SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
---------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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OR
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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
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: November 2, 2006.
$0.10 par value common stock - 72,284,200 shares outstanding
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition
at September 30, 2006 and June 30, 2006 (Unaudited) 1
Consolidated Statements of Income for the Three Months
Ended September 30, 2006 and 2005 (Unaudited) 2-3
Consolidated Statements of Comprehensive Income for the Three
Months Ended September 30, 2006 and 2005 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2006 and 2005 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7-12
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-21
Item 3: Quantitative and Qualitative Disclosure About Market Risk 22-23
Item 4: Controls and Procedures 24
PART II - OTHER INFORMATION 25-26
SIGNATURES 27
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands, Except Share Data, Unaudited)
September 30, June 30,
2006 2006
--------- -----------
Assets
------
Cash and amounts due from depository institutions $ 19,987 $ 22,563
Interest-bearing deposits in other banks 209,768 207,716
----------- -----------
Cash and Cash Equivalents 229,755 230,279
Securities available for sale (amortized cost $18,643 and $18,550) 18,509 18,346
Securities held to maturity (estimated fair value $207,713
and $204,447) 206,732 209,048
Loans receivable, including net deferred loan costs of $991
and $1,087 748,945 709,064
Less allowance for loan losses (5,609) (5,451)
----------- -----------
Net Loans Receivable 743,336 703,613
----------- -----------
Mortgage-backed securities held to maturity (estimated fair value
$663,849 and $670,329) 673,219 689,962
Premises and equipment 35,729 35,941
Federal Home Loan Bank of New York ("FHLB") stock 5,400 5,406
Interest receivable 8,709 8,836
Goodwill 82,263 82,263
Bank owned life insurance 14,759 14,628
Other assets 9,286 9,203
----------- -----------
Total Assets $ 2,027,697 $ 2,007,525
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits:
Non-interest bearing $ 58,518 $ 61,080
Interest-bearing 1,407,771 1,382,658
----------- -----------
Total Deposits 1,466,289 1,443,738
Advances from FHLB 60,954 61,105
Advance payments by borrowers for taxes 4,964 5,232
Other liabilities 7,733 6,564
----------- -----------
Total Liabilities 1,539,940 1,516,639
----------- -----------
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 72,454,700 outstanding and
72,737,500 issued and outstanding 7,274 7,274
Paid-in capital 193,241 192,534
Retained earnings 306,734 306,728
Unearned Employee Stock Ownership Plan shares; 1,515,365 shares
and 1,551,733 shares (15,154) (15,517)
Treasury stock, at cost; 282,800 shares and 0 shares (4,251) --
Accumulated other comprehensive (loss) (87) (133)
----------- -----------
Total Stockholders' Equity 487,757 409,886
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,027,697 $ 2,007,525
=========== ===========
See notes to consolidated financial statements
-1-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands, Except Per Share Data, Unaudited)
Three Months Ended
September 30,
-------------------------
2006 2005
------- -------
Interest Income:
Loans $10,311 $ 8,121
Mortgage-backed securities 8,021 8,568
Securities:
Taxable 400 2,438
Tax-exempt 1,885 1,925
Other interest-earning assets 2,667 919
------- -------
Total Interest Income 23,284 21,971
------- -------
Interest Expense:
Deposits 10,745 8,287
Borrowings 851 871
------- -------
Total Interest Expense 11,596 9,158
------- -------
Net Interest Income 11,688 12,813
Provision for Loan Losses 158 75
------- -------
Net Interest Income after Provision
for Loan Losses 11,530 12,738
------- -------
Non-Interest Income:
Fees and service charges 228 277
Gain on sale of securities -- 86
Miscellaneous 340 230
------- -------
Total Non-Interest Income 568 593
------- -------
Non-interest expenses:
Salaries and employee benefits 6,814 5,603
Net occupancy expense of
premises 858 896
Equipment 1,076 1,052
Advertising 393 325
Federal insurance premium 142 134
Amortization of intangible assets 159 159
Directors' compensation 657 230
Miscellaneous 997 979
------- -------
Total Non-Interest Expenses 11,096 9,378
------- -------
Income before Income Taxes 1,002 3,953
Income Taxes 76 989
------- -------
Net Income $ 926 $ 2,964
======= =======
See notes to consolidated financial statements.
-2-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
---------------------------------------------
(In Thousands, Except Per Share Data, Unaudited)
Three Months Ended
September 30,
-----------------------------------
2006 2005
--------------- ---------------
Net Income per Common Share:
Basic $ 0.01 $ 0.04
Diluted 0.01 0.04
Weighted Average Number of
Common Shares Outstanding:
Basic 69,751 71,053
Diluted 70,465 71,053
Dividends Declared Per Common
Share $ 0.05 $ 0.09
See notes to consolidated financial statements.
-3-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In Thousands, Unaudited)
Three Months Ended
September 30,
------------------
2006 2005
------- -------
Net Income $ 926 $ 2,964
------- -------
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 70 (1,261)
Deferred income tax benefit
(expense) (24) 441
------- -------
Other Comprehensive Income
(Loss) 46 (876)
------- -------
Comprehensive Income $ 972 $ 2,088
======= =======
See notes to consolidated financial statements.
-4-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands, Unaudited)
Three Months Ended
September 30,
--------------------
2006 2005
-------- --------
Cash Flows from Operating Activities:
Net income $ 926 $ 2,964
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 489 452
Net amortization of premiums, discounts and loan fees and costs 243 202
Deferred income taxes (151) (214)
Amortization of intangible assets 159 159
Provision for loan losses 158 75
Realized gains on sale of securities available for sale - (86)
(Increase) in cash surrender value of bank owned life insurance (131) (73)
ESOP, stock option plan and restricted stock plan expenses 1,859 437
Realized loss on sale of real estate owned - 35
Decrease in interest receivable 127 813
(Increase) in other assets (116) (1,239)
Increase (decrease) in interest payable (1) 12
Increase (decrease) in other liabilities 1,180 (87)
-------- --------
Net Cash Provided by Operating Activities 4,742 3,450
-------- --------
Cash Flows from Investing Activities:
Purchases of securities available for sale (92) (67)
Proceeds from sale of securities available for sale - 6,864
Purchases of securities held to maturity - (4,000)
Proceeds from calls and maturities of securities held to maturity 1,305 9,204
Proceeds from repayments of securities held to maturity 1,011 1,348
Purchase of loans (13,528) (3,187)
Net (increase) in loans receivable (26,414) (36,326)
Proceeds from sale of real estate owned - 65
Purchases of mortgage-backed securities held to maturity (19,419) (41,900)
Principal repayments on mortgage-backed securities held to maturity 35,979 53,576
Additions to premises and equipment (277) (954)
Redemption of FHLB stock 7 -
Purchase of bank owned life insurance - (9,625)
-------- --------
Net Cash (Used in) Investing Activities $(21,428) $(25,002)
-------- --------
See notes to consolidated financial statements.
-5-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
(In Thousands, Unaudited)
Three Months Ended
September 30,
----------------------
2006 2005
--------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits $ 22,555 $ (32,047)
Repayment of FHLB advances (151) (143)
Increase (decrease) in advance payments by borrowers for taxes (268) 35
Refund of common stock offering expense - 3
Return of dividends paid in prior periods 8 -
Dividends paid to minority stockholders of Kearny Financial Corp. (942) (873)
Purchase of common stock of Kearny Financial Corp. for treasury (4,251) -
Purchase of common stock of Kearny Financial Corp. for restricted
stock plan (789) -
--------- ---------
Net Cash Provided by (Used in) Financing Activities $ 16,162 $ (33,025)
--------- ---------
Net (Decrease) in Cash and Cash Equivalents $ (524) $ (54,577)
Cash and Cash Equivalents - Beginning 230,279 139,865
--------- ---------
Cash and Cash Equivalents - Ending $ 229,755 $ 85,288
========= =========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the year for:
Income taxes, net of refunds $ 500 $ 4,076
========= =========
Interest $ 11,597 $ 9,146
========= =========
Supplemental Disclosure of Non-Cash Transactions:
Cash dividend declared $ 928 $ 1,004
========= =========
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 prepared the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
including the elimination of 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, 2006, 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
-------------------------------
Basic EPS is based on the weighted average number of common shares actually
outstanding adjusted for Employee Stock Ownership Plan ("ESOP") shares not yet
committed to be released and unvested restricted stock awards. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock, such as unvested restricted stock awards and
outstanding stock options, were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. Diluted EPS is calculated by 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. Shares issued and reacquired during
any period are weighted for the portion of the period they were outstanding.
The following is a reconciliation of the numerator and denominators of the basic
and diluted earnings per share computations:
Three Months Ended
September 30, 2006
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In Thousands, Except Per Share Data)
Net income $926
========
Basic earnings per share,
income available to
common stockholders $926 69,751 $0.01
========
Effect of dilutive securities:
Stock options - 514
Restricted stock awards - 200
-------- --------
$926 70,465 $0.01
======== ======== ========
-7-
Three Months Ended
September 30, 2005
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In Thousands, Except Per Share Data)
Net income $2,964
========
Basic earnings per share,
income available to
common stockholders $2,964 71,053 $0.04
========
Effect of dilutive securities:
Stock options - -
Restricted stock awards - -
-------- --------
$2,964 71,053 $0.04
======== ======== ========
4. DIVIDEND WAIVER
-------------------
During the quarter ended September 30, 2006, 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 approximately $2,546,000 declared during the quarter, on the shares of
Company common stock it owns.
5. STOCK COMPENSATION PLANS
----------------------------
The Company has two stock-related compensation plans: stock options and
restricted stock awards. 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 No. 123R upon
approval of the Plan, and began to expense the fair value of all options over
their vesting periods and began to expense the fair value of all share-based
compensation granted over the requisite service periods.
SFAS No. 123R also requires the Company to realize as a financing cash flow
rather than an operating cash flow, as previously required, the benefits of
realized tax deductions in excess of previously recognized tax benefits on
compensation expense (which was $0 for the three months ended September 30,
2006). In accordance with Staff Accounting Bulletin ("SAB") No. 107, the Company
classified share-based compensation for employees within salaries and employee
benefits to correspond with the same line item as the cash compensation paid to
employees. The Company classified share-based compensation for non-employee
directors within directors' compensation to correspond with the same line item
as the cash compensation paid to non-employee directors.
Employee options and non-employee director options generally vest over a
five-year service period. Management recognizes compensation expense for all
option grants over the awards' respective requisite service periods. Management
estimated the fair values relating to all of the fiscal 2006 option grants using
the Black-Sholes option-pricing model. Since there is no historical information
on the volatility of the Company's stock, management based expectations about
future volatility on the average volatilities of similar entities for an
appropriate period following their initial public offering. Thus, calculations
to determine the stock volatility of mutual holding companies converted since
1995, and a subset of the first group, all mutual holding companies that
converted after 2000, were used to derive the one and three-year Beta for
purposes of identifying a reasonable volatility factor. Management estimated the
expected life of
-8-
the options assuming that they must be no less than the vesting period, five
years, and no greater than their contractual life, ten years, in conjunction
with an evaluation of the grantees' ages and lengths of service. The 10-year
Treasury yield in effect at the time of the grant provides the risk-free rate
for periods within the contractual life of the option. Management recognizes
compensation expense for the fair values of these awards, which have graded
vesting, on a straight-line basis over the requisite service period of the
awards.
Restricted shares generally vest in full after five years. The product of the
number of shares granted and the grant date market price of the Company's common
stock determine the fair value of restricted shares under the Company's
restricted stock plans. Management recognizes compensation expense for the fair
value of restricted shares on a straight-line basis over the requisite service
period of five years.
During the three months ended September 30, 2006, the Company recorded $1.3
million of share-based compensation expense, comprised of stock option expense
of $498,000 and restricted stock expense of $825,000. The Company estimates it
will record an additional $4.0 million of share-based compensation expense
during the remainder of fiscal 2007.
The following is a summary of the Company's stock option activity and related
information for its option plans for the three months ended September 30, 2006:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Options Exercise Contractual Value
(000's) Price Term (000's)
----------- ----------- ----------- -----------
Outstanding at June 30, 2006 3,374 $12.34
Granted - -
Exercised - -
Forfeited - -
-----------
Outstanding at September 30, 2006 3,374 $12.34 9.1 years $9,575
===========
Exercisable at September 30, 2006 - - N/A N/A
The following is a summary of the status of the Company's non-vested options as
of September 30, 2006 and changes during the three months ended September 30,
2006:
Weighted
Average
Options Grant Date
(000's) Fair Value
----------- -----------
Non-vested at June 30, 2006 3,374 $2.95
Granted - -
Exercised - -
Forfeited - -
----------- -----------
Non-vested at September 30, 2006 3,374 $2.95
=========== ===========
Expected future compensation expense relating to the 3.4 million non-vested
options outstanding as of September 30, 2006 is $8.3 million over a weighted
average period of 4.1 years.
Upon exercise of vested options, management expects to draw on treasury stock as
the source of the shares. In July 2006, the Company announced a stock repurchase
plan to acquire up to 1,091,063 shares during the next twelve months for general
corporate purposes.
-9-
The following is a summary of the status of the Company's restricted shares as
of September 30, 2006 and changes during the three months ended September 30,
2006:
Weighted
Restricted Average
Shares Grant Date
(000's) Fair Value
----------- -----------
Non-vested at June 30, 2006 1,338 $12.34
Granted - -
Exercised - -
Forfeited - -
----------- -----------
Non-vested at September 30, 2006 1,338 $12.34
=========== ===========
Expected future compensation expense relating to the 1.3 million restricted
shares at September 30, 2006 is $13.7 million over a weighted average period of
4.1 years.
6. STOCK REPURCHASE PLANS
--------------------------
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. During the year ended June 30, 2006, the Company
purchased 1,371,341 shares at a total cost of $18,941,000, or approximately
$13.81 per share. During the quarter ended September 30, 2006, the Company
purchased an additional 54,314 shares at a cost of $789,000, or approximately
$14.52 per share to complete the funding of the Company's 2005 Stock
Compensation and Incentive Plan.
On July 18, 2006, the Company announced that the Board of Directors authorized a
stock repurchase plan to acquire up to 1,091,063 shares, or 5% of the Company's
outstanding common stock held by persons other than Kearny MHC. This stock
repurchase plan commenced after the Company completed its purchase of shares in
the open market to fund the Company's 2005 Stock Compensation and Incentive
Plan. During the quarter ended September 30, 2006, the Company purchased 282,800
shares at a cost of $4,251,000, or approximately $15.03 per share.
7. BENEFIT PLANS - COMPONENTS OF NET PERIODIC COST
--------------------------------------------------
Benefit Equalization Plan net periodic pension expense was as follows:
Three Months
Ended September 30,
---------------------------
2006 2005
---------- ----------
(In Thousands)
Service cost $ 15 $ 15
Interest cost 44 44
Amortization of unrecognized past service
costs (3) (3)
Amortization of unrecognized net actuarial
loss 46 46
----- -----
Net periodic pension expense $ 102 $ 102
===== =====
-10-
Postretirement Welfare Plan net periodic postretirement benefit cost was as
follows:
Three Months
Ended September 30,
---------------------------
2006 2005
---------- ----------
(In Thousands)
Service cost $ 8 $ 6
Interest cost 7 6
Amortization of unrecognized past service
liability 2 3
----- -----
Net periodic postretirement benefit cost $ 17 $ 15
===== =====
Directors' Consultation and Retirement Plan net periodic plan cost was as
follows:
Three Months
Ended September 30,
---------------------------
2006 2005
---------- ----------
(In Thousands)
Service cost $ 34 $ 32
Interest cost 34 29
Amortization of unrecognized transition
obligation 11 11
Amortization of unrecognized past service
liability 15 15
----- -----
Net periodic postretirement benefit cost $ 94 $ 87
===== =====
8. NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently evaluating the
potential impact, if any, of the adoption of FASB Statement No. 157 on our
consolidated financial condition, results of operations and cash flows.
On September 29, 2006, the Financial Accounting Standards Board "FASB" issued
SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans ("SFAS 158"), which amends SFAS 87 and SFAS 106 to require
recognition of the overfunded or underfunded status of pension and other
postretirement benefit plans on the balance sheet. Under SFAS 158, gains and
losses, prior service costs and credits, and any remaining transition amounts
under SFAS 87 and SFAS 106 that have not yet been recognized through net
periodic benefit cost will be recognized in accumulated other comprehensive
income, net of tax effects, until they are amortized as a component of net
periodic cost. The measurement date -- the date at which the benefit obligation
and plan assets are measured -- is required to be the company's fiscal year end.
SFAS 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 15, 2008. We are currently
evaluating the potential impact, if any, of the adoption of FASB Statement No.
158 on our consolidated financial condition and results of operations.
-11-
On September 13, 2006, the Securities and Exchange Commission "SEC" issued Staff
Accounting Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretive guidance
on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior
to SAB 108, Companies might evaluate the materiality of financial-statement
misstatements using either the income statement or balance sheet approach, with
the income statement approach focusing on new misstatements added in the current
year, and the balance sheet approach focusing on the cumulative amount of
misstatement present in a company's balance sheet. Misstatements that would be
material under one approach could be viewed as immaterial under another
approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according to
either the income statement or balance sheet approach. The Company has analyzed
SAB 108 and determined that upon adoption it will have no impact on the reported
results of operations or financial condition.
-12-
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, 2006 and June 30, 2006
Total assets increased $20.2 million, or 1.0%, to $2.03 billion at September 30,
2006, from $2.01 billion at June 30, 2006, due primarily to an increase in net
loans receivable offset by decreases in securities held to maturity and
mortgage-backed securities held to maturity. Generally, cash flows from the
securities portfolio partially funded loan originations during the quarter ended
September 30, 2006.
Cash and cash equivalents remained virtually unchanged between June 30, 2006 and
September 30, 2006 at approximately $230 million. Generally, cash flows from the
securities portfolio and an increase in deposits funded loan originations during
the three months ended September 30, 2006. Management expects to maintain
liquidity at an elevated level as long as the Treasury yield curve remains
inverted or flat, to the extent that the Bank does not need the funds for loan
originations.
Securities available for sale increased $163,000 or 0.9%, to $18.5 million at
September 30, 2006 compared to $18.3 million at June 30, 2006. The increase was
due to reinvestment of dividends earned on mutual fund holdings and
mark-to-market adjustments reflecting an easing of interest rates at the
mid-to-long end of the Treasury yield curve during the quarter ended September
30, 2006.
Securities held to maturity decreased $2.3 million, or 1.1%, to $206.7 million
at September 30, 2006, from $209.0 million at June 30, 2006. The decrease was
due primarily to maturities in the tax-exempt municipal bond portfolio and
principal amortization from pass-through certificates consisting of Small
Business Administration loans. Cash flows from the securities portfolio
partially funded loan originations during the three months ended September 30,
2006. During the quarter ending December 31, 2006, management plans to
reclassify its portfolio of securities held to maturity, for the most part
municipal bonds, to available for sale for the purpose of executing sales of the
bonds at opportune times. The carrying value of the municipal bond portfolio was
$199.0 million at September 30, 2006, with a weighted average yield of 3.77%. A
decline in pre-tax income reduces the advantage of holding tax-exempt
instruments and their yield is substantially below market. In October 2006,
management sold $27.4 million of the bonds recording a nominal gain.
-13-
Loans receivable, net of deferred fees and costs and the allowance for loan
losses, increased $39.7 million, or 5.6%, to $743.3 million at September 30,
2006 compared to $703.6 million at June 30, 2006. Management continues to
emphasize growth in the loan portfolio while in turn reducing the size of the
securities portfolio. One-to-four family residential mortgage loans,
particularly first mortgages and home equity loans, registered most of the
growth, increasing approximately $19.1 million and $7.4 million, to $484.9
million and $101.1 million at September 30, 2006, respectively. There was also
an increase in nonresidential and multi-family mortgages of approximately $18.0
million, which totaled $125.1 million at September 30, 2006. Commercial loans
remained virtually unchanged and totaled $3.1 million at September 30, 2006,
while there was a nominal decrease in home equity lines of credit to $12.3
million at the close of the current quarter. Construction loans were the only
category to see a substantial decrease during the quarter with balances
outstanding decreasing $3.6 million to $18.5 million and gross constructions
loans decreasing $6.6 million to $26.9 million between June 30, 2006 and
September 30, 2006. With the housing market slowing, management believes it is
prudent to reduce its exposure in this category, notwithstanding its policy of
generally not making construction loans to builders on a speculative basis. To
supplement the Bank's own loan originations, management relies on agreements to
purchase mortgages from several mortgage companies, with $13.5 million purchased
during the quarter ended September 30, 2006. The Bank has not originated or
purchased any interest only mortgages or pay option adjustable rate mortgages.
Mortgage-backed securities held to maturity decreased $16.8 million, or 2.4%, to
$673.2 million at September 30, 2006, from $690.0 million at June 30, 2006. Cash
flows from monthly principal and interest payments partially funded loan
originations during the quarter ended September 30, 2006. Management reinvested
approximately $19.4 million in mortgage-backed securities, purchasing $5.2
million in fixed rate Community Reinvestment Act ("CRA") eligible issues and
$14.2 million in issues in which the underlying loans are 3/1 or 5/1 adjustable
rate mortgages. Excluding the CRA eligible issues, which the Bank purchases to
meet its CRA investments requirement, it has been management's policy for
several years to purchase only adjustable rate issues, preferably seasoned such
that the first rate change date and conversion to a one-year adjustable product
may be less than three or five years away.
Premises and equipment decreased $212,000, or 0.6%, to $35.7 million at
September 30, 2006 compared to $35.9 million at June 30, 2006 as depreciation
exceeded the cost of additions to fixed assets. Bank owned life insurance
increased $131,000, or 0.9%, to $14.8 million at September 30, 2006 compared to
$14.6 million at June 30, 2006, due to an increase in the cash surrender value
of the underlying insurance policies.
Deposits increased $22.6 million, or 1.6%, to $1.47 billion at September 30,
2106 compared to $1.44 billion at June 30, 2006. During the quarter ended
September 30, 2006, certificates of deposit and interest-bearing demand deposits
increased approximately $52.3 million and $4.9 million, to $935.3 million and
$127.0 million, respectively; while savings deposits decreased approximately
$32.1 million to $345.4 million and non-interest-bearing deposits decreased $2.6
million to $58.5 million. The ongoing threat of loss of deposits to competitors,
both core deposits and certificates of deposit, necessitated the continuance of
promotional interest rates to counteract promotions offered by other financial
institutions in the Bank's market area. The challenge for management continued
to be balancing the potential rate of attrition against a significant increase
in the cost of deposits. The most popular products were certificates of deposits
with five, nine and 13 month terms and a tiered money market account, which
management expects will re-price lower if the Federal Reserve Bank begins to
ease short-term interest rates as anticipated during the first half of 2007.
Federal Home Loan Bank advances decreased $151,000, to $61.0 million at
September 30, 2006 compared to $61.1 million at June 30, 2006 due to scheduled
principal payments on amortizing advances. Management expects to repay a $5.0
million advance, with an interest rate of 5.90%, when this advance matures in
November 2006.
-14-
Stockholders' equity decreased $3.1 million, to $487.8 million at September 30,
2006, from $490.9 million at June 30, 2006. The decrease was primarily the
result of the purchase of stock to fund the restricted stock plan and for
treasury purposes. The Company purchased 54,314 shares at a cost of $789,000 for
the restricted stock plan and 282,800 shares at a cost of $4,251,000 as treasury
shares. A common stock dividend of $0.05 per share totaling $928,000 declared
for payment in the subsequent quarter also contributed to the decrease in
stockholders' equity. Partially offsetting the decrease was net income of
$926,000 recorded during the quarter, the release of $535,000 of unearned
employee stock ownership plan shares, the vesting of $826,000 of unearned
restricted stock plan shares and a $498,000 adjustment to equity for expensing
stock options.
Comparison of Operating Results for the Three Months Ended September 30, 2006
and 2005
General. Net income for the quarter ended September 30, 2006 was $926,000 or
$0.01 per share, a decrease of $2.0 million, or 66.7%, from $3.0 million or
$0.04 per share for the quarter ended September 30, 2005. The decrease in net
income resulted primarily from an increase in non-interest expense, particularly
salaries and employee benefits and directors' compensation due to stock
compensation plans, and a decrease in net interest income. An 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 September
30, 2006 was $11.7 million, a decrease of $1.1 million, or 8.6%, compared to
$12.8 million for the three months ended September 30, 2005. The decrease in net
interest income was due almost exclusively to a substantial increase in interest
expense partially offset by an increase in interest income, rather than a change
in volume of interest-earnings assets versus interest-bearing liabilities. The
ratio of average interest-earning assets to average interest-earning liabilities
remained virtually unchanged at September 30, 2006 compared to a year earlier.
The net interest rate spread decreased 27 basis points to 1.84% for the quarter
ended September 30, 2006, from 2.11% for the quarter ended September 30, 2005.
During the quarter ended September 30, 2006, interest-bearing liabilities
continued to re-price faster than interest-earning assets, due primarily to the
promotional interest rates introduced to attract new deposits which also
affected the rollover rates on maturing certificates of deposit. The cost of
average interest-bearing liabilities increased 80 basis points, from 2.40% for
the three months ended September 30, 2005, to 3.20% for the three months ended
September 30, 2006. During the quarter ended September 30, 2006, the yield on
average interest-earning assets increased 53 basis points, to 5.04% for the
quarter ended September 30, 2006, from 4.51% for the quarter ended September 30,
2005.
The net interest margin decreased ten basis points to 2.53% for the three months
ended September 30, 2006, compared with 2.63% for the three months ended
September 30, 2005. The decrease in the net interest margin resulted from a
decrease in net interest income partially offset by a decrease in average
interest-earning assets. Average interest-earning assets during the quarter
ended September 30, 2006 were $1.85 billion or $100.6 million less than average
interest-earning assets of $1.95 billion during the quarter ended September 30,
2005. The decrease resulted primarily from cash flows utilized to fund deposit
outflows. Average interest-bearing liabilities during the quarter ended
September 30, 2006 were $1.45 billion or $75.0 million less than average
interest-bearing liabilities of $1.52 billion during the quarter ended September
30, 2005. The ratio of average interest-earning assets to average
interest-bearing liabilities was 127.4% for the quarter ended September 30,
2006, virtually unchanged from 127.7% for the quarter ended September 30, 2005.
-15-
Interest Income. Total interest income increased $1.3 million, or 5.9%, to $23.3
million for the three months ended September 30, 2006, from $22.0 million for
the three months ended September 30, 2005. Year-over-year, interest income from
loans and other interest-earning assets increased while interest from
mortgage-backed securities and securities decreased.
Interest income from loans receivable increased $2.2 million, or 27.2%, to $10.3
million for the three months ended September 30, 2006, from $8.1 million for the
three months ended September 30, 2005 due to growth in the portfolio as well as
an improvement in yield. The average balance of net loans receivable increased
$145.0 million, or 25.1%, to $721.8 million for the quarter ended September 30,
2006, from $576.8 million for the quarter ended September 30, 2005. The Bank's
business plan seeks to continue increasing the Bank's loan portfolio while
reducing its reliance on securities to generate interest income. The yield on
average net loans receivable increased eight basis points to 5.71% for the
quarter ended September 30, 2006, compared to 5.63% for the quarter ended
September 30, 2005. The improvement in yield year-over-year was due in part to
growth in the nonresidential and multi-family mortgage category.
Interest income from mortgage-backed securities held to maturity decreased
$547,000, or 6.4%, to $8.0 million for the three months ended September 30,
2006, compared to $8.6 million for the three months ended September 30, 2005.
The average balance of mortgage-backed securities decreased $73.8 million, or
9.7%, to $683.7 million for the quarter ended September 30, 2006, from $757.5
million for the quarter ended September 30, 2005. The yield on average
mortgage-backed securities increased 17 basis points to 4.69% for the three
months ended September 30, 2006, from 4.52% for the three months ended September
30, 2005. The decrease in the average balance of mortgage-backed securities,
year-over-year, resulted from the redeployment of principal payments into loan
originations as well as funding deposit outflows. The increase in yield resulted
from rate adjustments in pass-through certificates containing adjustable rate
mortgages as management's plan to invest primarily in adjustable rate products
began to produce positive results.
Interest income from securities available for sale and held to maturity
decreased $2.1 million, or 47.7%, to $2.3 million for the quarter ended
September 30, 2006, from $4.4 million for the quarter ended September 30, 2005.
The average balance of securities decreased $275.3 million, or 54.9%, to $226.4
million for the quarter ended September 30, 2006, compared to $501.7 million for
the quarter ended September 30, 2005. The decrease in the average balance was
due primarily to the sale of the Bank's entire portfolio of government agency
notes, with a carrying value of $249.0 million, and Freddie Mac common stock
with a carrying value of $8.9 million, in February 2006. Management utilized
cash flows from maturing securities to fund loan originations and deposit
outflows. The yield on average securities improved 56 basis points from 3.48%
for the three months ended September 30, 2005, to 4.04% for the three months
ended September 30, 2006. The higher yield on securities resulted from the
February 2006 sale of the government agency notes, which provided a yield of
3.22%. During the quarter ending December 31, 2006, management plans to
reclassify its portfolio of securities held to maturity, for the most part
municipal bonds, to available for sale for purposes of executing sales of the
bonds. With a weighted average yield of 3.77% as of September 30, 2006, a sale
of the municipal bond portfolio and subsequent reinvestment of the proceeds into
cash equivalents and ultimately loans should have a positive effect on future
results.
Interest income from other interest-earning assets increased $1.7 million to
$2.7 million for the quarter ended September 30, 2006, from $919,000 for the
quarter ended September 30, 2005. This was a result of a significant increase in
the yield as well as the average balance of other interest-earning assets. There
was a 166 basis point increase in the yield on average other interest-earning
assets to 4.96% for the quarter ended September 30, 2006, from 3.30% for the
quarter ended September 30, 2005, due to rising short-term interest rates and
particularly the rate paid on overnight deposits. There was a $103.6 million
increase in the average balance of other interest-earning assets to $215.0
million for the three months
-16-
ended September 30, 2006, from $111.4 million for the three months ended
September 30, 2005. The average balance of other interest-earning assets
increased due to an increase in interest-earning deposits, the primary component
of other interest-earning assets, partially offset by a decrease in Federal Home
Loan Bank of New York capital stock. Management placed the proceeds from the
restructuring of the securities portfolio in February 2006 in cash equivalents
pending redeployment into other earning assets.
Interest Expense. Total interest expense increased $2.4 million, or 26.1%, to
$11.6 million for the three months ended September 30, 2006, from $9.2 million
for the three months ended September 30, 2005. Year-over-year, there was a
significant increase in interest expense attributed to deposits and a slight
decrease in interest expense from borrowings.
Interest expense from deposits increased $2.4 million, or 28.9%, to $10.7
million for the three months ended September 30, 2006, from $8.3 million for the
three months ended September 30, 2005. 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 82 basis points to 3.09% for the
quarter ended September 30, 2006, from 2.27% for the quarter ended September 30,
2005. In an effort to retain and attract deposits, management offered
promotional rates on selected certificates of deposit maturities and tiered
money market deposit accounts, and this strategy had a significant effect on the
Bank's cost of funds during the current quarter.
The average balance of interest-bearing deposits decreased $73.1 million, or
5.0%, to $1.39 billion for the three months ended September 30, 2006, from $1.46
billion for the three months ended September 30, 2005. The decrease in the
average balance speaks to the attrition caused by promotions offered by other
financial institutions in the Bank's market area.
Interest expense from Federal Home Loan Bank advances decreased $20,000, or
2.3%, to $851,000 for the quarter ended September 30, 2006, from $871,000 for
the quarter ended September 30, 2005. Average borrowings decreased $1.8 million,
or 2.9%, to $61.0 million for the three months ended September 30, 2006, from
$62.8 million for the three months ended September 30, 2005. The decrease in
average borrowings was more than enough to offset an increase in the cost of
average borrowings, which increased three basis points to 5.58% from 5.55%,
year-over-year. The decrease in the average balance resulted from scheduled
principal payments on amortizing advances leaving generally higher rate
long-term advances on the Bank's books, which contributed to the increase in
cost.
Provision for Loan Losses. The provision for loan losses increased $83,000, to
$158,000 for the quarter ended September 30, 2006, from a $75,000 provision
recorded for the quarter ended September 30, 2005. Management attributes the
increase primarily to growth in the loan portfolio. Total loans increased to
$748.0 million at September 30, 2006 from $708.0 million at June 30, 2006. Asset
quality continued to be strong as non-performing loans were $1.0 million, or
0.14% of total loans at September 30, 2006, as compared to $942,000, or 0.13% of
total loans at June 30, 2006. The allowance for loan losses as a percentage of
total loans outstanding was 0.75% at September 30, 2006 and 0.77% at June 30,
2006, reflecting allowance balances of $5.6 million and $5.5 million,
respectively.
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. The allowance
for loan losses as of September 30, 2006 was maintained 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.
-17-
Non-Interest Income. Non-interest income attributed to fees, service charges and
miscellaneous income increased $61,000, or 12.0%, to $568,000 for the three
months ended September 30, 2006, compared to $507,000 for the three months ended
September 30, 2005. The increase was due primarily to an increase of $58,000 in
income from bank owned life insurance partially offset by lower fees from
operations and the Bank's retail branch network of $21,000 and non-recurring
loan fees of $11,000. There was a loss on sale of real estate owned of $35,000
in the quarter ended September 30, 2005 with no such loss recorded in the
quarter ended September 30, 2006. Management is considering offering an
overdraft privilege program to the Bank's retail customers as a way of
increasing fee income.
There was no gain on sale of securities during the quarter ended September 30,
2006 compared to a gain on sale of securities of $86,000 recorded in the quarter
ended September 30, 2005.
Non-Interest Expense. Total non-interest expense increased $1.7 million, or
18.1%, to $11.1 million for the three months ended September 30, 2006, from $9.4
million for the three months ended September 30, 2005. The increase resulted
primarily from increases in salaries and employee benefits and directors'
compensation, nominal increases in equipment, advertising and miscellaneous
expenses, partially offset by lower net occupancy expense of premises.
Salaries and employee benefits increased $1.2 million, or 21.4%, to $6.8 million
for the quarter ended September 30, 2006, compared to $5.6 million for the
quarter ended September 30, 2005. Management attributes the increase primarily
to stock compensation plans approved at the Company's first annual stockholders'
meeting held in October 2005, which resulted in an expense of $933,000 during
the quarter ended September 30, 2006, with no such expense recorded in the
quarter ended September 30 2005. The current quarter included employee stock
ownership plan compensation expense of $548,000, an increase of $89,000 compared
to $459,000 during the quarter ended September 30, 2005. Year-over-year, there
were increases totaling approximately $189,000 in other components of salaries
and employee benefits, including compensation expense, pension expense, other
benefits expense and payroll taxes expense.
Year-over-year, net occupancy expense of premises decreased $38,000 to $858,000
from $896,000. The decrease resulted from a commensurate decrease in net rent
expense due to management's ongoing efforts to lease surplus space in Bank
facilities to other businesses. The rental income partially offsets the
occupancy expense of such premises.
Equipment expense increased $24,000, with the expense in both quarters of
approximately $1.1 million. The increase resulted from nominal increases in
maintenance expense, depreciation expense and data processing costs.
Advertising expense increased $68,000 to $393,000, compared to $325,000 during
the same period in the prior year, due to an extensive advertising campaign to
promote deposit and loan products. The campaign included programs to market
special certificate of deposit rates, a tiered money market deposit account and
Star Banking, a relationship based retail-banking product designed to build core
deposits.
Directors' compensation increased $427,000, to $657,000 during the quarter ended
September 30, 2006, from $230,000 in the quarter ended September 30, 2005. The
increase resulted primarily from stock compensation plans, which resulted in an
expense of $390,000 during the quarter ended September 30, 2006, with no such
expense recorded in the quarter ended September 30, 2005. Year-over-year, there
were increases totaling approximately $37,000 in other components of directors'
compensation, including fees and an incentive bonus plan.
-18-
Miscellaneous expenses increased $18,000, to $997,000 for the quarter ended
September 30, 2006, compared to $979,000 for the quarter ended September 30,
2005. The most significant increases included audit and accounting services
expense and loan expense, which increased $15,000 and $35,000, respectively. The
largest decreases included legal expense, printing and office supplies expense
and miscellaneous expense, which decreased $15,000, $21,000 and $27,000,
respectively. Expense attributed to the Company's annual meeting was $38,000 in
the current quarter with no such expense recorded during the same quarter prior
year. All other elements of non-interest expense decreased approximately $8,000,
year-over-year.
Provision for Income Taxes. The provision for income taxes decreased $913,000 to
$76,000 for the quarter ended September 30, 2006, from $989,000 for the quarter
ended September 30, 2005. The effective income tax rate was 7.6% for the three
months ended September 30, 2006, as compared to 25.0% for the three months ended
September 30, 2005. Management attributes the lower effective income tax rate
primarily to a decrease in pre-tax income, $1.0 million for the quarter ended
September 30, 2006 compared to $4.0 million for the quarter ended September 30,
2005. Also a factor, due to the Bank's significant investment in tax-exempt
municipal bonds, tax-exempt interest reduced the Company's federal income
expense by approximately $593,000 during the quarter ended September 30, 2006,
compared to a reduction of approximately $621,000 in the quarter ended September
30, 2005.
-19-
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, principal amortization, principal prepayments and maturities
of mortgage-backed securities and loans receivable; maturities of securities and
funds provided from operations. In addition, the Bank invests excess funds in
short-term interest-earning assets such as over-night deposits, which provide
liquidity to meet lending requirements. While scheduled payments from the
amortization of loans and mortgage-backed securities and maturing 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. However, management
expects to maintain liquidity at an elevated level as long as the Treasury yield
curve remains inverted or flat, to the extent that the Bank does need the funds
for loan originations.
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 September 30, 2006,
the Bank had outstanding commitments to originate loans of $40.1 million,
commitments to fund the purchase of loans on a flow basis of $56.2 million,
construction loans in process of $8.4 million and unused lines of credit of
$28.1 million.
During the quarter ended June 30, 2006, management introduced promotional rates
for terms of five, nine and 13 months to retain and attract new certificates of
deposit. The Bank continued to offer the promotional rates during the quarter
ended September 30, 2006. Certificates of deposit increased $52.3 million
between the linked quarters, from $883.1 million at June 30, 2006 to $935.4
million at September 30, 2006. Certificates of deposit scheduled to mature in
one year or less at September 30, 2006 totaled $758.9 million compared to $658.2
million at June 30, 2006. Based on historical experience, management believes
that a significant portion of maturing deposits will remain with the Bank.
However, if the cost of deposits continues to increase at the rate experienced
during the quarter ended September 30, 2006, management may introduce a more
conservative pricing strategy, which could lead to significant deposit outflows.
Taking into consideration the Bank's substantial liquidity position, management
implemented such a policy change in late October 2006.
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 September 30, 2006, advances from the FHLB amounted to $61.0
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.
-20-
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, 2006, 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,
2006, as compared to the minimum regulatory capital requirements:
September 30, 2006 (Unaudited)
-------------------------------------------------------------------------------
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Action Provisions
------------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ---------- ---------- --------- ----------
(Dollars in Thousands)
Total Capital
(to risk-weighted assets) $ 376,453 47.49% $ 63,412 8.00% $ 79,266 10.00%
Tier 1 Capital
(to risk-weighted assets) $ 370,844 46.78% - - $ 47,559 6.00%
Core (Tier 1) Capital
(to adjusted total assets) $ 370,844 19.26% $ 57,759 3.00% $ 96,266 5.00%
Tangible Capital
(to adjusted total assets) $ 370,844 19.26% $ 28,880 1.50% - -
-21-
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, 2006, 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, 2006.
At June 30, 2006
------------------------------------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
--------------------------------- ----------------------------------------------------
Net Portfolio Basis Point
Changes in Rates (1) $ Amount $ Change % Change Value Ratio Change
----------------------- -------------- -------------- -------------- -------------- --------------
(In Thousands)
+300 bp 274,160 -135,558 -33% 15.39% -581 bp
+200 bp 318,540 -91,178 -22% 17.40% -380 bp
+100 bp 364,082 -45,637 -11% 19.35% -185 bp
0 bp 409,718 - - 21.20% -
-100 bp 451,685 +41,966 +10% 22.80% +160 bp
-200 bp 482,117 +72,398 +18% 23.88% +268 bp
(1) The -300 bp scenario is not shown due to the low prevailing interest rate
environment.
-22-
This analysis also indicated that as of June 30, 2006 an immediate and permanent
2.00% increase in interest rates would cause an approximately 6.41% decrease in
our net interest income.
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.
-23-
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.
-24-
PART II
ITEM 1. Legal Proceedings
-----------------
At September 30, 2006, 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 1A. Risk Factors
------------
Management of the Company does not believe there have been
any material changes with regard to the Risk Factors
previously disclosed under Item 1A. of the Company's Form
10-K for the year ended June 30, 2006, previously filed with
the Securities and Exchange Commission.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
The following table reports information regarding
repurchases of the Company's common stock during the quarter
ended September 30, 2006.
--------------------------------------------------------------------------------
Total Number of Maximum
Shares Number of
Purchased by Shares that
Total Part of Publicly May Yet Be
Number of Average Announced Purchased Under
Shares Price Paid Plans or the Plans or
Period Purchsed per Share Programs Programs(1)
--------------------------------------------------------------------------------
July 1-31, 2006 - - - -
--------------------------------------------------------------------------------
August 1-31, 2006 53,200 $14.72 53,200 1,037,863
--------------------------------------------------------------------------------
September 1-30, 2006 229,600 $15.11 282,800 808,263
--------------------------------------------------------------------------------
Total 282,800 $15.03 282,800 -
--------------------------------------------------------------------------------
(1) On July 18, 2006, the Company announced a five percent stock repurchase
plan (approximately 1,091,063 shares). Such purchases are to be made from
time to time in the open market, based on stock availability, price and the
Company's financial performance. This program has no expiration date.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
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 K. 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: November 8, 2006 By: /s/ John N. Hopkins
---------------- -------------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly authorized officer and principal
executive officer)
Date: November 8, 2006 By: /s/ Albert E. Gossweiler
---------------- -------------------------------------------
Albert E. Gossweiler
Senior Vice President and Chief Financial
Officer
(Principal financial officer)
-26-