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, 2006
-------------------
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 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: February 1, 2007.
$0.10 par value common stock - 71,654,937 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, 2006 and June 30, 2006 (Unaudited) 1
Consolidated Statements of Income for the Three Months
and Six Months Ended December 31, 2006 and 2005
(Unaudited) 2-3
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended December 31, 2006
and 2005 (Unaudited) 4-5
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2006 and 2005 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-28
Item 3: Quantitative and Qualitative Disclosure About Market
Risk 29-30
Item 4: Controls and Procedures 31
PART II - OTHER INFORMATION 32-33
SIGNATURES 34
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands, Except Share Data, Unaudited)
December 31, June 30,
2006 2006
(As restated)
----------- -----------
Assets
------
Cash and amounts due from depository institutions $ 19,376 $ 22,563
Interest-bearing deposits in other banks 266,543 207,716
----------- -----------
Cash and Cash Equivalents 285,919 230,279
Securities available for sale (amortized cost $116,985 and $227,598) 116,468 222,793
Loans receivable, including net deferred loan costs of $1,272 and $1,087 799,418 709,064
Less allowance for loan losses (5,755) (5,451)
----------- -----------
Net Loans Receivable 793,663 703,613
Mortgage-backed securities available for sale (amortized cost $669,753 661,898 670,329
and $689,962)
Premises and equipment 35,929 35,941
Federal Home Loan Bank of New York ("FHLB") stock 5,168 5,406
Interest receivable 8,013 8,836
Goodwill 82,263 82,263
Bank owned life insurance 14,889 14,628
Other assets 13,820 17,685
----------- -----------
Total Assets $ 2,018,030 $ 1,991,773
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Deposits:
Non-interest bearing $ 56,816 $ 61,080
Interest-bearing 1,423,258 1,382,658
----------- -----------
Total Deposits 1,480,074 1,443,738
Advances from FHLB 55,801 61,105
Advance payments by borrowers for taxes 4,838 5,232
Other liabilities 6,036 6,564
----------- -----------
Total Liabilities 1,546,749 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
shares and 71,648,937 shares and 72,737,500 shares issued and outstanding 7,274 7,274
Paid-in capital 195,210 192,534
Retained earnings 306,387 306,728
Unearned Employee Stock Ownership Plan shares; 1,478,994 shares
and 1,551,732 shares
(14,790) (15,517)
Treasury stock, at cost; 1,088,563 shares and 0 shares (17,358) --
Accumulated other comprehensive (loss) (5,442) (15,885)
----------- -----------
Total Stockholders' Equity 471,281 475,134
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,018,030 $ 1,991,773
=========== ===========
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 Six Months Ended
December 31, December 31,
------------------------- --------------------------
2006 2005 2006 2005
-------- -------- -------- --------
Interest Income:
Loans $ 11,075 $ 8,544 $ 21,386 $ 16,665
Mortgage-backed securities 8,077 8,418 16,098 16,986
Securities:
Taxable 390 2,416 790 4,854
Tax-exempt 1,376 1,912 3,261 3,837
Other interest-earning assets 3,169 705 5,836 1,624
-------- -------- -------- --------
Total Interest Income 24,087 21,995 47,371 43,966
-------- -------- -------- --------
Interest Expense:
Deposits 12,096 8,650 22,841 16,937
Borrowings 807 857 1,658 1,728
-------- -------- -------- --------
Total Interest Expense 12,903 9,507 24,499 18,665
-------- -------- -------- --------
Net Interest Income 11,184 12,488 22,872 25,301
Provision for Loan Losses 119 64 277 139
-------- -------- -------- --------
Net Interest Income after Provision
for Loan Losses 11,065 12,424 22,595 25,162
-------- -------- -------- --------
Non-Interest Income:
Fees and service charges 276 289 504 566
Gain on sale of securities 152 -- 152 86
Miscellaneous 344 328 684 558
-------- -------- -------- --------
Total Non-Interest Income 772 617 1,340 1,210
-------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 6,746 5,760 13,560 11,363
Net occupancy expense of
premises 841 789 1,699 1,685
Equipment 1,100 1,080 2,176 2,132
Advertising 409 385 802 710
Federal insurance premium 142 136 284 270
Amortization of intangible assets 159 159 318 318
Directors' compensation 561 582 1,218 812
Miscellaneous 1,243 1,247 2,240 2,226
-------- -------- -------- --------
Total Non-Interest Expenses 11,201 10,138 22,297 19,516
-------- -------- -------- --------
Income before Income Taxes 636 2,903 1,638 6,856
Income Taxes 89 577 165 1,566
-------- -------- -------- --------
Net Income $ 547 $ 2,326 $ 1,473 $ 5,290
======== ======== ======== ========
2
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
---------------------------------------------
(In Thousands, Except Per Share Data, Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- --------------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net Income per Common Share:
Basic $ 0.01 $ 0.03 $ 0.02 $ 0.07
Diluted 0.01 0.03 0.02 0.07
Weighted Average Number of
Common Shares Outstanding:
Basic 69,258 71,046 69,505 71,049
Diluted 69,753 71,063 69,901 71,058
Dividends Declared Per Common
Share $ 0.05 $ 0.05 $ 0.10 $ 0.14
See notes to consolidated financial statements.
3
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Six Months Ended December 31, 2005
(In Thousands, Except Per Share Data, Unaudited)
Accumulated
Common Stock Unearned
-------------------- Paid-In Retained ESOP
Shares Amount Capital Earnings Shares
------ ------ ------- -------- ------
Balance - June 30, 2005 72,738 $ 7,274 $ 207,838 $ 301,857 $(16,972)
Comprehensive income:
Net income -- -- -- 5,290 --
Realized gain on securities available
for sale, net of income tax of $30 -- -- -- -- --
Unrealized loss on securities available
for sale, net of deferred income tax
benefit of $44 -- -- -- -- --
Total Comprehensive income
Refund of common stock offering
expense -- -- 3 -- --
ESOP shares committed to be released
(72 shares) -- -- 150 -- 727
Stock option transactions -- -- 215 -- --
Treasury stock purchases (178) -- -- -- --
Cash dividends declared ($0.14/share) -- -- -- (2,802) --
------ ----- ------- ------- -------
Balance - December 31, 2005 72,560 7,274 208,206 304,345 (16,245)
====== ===== ======= ======= =======
Other
Treasury Comprehensive
Stock Income (Loss) Total
----- ------------- -----
Balance - June 30, 2005 $ -- 5,485 $ 505,482
Comprehensive income:
Net income -- -- 5,290
Realized gain on securities available
for sale, net of income tax of $30 -- (56) (56)
Unrealized loss on securities available
for sale, net of deferred income tax
benefit of $44 -- (83) (83)
Total Comprehensive income 5,151
Refund of common stock offering
expense -- -- 3
ESOP shares committed to be released
(72 shares) -- -- 877
Stock option transactions -- -- 215
Treasury stock purchases (2,268) -- (2,268)
Cash dividends declared ($0.14/share) -- -- (2,802)
------ ----- -------
Balance - December 31, 2005 (2,268) 5,346 506,658
====== ===== =======
See notes to consolidated financial statements.
4
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Six Months Ended December 31, 2006
(In Thousands, Except Per Share Data, Unaudited)
Accumulated
Common Stock Unearned
-------------------- Paid-In Retained ESOP
Shares Amount Capital Earnings Shares
------ ------ ------- -------- ------
Balance - June 30, 2006 (as restated) 72,737 $ 7,274 $ 192,534 $ 306,728 $(15,517)
Comprehensive income:
Net income -- -- -- 1,473 --
Realized gain on securities available
for sale, net of income tax of $53 -- -- -- -- --
Unrealized loss on securities available
for sale, net of deferred income tax
benefit of $5,676 -- -- -- -- --
Total Comprehensive income
ESOP shares committed to be released
(72 shares) -- -- 391 -- 727
Stock option transactions -- -- 996 -- --
Treasury stock purchases (1,091) -- -- -- --
Treasury stock reissued 3 -- (8) -- --
Restricted stock plan shares
purchased (54 shares) -- -- (789) -- --
Restricted stock plan shares
earned (134 shares) -- -- 1,652 -- --
Tax benefit related to vesting of
restricted stock -- -- 434 -- --
Cash dividends declared ($0.10/share) -- -- -- (1,814) --
------ ----- ------- ------- -------
Balance - December 31, 2006 71,649 7,274 195,210 306,387 (14,790)
====== ===== ======= ======= =======
Other
Treasury Comprehensive
Stock Income (Loss) Total
----- ------------- -----
Balance - June 30, 2006 (as restated) $ -- (15,885) $ 475,134
----------
Comprehensive income:
Net income -- -- 1,473
Realized gain on securities available
for sale, net of income tax of $53 -- (99) (99)
Unrealized loss on securities available
for sale, net of deferred income tax
benefit of $5,676 -- 10,542 10,542
----------
Total Comprehensive income 11,916
----------
ESOP shares committed to be released
(72 shares) -- -- 1,118
Stock option transactions -- -- 996
Treasury stock purchases (17,398) -- (17,398)
Treasury stock reissued 40 -- 32
Restricted stock plan shares
purchased (54 shares) -- -- (789)
Restricted stock plan shares
earned (134 shares) -- -- 1,652
Tax benefit related to vesting of
restricted stock -- -- 434
Cash dividends declared ($0.10/share) -- -- (1,814)
------- ------ -------
Balance - December 31, 2006 (17,358) (5,442) 471,281
======= ====== =======
See notes to consolidated financial statements.
5
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Unaudited)
Six Months Ended
December 31,
--------------------
2006 2005
-------- --------
Cash Flows from Operating Activities:
Net income $ 1,473 $ 5,290
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 992 924
Net amortization of premiums, discounts and loan fees and costs 464 406
Deferred income taxes 2,377 748
Amortization of intangible assets 318 318
Provision for loan losses 277 139
Realized gains on sale of securities available for sale (152) (86)
(Increase) in cash surrender value of bank owned life insurance (261) (184)
ESOP, stock option plan and restricted stock plan expenses 3,766 1,092
Realized loss on sale of real estate owned -- 35
Realized gain on disposition of premises and equipment (3) --
(Increase) decrease in interest receivable 823 (289)
(Increase) in other assets (4,454) (2,911)
Increase (decrease) in interest payable (21) 30
(Decrease) in other liabilities (450) (1,177)
-------- --------
Net Cash Provided by Operating Activities 5,149 4,335
-------- --------
Cash Flows from Investing Activities:
Purchases of securities available for sale (189) (139)
Proceeds from sale of securities available for sale 105,823 6,864
Purchases of securities held to maturity -- (4,000)
Proceeds from calls and maturities of securities available for sale 3,894 --
Proceeds from calls and maturities of securities held to maturity -- 9,989
Proceeds from repayments of securities available for sale 1,246 --
Proceeds from repayments of securities held to maturity -- 2,337
Purchase of loans (42,791) (3,794)
Net (increase) in loans receivable (47,662) (66,361)
Proceeds from sale of real estate owned -- 65
Purchases of mortgage-backed securities available for sale (49,627) --
Purchases of mortgage-backed securities held to maturity -- (64,765)
Principal repayments on mortgage-backed securities available for sale 69,488 --
Principal repayments on mortgage-backed securities held to maturity -- 104,429
Additions to premises and equipment (998) (2,068)
Proceeds from cash settlement on premises and equipment 21 --
Redemption of FHLB stock 238 6,181
Purchase of bank owned life insurance -- (10,208)
-------- --------
Net Cash Provided by (Used in) Investing Activities $ 39,443 $(21,470)
======== ========
6
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
(In Thousands, Unaudited)
Six Months Ended
December 31,
-----------------------
2006 2005
--------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits $ 36,322 $ (45,314)
Repayment of FHLB advances (5,304) (287)
(Decrease) in advance payments by borrowers for taxes (394) (6)
Refund of common stock offering expense -- 3
Return of dividends paid in prior periods 15 --
Dividends paid to minority stockholders of Kearny Financial Corp. (1,870) (1,964)
Purchase of common stock of Kearny Financial Corp. for treasury (17,398) (2,268)
Treasury stock reissued 32 --
Purchase of common stock of Kearny Financial Corp. for restricted
stock plan (789) --
Tax benefit related to vesting of restricted stock 434 --
--------- ---------
Net Cash Provided by (Used in) Financing Activities $ 11,048 $ (49,836)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents $ 55,640 $ (66,971)
Cash and Cash Equivalents - Beginning 230,279 139,865
--------- ---------
Cash and Cash Equivalents - Ending $ 285,919 $ 72,894
========= =========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the year for:
Income taxes, net of refunds $ 1,247 $ 4,302
========= =========
Interest $ 24,520 $ 18,635
========= =========
Supplemental Disclosure of Non-Cash Transactions:
Cash dividend declared $ 901 $ 995
========= =========
See notes to consolidated financial statements.
7
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 and six month periods ended December 31, 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 earnings per share ("EPS") is based on the weighted average number of
common shares actually outstanding adjusted for Employee Stock Ownership Plan
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 Six Months Ended
December 31, 2006 December 31, 2006
-------------------------------------- ------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
Net income $ 547 $1,473
====== ======
Basic earnings per share,
income available to
common stockholders $ 547 69,258 $0.01 $1,473 69,505 $0.02
===== =====
Effect of dilutive securities:
Stock options -- 217 -- 109
Restricted stock awards -- 278 -- 287
------ -------- ------ ------
$ 547 69,753 $0.01 $1,473 69,901 $0.02
====== ======== ===== ====== ====== =====
8
Three Months Ended Six Months Ended
December 31, 2005 December 31, 2005
-------------------------------------- ------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
Net income $2,326 $5,290
====== ======
Basic earnings per share,
income available to
common stockholders $2,326 71,046 $0.03 $5,290 71,049 $0.07
===== =====
Effect of dilutive securities:
Stock options -- -- -- --
Restricted stock awards -- 17 -- 9
------ -------- ------ ------
$2,326 71,063 $0.03 $5,290 71,058 $0.07
====== ======== ===== ====== ====== =====
4. DIVIDEND WAIVER
-------------------
During the quarter ended December 31, 2006, 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 approximately $2.5 million declared during the quarter, on the
shares of Company common stock it owns. Furthermore, in December 2006, the OTS
advised Kearny MHC that it would not object to dividend waivers for the quarters
ending March 31, 2007, June 30, 2007 and September 30, 2007, provided the OTS
does not subsequently determine that the proposed waivers are detrimental to the
safe and sound operation of the Bank.
5. STOCK COMPENSATION PLANS
----------------------------
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 the
Bank received in aggregate 2,305,000 options and 910,000 shares of restricted
stock. The Company adopted SFAS No. 123(R) 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. 123(R) 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 $434,000 for the six months ended December 31,
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.
9
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 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.
Management used the following assumptions to estimate the fair values of options
granted:
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Weighted average risk-free interest rate -- 4.53% -- 4.53%
Expected dividend yield -- 1.62% -- 1.62%
Weighted average volatility factor of the expected
market price of the Company's common stock -- 18.00% -- 18.00%
Weighted average expected life of the options -- 6.50 years -- 6.50 years
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. 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 December 31, 2006, the Company recorded stock
option expense of $498,000 and restricted stock expense of $825,000. During the
six months ended December 31, 2006, the Company recorded stock option expense of
$996,000 and restricted stock expense of $1.6 million. The Company estimates it
will record in aggregate an additional $2.6 million of stock option and
restricted stock expenses during the remainder of fiscal 2007.
The following is a summary of the status of the Company's outstanding stock
options as of December 31, 2006 and stock option activity and related
information during the six months ended December 31, 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 (3) $12.71 $8
Forfeited -- --
-------
Outstanding at December 31, 2006 3,371 $12.34 8.9 years $12,536
==========
Exercisable at December 31, 2006 672 $12.34 8.9 years $2,509
10
The following is a summary of the status of the Company's unexercisable options
as of December 31, 2006 and changes during the six months ended December 31,
2006:
Weighted
Average
Options Grant Date
(000's) Fair Value
---------- -----------
Unexercisable at June 30, 2006 3,374 $2.95
Granted -- --
Vested (675) $2.95
Forfeited -- --
---------- -----------
Unexercisable at December 31, 2006 2,699 $2.95
========== ===========
As of December 31, 2006, expected future compensation expense attributed to the
2.7 million unexercisable options outstanding is $7.8 million over 3.9 years.
Upon exercise of 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 including funding the exercise of options.
The following is a summary of the status of the Company's outstanding restricted
share awards as of December 31, 2006 and changes during the six months ended
December 31, 2006:
Weighted
Restricted Average
Shares Grant Date
(000's) Fair Value
------------ ----------
Non-vested at June 30, 2006 1,338 $12.34
Granted -- --
Vested (268) $12.34
Forfeited -- --
----- ------
Non-vested at December 31, 2006 1,070 $12.34
===== ======
As of December 31, 2006, expected future compensation expense attributed to the
1.1 million non-vested restricted shares outstanding at that date is $12.8
million over 3.9 years.
6. STOCK REPURCHASE PLANS
--------------------------
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 awards under the Company's 2005 Stock Compensation and
Incentive Plan. During the three months ended December 31, 2006, the Company
purchased 808,263 shares at a cost of $13.1 million, or approximately $16.27 per
share. During the six months ended December 31, 2006, a total of 1,091,063
shares were purchased under the plan at a cost of $17.4 million, or
approximately $15.95 per share.
On January 18, 2007, the Company announced that the Board of Directors
authorized an additional stock repurchase plan to acquire up to 1,036,634
shares, or 5% of the Company's outstanding stock held by persons other than
Kearny MHC. Such purchases will be made from time to time in the open market or
in privately negotiated stock purchases, based on stock availability, price and
the Company's financial performance. It is anticipated that purchases will be
made during the next twelve months, although no
11
assurance can be given as to when they will be made or to the total number of
shares that will be purchased.
7. BENEFIT PLANS - COMPONENTS OF NET PERIODIC COST
--------------------------------------------------
Benefit Equalization Plan net periodic pension expense was as follows:
Three Months Six Months
Ended December 31, Ended December 31,
----------------------- -----------------------
2006 2005 2006 2005
----- ----- ----- -----
(In Thousands) (In Thousands)
Service cost $ 15 $ 15 $ 30 $ 30
Interest cost 44 44 88 88
Amortization of unrecognized past service
costs (3) (3) (6) (6)
Amortization of unrecognized net actuarial
loss 46 46 92 92
----- ----- ----- -----
Net periodic pension expense $ 102 $ 102 $ 204 $ 204
===== ===== ===== =====
Postretirement Welfare Plan net periodic postretirement benefit cost was as
follows:
Three Months Six Months
Ended December 31, Ended December 31,
----------------------- -----------------------
2006 2005 2006 2005
----- ----- ----- -----
(In Thousands) (In Thousands)
Service cost $ 8 $ 6 $ 16 $ 12
Interest cost 7 6 14 12
Amortization of unrecognized past service
liability 2 3 4 6
---- ---- ---- ----
Net periodic postretirement benefit cost $ 17 $ 15 $ 34 $ 30
==== ==== ==== ====
Directors' Consultation and Retirement Plan net periodic plan cost was as
follows:
Three Months Six Months
Ended December 31, Ended December 31,
---------------------- ----------------------
2006 2005 2006 2005
----- ----- ----- -----
(In Thousands) (In Thousands)
Service cost $ 34 $ 32 $ 68 $ 64
Interest cost 34 29 68 58
Amortization of unrecognized transition
obligation 11 11 22 22
Amortization of unrecognized past service
liability 15 15 30 30
---- ---- ---- ----
Net periodic postretirement benefit cost $ 94 $ 87 $188 $174
==== ==== ==== ====
12
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 over funded or under funded 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.
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
misstatements 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.
9 RESTATEMENT
--------------
In a Form 8-K filed January 8, 2007, the Company reported that on January 2,
2007, the Audit Committee of the Company's Board of Directors determined that
the Company will need to restate the financial statements contained in its
Annual Report on Form 10-K for the fiscal year ended June 30, 2006 and Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 2006 and
September 30, 2006 (collectively, the "Financial Statements") and the previously
issued Financial Statement should no longer be relied upon.
The Company had previously disclosed its intention to reclassify its portfolio
of securities held to maturity (consisting primarily of municipal bonds and to a
lesser degree U.S. government obligations) to available for sale during the
quarter ending December 31, 2006, for the purpose of executing sales of the
municipal bonds at opportune times. A decline in pre-tax income reduces the
advantage of holding tax-exempt instruments and their yield is substantially
below market. During the three months ended
13
December 31, 2006, management sold municipal bonds with a par value of $105.9
million recording a gain of $152,000.
The determination was made by the Audit Committee that under Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, an error was made in not making this
reclassification during the quarter ended March 31, 2006 when the Company sold
all of the government agency notes held in the portfolio. Notwithstanding the
Company's decision to make the reclassification during the quarter ended
December 31, 2006 in order to permit management to make periodic sales of
securities from this portfolio when the opportunity presents itself, proper
accounting treatment of the securities held to maturity portfolio required the
change to already have been made. Furthermore, the Audit Committee believes that
this reclassification should be extended to mortgage-backed securities held to
maturity and included in the Financial Statements for the fiscal year ended June
30, 2006 and quarterly periods ended March 31, 2006 and September 30, 2006.
The effect of this change is that the securities are now reported at fair value
instead of at amortized cost, which results in a change in the value of these
assets previously reported on the statements of financial condition at March 31,
2006, June 30, 2006 and September 30, 2006. Carrying these securities at fair
value will impact the accumulated other comprehensive income (loss), which is a
component of stockholders' equity. The adjustments to be made to the Financial
Statements are non-cash in nature and do not result in changes to the income
statements or previously reported total net income for any period.
The Company intends to file the restated Financial Statements during the first
quarter of the 2007 calendar year.
The following table presents changes to the Consolidated Statement of Financial
Condition at June 30, 2006 resulting from the restatement:
June 30, June 30,
2006 2006
(As previously (As restated)
reported)
-----------------------------
(In Thousands)
Securities available for sale 18,346 222,793
Securities held to maturity 209,048 --
Mortgage-backed securities available for sale -- 670,329
Mortgage-backed securities held to maturity 689,962 --
Other assets 9,203 17,685
Total Assets 2,007,525 1,991,773
Accumulated other comprehensive (loss) (133) (15,885)
Total Stockholders' Equity 490,886 475,134
Total Liabilities and Stockholders' Equity 2,007,525 1,991,773
14
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, 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, 2006 AND JUNE 30, 2006
Total assets increased $26.2 million, or 1.3%, to $2.02 billion at December 31,
2006, from $1.99 billion at June 30, 2006, due primarily to a $90.1 million
increase in net loans receivable and a $55.6 million increase in cash and cash
equivalents and to a lesser degree, a $24.9 million increase in the fair value
of the securities portfolio. Partially offsetting these increases were decreases
in the securities portfolio due to calls and maturities, repayments and sales of
securities.
Cash and cash equivalents increased 24.1% to $285.9 million at December 31, 2006
from $230.3 million at June 30, 2006. The increase in cash and cash equivalents
resulted primarily from the sale of securities as well as principal and interest
payments and from maturities in the securities portfolio and to a lesser degree
an increase in deposits at the Bank, particularly in certificates of deposit and
tiered money market accounts, as discussed below. To the extent that the Bank
does not need the funds for loan originations, management expects to maintain
liquidity at an elevated level as long as the Treasury yield curve remains
inverted or flat because the high short term interest rates resulting from the
current yield curve make cash and cash equivalents attractive.
Securities decreased by $106.3 million, or 47.7%, to $116.5 million at December
31, 2006, compared to $222.8 million at June 30, 2006. During the quarter ended
December 31, 2006, management sold municipal bonds with an amortized cost of
$105.7 million, recording a gain of $152,000. A decline in pre-tax income
reduces the advantage of holding tax-exempt instruments and their yield was
substantially below market. The municipal bond portfolio was $195.7 million at
June 30, 2006, with a weighted average yield of 3.78%. At December 31, 2006, the
Bank's remaining municipal bond portfolio was $92.5 million with a weighted
average yield of 3.73%. During the six months ended December 31, 2006, there was
also a call of a $2.0 million trust preferred security. Management utilized cash
flows from principal and interest payments to fund loan originations during the
six month period.
Loans receivable, net of deferred fees and costs and the allowance for loan
losses, increased $90.1 million, or 12.8%, to $793.7 million at December 31,
2006, compared to $703.6 million at June 30, 2006.
15
The increase resulted from continuing implementation of the Bank's business plan
which calls for increasing the loan portfolio while reducing the securities
portfolio. Total loans constituted 39.6% of assets at December 31, 2006,
compared to 35.5% at June 30, 2006. Meanwhile, the securities portfolio
constituted 38.6% of assets at December 31, 2006, compared to 44.8% at June 30,
2006.
One-to-four family residential mortgage loans, particularly first mortgages and
nonresidential mortgages registered most of the growth, increasing approximately
$43.1 million and $37.1 million, to $509.0 million and $133.2 million at
December 31, 2006, respectively. There was also an increase in home equity loans
and multi-family mortgages of approximately $12.9 million and $5.1 million,
which totaled $106.6 million and $16.1 million at December 31, 2006,
respectively. Commercial loans decreased $823,000 to $2.4 million. There was
also a nominal decrease in home equity lines of credit of $932,000 to $12.1
million. Construction loans were the only category to see a significant decrease
during the six months. With balances outstanding decreasing $6.3 million to
$15.7 million and gross constructions loans decreasing $10.4 million to $23.0
million. Virtually the entire decrease in gross construction loans occurred in
the nonresidential category. To supplement the Bank's own loan originations,
management relies on agreements to purchase mortgages from several mortgage
companies, with $42.8 million purchased during the six months ended December 31,
2006. The Bank has not originated or purchased any interest only mortgages or
pay option adjustable rate mortgages.
Mortgage-backed securities decreased $8.4 million, or 1.3%, to $661.9 million at
December 31, 2006, from $670.3 million at June 30, 2006. Management reinvested
approximately $49.6 million in mortgage-backed securities, purchasing $15.3
million in fixed rate Community Reinvestment Act ("CRA") eligible issues and
$34.3 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 conversion to a one-year adjustable product may be less than three or
five years away. Management's redeployment of cash flows from principal and
interest payments to fund loan originations contributed to the decrease in the
size of the mortgage-backed security portfolio.
Premises and equipment was unchanged at $35.9 million at both December 31 and
June 30, 2006, as depreciation virtually offset the cost of additions to fixed
assets. The most significant addition to premises and equipment during the
period was completion of renovations at the Bank's retail branch in Old Tappan,
New Jersey at a cost of approximately $361,000. Bank owned life insurance
increased $261,000, or 1.8%, to $14.9 million at December 31, 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 $36.3 million, or 2.5%, to $1.48 billion at December 31,
2006, compared to $1.44 billion at June 30, 2006. During the six months ended
December 31, 2006, certificates of deposit and interest-bearing demand deposits,
particularly tiered money market deposit accounts, increased approximately $70.7
million and $17.7 million, to $953.8 million and $139.8 million, respectively;
while savings deposits decreased approximately $47.9 million to $329.6 million
and non-interest-bearing deposits decreased $4.3 million to $56.8 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, however, mid-way through the quarter ended December 31,
2006, management began to back away from this strategy in an attempt to mitigate
margin compression resulting from the increased cost of deposits from
promotional interest rates. Management expects to re-price the popular tiered
money market account to keep its growth under control. The challenge for
management continues to be balancing the rate of attrition against reducing the
Bank's cost of deposits. Management expects some loss of deposits as
certificates of deposit with five, nine and 13 month terms previously offered
with promotional interest rates mature during 2007.
16
Federal Home Loan Bank advances decreased $5.3 million, or 8.7%, to $55.8
million at December 31, 2006, compared to $61.1 million at June 30, 2006. The
reduction in borrowings resulted from the maturity of a $5.0 million advance,
with an interest rate of 5.90%, and scheduled principal payments on amortizing
advances.
During the six months ended December 31, 2006, stockholders' equity decreased
$3.8 million, or 0.8%, to $471.3 million at December 31, 2006 compared to $475.1
million at June 30, 2006. The decrease was primarily the result of stock
repurchases partially offset by an increase in accumulated other comprehensive
income. The Company purchased 54,314 shares at a cost of $789,000 for the
restricted stock plan and purchased 1,091,063 shares at a cost of $17.4 million
as treasury shares. Cash dividends of $0.10 per share totaling $1.8 million
declared for payment in the quarters ended December 31, 2006 and ending March
31, 2007 also contributed to the decrease in stockholders' equity. Partially
offsetting the decrease was an increase of $10.4 million in accumulated other
comprehensive income (loss) due to a decrease in the unrealized loss on
securities held at December 31, 2006, net income of $1.5 million recorded during
the period, the release of $1.1 million of Employee Stock Ownership Plan shares,
the release of $1.7 million of restricted stock plan shares, a $996,000
adjustment to equity for expensing stock options and a tax benefit of $434,000
recorded due to vesting of restricted stock.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND
2005
GENERAL. Net income for the quarter ended December 31, 2006 was $547,000 or
$0.01 per share, a decrease of $1.8 million, or 78.3%, from $2.3 million or
$0.03 per share for the quarter ended December 31, 2005. The decrease in net
income resulted primarily from a decrease in net interest income and an increase
in non-interest expense, particularly salaries and employee benefits due to the
cost of stock compensation plans.
NET INTEREST INCOME. Net interest income for the three months ended December 31,
2006 was $11.2 million, a decrease of $1.3 million, or 10.4%, compared to $12.5
million for the three months ended December 31, 2005. The decrease in net
interest income was due for the most part to a significant increase in interest
expense only partially offset by an increase in interest income. To a lesser
degree, a reduction in the volume of interest-earnings assets versus
interest-bearing liabilities contributed to the decrease in net interest income.
The Bank's net interest rate spread decreased 39 basis points to 1.67% for the
quarter ended December 31, 2006, from 2.06% for the quarter ended December 31,
2005. During the quarter ended December 31, 2006, interest rate sensitivity was
still an issue as interest-bearing liabilities continued to re-price faster than
interest-earning assets, due to both the promotional interest rates utilized to
attract new deposits, which also affected the rollover rates on maturing
certificates of deposit, as well as offering generally higher non-promotional
interest rates to remain competitive in the market place. The cost of average
interest-bearing liabilities increased 94 basis points, from 2.54% for the three
months ended December 31, 2005, to 3.48% for the three months ended December 31,
2006. During the quarter ended December 31, 2006, the yield on average
interest-earning assets increased 55 basis points, to 5.15% for the quarter
ended December 31, 2006, from 4.60% for the quarter ended December 31, 2005.
The Bank's net interest margin decreased 22 basis points to 2.39% for the three
months ended December 31, 2006, compared with 2.61% for the three months ended
December 31, 2005. Average interest-earning assets during the quarter ended
December 31, 2006 were $1.87 billion or $41.5 million less than average
interest-earning assets of $1.91 billion during the quarter ended December 31,
2005. The decrease resulted in part from use of cash to fund deposit outflows
and reduce borrowed money as well as fund stock repurchases. Average
interest-bearing liabilities during the quarter ended December 31, 2006 were
$1.48 billion or $15.3 million less than average interest-bearing liabilities of
$1.50 billion during the
17
quarter ended December 31, 2005. The ratio of average interest-earning assets to
average interest-bearing liabilities was 126.2% for the quarter ended December
31, 2006, compared to 127.7% for the quarter ended December 31, 2005.
INTEREST INCOME. Total interest income increased $2.1 million, or 9.5%, to $24.1
million for the three months ended December 31, 2006, from $22.0 million for the
three months ended December 31, 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 $2.6 million, or 30.6%, to $11.1
million for the three months ended December 31, 2006, from $8.5 million for the
three months ended December 31, 2005 due to growth in the portfolio as well as
an improvement in yield. The average balance of net loans receivable increased
$155.2 million to $766.4 million during the quarter ended December 31, 2006,
from $611.2 million during the quarter ended December 31, 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. Average net
loans receivable constituted 41.0% of average interest-earning assets for the
quarter ended December 31, 2006, as compared to 32.0% for the same quarter a
year ago. By contrast, average securities constituted 45.4% of average
interest-earning assets for the quarter ended December 31, 2006, as compared to
64.3% for the quarter ended December 31, 2005. The yield on average net loans
receivable increased 19 basis points to 5.78% for the quarter ended December 31,
2006, compared to 5.59% for the quarter ended December 31, 2005. The improvement
in yield year-over-year was due in part to growth in the nonresidential mortgage
category.
Interest income from mortgage-backed securities decreased $341,000, or 4.1%, to
$8.1 million for the three months ended December 31, 2006, compared to $8.4
million for the three months ended December 31, 2005 due to a reduction in the
portfolio partially offset by an improvement in yield. The average balance of
mortgage-backed securities decreased $64.2 million to $675.1 million for the
quarter ended December 31, 2006, from $739.3 million for the quarter ended
December 31, 2005. The yield on average mortgage-backed securities increased 23
basis points to 4.78% for the three months ended December 31, 2006, from 4.55%
for the three months ended December 31, 2005. The decrease in the average
balance of mortgage-backed securities, year-over-year, resulted from the
redeployment of principal payments into loan originations. The increase in yield
resulted from rate adjustments in pass-through certificates containing
adjustable rate mortgages. Excluding fixed rate CRA eligible securities,
management typically reinvests in adjustable rate product, preferably seasoned
3/1 and 5/1 adjustable rate mortgages such that the first rate change date and
conversion to a one-year adjustable product may be less than three or five years
away.
Interest income from securities decreased $2.5 million, or 58.1%, to $1.8
million for the quarter ended December 31, 2006, from $4.3 million for the
quarter ended December 31, 2005 due to a substantial reduction in the portfolio
partially offset by an improvement in yield. The average balance of securities
decreased $315.1 million to $173.4 million for the quarter ended December 31,
2006, compared to $488.5 million for the quarter ended December 31, 2005. The
decrease in the average balance was due primarily to the sale of the Bank's
entire portfolio of government agency notes and Freddie Mac common stock in
February 2006. Those sales were followed by a sale of municipal bonds, with an
amortized cost of $105.7 million during the quarter ended December 31, 2006. The
yield on average securities improved 54 basis points from 3.54% for the three
months ended December 31, 2005, to 4.08% for the three months ended December 31,
2006. The higher yield on securities resulted from the sale of the government
agency notes and municipal bonds. The yield on the notes was 3.22% at the time
of their sale. The yield on the bonds was 3.78% at June 30, 2006, with the
remaining balance of the portfolio yielding 3.73% at December 31, 2006.
18
Interest income from other interest-earning assets increased $2.5 million to
$3.2 million for the quarter ended December 31, 2006, from $705,000 for the
quarter ended December 31, 2005. This was a result of a significant increase in
the average balance of other interest-earning assets as well as an improvement
in yield. There was a $182.4 million increase in the average balance of other
interest-earning assets to $254.3 million for the three months ended December
31, 2006, from $71.9 million for the three months ended December 31, 2005. There
was a 106 basis point increase in the yield on average other interest-earning
assets to 4.98% for the quarter ended December 31, 2006, from 3.92% for the
quarter ended December 31, 2005, due to rising short-term interest rates
year-over-year, particularly the rate paid on overnight deposits and due also to
an increase in the dividend yield on Federal Home Loan Bank ("FHLB") of New York
capital stock. The average balance of other interest-earning assets increased
due to an increase in interest-earning deposits in other banks, the primary
component of other interest-earning assets, partially offset by a decrease of
$4.0 million in the average balance of FHLB capital stock, due to a repurchase
by FHLB to meet regulatory requirements. To the extent not required to fund loan
originations, management reinvested cash flows from the sales of securities and
principal and interest payments from securities in cash equivalents pending
redeployment into other earning assets.
..
INTEREST EXPENSE. Total interest expense increased $3.4 million, or 35.8%, to
$12.9 million for the three months ended December 31, 2006, from $9.5 million
for the three months ended December 31, 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 $3.4 million, or 39.1%, to $12.1
million for the three months ended December 31, 2006, from $8.7 million for the
three months ended December 31, 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 99 basis points to 3.40% for the
quarter ended December 31, 2006, from 2.41% for the quarter ended December 31,
2005. At various times during the year, management offered promotional rates on
selected certificates of deposit maturities and tiered money market deposit
accounts in an effort to retain and attract deposits. This strategy had a
significant effect on the Bank's cost of funds year-over-year. Midway through
the current quarter, management began to back away from this strategy in an
attempt to mitigate margin compression. The average balance of interest-bearing
deposits decreased $12.1 million to $1.42 billion for the three months ended
December 31, 2006, from $1.43 billion for the three months ended December 31,
2005.
Interest expense from Federal Home Loan Bank advances decreased $50,000, or
5.8%, to $807,000 for the quarter ended December 31, 2006, from $857,000 for the
quarter ended December 31, 2005 due to a decrease in average borrowings and a
decrease in cost. Average borrowings decreased $3.3 million to $58.2 million for
the three months ended December 31, 2006, from $61.5 million for the three
months ended December 31, 2005. The decrease in the average balance resulted
from the maturity of a $5.0 million advance and scheduled principal payments on
amortizing advances. The maturity of the advance, which was the Bank's most
costly borrowing at 5.90%, also contributed to a decrease in the cost of average
borrowings of three basis points to 5.55% from 5.58%, year-over-year.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $55,000 to
$119,000 for the quarter ended December 31, 2006, as compared to $64,000 during
the quarter ended December 31, 2005. The provisions during both quarters
resulted primarily from growth in the loan portfolio. Total loans increased to
$798.1 million at December 31, 2006 from $748.0 million at September 30, 2006.
Asset quality continued to be strong as non-performing loans were $639,000, or
0.08% of total loans at December 31, 2006, as compared to $1.0 million, or 0.14%
of total loans at September 30, 2006. The allowance for loan losses as a
percentage of total loans outstanding was 0.72% at December 31, 2006 and 0.75%
at September 30, 2006, reflecting allowance balances of $5.8 million and $5.6
million,
19
respectively. The increase in the allowance balance during the current quarter
included a recovery of $27,000.
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 December 31, 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.
NON-INTEREST INCOME. Non-interest income attributed to fees, service charges and
miscellaneous income was virtually unchanged, increasing $3,000 year-over-year
to $620,000 during the three months ended December 31, 2006. Fees and service
charges from operations and the Bank's retail branch network were lower by
$13,000 but miscellaneous income increased $16,000 compared to the year earlier
quarter. The quarter ended December 31, 2005 included non-recurring loan
prepayment fees of $73,000. Management plans to introduce an overdraft privilege
program for the Bank's retail customers as a way of increasing fee income.
There was a gain on sale of securities during the quarter ended December 31,
2006 of $152,000 but no gain during the comparative quarter ended December 31,
2005.
NON-INTEREST EXPENSE. Total non-interest expense increased $1.1 million, or
10.9%, to $11.2 million for the three months ended December 31, 2006, from $10.1
million for the three months ended December 31, 2005. The increase resulted
primarily from increases in salaries and employee benefits, net occupancy
expense of premises, equipment expense and advertising expense, partially offset
by directors' compensation expense.
Salaries and employee benefits increased $986,000, or 17.1%, to $6.7 million for
the quarter ended December 31, 2006, compared to $5.8 million for the quarter
ended December 31, 2005. Management attributes the increase primarily to the
2005 Stock Compensation and Incentive Plan approved at the Company's annual
stockholders' meeting held in October 2005, which resulted in an expense of
$933,000 during the quarter ended December 31, 2006; a $653,000 increase
compared to $280,000 recorded in the quarter ended December 31, 2005. The
current quarter included Employee Stock Ownership Plan compensation expense of
$595,000, an increase of $132,000 compared to $463,000 during the quarter ended
December 31, 2005 due to an increase in the Company's average stock price,
year-over-year. Year-over-year, there were increases totaling approximately
$201,000 in other components of salaries and employee benefits, including a
decrease of $49,000 in compensation expense, an increase of $104,000 in pension
expense, an increase in other benefits expense of $95,000 and a $51,000 increase
in payroll taxes expense due primarily to vesting of restricted stock.
Year-over-year, net occupancy expense of premises increased $52,000 to $841,000
from $789,000. The increase resulted principally from a $53,000 increase in
property taxes expense attributed to the Bank's facilities. Increases in rent
expense, net, depreciation expense and utilities expense of $10,000, $30,000 and
8,000, respectively, were offset by a $47,000 decrease in repairs and
maintenance expense.
Equipment expense increased $21,000, with an expense in both quarters of
approximately $1.1 million. An increase in service bureau expense of $80,000 was
partially offset by a decrease of $59,000 in maintenance expense.
20
Advertising expense increased $24,000 to $409,000, compared to $385,000 during
the same period in the prior year, due to an extensive advertising campaign to
promote special certificate of deposit and tiered money market deposit account
interest rates. There were also advertising campaigns focused on loan products
and celebration of the first year anniversary of the Bank's retail branch
opening in Lacey Township, New Jersey.
Directors' compensation decreased $21,000, to $561,000 during the quarter ended
December 31, 2006, compared to $582,000 in the quarter ended December 31, 2005.
An increase of $95,000 attributed to the 2005 Stock Compensation and Incentive
Plan approved at the Company's annual stockholders' meeting held in October
2005, was offset by $80,000 and $36,000 decreases in directors' fees and other
director compensation, respectively. The Company's obligation to pay advisory
board fees in connection with its acquisition of West Essex Bancorp ended in
June 2006, which contributed to lower directors' fees while other forms of
director compensation decreased due to the Board's decision to freeze its
incentive compensation plan for the time being.
Though miscellaneous expenses were unchanged at $1.2 million between comparative
periods, there were several variances of note, year-over-year. Included in the
current quarter were increases in both legal and professional and consulting
fees of $79,000 and $36,000, respectively, which management attributes to
ongoing evaluation and implementation of growth and diversification strategies
related to execution of the Company's business plan. Meanwhile, expenses
attributed to the Company's annual meeting decreased $57,000, since the earlier
quarter contained all of the cost from the first annual meeting held in October
2005 and management began to accrue for the cost of the 2006 meeting. The
quarter ended December 31, 2005 also included a settlement for $51,000 with the
New Jersey Division of Taxation resulting from a use tax audit covering the
previous five years.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased $488,000,
or 84.6%, to $89,000 for the quarter ended December 31, 2006, from $577,000 for
the quarter ended December 31, 2005. The effective income tax rate was 14.0% for
the three months ended December 31, 2006, as compared to 19.9% for the three
months ended December 31, 2005. The effective tax rate declined due to interest
from tax-exempt securities becoming a greater percentage of net income as net
income declined. Tax-exempt interest reduced the Company's federal income
expense by approximately $420,000 during the quarter ended December 31, 2006,
compared to a reduction of approximately $603,000 in the quarter ended December
31, 2005. Management is liquidating the municipal bond portfolio due to the
decline in pre-tax income which reduces the advantage of holding tax-exempt
instruments as well as the low yield on the portfolio.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 AND
2005
GENERAL. Net income for the six months ended December 31, 2006 was $1.5 million
or $0.02 per share, a decrease of $3.8 million, or 71.7%, from $5.3 million or
$0.07 per share for the six months ended December 31, 2005. The decrease in net
income resulted primarily from a decrease in net interest income and an increase
in non-interest expense, particularly salaries and employee benefits and
directors' compensation due to the cost of stock compensation plans.
NET INTEREST INCOME. Net interest income for the six months ended December 31,
2006 was $22.9 million, a decrease of $2.4 million, or 9.5%, compared to $25.3
million for the six months ended December 31, 2005. The decrease in net interest
income was due for the most part to a significant increase in interest expense
only partially offset by an increase in interest income. To a lesser degree, a
reduction in the volume of interest-earnings assets versus interest-bearing
liabilities contributed to the decrease in net interest income.
21
The Bank's net interest rate spread decreased 33 basis points to 1.76% for the
six months ended December 31, 2006, from 2.09% for the six months ended December
31, 2005. The cost of average interest-bearing liabilities increased 87 basis
points, from 2.47% for the six months ended December 31, 2005, to 3.34% for the
six months ended December 31, 2006. During the six months ended December 31,
2006, the yield on average interest-earning assets increased 54 basis points, to
5.10% for the six months ended December 31, 2006, from 4.56% for the six months
ended December 31, 2005. Interest-bearing liabilities continued to re-price
faster than interest-earning assets during the six months ended December 31,
2006, due to both the promotional interest rates utilized to attract new
deposits, which also affected the rollover rates on maturing certificates of
deposit, as well as offering generally higher non-promotional interest rates
resulting from competitive pressures in the market place. During the comparative
period, management had temporarily ceased offering promotional interest rates, a
strategy which began earlier in 2005, but was forced to resume those efforts to
address the deposit outflows when the promotions ceased.
The Bank's net interest margin decreased 16 basis points to 2.46% for the six
months ended December 31, 2006, compared with 2.62% for the six months ended
December 31, 2005. Average interest-earning assets during the six months ended
December 31, 2006 were $1.86 billion or $71.0 million less than average
interest-earning assets of $1.93 billion during the six months ended December
31, 2005. The decrease resulted in part from use of cash to fund deposit
outflows and reduce borrowed money as well as fund stock repurchases. Average
interest-bearing liabilities during the six months ended December 31, 2006 were
$1.47 billion or $45.1 million less than average interest-bearing liabilities of
$1.51 billion during the six months ended December 31, 2005. The ratio of
average interest-earning assets to average interest-bearing liabilities was
126.8% for the six months ended December 31, 2006, compared to 127.7% for the
six months ended December 31, 2005.
INTEREST INCOME. Total interest income increased $3.4 million, or 7.7%, to $47.4
million for the six months ended December 31, 2006, from $44.0 million for the
six months ended December 31, 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 $4.7 million, or 28.1%, to $21.4
million for the six months ended December 31, 2006, from $16.7 million for the
six months ended December 31, 2005 due primarily to growth in the portfolio as
well as an improvement in yield. The average balance of net loans receivable
increased $150.1 million to $744.1 million during the six months ended December
31, 2006, from $594.0 million during the six months ended December 31, 2005. The
increase resulted from continuing implementation of the Bank's business plan
which calls for increasing the loan portfolio while reducing the securities
portfolio. Average net loans receivable constituted 40.0% of average
interest-earning assets for the six months ended December 31, 2006, as compared
to 30.8% for the same period a year ago. By contrast, average securities
constituted 47.3% of average interest-earning assets for the six months ended
December 31, 2006, as compared to 64.5% for the six months ended December 31,
2005. During the six months ended December 31, 2006, the Bank purchased
approximately $42.8 million in loans from mortgage companies compared to
approximately $3.8 million during the same period a year earlier due to the
slowing real restate market, which affected the Bank's ability to originate
loans internally. The yield on average net loans receivable increased 14 basis
points to 5.75% for the six months ended December 31, 2006, compared to 5.61%
for the six months ended December 31, 2005. The improvement in yield
year-over-year was due in part to growth in the nonresidential mortgage
category.
Interest income from mortgage-backed securities decreased $888,000, or 5.2%, to
$16.1 million for the six months ended December 31, 2006, compared to $17.0
million for the six months ended December 31, 2005 due to a significant
reduction in the portfolio partially offset by an improvement in yield. The
average balance of mortgage-backed securities decreased $69.0 million to $679.4
million for the six months ended December 31, 2006, from $748.4 million for the
six months ended December 31, 2005. The yield on average mortgage-backed
securities increased 20 basis points to 4.74% for the six months ended December
31, 2006, from 4.54% for the six months ended December 31, 2005.
22
The decrease in the average balance of mortgage-backed securities,
year-over-year, resulted from the redeployment of principal payments into loan
originations. The increase in yield resulted from rate adjustments in
pass-through certificates containing adjustable rate mortgages. Excluding CRA
eligible securities which are fixed rate, when redeploying cash flows from the
portfolio back into mortgage-backed securities, management routinely reinvested
in adjustable rate product, preferably seasoned 3/1 and 5/1 adjustable rate
mortgages such that the first rate change date and conversion to a one-year
adjustable product may be less than six or five years away. By sacrificing
higher yields on fixed rate securities in the short-term, the Bank gained some
interest rate risk protection in the future.
Interest income from securities decreased $4.6 million, or 52.9%, to $4.1
million during the six months ended December 31, 2006, from $8.7 million during
the six months ended December 31, 2005 due to a substantial reduction in the
portfolio partially offset by an improvement in yield. The average balance of
securities decreased $295.2 million to $199.9 million for the six months ended
December 31, 2006, compared to $495.1 million for the six months ended December
31, 2005. The decrease in the average balance was due primarily to the sale of
the Bank's entire portfolio of government agency notes, with an amortized cost
of $249.0 million, and Freddie Mac common stock with a fair value of $8.9
million, in February 2006. Those sales were followed by a sale of municipal
bonds, with an amortized cost of $105.7 million during the six months ended
December 31, 2006. During the comparative period, management was still
reinvesting cash flows from maturing securities back into the portfolio,
primarily in the tax-exempt category, due to nominally higher coupons as well as
higher tax equivalent yields. However, the decline in pre-tax income reduces the
advantage of holding tax-exempt instruments. The yield on average securities
improved 54 basis points from 3.51% for the six months ended December 31, 2005,
to 4.05% for the six months ended December 31, 2006. The higher yield on
securities resulted from the sale of the government agency notes and municipal
bonds. The yield on the notes was 3.22% at the time of their sale. The yield on
the bonds was 3.78% at June 30, 2006, with the remaining balance of the
portfolio yielding 3.73% at December 31, 2006.
Interest income from other interest-earning assets increased $4.2 million, or
262.5%, to $5.8 million for the six months ended December 31, 2006, from $1.6
million for the six months ended December 31, 2005. This was a result of a
significant increase in the average balance of other interest-earning assets as
well as an improvement in yield. There was a $143.0 million increase in the
average balance of other interest-earning assets to $234.7 million for the six
months ended December 31, 2006, from $91.7 million for the six months ended
December 31, 2005. There was a 142 basis point increase in the yield on average
other interest-earning assets to 4.97% for the six months ended December 31,
2006, from 3.55% for the six months ended December 31, 2005, due to increases in
short-term interest rates year-over-year, particularly the rate paid on
overnight deposits as well as the dividend yield on Federal Home Loan Bank
("FHLB") of New York capital stock. 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 FHLB capital stock of $5.0 million due to a repurchase
by FHLB to meet regulatory requirements. Management reinvested the proceeds from
the sales of securities in cash equivalents pending redeployment into other
earning assets.
..
INTEREST EXPENSE. Total interest expense increased $5.8 million, or 31.0%, to
$24.5 million for the six months ended December 31, 2006, from $18.7 million for
the six months ended December 31, 2005. Year-over-year, there was a significant
increase in interest expense attributed to deposits and a nominal decrease in
interest expense from borrowings.
Interest expense from deposits increased $5.9 million, or 34.9%, to $22.8
million for the six months ended December 31, 2006, from $16.9 million for the
six months ended December 31, 2005. The
23
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 91 basis points to 3.25% for the six months ended December
31, 2006, from 2.34% for the six months ended December 31, 2005. The average
balance of interest-bearing deposits decreased $42.6 million to $1.41 billion
for the six months ended December 31, 2006, from $1.45 billion for the six
months ended December 31, 2005. During the year, management offered promotional
rates on selected certificates of deposit maturities and tiered money market
deposit accounts in an effort to retain and attract deposits. This strategy had
a significant effect on the Bank's cost of funds year-over-year. Midway through
the quarter ended December 31, 2006, management began to back away from this
strategy in an attempt to mitigate margin compression. With respect to the same
period a year ago, the Bank reacted to competitive pressures in the market place
earlier in 2005 by offering a premium short-term interest rate, which attracted
new money in the form of certificates of deposit and then ceased offering
promotional interest rates due to the rising cost of funds.
Interest expense from Federal Home Loan Bank advances decreased $70,000, or
4.1%, virtually unchanged at $1.7 million, year-over-year. Average borrowings
decreased $2.1 million to $60.0 million for the six months ended December 31,
2006, from $62.1 million for the six months ended December 31, 2005. The cost of
average borrowings was unchanged at 5.56%. The decrease in the average balance
resulted from scheduled principal payments on amortizing advances and to a
limited degree the maturity of a $5.0 million advance in November 2006.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $138,000, to
$277,000 for the six months ended December 31, 2006, from a $139,000 provision
recorded during the six months ended December 31, 2005. Management attributes
the increase principally to growth in the loan portfolio. Total loans increased
to $798.1 million at December 31, 2006 from $708.0 million at June 30, 2006.
Asset quality continued to be strong as non-performing loans were $639,000, or
0.08% of total loans at December 31, 2006, as compared to $1.0 million, or 0.14%
of total loans at June 30, 2006. The allowance for loan losses as a percentage
of total loans outstanding was 0.72% at December 31, 2006 and 0.77% at June 30,
2006, reflecting allowance balances of $5.8 million and $5.5 million,
respectively. The increase in the allowance balance during the six months ended
December 31, 2006 included a recovery of $27,000 and no charge-offs compared to
a recovery and charge-off of $5,000 and $6,000, respectively, during the six
months ended December 31, 2005.
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 December 31, 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.
NON-INTEREST INCOME. Non-interest income attributed to fees, service charges and
miscellaneous income increased $64,000, or 5.7%, to $1.2 million during the six
months ended December 31, 2006 compared to $1.1 million during the six months
ended December 31, 2005. Fees and service charges from operations and the Bank's
retail branch network decreased by $62,000 but miscellaneous income increased
$126,000 compared to the year earlier period. Income from bank owned life
insurance increased $58,000 due to the purchase of additional insurance during
the six months ended December 31, 2005. During the six months ended December 31,
2005, fees and service charges included non-recurring loan prepayment fees of
$85,000 compared to $1,000 in 2006. There was also a loss on sale of real estate
owned of $35,000 recorded during the six months ended December 31, 2005 with no
such loss in the current period.
24
There was a gain on sale of securities during the six months ended December 31,
2006 of $152,000 compared to $86,000 during the six months ended December 31,
2005.
NON-INTEREST EXPENSE. Total non-interest expense increased $2.8 million, or
14.4%, to $22.3 million for the six months ended December 31, 2006, from $19.5
million for the six months ended December 31, 2005. The increase resulted
primarily from increases in salaries and employee benefits and directors'
compensation with nominal increases in net occupancy expense of premises,
equipment expense, advertising expense and miscellaneous expense.
Salaries and employee benefits increased $2.2 million, or 19.3%, to $13.6
million for the six months ended December 31, 2006, compared to $11.4 million
for the six months ended December 31, 2005. Management attributes the increase
primarily to the 2005 Stock Compensation and Incentive Plan approved at the
Company's annual stockholders' meeting held in October 2005, which resulted in
an expense of $1.9 million during the six months ended December 31, 2006; a $1.6
million increase compared to $280,000 recorded in the six months ended December
31, 2005. The current six months included Employee Stock Ownership Plan
compensation expense of $1.1 million, an increase of $222,000 compared to
$922,000 during the six months ended December 31, 2005 due to an increase in the
Company's average stock price, year-over-year. Other components of salaries and
employee benefits increased $389,000 compared to the prior year, including
increases of $80,000 and $36,000 in compensation expense and pension expense,
respectively, both due to normal salary increases, an increase in other benefits
expense of $231,000 due principally to employee health insurance and a $42,000
increase in payroll taxes expense due primarily to vesting of restricted stock.
Net occupancy expense of premises increased $14,000, virtually unchanged at $1.7
million, year-over-year. Rental income from surplus retail branch space resulted
in a $29,000 decrease in rent expense, net, and repairs and maintenance expense
decreased $72,000. They were offset by increases in property taxes expense,
depreciation expense and utilities expense of $22,000, $58,000 and $36,000,
respectively. The Bank leases surplus space in retail branch facilities in
Springfield and River Vale and will begin receiving rental income from the
Pleasantdale office in West Orange beginning in January 2007.
Equipment expense increased $44,000 to $2.2 million from $2.1 million during the
six months ended December 31, 2005. An increase in service bureau expense of
$89,000, resulting from higher data processing costs and depreciation expense of
$9,000 were partially offset by a decrease of $54,000 in repairs and maintenance
expense.
Advertising expense increased $92,000 to $802,000, compared to $710,000 during
the same period in the prior year, due to an extensive advertising campaign to
publicize promotional interest rates for certificates of deposit, tiered money
market deposit accounts and StarBanking, a bundled services package. There were
also extensive advertising campaigns focused on the Bank's loan products.
Directors' compensation increased $406,000, to $1.2 million during the six
months ended December 31, 2006, compared to $812,000 during the six months ended
December 31, 2005. An increase of $486,000 attributed to the 2005 Stock
Compensation and Incentive Plan approved at the Company's annual stockholders'
meeting held in October 2005, was partially offset by an $118,000 decrease in
directors' fees. The Company's obligation to pay advisory board fees in
connection with its acquisition of West Essex Bancorp ended in June 2006, which
contributed to lower directors' fees while other forms of compensation,
including the directors' incentive compensation plan increased $38,000. The
directors' incentive compensation plan was not frozen until the quarter ended
December 31, 2006.
25
Though miscellaneous expenses were virtually unchanged at $2.2 million,
increasing $14,000 between comparative periods, there were several variances of
note, year-over-year. Included in the current quarter were increases in both
legal and professional and consulting fees of $64,000 and $26,000, respectively,
which management attributes to ongoing evaluation and implementation of growth
and diversification strategies related to execution of the Company's business
plan. The six months ended December 31, 2005 also included a settlement for
$51,000 with the New Jersey Division of Taxation resulting from a use tax audit
covering the previous five years.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased $1.4, or
87.5%, to $165,000 for the six months ended December 31, 2006, from $1.6 million
for the six months ended December 31, 2005. The effective tax rate was 10.1% for
the six months ended December 31, 2006, as compared to 22.8% for the six months
ended December 31, 2005. The effective tax rate declined due to interest from
tax exempt securities becoming a greater percentage of net income as net income
declined. Tax-exempt interest reduced the Company's federal income expense by
approximately $1.0 million during the six months ended December 31, 2006,
compared to a reduction of approximately $1.2 million during the six months
ended December 31, 2005. Management is liquidating the municipal bond portfolio
due to the decline in pre-tax income which reduces the advantage of holding
tax-exempt instruments as well as the low yield on the portfolio. 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.
26
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 overnight 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, to the extent
that the Bank does not need the funds for loan originations, management expects
to maintain liquidity at an elevated level as long as the Treasury yield curve
remains inverted or flat.
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, 2006,
the Bank had outstanding commitments to originate loans of $10.7 million,
commitments to fund the purchase of loans on a flow basis of $55.9 million,
construction loans in process of $9.5 million and unused lines of credit of
$28.2 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 for certificates of
deposit with those terms during the quarter ended September 30, 2006 as well as
a promotional rate for a tiered money market deposit account. The program
continued until midway through the current quarter when the Bank ceased to offer
promotional rates on certificates of deposit. Management reduced the most costly
tier on the tiered money market deposit account in January 2007.
Certificates of deposit increased $70.7 million from $883.1 million at June 30,
2006 to $953.8 million at December 31, 2006 while interest-bearing transaction
accounts increased $17.7 million from $122.1 million at June 30, 2006 to $139.8
million at December 31, 2006, with most of the increase attributed to tiered
money market deposit accounts. Certificates of deposit scheduled to mature in
one year or less at December 31, 2006 totaled $831.5 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, given management's more conservative pricing strategy implemented in
late October 2006, the Bank could face significant deposit outflows during 2007.
The Bank's substantial liquidity position, which includes $285.9 million in cash
and cash equivalents at December 31, 2006, provides a cushion for deposit
outflows, if they occur.
Borrowings from the Federal Home Loan Bank ("FHLB") of New York are available to
supplement the Bank's liquidity position and to the extent that maturing
deposits do not remain with us, they may need to be replaced with borrowings. At
December 31, 2006, advances from the FHLB amounted to $55.8 million. The Bank
has the capacity to borrow additional funds from the FHLB, through an overnight
line of credit of $200.0 million or by taking additional short-term or long-term
advances.
27
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, 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 December 31, 2006,
as compared to the minimum regulatory capital requirements:
December 31, 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) $ 378,691 46.34% $ 65,381 8.00% $ 81,726 10.00%
Tier 1 Capital
(to risk-weighted assets) $ 372,936 45.63% - - $ 49,036 6.00%
Core (Tier 1) Capital
(to adjusted total assets) $ 372,936 19.28% $ 58,024 3.00% $ 96,707 5.00%
Tangible Capital
(to adjusted total assets) $ 372,936 19.28% $ 29,012 1.50% - -
In December 2006, the Bank received approval from the Office of Thrift
Supervision for a $15.0 million capital distribution to the Company. The cash
dividend was paid in January 2007.
28
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.
29
The following table sets forth the Bank's NPV as of September 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 December 31,
2006.
At September 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 290,401 -129,994 -31% 15.90% -541 bp
+200 bp 334,873 -85,521 -20% 17.85% -346 bp
+100 bp 378,786 -41,609 -10% 19.67% -164 bp
0 bp 420,395 - - 21.31% -
-100 bp 457,349 +36,954 +9% 22.69% +138 bp
-200 bp 488,198 +67,803 +16% 23.77% +246 bp
(1) The -300 bp scenario is not shown due to the low prevailing interest rate
environment.
This analysis also indicated that as of September 30, 2006 an immediate and
permanent 2.00% increase in interest rates would cause an approximately 7.57%
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.
30
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.
31
PART II
ITEM 1. Legal Proceedings
-----------------
At December 31, 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 has 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 December 31, 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)
--------------------------------------------------------------------------------
October 1-31, 2006 170,500 $15.25 170,500 637,763
--------------------------------------------------------------------------------
November 1-30, 2006 180,500 $16.68 180,500 457,263
--------------------------------------------------------------------------------
December 1-3, 2006 457,263 $16.48 457,263 0
--------------------------------------------------------------------------------
Total 808,263 $16.27 808,263 -
--------------------------------------------------------------------------------
(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. On
January 18, 2007, the Company announced an additional five percent stock
repurchase plan (approximately 1,036,634 shares).
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 23, 2006. There were outstanding
and entitled to vote at the Meeting 72,624,900 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 69,309,563
shares of Common Stock representing 95.4% of the total
eligible votes to be cast. Proposal 1 was to elect three
directors of the Company. Proposal 2 was to ratify the
appointment of the independent auditor for the fiscal year
ending June 30, 2007. The result of the voting at the
Meeting is as follows:
PROPOSAL 1:
Henry S. Parow FOR: 68,562,286 WITHHELD: 747,277
John N. Hopkins FOR: 69,235,059 WITHHELD: 74,504
Leopold W. Montanaro FOR: 69,233,166 WITHHELD: 76,397
PROPOSAL 2:
Ratification of the appointment of Beard Miller Company LLP as independent auditor.
FOR: 69,233,359
AGAINST: 37,871
ABSTAIN: 38,333
32
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 Employment Agreement between Kearny Federal Savings Bank and Craig L. Montanaro (2)
10.9 Directors Consultation and Retirement Plan (1)
10.10 Benefit Equalization Plan (1)
10.11 Benefit Equalization Plan for Employee Stock Ownership Plan (1)
10.12 Stock Option Plan (3)
10.13 Restricted Stock Plan (3)
10.14 Kearny Federal Savings Bank Director Life Insurance Agreement (4)
10.15 Kearny Federal Savings Bank Executive Life Insurance Agreement (4)
11.0 Statements re: computation of per share earnings (Filed herewith).
31.0 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.0 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
------------------------------
(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 exhibit to the
Registrant's Form 8-K filed on July 21, 2005. (File No.
000-51093).
(3) Incorporated by reference to the Registrant's
definitive proxy statement filed September 30, 2005
(File No. 000-51093).
(4) Incorporated by reference to the exhibits to the
Registrant's Form 8-K filed on August 18, 2005. (File
No. 000-51093).
33
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 8, 2007 By: /s/ John N. Hopkins
---------------- ---------------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly authorized officer and principal
executive officer)
Date: February 8, 2007 By: /s/ William C. Ledgerwood
---------------- -------------------------------------------
William C. Ledgerwood
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
34