.76% +159 bp
-15-
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV require the making of certain
assumptions, which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remains constant over the
measurement period. The model also assumes that a particular change in interest
rates reflects uniformly across the yield curve regardless of the duration to
maturity or re-pricing of specific assets and liabilities. Accordingly, although
the NPV measurements and net interest income models provide an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income and
will differ from actual results.
-16-
ITEM 4.
CONTROLS AND PROCEDURES
-----------------------
Based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")), the Company's principal executive officer and the principal
financial officer have concluded that as of the end of the period covered by
this Quarterly Report on Form 10-Q such disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and is accumulated and communicated to the
Company's management, including the principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosures.
During the quarter under report, there was no change in the Company's internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities and Exchange Act of 1934) that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-17-
PART II
ITEM 1. Legal Proceedings
-----------------
At September 30, 2005, neither the Company nor the Bank were involved
in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business, which involve amounts
in the aggregate believed by management to be immaterial to the
financial condition of the Company and the Bank.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits
--------
The following Exhibits are filed as part of this report:
3.1 Charter of Kearny Financial Corp. (1)
3.2 By-laws of Kearny Financial Corp. (1)
4.0 Specimen Common Stock Certificate of Kearny Financial Corp. (1)
10.1 Employment Agreement between Kearny Federal Savings Bank and
John N. Hopkins (1)
10.2 Employment Agreement between Kearny Federal Savings Bank and
Allan Beardslee (1)
10.3 Employment Agreement between Kearny Federal Savings Bank and
Albert E. Gossweiler (1)
10.4 Employment Agreement between Kearny Federal Savings Bank and
Sharon Jones (1)
10.5 Employment Agreement between Kearny Federal Savings Bank and
William C. Ledgerwood (1)
10.6 Employment Agreement between Kearny Federal Savings Bank and
Erika Sacher (1)
10.7 Employment Agreement between Kearny Federal Savings Bank and
Patrick M. Joyce (1)
10.8 Directors Consultation and Retirement Plan (1)
10.9 Benefit Equalization Plan (1)
10.10 Benefit Equalization Plan for Employee Stock Ownership Plan (1)
11.0 Statements re: computation of per share earnings
(Filed herewith).
31.0 Rule 13a-14(a)/15d-14(a) Certifications (Filed herewith).
32.0 Section 1350 Certifications (Filed herewith).
` ---------------------
(1) Incorporated by reference to the identically numbered exhibit to
the Registrant's Registration Statement on Form S-1 (File No.
333-118815).
-18-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on it behalf by the
undersigned thereunto duly authorized.
KEARNY FINANCIAL CORP.
Date: November 14, 2005 By: /s/ John N. Hopkins
------------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly authorized officer and principal
executive officer)
Date: November 14, 2005 By: /s/ Albert E. Gossweiler
------------------------------------------
Albert E. Gossweiler
Senior Vice President and Chief Financial
Officer
(Principal financial officer)
-19-