SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
---------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
---------------------------------------
OR
---------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 000-51093
---------
KEARNY FINANCIAL CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 22-3803741
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
120 Passaic Ave., Fairfield, New Jersey 07004-3510
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 973-244-4500
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: February 13, 2006.
$0.10 par value common stock - 72,559,836 shares outstanding
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition
at December 31, 2005 and June 30, 2005 (Unaudited) 1
Consolidated Statements of Income for the Three Months and Six
Months Ended December 31, 2005 and 2004 (Unaudited) 2-3
Consolidated Statements of Comprehensive Income for the Three
Months and Six Months Ended December 31, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2005 and 2004 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7-8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-20
Item 3: Quantitative and Qualitative Disclosure About Market Risk 21-22
Item 4: Controls and Procedures 23
PART II - OTHER INFORMATION 24-25
SIGNATURES 26
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands, Except Share and Per Share Data, Unaudited)
December 31, June 30,
2005 2005
----------- -----------
Assets
------
Cash and amounts due from depository institutions $ 19,294 $ 16,683
Interest-bearing deposits in other banks 53,600 123,182
----------- -----------
Cash and cash equivalents 72,894 139,865
Securities available for sale 26,740 33,591
Investment securities held to maturity 461,781 470,098
Loans receivable, including net deferred loan costs of $948 and $815 633,675 563,434
Less: Allowance for loan losses (5,554) (5,416)
----------- -----------
Net loans receivable 628,121 558,018
----------- -----------
Mortgage-backed securities held to maturity 717,953 758,121
Premises and equipment 36,121 34,977
Federal Home Loan Bank of New York stock ("FHLB") 5,180 11,361
Interest receivable 10,719 10,430
Goodwill 82,263 82,263
Bank Owned Life Insurance ("BOLI") 14,373 3,981
Other assets 6,628 4,300
----------- -----------
Total assets $ 2,062,773 $ 2,107,005
=========== ===========
Liabilities and stockholders' equity
------------------------------------
Liabilities
-----------
Deposits:
Non-interest bearing $ 58,603 $ 56,142
Interest bearing 1,424,891 1,472,635
----------- -----------
Total deposits 1,483,494 1,528,777
Advances from FHLB 61,400 61,687
Advance payments by borrowers for taxes 4,621 4,627
Other liabilities 6,844 6,432
----------- -----------
Total liabilities 1,556,359 1,601,523
----------- -----------
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;
72,559,836 and 72,737,500 issued and outstanding 7,274 7,274
Paid in capital 208,206 207,838
Retained earnings - substantially restricted 304,101 301,857
Unearned Employee Stock Ownership Plan ("ESOP") shares (16,245) (16,972)
Treasury stock, at cost; 177,664 and 0 (2,268) --
Accumulated other comprehensive income 5,346 5,485
----------- -----------
Total stockholders' equity 506,414 505,482
----------- -----------
Total liabilities and stockholders' equity $ 2,062,773 $ 2,107,005
=========== ===========
See notes to consolidated financial statements.
-1-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands, Except Share and Per Share Data, Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Interest income:
Loans $ 8,544 $ 7,321 $ 16,665 $ 14,453
Mortgage-backed securities 8,418 8,298 16,986 16,947
Investment and available for sale
securities 4,328 4,083 8,691 8,094
Other interest earning assets 705 130 1,624 245
-------- -------- -------- --------
Total interest income 21,995 19,832 43,966 39,739
-------- -------- -------- --------
Interest expense:
Deposits 8,650 6,186 16,937 12,298
Borrowings 857 988 1,728 1,979
-------- -------- -------- --------
Total interest expense 9,507 7,174 18,665 14,277
-------- -------- -------- --------
Net interest income 12,488 12,658 25,301 25,462
Provision for loan losses 64 (34) 139 117
-------- -------- -------- --------
Net interest income after provision
for loan losses 12,424 12,692 25,162 25,345
-------- -------- -------- --------
Non-interest income:
Fees and service charges 289 171 566 348
Gain on the sale of available for
sale securities - - 86 71
Miscellaneous 328 239 558 485
-------- -------- -------- --------
Total non-interest income 617 410 1,210 904
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits 5,760 5,342 11,363 9,994
Net occupancy expense of premises 789 723 1,685 1,370
Equipment 1,080 944 2,132 1,818
Advertising 385 295 710 576
Federal insurance premium 136 139 270 279
Amortization of intangible assets 159 159 318 318
Directors' compensation 582 230 812 447
Miscellaneous 1,247 935 2,226 1,754
-------- -------- -------- --------
Total non-interest expense 10,138 8,767 19,516 16,556
-------- -------- -------- --------
Income before income taxes 2,903 4,335 6,856 9,693
Income taxes 577 1,143 1,566 2,705
-------- -------- -------- --------
Net income $ 2,326 $ 3,192 $ 5,290 $ 6,988
======== ======== ======== ========
See notes to consolidated financial statements.
-2-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Cont'd)
------------------------------------------
(In Thousands, Except Share and Per Share Data, Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ---------------------
2005 2004 2005 2004
----------- -------- ---------- --------
Net income per common share:
Basic $ 0.03 $ 319.20 $ 0.07 $ 698.80
Diluted 0.03 319.20 0.07 698.80
Weighted average number of
common shares outstanding:
Basic 71,046,123 10,000 71,049,401 10,000
Diluted 71,096,851 10,000 71,074,765 10,000
See notes to consolidated financial statements.
-3-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In Thousands, Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
Net income $ 2,326 $ 3,192 $ 5,290 $ 6,988
------- ------- ------- -------
Other comprehensive income (loss),
net of income taxes:
Gross realized holdings (gain) on
securities available for sale - - (86) (71)
Income tax expense - - 30 25
Gross unrealized holdings gain
(loss) on securities available
for sale 1,134 1,911 (127) 2,752
Deferred income tax benefit
(expense) (397) (669) 44 (963)
------- ------- ------- -------
Other comprehensive income (loss) 737 1,242 (139) 1,743
------- ------- ------- -------
Comprehensive income $ 3,063 $ 4,434 $ 5,151 $ 8,731
======= ======= ======= =======
See notes to consolidated financial statements.
-4-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands, Unaudited)
Six Months Ended
December 31,
----------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 5,290 $ 6,988
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 924 639
Net amortization of premiums, discounts and loan fees and costs 406 501
Deferred income taxes 748 (582)
Amortization of intangible assets 318 318
Provision for loan losses 139 117
Realized gain on sale of securities available for sale (86) (71)
Decrease (increase) in interest receivable (289) 141
Decrease (increase) in other assets (2,911) (1,325)
Realized loss on sale of real estate owned 35 -
Increase (decrease) in interest payable 30 (25)
Increase (decrease) in other liabilities (1,177) (96)
Increase in cash surrender value of bank owned life insurance (184) (74)
ESOP and stock option plan expenses 1,092 -
--------- ---------
Net cash provided by operating activities 4,335 6,531
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (139) (91)
Proceeds from sale of securities available for sale 6,864 1,115
Purchases of investment securities held to maturity (4,000) (22,148)
Proceeds from calls and maturities of investment securities held to
maturity 9,989 14,791
Proceeds from repayments of investment securities held to maturity 2,337 2,545
Purchase of loans (10,753) -
Net (increase) decrease in loans receivable (59,402) (3,702)
Proceeds from sale of real estate owned 65 -
Purchases of mortgage-backed securities held to maturity (64,765) (27,112)
Principal repayments on mortgage-backed securities held to maturity 104,429 91,999
Additions to premises and equipment (2,068) (7,197)
Redemption (purchase) of FHLB Stock 6,181 -
Purchase of bank owned life insurance (10,208) -
--------- ---------
Net cash provided by (used in) investing activities (21,470) 50,200
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits (45,314) (44,840)
Repayment of FHLB advances (287) (270)
Net change in short-term borrowings from FHLB - (12,000)
Increase (decrease) in advance payments by borrowers for taxes (6) (198)
Refund of common stock offering expenses 3 -
Purchase of treasury stock of Kearny Financial Corp. (2,268) -
Dividends paid to minority stockholders of Kearny Financial Corp. (1,964) -
--------- ---------
Net cash (used in) provided by financing activities $ (49,836) $ (57,308)
--------- ---------
See notes to consolidated financial statements.
-5-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
----------------------------------------------
(In Thousands, Unaudited)
Six Months Ended
December 31,
----------------------
2005 2004
--------- ---------
Net (decrease) increase in cash and cash equivalents $ (66,971) $ (577)
Cash and cash equivalents - beginning 139,865 39,488
--------- ---------
Cash and cash equivalents - ending $ 72,894 $ 38,911
========= =========
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes, net of refunds $ 4,302 $ (519)
========= =========
Interest $ 18,635 $ 14,302
========= =========
Supplemental disclosure of non-cash transactions:
Cash dividend declared $ 1,082 $ -
========= =========
See notes to consolidated financial statements.
-6-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 and six month periods ended December 31, 2005, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other period.
In March 2004, the EITF reached a consensus on Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides guidance on other-than-temporary impairment models for
marketable debt and equity securities accounted for under SFAS 115 and
non-marketable equity securities accounted for under the cost method. The EITF
developed a basic three-step model to evaluate whether an investment is
other-than-temporarily impaired. In November 2005, the FASB approved the
issuance of FASB Staff Position FAS No. 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
FSP addresses when an investment is considered impaired, whether the impairment
is other-than-temporary and the measurement of an impairment loss. The FSP also
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary. The FSP
is effective for reporting periods beginning after December 15, 2005 with
earlier application permitted. For the Company, the effective date will be
January 1, 2006. The adoption of this accounting principle is not expected to
have a significant impact on our financial position or results of operations.
3. EARNINGS PER SHARE
----------------------
Basic earnings per share or EPS equals net income available to common
stockholders divided by the weighted-average number of common shares
outstanding. If potentially dilutive contracts exist such as stock options, or
their equivalent, diluted EPS is also included, calculated using the treasury
stock method. Using this approach, assume there was an exercise of an option at
the beginning of the period, or date of grant, if later. Furthermore, assume
that the proceeds received from the exercise of the option provide funds to buy
treasury stock at the average market price for the period. Finally, assume that
the exercise will only occur if the average market price of the underlying
shares during the period is greater than the exercise price of the option. The
weighted average number of common shares outstanding is increased by the number
of shares assumed issued owing to the exercise of options, or their equivalent,
reduced by the assumed treasury shares purchased.
-7-
Though the effective date of the Company's initial public offering was February
23, 2005, the presentation of basic and diluted EPS assumes the effective date
of the transaction was July 1, 2004. The calculation of basic and diluted EPS
includes the 30% of the outstanding shares sold to the public as well as the 70%
of the outstanding shares held by Kearny MHC. The calculation excludes Kearny
Federal Savings Bank Employee Stock Ownership Plan (the "ESOP") shares not
allocated to participants or not committed for release for allocation to
participants.
4. DIVIDEND WAIVER
-------------------
During the quarter ended December 31, 2005, the federally chartered mutual
holding company of the Company ("Kearny MHC"), waived its right, upon
non-objection from the Office of Thrift Supervision ("OTS"), to receive cash
dividends of $2,546,000 paid during the quarter and cash dividends of $2,546,000
declared during the quarter, on the shares of Company common stock it owns.
Furthermore, OTS advised Kearny MHC that it would not object to dividend waivers
for the quarters ending March 31, 2006, June 30, 2006 and September 30, 2006,
provided OTS does not subsequently determine that the proposed waivers are
detrimental to the safe and sound operation of the Bank.
5. STOCK-BASED COMPENSATION
----------------------------
At the annual meeting held on October 24, 2005, stockholders of the Company
approved the Kearny Financial Corp. 2005 Stock Compensation and Incentive Plan.
The plan authorizes the award of up to 3,564,137 shares as stock options and
1,425,655 shares as restricted stock awards. On October 24, 2005, non-employee
directors received in aggregate 1,069,240 options and 427,696 shares of
restricted stock. On December 5, 2005, certain officers of the Company and Bank
received in aggregate 2,305,000 options and 910,000 shares of restricted stock.
The Company adopted SFAS 123R October 1, 2005 and will record stock compensation
expense of approximately $26.5 million between the quarter ended December 31,
2005 through the quarter ending December 31, 2010 for stock awards outstanding
as of December 31, 2005. Any additional impact that the adoption of this
statement will have on our financial position and results of operations will be
determined by share-based payments granted in future periods and the assumptions
on which the value of those share-based payments is based.
6. STOCK REPURCHASE PLAN
-------------------------
On November 9, 2005, the Company announced that it received regulatory approval
to begin the purchase of up to 1,425,655 shares or approximately 2% of the
outstanding shares of its common stock in open market transactions for use in
funding the Company's 2005 Stock Compensation and Incentive Plan previously
approved by stockholders. In December 2005, the Company purchased 177,664 shares
at a total cost of $2,268,000, or approximately $12.76 per share. Temporarily,
the repurchased shares appear as treasury stock in the Consolidated Statement of
Financial Condition as of December 31, 2005, pending completion of a trust
arrangement to administer restricted stock awards granted under the 2005 Stock
Compensation and Incentive Plan.
-8-
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 December 31, 2005 and June 30, 2005
Total assets decreased by $44.2 million, or 2.1%, to $2.06 billion at December
31, 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 six months ended December 31, 2005.
Cash and cash equivalents decreased $67.0 million, or 47.9%, to $72.9 million at
December 31, 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.
During the six months ended December 31, 2005, the Company paid cash dividends
for the first time to minority stockholders. The two quarterly dividends totaled
$2.0 million.
The carrying value of securities available for sale decreased $6.9 million, or
20.5%, to $26.7 million at December 31, 2005, from $33.6 million at June 30,
2005. The decrease was due exclusively to the sale of a $6.9 million government
income fund acquired during an earlier merger. Mark-to-market adjustments to
other investments in the available for sale portfolio during the six months
ended December 31, 2005 resulted in no change to their carrying value, compared
to the value of the portfolio as of June 30, 2005.
Investment securities held to maturity decreased $8.3 million, or 1.8%, to
$461.8 million at December 31, 2005, from $470.1 million at June 30, 2005. The
decrease came primarily in the government agency notes and municipal bond
categories, with the proceeds from maturing notes funding loan originations and
deposit outflows during the six months ended December 31, 2005.
Loans receivable, net of deferred fees and the allowance for loan losses,
increased $70.1 million, or 12.6%, to $628.1 million at December 31, 2005, from
$558.0 million at June 30, 2005. The ratio of loans to deposits improved to
42.3% at December 31, 2005, from 36.5% at June 30, 2005. The increase came in
one-to-four family mortgage loans, particularly first mortgages and home equity
loans. There was also
-9-
substantial growth in construction loans, including all three categories:
one-to-four family, multi-family and non-residential. There was nominal growth
in home equity lines of credit, non-residential mortgage loans and multi-family
mortgage loans. Commercial business loans remained unchanged during the six
months ended December 31, 2005.
Mortgage-backed securities held to maturity decreased $40.1 million, or 5.3%, to
$718.0 million at December 31, 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 six months ended December 31, 2005. Though the
mortgage-backed securities portfolio decreased overall, there were purchases
totaling $64.8 million during the six months ended December 31, 2005. The
purchases were for the most part adjustable rate, thus sacrificing higher yields
on fixed rate securities in the short-term, for interest rate risk protection in
the future.
Bank owned life insurance ("BOLI") increased $10.4 million to $14.4 million at
December 31, 2005, from $4.0 million at June 30, 2005. Of the $10.4 million
increase, $10.2 million resulted from the purchase of additional policies. The
cash surrender value of the insurance increased $184,000 during the six months
ended December 31, 2005.
Deposits decreased $45.3 million, or 3.0%, to $1.48 billion at December 31,
2005, from $1.53 billion at June 30, 2005. During the six months ended December
31, 2005, the Bank attempted to resist pressure to increase the rates it pays on
deposits. Management's goal is to slow the increase in the cost of funds caused
by a rise in market interest rates. The result of this strategy is the loss of
deposits. The decrease was primarily in certificates of deposit. During the
quarter ended June 30, 2005, the Bank reacted to competitive pressures in the
market place by offering a premium short-term interest rate, which attracted new
money in the form of certificates of deposit. However, the Bank retreated from
that strategy during the two most recent quarters due to the negative effect on
its cost of funds.
Federal Home Loan Bank advances decreased $287,000, to $61.4 million at December
31, 2005, from $61.7 million at June 30, 2005. The decrease resulted from
scheduled monthly principal payments on amortizing advances.
Stockholders' equity increased $932,000, to $506.4 million at December 31, 2005,
from $505.5 million at June 30, 2005. The increase resulted from net income
recorded during the six months ended December 31, 2005, the release of unearned
ESOP shares and transactions resulting from the stock option plan approved at
the Company's annual meeting held in October 2005. There was a nominal decrease
in accumulated other comprehensive income, due to a reduction in the carrying
value, net of taxes, of the Company's available for sale portfolio. A cash
dividend of $0.05 per share paid during the quarter ended September 30, 2005 and
a cash dividend of $0.05 per share declared during the quarter ended December
31, 2005, plus 177,664 shares of treasury stock purchased in December 2005
partially offset the increase in stockholders' equity.
Comparison of Operating Results for the Three Months Ended December 31, 2005 and
2004
General. Net income for the quarter ended December 31, 2005 was $2.3 million, a
decrease of $866,000, or 27.1%, from $3.2 million for the quarter ended December
31, 2004. The decrease in net income resulted from an increase in non-interest
expense, particularly salaries and employee benefits, directors' compensation
and miscellaneous expenses. A nominal decrease in net interest income and
increase in the provision for loan losses also contributed to the decrease in
net income.
Net Interest Income. Net interest income for the three months ended December 31,
2005 was $12.5 million, a decrease of $170,000, or 1.3%, compared to $12.7
million for the three months ended December 31, 2004. Despite a large decrease
in the net interest rate spread and a smaller decrease in the net interest
margin, a substantial increase in the ratio of average interest-earning assets
to average interest-bearing liabilities helped interest income stay somewhat on
pace with increasing interest expense, year-over-year.
-10-
The net interest rate spread decreased 60 basis points to 2.06% for the quarter
ended December 31, 2005, from 2.66% for the quarter ended December 31, 2004.
During the quarter ended December 31, 2005, interest-bearing liabilities
continued to re-price faster than interest-earning assets. The cost of average
interest-bearing liabilities increased 67 basis points, from 1.87% for the three
months ended December 31, 2004, to 2.54% for the three months ended December 31,
2005. With respect to the two components of interest-bearing liabilities, the
cost of borrowings increased faster than the cost of deposits, year-over-year.
During the same period, the yield on average interest-earning assets increased
seven basis points, to 4.60% for the quarter ended December 31, 2005, from 4.53%
for the quarter ended December 31, 2004. The net interest margin decreased 28
basis points to 2.61% for the three months ended December 31, 2005, compared
with 2.89% for the three months ended December 31, 2004.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased from 114.36% for the quarter ended December 31, 2004, to
127.69% for the quarter ended December 31, 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. During the current quarter,
the Bank continued to deploy the proceeds from the Company's initial public
offering, investing the cash primarily in loans receivable.
Interest Income. Total interest income increased $2.2 million, or 11.1%, to
$22.0 million for the three months ended December 31, 2005, from $19.8 million
for the three months ended December 31, 2004. Average interest-earning assets
increased $160.0 million, or 9.1%, to $1.91 billion for the quarter ended
December 31, 2005, from $1.75 billion for the quarter ended December 31, 2004.
Management attributes the increase in interest income to a significant increase
in average interest-earning assets, rather than an increase in the yield on
average interest-earning assets, which was a nominal seven basis points. The
largest increases came in the loans receivable, mortgage-backed securities held
to maturity and other interest-earning assets, year-over-year, resulting from
the infusion of cash from the Company's initial public offering.
Interest income on loans receivable increased $1.2 million, or 16.4%, to $8.5
million for the three months ended December 31, 2005, from $7.3 million for the
three months ended December 31, 2004. The average balance of loans receivable
increased $99.2 million, or 19.4%, to $611.2 million for the quarter ended
December 31, 2005, from $512.0 million for the quarter ended December 31, 2004.
The increase in interest income from loans receivable would have been greater,
were it not for a 13 basis point decrease in the yield on average loans
receivable to 5.59% for the quarter ended December 31, 2005, from 5.72% for the
quarter ended December 31, 2004. A major marketing effort, which continued
throughout 2005, contributed to the increase in the average balance of loans
receivable. However, despite upward rate adjustments on adjustable rate and
floating rate loans in the Bank's portfolio, the weighted average interest rate
of recent loan originations continued to lag behind the weighted average
interest rate of recent loans paid in full, contributing to a decrease in the
yield on average loans receivable.
Interest income on mortgage-backed securities held to maturity increased
$120,000, virtually unchanged at $8.4 million for the three months ended
December 31, 2005, compared to $8.3 million for the three months ended December
31, 2004. The average balance of mortgage-backed securities increased $20.6
million, or 2.9%, to $739.3 million for the quarter ended December 31, 2005,
from $718.7 million for the quarter ended December 31, 2004. The yield on
average mortgage-backed securities decreased to 4.55% for the three months ended
December 31, 2005, from 4.62% for the three months ended December 31, 2004. The
increase in the average balance of mortgage-backed securities, year-over-year,
resulted from reinvestment of monthly principal and interest payments and
deployment of cash and cash equivalents into new mortgage-backed securities. The
decrease in yield resulted from the reinvestment of monthly principal payments
from higher coupon mortgage-backed securities into new securities, which
occurred in a relatively lower interest rate environment. The purchases were for
the most part adjustable rate, thus sacrificing higher yields on fixed rate
securities in the short-term, for interest rate risk protection in the future.
-11-
Interest income on investment securities available for sale and held to maturity
increased $245,000, or 6.0%, to $4.3 million for the quarter ended December 31,
2005, from $4.1 million for the quarter ended December 31, 2004. The average
balance of investment securities remained virtually unchanged at $488.5 million
for the quarter ended December 31, 2005, compared to $488.2 million for the
prior year, due to the reinvestment of cash from maturing securities back into
the portfolio, primarily in the tax-exempt category. The yield improved from
3.35% for the three months ended December 31, 2004, to 3.54% for the three
months ended December 31, 2005. The higher yield resulted from the reinvestment
of maturing short-term government agency notes in tax-exempt municipal bonds
featuring nominally higher coupons as well as higher tax equivalent yields.
Interest income on other interest-earning assets increased to $705,000 for the
quarter ended December 31, 2005, from $130,000 for the quarter ended December
31, 2004. This was a result of a $40.0 million increase in the average balance
of other interest-earning assets to $71.9 million for the three months ended
December 31, 2005, from $31.9 million for the three months ended December 31,
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, partially offset by a decrease in FHLB capital stock.
Interest-earning deposits increased due to the proceeds from the initial public
offering completed in February 2005, while FHLB capital stock decreased due to a
repurchase by FHLB to meet regulatory requirements. There was a 229 basis point
increase in the yield on average other interest-earning assets to 3.92% for the
quarter ended December 31, 2005, from 1.63% for the quarter ended December 31,
2004, due to rising short-term interest rates.
Interest Expense. Total interest expense increased $2.3 million, or 31.9%, to
$9.5 million for the three months ended December 31, 2005, from $7.2 million for
the three months ended December 31, 2004. The increase resulted primarily from
an increase in the cost of average interest-bearing liabilities, partially
offset by a decrease in the average balance of interest-bearing liabilities.
There was a 67 basis point increase in the cost of average interest-bearing
liabilities to 2.54% for the three months ended December 31, 2005, from 1.87%,
for the three months ended December 31, 2004. The average balance of
interest-bearing liabilities decreased $34.5 million, or 2.3%, to $1.50 billion
for the quarter ended December 31, 2005, from $1.53 billion for the quarter
ended December 31, 2004.
Interest expense on deposits increased $2.5 million, or 40.3%, to $8.7 million
for the three months ended December 31, 2005, from $6.2 million for the three
months ended December 31, 2004. The increase resulted primarily from an increase
in the cost of average interest-bearing deposits, which more than offset a
decrease in the average balance of interest-bearing deposits. The cost of
average interest-bearing deposits increased 70 basis points to 2.41% for the
quarter ended December 31, 2005, from 1.71% for the quarter ended December 31,
2004. The average balance of interest-bearing deposits decreased $13.0 million,
to $1.44 billion for the three months ended December 31, 2005, from $1.45
billion for the three months ended December 31, 2004. Management's goal is to
slow the increase in the cost of funds caused by a rise in market interest
rates. The result of this strategy is a loss of deposits. The decrease was
primarily in certificates of deposit. During the quarter ended June 30, 2005,
the Bank reacted to competitive pressures in the market place by offering a
premium short-term interest rate, which attracted new money in the form of
certificates of deposit. However, the Bank retreated from that strategy during
the two most recent quarters due to the negative effect on its cost of funds.
Interest expense on Federal Home Loan Bank advances decreased $131,000, or
13.3%, to $857,000 for the quarter ended December 31, 2005, from $988,000 for
the quarter ended December 31, 2004. The average balance decreased $21.5
million, or 25.9%, to $61.5 million for the three months ended December 31,
2005, from $83.0 million for the three months ended December 31, 2004, which was
more than enough to offset an increase in the cost of average borrowings. The
cost of average borrowings increased 82 basis points to 5.58% from 4.76%,
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
-12-
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 Bank's
books.
Provision for Loan Losses. The provision for loan losses increased $98,000, to
$64,000 for the quarter ended December 31, 2005, from a $34,000 reduction
recorded during the quarter ended December 31, 2004. Management attributes the
increase primarily to growth in the loan portfolio. Total loans increased to
$632.7 million at December 31, 2005, from $562.6 million at June 30, 2005.
Non-performing loans were $1.2 million, or 0.19% of total loans at December 31,
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 0.88%
at December 31, 2005 and 0.96% at June 30, 2005, reflecting allowance balances
of $5.6 million and $5.4 million, respectively. The allowance for loan losses
was $5.3 million at December 31, 2004.
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 December 31, 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 $207,000, to $617,000 for the three months ended
December 31, 2005, compared to $410,000 for the three months ended December 31,
2004. The increase in non-interest income attributed to fees, service charges
and miscellaneous income was due primarily to income of $95,000 realized from
additional bank owned life insurance purchased during the two most recent
quarters, a non-recurring mortgage prepayment penalty of $73,000 and increased
fee income from the Bank's retail branch system.
There was no income from gains on the sale of securities during the quarter
ended December 31, 2005 or December 31, 2004.
Non-Interest Expense. Total non-interest expense increased $1.3 million, or
14.8%, to $10.1 million for the three months ended December 31, 2005, from $8.8
million for the three months ended December 31, 2004. The increase consisted
primarily of an increase in salaries and employee benefits, directors'
compensation, nominal increases in equipment expense and advertising expense and
higher miscellaneous expenses.
Salaries and employee benefits increased $418,000, or 7.9%, to $5.8 million for
the quarter ended December 31, 2005, compared to $5.3 million for the quarter
ended December 31, 2004. Management attributes the increase primarily to stock
benefit plans approved at the Company's first annual meeting held in October
2005, which resulted in an expense of $280,000. Compensation expense was
virtually flat, while other employee benefits including health insurance
increased $109,000, year-over-year. Pension expense decreased $433,000 from the
earlier quarter, when the Bank recorded a special charge due to actuarial
adjustments resulting from lower than expected investment returns on plan assets
and higher required contributions resulting from the incremental effect of
normal salary increases. The quarter ended December 31, 2005 contained employee
stock ownership plan ("ESOP") compensation expense of $440,000, while the
quarter ended December 31, 2004 did not include this expense category. The Bank
established the ESOP during the initial public offering completed in February
2005, purchasing 1.7 million shares in the IPO.
-13-
An increase of $136,000, year-over-year, in equipment expense resulted from
higher depreciation expense and increased costs related to data processing,
including system risk assessment and intrusion protection, ATM support and
Internet banking. Depreciation expense increased due primarily to new furniture,
fixtures and equipment located in the Company's headquarters building.
Advertising expense increased $90,000, compared to the earlier quarter, due to
an extensive advertising campaign associated with the grand opening of the
Bank's 26th retail branch office in Lanoka Harbor, New Jersey.
Directors' compensation increased $352,000, to $582,000 during the quarter ended
December 31, 2005, from $230,000 in the quarter ended December 31, 2004. The
increase resulted primarily from stock benefit plans approved at the Company's
annual meeting, with an expense recorded of $295,000. Other fees, including an
expense attributed to a directors' incentive compensation plan, increased
$57,000.
Miscellaneous expenses increased $312,000, or 33.4%, to $1.2 million for the
quarter ended December 31, 2005, compared to $935,000 for the quarter ended
December 31, 2004. Miscellaneous expenses included professional fees consisting
of legal expense and audit and accounting services expense, which increased
$75,000 and $103,000, respectively, and expenses of $95,000 attributed to the
Company's annual meeting. These expenses were in large part due to becoming a
public company during the months between reporting periods. All other elements
of non-interest expense totaled $1.1 million for the three months ended December
31, 2005; an increase of $63,000, or 6.3%, from $1.0 million for the three
months ended December 31, 2004.
Provision for Income Taxes. The provision for income taxes decreased $566,000,
or 51.5%, to $577,000 for the quarter ended December 31, 2005, from $1.1 million
for the quarter ended December 31, 2004. The effective income tax rate was 19.9%
for the three months ended December 31, 2005, as compared to 26.4% for the three
months ended December 31, 2004. There was a decrease in pre-tax income of $1.4
million, or 32.6%, to $2.9 million for the quarter ended December 31, 2005, from
$4.3 million for the quarter ended December 31, 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 subsidiary, Kearny Federal
Investment Corp., a wholly owned subsidiary of the Bank, which commenced
operations in July 2004. During the quarter ended December 31, 2005, the Company
recorded adjustments attributed to filing its federal and state income tax
returns for the year ended June 30, 2005, reducing tax expense by $81,000, which
was another factor in the decrease of its effective tax rate.
Comparison of Operating Results for the Six Months Ended December 31, 2005 and
2004
General. Net income for the six months ended December 31, 2005 was $5.3 million,
a decrease of $1.7 million, or 24.3%, from $7.0 million for the six months ended
December 31, 2004. The decrease in net income resulted from an increase in
non-interest expense, particularly salaries and employee benefits, and
directors' compensation, and to a lesser degree, net occupancy expense of
premises, equipment expense, advertising expense and miscellaneous expenses. A
nominal decrease in net interest income and increase in the provision for loan
losses also contributed to the decrease in net income.
Net Interest Income. A flattening Treasury yield curve during the twelve months
between December 31, 2004 and December 31, 2005 hindered the Bank's efforts to
offset increasing interest expense. Net interest income for the six months ended
December 31, 2005 was $25.3 million, a decrease of $161,000, or 0.6%, compared
to $25.5 million for the six months ended December 31, 2004. A substantial
increase in the ratio of average interest-earning assets to interest-bearing
liabilities offset a large decrease in the net interest rate spread and a
smaller decrease in the net interest margin. As a result, interest income lost
ground to interest expense, year-over-year.
-14-
The net interest rate spread decreased 56 basis points to 2.09% for the six
months ended December 31, 2005, from 2.65% for the six months ended December 31,
2004. Interest rate sensitivity during the six months ended December 31, 2005,
compared to the six months ending December 31, 2004, reflected a widening
negative gap, with interest-bearing liabilities re-pricing faster than
interest-earning assets. The cost of average interest-bearing liabilities
increased 62 basis points, from 1.85% for the six months ended December 31,
2004, to 2.47% for the six months ended December 31, 2005. With respect to the
two components of interest-bearing liabilities, the cost of borrowings increased
faster than the cost of deposits, year-over-year. During the same period, the
yield on average interest-earning assets increased six basis points, to 4.56%
for the six months ended December 31, 2005, from 4.50% for the six months ended
December 31, 2004. The net interest margin decreased 26 basis points to 2.62%
for the six months ended December 31, 2005, compared with 2.88% for the six
months ended December 31, 2004.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased from 114.27% for the six months ended December 31, 2004,
to 127.70% for the six months ended December 31, 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. Between the comparative
periods, including the six months ended December 31, 2005, the Bank focused on
deploying the proceeds from the Company's initial public offering, primarily in
loans receivable.
Interest Income. Total interest income increased $4.3 million, or 10.8%, to
$44.0 million for the six months ended December 31, 2005, from $39.7 million for
the six months ended December 31, 2004. Average interest-earning assets
increased $162.6 million, or 9.2%, to $1.93 billion for the six months ended
December 31, 2005, from $1.77 billion for the six months ended December 31,
2004. A significant increase in average interest-earning assets, rather than an
increase in the yield on average interest-earning assets, provided the stimulus
for the growth of interest income. There was growth, year-over-year, in the
average balances of all interest-earning asset categories: most notably in loans
receivable, and to a lesser degree in mortgage-backed securities held to
maturity, investment securities available for sale and held to maturity and
other interest-earning assets. Generally, the growth resulted primarily from the
infusion of cash from the Company's initial public offering.
Interest income on loans receivable increased $2.2 million, or 15.2%, to $16.7
million for the six months ended December 31, 2005, from $14.5 million for the
six months ended December 31, 2004. The average balance of loans receivable
increased $82.6 million, or 16.2%, to $594.0 million for the six months ended
December 31, 2005, from $511.4 million for the six months ended December 31,
2004. There was a four basis point decrease in the yield on average loans
receivable to 5.61% for the six months ended December 31, 2005, from 5.65% for
the six months ended December 31, 2004. Early in 2005, the Bank launched a major
marketing effort that continued throughout the year, designed to take advantage
of a strong housing market. This marketing program significantly boosted loan
originations, which contributed to the increase in the average balance of loans
receivable. However, the weighted average interest rate of loan originations
during the year was lower than the weighted average interest rate of loans paid
in full, causing a decrease in the yield on average loans receivable.
Interest income on mortgage-backed securities held to maturity increased a
nominal $39,000, virtually unchanged at $17.0 million for the six months ended
December 31, 2005, compared to $16.9 million for the six months ended December
31, 2004. The average balance of mortgage-backed securities increased $11.5
million, or 1.6%, to $748.4 million for the six months ended December 31, 2005,
from $736.9 million for the six months ended December 31, 2004. The yield on
average mortgage-backed securities decreased to 4.54% for the six months ended
December 31, 2005, from 4.60% for the six months ended December 31, 2004. The
increase in the 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 the reinvestment
of monthly principal payments from higher coupon mortgage-backed securities into
new securities, which occurred in a relatively lower interest rate environment.
Generally, additions to the portfolio were adjustable rate, due to management's
-15-
concerns about rising interest rates. By sacrificing higher yields on fixed rate
securities in the short-term, the Bank gained some interest rate risk protection
in the portfolio for the future.
Interest income on investment securities available for sale and held to maturity
increased $597,000, or 7.4%, to $8.7 million for the six months ended December
31, 2005, from $8.1 million for the six months ended December 31, 2004. The
average balance of investment securities increased $10 million, or 2.1%, to
$495.1 million for the six months ended December 31, 2005, compared to $485.1
million during the prior year. The yield improved from 3.34% for the six months
ended December 31, 2004, to 3.51% for the six months ended December 31, 2005.
The increase in the average balance of investment securities, year-over-year,
resulted from the reinvestment of cash from maturing securities back into the
portfolio, supplemented by the deployment of cash and cash equivalents.
Purchases were primarily in the tax-exempt category. The higher yield resulted
from the reinvestment of maturing short-term government agency notes in
tax-exempt municipal bonds featuring nominally higher coupons as well as higher
tax equivalent yields.
Interest income on other interest-earning assets increased to $1.6 million for
the six months ended December 31, 2005, from $245,000 for the six months ended
December 31, 2004. This was a result of a $58.5 million increase in the average
balance of other interest-earning assets to $91.7 million for the six months
ended December 31, 2005, from $33.2 million for the six months ended December
31, 2004. The average balance of other interest-earning assets increased due to
the increase in interest-earning deposits, which consisted of cash received from
the initial public offering completed in February 2005. There was a nominal
decrease of $1.0 million in the average balance of FHLB capital stock, another
component of interest-earning assets, which decreased due to a repurchase by
FHLB to meet regulatory requirements. There was a 208 basis point increase in
the yield on average other interest-earning assets to 3.55% for the six months
ended December 31, 2005, from 1.47% for the six months ended December 31, 2004,
due to rising short-term interest rates.
Interest Expense. Total interest expense increased $4.4 million, or 30.8%, to
$18.7 million for the six months ended December 31, 2005, from $14.3 million for
the six months ended December 31, 2004. The increase resulted primarily from an
increase in the cost of average interest-bearing liabilities, partially offset
by a decrease in the average balance of interest-bearing liabilities. There was
a 62 basis point increase in the cost of average interest-bearing liabilities to
2.47% for the six months ended December 31, 2005, from 1.85%, for the six months
ended December 31, 2004. The average balance of interest-bearing liabilities
decreased $35.3 million, or 2.3%, to $1.51 billion for the six months ended
December 31, 2005, from $1.55 billion for the six months ended December 31,
2004.
Interest expense on deposits increased $4.6 million, or 37.4%, to $16.9 million
for the six months ended December 31, 2005, from $12.3 million for the six
months ended December 31, 2004. The increase resulted primarily from an increase
in the cost of average interest-bearing deposits, partially offset by a decrease
in the average balance of interest-bearing deposits. The cost of average
interest-bearing deposits increased 66 basis points to 2.34% for the six months
ended December 31, 2005, from 1.68% for the six months ended December 31, 2004.
The average balance of interest-bearing deposits decreased $12.9 million, to
$1.45 billion for the six months ended December 31, 2005, from $1.46 billion for
the six months ended December 31, 2004. During the quarter ended June 30, 2005,
the Bank reacted to competitive pressures in the market place by offering a
premium short-term interest rate, which attracted new money in the form of
certificates of deposit. However, the Bank retreated from that strategy during
the two most recent quarters due to the negative effect on its cost of funds.
Management's goal is to slow the increase in the cost of funds caused by a rise
in market interest rates, but a result of this strategy is a loss of deposits.
The decrease was primarily in certificates of deposit, year-over-year.
Interest expense on Federal Home Loan Bank advances decreased $251,000, or
12.6%, to $1.7 million for the six months ended December 31, 2005, from $2.0
million for the six months ended December 31, 2004. The average balance
decreased $22.4 million, or 26.5%, to $62.1 million for the six months ended
-16-
December 31, 2005, from $84.5 million for the six months ended December 31,
2004, which was more than enough to offset an increase in the cost of average
borrowings. The cost of average borrowings increased 88 basis points to 5.56%
from 4.68%, 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, plus scheduled monthly principal payments on
amortizing advances. 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 Bank's books.
Provision for Loan Losses. The provision for loan losses increased $22,000, to
$139,000 for the six months ended December 31, 2005, from $117,000 recorded
during the six months ended December 31, 2004. Management attributes the
increase primarily to growth in the loan portfolio between the two periods.
Total loans increased to $632.7 million at December 31, 2005, from $562.6
million at June 30, 2005. Non-performing loans were $1.2 million, or 0.19% of
total loans at December 31, 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 0.88% at December 31, 2005 and 0.96% at June 30, 2005,
reflecting allowance balances of $5.6 million and $5.4 million, respectively.
The allowance for loan losses was $5.3 million at December 31, 2004.
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 December 31, 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 $291,000, to $1.1 million for the six months
ended December 31, 2005, from $833,000 for the six months ended December 31,
2004. The increase in non-interest income attributed to fees, service charges
and miscellaneous income was due primarily to income of $132,000 realized from
additional bank owned life insurance purchased during the quarters ended
September 30 and December 31, 2005, a non-recurring mortgage prepayment penalty
of $73,000 and increased fee income from the Bank's retail branch system.
There was non-interest income from gains on the sale securities of $86,000
during the six months ended December 31, 2005, compared to non-interest income
from gains on the sale of securities of $71,000 during the six months ended
December 31, 2004.
Non-Interest Expense. Total non-interest expense increased $2.9 million, or
17.5%, to $19.5 million for the six months ended December 31, 2005, from $16.6
million for the six months ended December 31, 2004. The increase consisted
primarily of an increase in salaries and employee benefits, net occupancy
expense of premises, equipment expense, advertising expense, directors'
compensation and miscellaneous expenses.
Salaries and employee benefits increased $1.4 million, or 14.0%, to $11.4
million for the six months ended December 31, 2005, compared to $10.0 million
for the six months ended December 31, 2004. Management attributes the increase
primarily to stock benefit plans approved at the Company's first annual meeting
held in October 2005, which resulted in an expense of $280,000 and employee
stock ownership plan ("ESOP") compensation expense of $877,000. The Bank
established the ESOP during the initial public offering completed in February
2005, purchasing 1.7 million shares in the IPO. Compensation expense increased
$453,000, year-over-year, due to normal salary increases and additional
-17-
personnel hired to staff the Bank's 26th retail branch office, which opened in
Lanoka Harbor, New Jersey. Other employee benefits expense including employee
health insurance increased $198,000, year-over-year. Pension expense decreased
$473,000 from the earlier reporting period, when the Bank recorded a special
charge due to actuarial adjustments resulting from lower than expected
investment returns on plan assets and higher required contributions resulting
from the incremental effect of normal salary increases.
Net occupancy expense of premises increased $315,000 to $1.7 million during the
six months ended December 31, 2005. Management attributes most of the increase
to repairs and maintenance expense and utilities expense associated with the
operation of the Bank's retail branch system. An increase in depreciation
expense resulted from the Company's headquarters building in Fairfield, New
Jersey, which the Bank's personnel did not occupy until late in 2004. Late in
2005, the Bank began leasing space to a tenant, located in the building housing
its Springfield, New Jersey retail branch office, which will help mitigate the
cost of operating that location. The Bank may lease other surplus space to
tenants in the future.
An increase of $314,000, year-over-year, in equipment expense resulted from
higher depreciation expense and increased costs related to data processing,
including system risk assessment and intrusion protection, ATM support and
Internet banking. Depreciation expense increased due primarily to new furniture,
fixtures and equipment located in the Company's headquarters building.
Advertising expense increased $134,000, compared to the earlier period, due to
an extensive advertising campaign associated with the grand opening of the
Bank's 26th retail branch office in Lanoka Harbor, New Jersey. The Bank also
conducted a yearlong marketing campaign to increase its loan originations.
Directors' compensation increased $365,000, to $812,000 during the six months
ended December 31, 2005, from $447,000 in the six months ended December 31,
2004. The increase resulted primarily from stock benefit plans approved at the
Company's annual meeting, with an expense recorded of $295,000. Other fees,
including an expense attributed to a directors' incentive compensation plan,
increased $70,000.
Miscellaneous expenses increased $472,000, or 26.2%, to $2.2 million for the six
months ended December 31, 2005, compared to $1.8 million for the six months
ended December 31, 2004. Miscellaneous expenses included professional fees
consisting of legal expense and audit and accounting services expense, which
increased $101,000 and $174,000, respectively, and expenses of $95,000
attributed to the Company's annual meeting. These expenses were in large part
due to becoming a public company during the months between reporting periods.
Audit and accounting services expense includes expenditures to assist the
Company in preparing for compliance with Sarbanes-Oxley Section 404 in June
2006. All other elements of non-interest expense totaled $588,000 for the six
months ended December 31, 2005; a decrease of $9,000, or 0.21%, from $597,000
for the six months ended December 31, 2004.
Provision for Income Taxes. The provision for income taxes decreased $1.1
million, or 40.7%, to $1.6 million for the six months ended December 31, 2005,
from $2.7 million for the six months ended December 31, 2004. The effective
income tax rate was 22.8% for the six months ended December 31, 2005, as
compared to 27.9% for the six months ended December 31, 2004. There was a
decrease in pre-tax income of $2.8 million, or 28.9%, to $6.9 million for the
six months ended December 31, 2005, from $9.7 million for the six months ended
December 31, 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
subsidiary, Kearny Federal Investment Corp., a wholly owned subsidiary of the
Bank, which commenced operations in July 2004. During the six months ended
December 31, 2005, the Company recorded adjustments attributed to filing its
federal and state income tax returns for the year ended June 30, 2005, reducing
tax expense by $81,000, which was another factor in the decrease of its
effective tax rate.
-18-
Liquidity and Capital Resources
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 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 adequate but not excessive liquidity, and liquidity management is both
a daily and long-term function of business management.
The Bank reviews cash flow projections regularly and updates them in order to
maintain liquid assets at levels believed to meet the requirements of normal
operations, including loan commitments and potential deposit outflows from
maturing certificates of deposit and savings withdrawals. At December 31, 2005,
the Bank had outstanding commitments to originate loans of $70.8 million,
construction loans in process of $18.4 million and unused lines of credit of
$27.3 million. Certificates of deposit increased during the quarter ended June
30, 2005, due to a promotional short-term rate offered by the Bank to its
depositors. Deposits, primarily certificates of deposit, decreased in the
quarters ended September 30, 2005 and December 31, 2005 as the Bank
intentionally slowed increases in the rates it pays on deposits relative to the
pace of rising market interest rates. Certificates of deposit scheduled to
mature in one year or less at December 31, 2005, totaled $716.1 million.
While deposits are the Bank's primary source of funds, the Bank also generates
cash through borrowings from the Federal Home Loan Bank of New York (the
"FHLB"). At December 31, 2005, advances from the FHLB amounted to $61.4 million.
The Bank has the capacity to borrow additional funds from the FHLB, through an
overnight line of credit or by taking additional long-term or short-term
advances. As a result of continued strong loan demand and continued deposit
outflows, the Bank began utilizing the FHLB overnight line of credit during the
quarter ending March 31, 2006.
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
December 31, 2005, Kearny Federal Savings Bank exceeded all capital requirements
of the Office of Thrift Supervision (the "OTS").
-19-
The following table sets forth the Bank's capital position at December 31, 2005,
as compared to the minimum regulatory capital requirements:
December 31, 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) 371,989 49.76% $ 59,809 8.00% $ 74,762 10.00%
Tier 1 Capital
(to risk-weighted assets) 362,728 48.52% - - $ 44,857 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 362,728 18.78% $ 57,957 3.00% $ 96,596 5.00%
Tangible Capital
(to adjusted total assets) 362,728 18.78% $ 28,979 1.50% - -
-20-
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 September 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 December 31, 2005.
At September 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 307,581 -137,422 -31% 16.45% -551 bp
+200 bp 354,153 -90,849 -20% 18.42% -354 bp
+100 bp 400,710 -44,292 -10% 20.28% -167 bp
0 bp 445,003 - - 21.96% -
-100 bp 480,096 +35,093 +8% 23.20% +124 bp
-200 bp 499,560 +54,557 +12% 23.81% +186 bp
-21-
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.
-22-
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.
-23-
PART II
ITEM 1. Legal Proceedings
-----------------
At December 31, 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
---------------------------------------------------
The Annual Meeting of Stockholders (the "Meeting") of the Company
was held on October 24, 2005. There were outstanding and entitled
to vote at the Meeting 72,737,500 shares of Common Stock of the
Company, including 50,916,250 shares held by Kearny MHC, the
mutual holding company parent of the Company that holds 70% of
the outstanding stock. Kearny MHC voted its shares in favor of
all proposals. There were present at the meeting or by proxy the
holders of 69,227,748 shares of Common Stock representing 95.2%
of the total eligible votes to be cast. Proposal 1 was to elect
three directors of the Company. Proposal 2 was to approve the
Company's 2005 Stock Compensation and Incentive Plan. Proposal 3
was to ratify the appointment of the independent auditor for the
fiscal year ending June 30, 2006. The result of the voting at the
Meeting is as follows:
Proposal 1:
Joseph P. Mazza FOR: 67,051,976 WITHHELD: 2,175,772
John F. Regan FOR: 67,052,319 WITHHELD: 2,175,429
Theodore J. Aanensen FOR: 67,340,353 WITHHELD: 1,887,395
Leopold W. Montanaro FOR: 67,336,612 WITHHELD: 1,891,136
Proposal 2:
Approval of the Kearny Financial Corp. 2005 Stock Compensation
and Incentive Plan.
FOR: 59,715,088
AGAINST: 1,157,301
ABSTAIN: 86,795
Proposal 3:
Ratification of the appointment of Beard Miller Company LLP as
independent auditor.
FOR: 68,725,877
AGAINST: 450,111
ABSTAIN: 51,760
ITEM 5. Other Information
-----------------
None.
-24-
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 Parisi (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)
10.11 2005 Stock Compensation and Incentive Plan (2)
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).
(2) Incorporated by reference to the Registrant's definitive proxy
statement filed September 30, 2005 (File No. 000-51093).
-25-
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: February 14, 2006 By: /s/ John N. Hopkins
----------------- ----------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly authorized officer and principal
executive officer)
Date: February 14, 2006 By: /s/ Albert E. Gossweiler
----------------- ----------------------------------------
Albert E. Gossweiler
Senior Vice President and Chief
Financial Officer
(Principal financial officer)
-26-