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, 2007
---------------------------------------
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, 2008.
$0.10 par value common stock - 70,722,937 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, 2007 and June 30, 2007 (Unaudited) 1
Consolidated Statements of Income for the Three Months and Six Months
Ended December 31, 2007 and 2006 (Unaudited) 2-3
Consolidated Statements of Changes in Stockholders' Equity for the Six
Months Ended December 31, 2007 and 2006 (Unaudited) 4-5
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2007 and 2006 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-12
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-27
Item 3: Quantitative and Qualitative Disclosure About Market Risk 28-29
Item 4: Controls and Procedures 30
PART II - OTHER INFORMATION 31-32
SIGNATURES 34
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands, Except Share Data, Unaudited)
December 31, June 30,
2007 2007
----------- -----------
Assets
------
Cash and amounts due from depository institutions $ 20,976 $ 18,999
Interest-bearing deposits in other banks 153,435 144,342
----------- -----------
Cash and Cash Equivalents 174,411 163,341
Securities available for sale (amortized cost $45,594 and $90,580) 44,236 88,869
Loans receivable, including net deferred loan costs of $1,061 and $1,511 967,590 866,542
Less allowance for loan losses (6,143) (6,049)
----------- -----------
Net Loans Receivable 961,447 860,493
Mortgage-backed securities available for sale (amortized cost $684,311
and $655,123) 687,858 643,779
Premises and equipment 34,671 35,369
Federal Home Loan Bank of New York ("FHLB") stock 13,148 4,162
Interest receivable 8,439 8,028
Goodwill 82,263 82,263
Bank owned life insurance 15,430 15,154
Other assets 8,983 15,795
----------- -----------
Total Assets $ 2,030,886 $ 1,917,253
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits:
Non-interest bearing $ 53,452 $ 56,339
Interest-bearing 1,261,937 1,355,374
----------- -----------
Total Deposits 1,315,389 1,411,713
Advances from FHLB 228,165 28,488
Advance payments by borrowers for taxes 5,147 5,460
Other liabilities 8,663 9,000
----------- -----------
Total Liabilities 1,557,364 1,454,661
----------- -----------
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 issued; 70,906,537 and 71,143,337 shares outstanding, respectively 7,274 7,274
Paid-in capital 200,677 197,976
Retained earnings 305,517 304,970
Unearned Employee Stock Ownership Plan shares; 1,333,521 shares
and 1,406,258 shares, respectively (13,335) (14,063)
Treasury stock, at cost; 1,830,963 shares and 1,594,163 shares, respectively (27,274) (24,361)
Accumulated other comprehensive income (loss) 663 (9,204)
----------- -----------
Total Stockholders' Equity 473,522 462,592
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,030,886 $ 1,917,253
=========== ===========
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,
-------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Interest Income:
Loans $ 13,937 $ 11,075 $ 27,108 $ 21,386
Mortgage-backed securities 8,583 8,077 16,786 16,098
Securities:
Taxable 335 390 687 790
Tax-exempt 204 1,376 753 3,261
Other interest-earning assets 1,552 3,169 2,690 5,836
-------- -------- -------- --------
Total Interest Income 24,611 24,087 48,024 47,371
-------- -------- -------- --------
Interest Expense:
Deposits 10,974 12,096 22,224 22,841
Borrowings 1,974 807 2,765 1,658
-------- -------- -------- --------
Total Interest Expense 12,948 12,903 24,989 24,499
-------- -------- -------- --------
Net Interest Income 11,663 11,184 23,035 22,872
Provision for Loan Losses - 119 94 277
-------- -------- -------- --------
Net Interest Income after Provision
for Loan Losses 11,663 11,065 22,941 22,595
-------- -------- -------- --------
Non-Interest Income:
Fees and service charges 327 276 662 504
Gain (loss) on sale of securities
available for sale (2) 152 5 152
Miscellaneous 344 344 714 684
-------- -------- -------- --------
Total Non-Interest Income 669 772 1,381 1,340
-------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 6,002 6,746 12,325 13,553
Net occupancy expense of
Premises 902 841 1,792 1,699
Equipment 1,087 1,100 2,123 2,176
Advertising 155 409 406 802
Federal insurance premium 140 142 281 284
Amortization of intangible assets 60 159 219 318
Directors' compensation 550 561 1,110 1,218
Miscellaneous 1,203 1,243 2,204 2,247
-------- -------- -------- --------
Total Non-Interest Expenses 10,099 11,201 20,460 22,297
-------- -------- -------- --------
Income before Income Taxes 2,233 636 3,862 1,638
Income Taxes 857 89 1,456 165
-------- -------- -------- --------
Net Income $ 1,376 $ 547 $ 2,406 $ 1,473
======== ======== ======== ========
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,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Net Income per Common
Share (EPS):
Basic $ 0.02 $ 0.01 $ 0.03 $ 0.02
Diluted 0.02 0.01 0.03 0.02
Weighted Average Number of
Common Shares Outstanding:
Basic 68,808 69,258 68,763 69,505
Diluted 68,957 69,753 68,946 69,901
Dividends Declared Per Common
Share $ 0.05 $ 0.05 $ 0.10 $ 0.10
See notes to consolidated financial statements.
3
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 Other
---------------- Paid-In Retained ESOP Treasury Comprehensive
Shares Amount Capital Earnings Shares Stock (Loss) Total
------ ------ -------- -------- -------- -------- -------- --------
Balance - June 30, 2006 72,737 $7,274 $192,534 $306,728 $(15,517) $ - $(15,885) $475,134
Comprehensive income:
Net income - - - 1,473 - - - 1,473
Realized gain on securities available
for sale, net of income tax of $53 - - - - - - (99) (99)
Unrealized gain on securities available
for sale, net of deferred income tax
of $5,676 - - - - - - 10,542 10,542
--------
Total Comprehensive income 11,916
--------
ESOP shares committed to be released
(72 shares) - - 391 - 727 - - 1,118
Stock option expense - - 996 - - - - 996
Treasury stock purchases (1,091) - - - - (17,398) - (17,398)
Treasury stock reissued 3 - (8) - - 40 - 32
Restricted stock plan shares
purchased (54 shares) - - (789) - - - - (789)
Restricted stock plan shares earned
(134 shares) - - 1,652 - - - - 1,652
Tax effect from stock based
compensation - - 434 - - - - 434
Cash dividends declared ($0.10/share) - - - (1,814) - - - (1,814)
------ ------ -------- -------- -------- -------- -------- --------
Balance - December 31, 2006 71,649 $7,274 $195,210 $306,387 $(14,790) $(17,358) $ (5,442) $471,281
====== ====== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
4
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended December 31, 2007
(In Thousands, Except Per Share Data, Unaudited)
Accumulated
Common Stock Unearned Other
---------------- Paid-In Retained ESOP Treasury Comprehensive
Shares Amount Capital Earnings Shares Stock (Loss) Total
------ ------ -------- -------- -------- -------- -------- --------
Balance - June 30, 2007 71,143 7,274 $197,976 $304,970 $(14,063) $(24,361) $(9,204) $462,592
Comprehensive income:
Net income - - - 2,406 - - - 2,406
Realized gain on securities available
for sale, net of income tax of $3 - - - - - - (2) (2)
Unrealized gain on securities available
for sale, net of deferred income tax
of $5,814 - - - - - - 9,435 9,435
Benefit plans, net of deferred income
tax of $289 - - - - - - 434 434
--------
Total Comprehensive income 12,273
--------
ESOP shares committed to be released
(72 shares) - - 200 - 728 - - 928
Dividends contributed for payment of
ESOP loan - - 24 - - - - 24
Stock option expense - - 954 - - - - 954
Treasury stock purchases (241) - - - - (2,989) - (2,989)
Treasury stock reissued 5 - (13) - - 76 - 63
Restricted stock plan shares earned
(126 shares) - - 1,542 - - - - 1,542
Tax effect from stock based
compensation - - (6) - - - - (6)
Cash dividends declared ($0.10/share) - - - (1,859) - - - (1,859)
------ ------ -------- -------- -------- -------- ------- --------
Balance - December 31, 2007 70,907 $7,274 $200,677 $305,517 $(13,335) $(27,274) $ 663 $473,522
====== ====== ======== ======== ======== ======== ======= ========
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,
----------------------
2007 2006
--------- ---------
Cash Flows from Operating Activities:
Net income $ 2,406 $ 1,473
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 933 992
Net amortization of premiums, discounts and loan fees and costs 367 464
Deferred income taxes 747 2,377
Amortization of intangible assets 220 318
Amortization of benefit plans' unrecognized net loss, net of gain
from curtailment and tax effects 57 -
Provision for loan losses 94 277
Realized gains on sales of securities available for sale (5) (152)
Increase in cash surrender value of bank owned life insurance (276) (261)
ESOP, stock option plan and restricted stock plan expenses 3,424 3,766
Realized gain on disposition of premises and equipment - (3)
(Increase) decrease in interest receivable (411) 823
Increase in other assets (217) (4,454)
Increase (decrease) in interest payable 962 (21)
Decrease in other liabilities (639) (450)
--------- ---------
Net Cash Provided by Operating Activities 7,662 5,149
--------- ---------
Cash Flows from Investing Activities:
Purchases of securities available for sale (206) (189)
Proceeds from sale of securities available for sale 44,154 105,823
Proceeds from calls and maturities of securities available for sale 656 3,894
Proceeds from repayments of securities available for sale 387 1,246
Purchase of loans (48,141) (42,791)
Net increase in loans receivable (53,000) (47,662)
Purchases of mortgage-backed securities available for sale (95,349) (49,627)
Principal repayments on mortgage-backed securities available for sale 65,887 69,488
Additions to premises and equipment (235) (998)
Proceeds from cash settlement on premises and equipment - 21
Purchase of FHLB stock (9,000) -
Redemption of FHLB stock 14 238
--------- ---------
Net Cash (Used In) Provided by Investing Activities $ (94,833) $ 39,443
--------- ---------
6
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
(In Thousands, Unaudited)
Six Months Ended
December 31,
--------- ---------
2007 2006
--------- ---------
Cash Flows from Financing Activities:
Net (decrease) increase in deposits $ (96,345) $ 36,322
Repayment of long-term FHLB advances (323) (5,304)
Long-term FHLB advances 200,000 -
Decrease in advance payments by borrowers for taxes (313) (394)
Dividends paid to minority stockholders of Kearny Financial Corp. (1,870) (1,855)
Purchase of common stock of Kearny Financial Corp. for treasury (2,989) (17,398)
Treasury stock reissued 63 32
Purchase of common stock of Kearny Financial Corp. for restricted
stock plan - (789)
Dividends contributed for payment of ESOP loan 24 -
Tax (expense) benefit from stock based compensation (6) 434
--------- ---------
Net Cash Provided by Financing Activities $ 98,241 $ 11,048
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents $ (11,070) $ 55,640
Cash and Cash Equivalents - Beginning 163,341 230,279
--------- ---------
Cash and Cash Equivalents - Ending $ 174,411 $ 285,919
========= =========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the year for:
Income taxes, net of refunds $ 868 $ 1,247
========= =========
Interest $ 24,027 $ 24,520
========= =========
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 ("GAAP"). However, in the opinion of management,
all adjustments (consisting of normal adjustments) necessary for a fair
presentation of the consolidated financial statements have been included. The
results of operations for the three-month and six-month periods ended December
31, 2007, are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other period.
The data in the consolidated statements of financial condition for June 30, 2007
was derived from the Company's annual report on Form 10-K. That data, along with
the interim financial information presented in the consolidated statements of
financial condition, income, changes in stockholders' equity and cash flows
should be read in conjunction with the 2007 consolidated financial statements,
including the notes thereto included in the Company's annual report on Form
10-K.
3. NET INCOME PER COMMON SHARE ("EPS")
--------------------------------------
Basic EPS is based on the weighted average number of common shares actually
outstanding adjusted for Employee Stock Ownership Plan ("ESOP") shares not yet
committed to be released and unvested restricted stock awards. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock, such as unvested restricted stock awards and
outstanding stock options, were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. Diluted EPS is calculated by adjusting the weighted average number of
shares of common stock outstanding to include the effect of contracts or
securities exercisable or which could be converted into common stock, if
dilutive, using the treasury stock method. Shares issued and reacquired during
any period are weighted for the portion of the period they were outstanding.
8
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, 2007 December 31, 2007
-------------------------------------- ------------------------------------------
Income Shares Per Income Shares Per
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
Net income $ 1,376 $ 2,406
========== ==============
Basic earnings per share,
income available to
common stockholders $ 1,376 68,808 $ 0.02 $ 2,406 68,763 $ 0.03
========== ==========
Effect of dilutive securities:
Stock options - 4 - 9
Restricted stock awards - 145 - 174
---------- ------ ---------- -------------- ------ ----------
$ 1,376 68,957 $ 0.02 $ 2,406 68,946 $ 0.03
========== ====== ========== ============== ====== ==========
Three Months Ended Six Months Ended
December 31, 2006 December 31, 2006
-------------------------------------- ------------------------------------------
Income Shares Per Income Shares Per
(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
=========== ====== =========== ============= ====== ==========
4. DIVIDEND WAIVER
-------------------
During the quarter and six months ended December 31, 2007, Kearny MHC, the
federally chartered mutual holding company of the Company waived its right, in
accordance with the non-objection previously granted by the Office of Thrift
Supervision, to receive cash dividends of approximately $2.5 million and $5.1
million, respectively, declared on the shares of Company common stock it owns.
5. STOCK REPURCHASES PLAN
--------------------------
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. During the quarter ended December 31, 2007,
the Company purchased 207,400 shares at a cost of $2.5 million, or approximately
$12.15 per share. The total purchased under this plan through December 31, 2007
was 758,400 shares at a cost of $10.2 million, or approximately $13.40 per
share.
9
xxxx
6. BENEFIT PLANS - COMPONENTS OF NET PERIODIC EXPENSE
The following table sets forth the aggregate net periodic benefit expense for
the Bank's Benefit Equalization Plan, Postretirement Welfare Plan and Directors'
Consultation and Retirement Plan:
Three Months Six Months
Ended December 31, Ended December 31,
-------------------- ---------------------
2007 2006 2007 2006
------ ------ ------ ------
(In Thousands) (In Thousands)
Service cost $ 40 $ 57 $ 79 $ 114
Interest cost 81 85 163 170
Curtailment (Gain) - - (35) -
Amortization of unrecognized transition
obligation 11 11 22 22
Amortization of unrecognized past service
liability 18 14 35 28
Amortization of unrecognized net actuarial loss 36 46 73 92
----- ----- ----- -----
Net periodic benefit expense $ 186 $ 213 $ 337 $ 426
===== ===== ===== =====
Effective July 1, 2007, the Company implemented a freeze on all future benefit
accruals under the Bank's non-contributory defined benefit pension plan and
related benefit equalization plan. A curtailment gain of $682,000 related to the
reduction in the projected benefit obligation for the benefit equalization plan
was applied against the unrecognized net actuarial loss. In addition, a
curtailment gain of $35,000 was recorded as part of the net periodic benefit
expense due to the immediate recognition of the unrecognized prior service cost
for the benefit equalization plan during the quarter ended September 30, 2007.
7. NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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.
SFAS 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. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS No. 157 on its consolidated
financial condition, results of operations and cash flows.
In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
"Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of SFAS No. 157 to non-financial
assets and non-financial liabilities (non-financial items) that are not
recognized or disclosed at fair value in an entity's financial statements on a
recurring basis (at least annually). Therefore, if the change in fair value of a
non-financial item is not required to be recognized or disclosed in the
financial statements on an annual basis or more frequently, the effective date
of application of SFAS No. 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies SFAS No. 157 in
interim or annual financial statements before proposed FSP 157-b is finalized.
The Company is currently evaluating the potential impact, if any, of the
adoption of FSP 157-b on its consolidated financial condition, results of
operations and cash flows.
10
In September 2006, the FASB's Emerging Issues Task Force ("EITF") issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF 06-4").
EITF 06-4 requires the recognition of a liability related to the postretirement
benefits covered by an endorsement split-dollar life insurance arrangement. The
consensus highlights that the employer (who is also the policyholder) has a
liability for the benefit it is providing to its employee. As such, if the
policyholder has agreed to maintain the insurance policy in force for the
employee's benefit during his or her retirement, then the liability recognized
during the employee's active service period should be based on the future cost
of insurance to be incurred during the employee's retirement. Alternatively, if
the policyholder has agreed to provide the employee with a death benefit, then
the liability for the future death benefit should be recognized by following the
guidance in SFAS No. 106 or Accounting Principals Board (APB) Opinion No. 12, as
appropriate. For transition, an entity can choose to apply the guidance using
either of the following approaches: (a) a change in accounting principle through
retrospective application to all periods presented or (b) a change in accounting
principle through a cumulative-effect adjustment to the balance in retained
earnings at the beginning of the year of adoption. The new guidance is effective
for fiscal years beginning after December 15, 2007, with early adoption
permitted. The Company is currently evaluating the impact of adopting EITF Issue
No. 06-4 on its financial statements.
On September 29, 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans", which amends SFAS No.
87 and SFAS No. 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 No. 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS No. 87 and SFAS No. 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 No. 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. The implementation of this standard did not have and is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of SFAS No.
115". SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected will be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for our
Company July 1, 2008. The Company is evaluating the impact that the adoption of
SFAS No. 159 will have on its consolidated financial statements.
In March 2007, the FASB ratified EITF Issue No. 06-10 "Accounting for Collateral
Assignment Split-Dollar Life Insurance Agreements." EITF 06-10 provides guidance
for determining a liability for the postretirement benefit obligation as well as
recognition and measurement of the associated asset on the basis of the terms of
the collateral assignment agreement. EITF 06-10 is effective for fiscal years
beginning after December 15, 2007. The Company is currently assessing the impact
of EITF 06-10 on its consolidated financial position and results of operations.
In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards" ("EITF 06-11"). EITF 06-11 states that an entity should
recognize a realized tax benefit associated with dividends on non-vested equity
shares, non-vested equity share units and outstanding equity share options
charged to retained earnings as an increase in additional paid in capital. The
amount recognized in additional paid in
11
capital should be included in the pool of excess tax benefits available to
absorb potential future tax deficiencies on share-based payment awards. EITF
06-11 should be applied prospectively to income tax benefits of dividends on
equity-classified share-based payment awards that are declared in fiscal years
beginning after December 15, 2007. The Company expects that EITF 06-11 will not
have an impact on its consolidated financial statements.
FASB statement No. 141 (R) "Business Combinations" was issued in December of
2007. This Statement establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. The Statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective as of the beginning of a company's fiscal year
beginning after December 15, 2008. This new pronouncement may have a material
impact on the Company's financial statements in future periods.
Staff Accounting Bulletin ("SAB") No. 110 (SAB 110) amends and replaces Question
6 of Section D.2 of Topic 14 "Share-Based Payment," of the Staff Accounting
Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of
the staff regarding the use of the "simplified" method in developing an estimate
of expected term of "plain vanilla" share options and allows usage of the
"simplified" method for share option grants prior to December 31, 2007. SAB 110
allows public companies which do not have historically sufficient experience to
provide a reasonable estimate to continue use of the "simplified" method for
estimating the expected term of "plain vanilla" share option grants after
December 31, 2007. SAB 110 is effective January 1, 2008. The Company expects
that SAB 110 will not have an impact on its consolidated financial statements.
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Forward-Looking Statements
This Form 10-Q may include certain forward-looking statements based on current
management expectations. The actual results of Kearny Financial Corp. (the
"Company") could differ materially from those management expectations. Factors
that could cause future results to vary from current management expectations
include, but are not limited to, general economic conditions, legislative and
regulatory changes, monetary and fiscal policies of the federal government,
changes in tax policies, rates and regulations of federal, state and local tax
authorities. Additional potential factors include changes in interest rates,
deposit flows, 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, 2007 and June 30, 2007
Total assets increased $113.6 million or 5.9%, to $2.03 billion at December 31,
2007 from $1.92 billion at June 30, 2007. The increase was due primarily to
increases of $100.9 million, $44.1 million and $11.1 million, respectively, in
net loans receivable, mortgage-backed securities and cash and equivalents.
Partially offsetting these increases was a decrease of $44.7 million in
securities.
Cash and cash equivalents, consisting primarily of interest-bearing deposits in
other banks increased $11.1 million or 6.8%, to $174.4 million at December 31,
2007 from $163.3 million at June 30, 2007. The Bank borrowed $200.0 million from
the Federal Home Loan Bank during the six months ended December 31, 2007 to
replenish liquidity depleted by loan originations and deposit outflows.
Between June 30, 2007 and December 31, 2007, the securities portfolio, all of
which is classified as available for sale, decreased $44.7 million or 50.3%, to
$44.2 million from $88.9 million. The decrease resulted from a decrease in
amortized cost of $45.0 million due primarily to the sale of securities,
partially offset by a $353,000 decrease in unrealized losses. During the six
months ended December 31, 2007, management sold securities from the municipal
bond portfolio with an amortized cost of $44.1 million, which resulted in a gain
of $5,000. The decision to sell municipal bonds was prompted by the below market
yield on such bonds as well as the overall decline in the Company's pre-tax
income, which reduces the advantage of holding tax-exempt instruments. With
respect to the remaining municipal bond portfolio, management will continue to
assess its value given the improvement in pre-tax income and declining interest
rates versus a preference for securities that provide a steady cash flow.
Loans receivable, net of deferred fees and costs and the allowance for loan
losses, increased $100.9 million or 11.7%, to $961.4 million at December 31,
2007, compared to $860.5 million at June 30, 2007. Consistent with the Bank's
business plan, management continued to emphasize growth of the loan portfolio to
increase interest income during the six months ended December 31, 2007. Total
loans constituted 47.6% of assets at December 31, 2007, compared to 45.1% at
June 30, 2007.
13
Between June 30, 2007 and December 31, 2007, loan growth was concentrated in
one-to-four family residential first mortgage loans, which increased by $66.9
million to $626.2 million at December 31, 2007. Nonresidential mortgages
increased by $23.1 million to $164.6 million at December 31, 2007. Multi-family
mortgages increased by $2.7 million to $20.4 million at December 31, 2007. Home
equity loans increased by $6.6 million to $120.2 million at December 31, 2007.
Commercial loans increased by $1.8 million and totaled $6.0 million at December
31, 2007. There was a nominal decrease in the disbursed portion of home equity
lines of credit of $320,000 to $12.4 million and the unused balance decreased
$988,000 to $25.2 million at December 31, 2007. Construction loans outstanding
and gross construction loans increased $902,000 to $12.3 million and $6.2
million to $22.7 million, respectively, at December 31, 2007. To supplement the
Bank's in-house loan originations, management purchased one-to-four family
residential mortgages totaling $48.1 million during the six months ended
December 31, 2007. The Bank does not originate or purchase any interest only
mortgages, pay option adjustable rate mortgages or sub-prime mortgages.
Between June 30, 2007 and December 31, 2007, the mortgage-backed securities
portfolio, all of which is classified as available for sale, increased by $44.1
million or 6.8%, to $687.9 million from $643.8 million. The increase resulted
from a $14.9 million decrease in unrealized losses due to declining interest
rates and purchases totaling $95.3 million, partially offset by principal
repayments and maturities of $65.9 million. Management purchased mortgage-backed
securities issued by Fannie Mae or Freddie Mac composed of $55.2 million of
adjustable rate mortgages and $15.3 million of 30 year fixed rate Community
Reinvestment Act eligible issues needed to meet CRA investment requirements.
Management also implemented a nominal leverage strategy utilizing a part of the
proceeds from Federal Home Loan Bank ("FHLB") advances taken during the quarter
ended September 30, 2007 to fund the purchase of $24.8 million of 15 year and 20
year fixed rate mortgage-backed securities. Generally, cash flows from principal
and interest payments were redeployed to fund the purchases of additional
securities. Of particular significance management believes that the Bank does
not have sub-prime exposure in its mortgage-backed securities portfolio.
FHLB of New York stock increased $8.9 million or 211.9%, to $13.1 million at
December 31, 2007, compared to $4.2 million at June 30, 2007 due to a required
purchase of stock related to the $200.0 million increase in advances from FHLB.
The FHLB declared an 8.40% annualized cash dividend for the quarter ended
December 31, 2007, which followed a cash dividend paid at an annualized rate of
8.05% for the quarter ended September 30, 2007.
Deposits decreased $96.3 million or 6.8%, to $1.32 billion at December 31, 2007,
compared to $1.41 billion at June 30, 2007. During the six months, certificates
of deposit, savings deposits and non-interest-bearing demand accounts decreased
$76.3 million, $17.1 million and $2.9 million, respectively. Interest-bearing
demand deposits were virtually unchanged during the period. At December 31,
2007, deposits included certificates of deposit totaling $811.7 million, savings
deposits totaling $301.2 million, non-interest-bearing demand accounts totaling
$53.5 million and interest-bearing demand deposits totaling $149.0 million.
Deposits decreased $73.4 million during the quarter ended September 30, 2007,
but as expected, deposit attrition slowed to $22.9 million during the quarter
ended December 31, 2007 due to the recent reductions in the federal funds rate
by the Federal Reserve Board of Governors, amounting to a 100 basis point cut in
aggregate, which appear to be gradually lowering interest rates in the
marketplace. Management believes the effect of additional interest rate cuts in
the marketplace and investor concerns about the direction of the stock market
may reverse the outflow of deposits during the next quarter.
FHLB advances increased $199.7 million or 700.7%, to $228.2 million at December
31, 2007, compared to $28.5 million at June 30, 2007. The increase in borrowings
resulted primarily from a need to replenish liquidity utilized to fund loan
originations and deposit outflows and make cash available for potential
implementation of growth and diversification strategies related to execution of
the Company's business
14
plan. In the current interest rate environment management considers long-term
advances to be a favorable alternative to certificates of deposit. The $200.0
million in long-term advances have a ten year term. Partially offsetting the
increase was $323,000 in scheduled principal payments on amortizing advances.
During the six months ended December 31, 2007, stockholders' equity increased
$10.9 million or 2.4%, to $473.5 million from $462.6 million at June 30, 2007.
The increase was primarily the result of a $9.9 million increase in accumulated
other comprehensive income due to mark-to-market adjustments to the available
for sale securities portfolio and benefit plan related amortization from
accumulated other comprehensive income pursuant to SFAS No. 158. Also
contributing to the increase was net income for the period of $2.4 million, the
release of $928,000 of Employee Stock Ownership Plan shares and $1.5 million of
restricted stock plan shares and an addition to paid-in capital of $954,000 for
the expensing of stock options. Partially offsetting the increase was a $2.9
million increase in treasury stock due to the purchase of 241,800 shares of the
Company's common stock at a cost of $3.0 million, partially offset by shares
reissued for stock option exercises; and $1.9 million in cash dividends declared
for payment to minority shareholders. The Company's dividend was $0.10 per share
in aggregate for the two quarters.
Comparison of Operating Results for the Three Months Ended December 31, 2007 and
2006
General. Net income for the quarter ended December 31, 2007 was $1.4 million or
$0.02 per diluted share, an increase of $829,000 or 151.6%, from $547,000 or
$0.01 per diluted share for the quarter ended December 31, 2006. The increase in
net income year-over-year resulted from an increase in net interest income and
decreases in the provision for loan losses and in non-interest expense,
partially offset by a decrease in non-interest income and an increase in income
taxes.
Net Interest Income. Net interest income for the quarter ended December 31, 2007
was $11.7 million, an increase of $479,000 or 4.3%, compared to $11.2 million
for the quarter ended December 31, 2006. The increase in net interest income was
due to an increase in interest income, partially offset by an increase in
interest expense.
The Company's net interest rate spread was 1.80% during the quarter ended
December 31, 2007 compared to 1.65% during the quarter ended December 31, 2006.
Year-over-year, the yield on average interest-earning assets increased 24 basis
points to 5.37% while the cost of average interest-bearing liabilities increased
nine basis points to 3.57%. The increase in the yield on average
interest-earning assets was due to increases in the yields on average loans
receivable, mortgage-backed securities and securities, partially offset by a
decrease in the yield on other interest-earning assets. The cost of average
interest-bearing liabilities increased due to an increase in the cost of average
interest-bearing deposits partially offset by a decrease in the cost of average
borrowings. The Bank continues to be liability sensitive, with approximately
83.4% of its certificates of deposit re-pricing within twelve months. The recent
reductions in the federal funds rate should result in an improvement in net
interest income as the cost of interest-bearing deposits begins to decline.
However, with loan originations slowing, liquidity will probably remain high; as
a consequence the declining yield on cash equivalents, which may fall quickly as
interest rates fall, could mitigate the improvement in net interest income.
The Company's net interest margin increased 16 basis points to 2.55% during the
quarter ended December 31, 2007, compared with 2.39% during the quarter ended
December 31, 2006 resulting from an increase in net interest income and a
decrease in average interest-earning assets. Average interest-earning assets
during the quarter ended December 31, 2007 were $1.83 billion or $44.0 million
less than average interest-earning assets of $1.87 billion during the quarter
ended December 31, 2006. Average securities and other interest-earning assets
decreased, partially offset by an increase in average loans receivable and
mortgage-backed securities, which had a favorable affect on yield. Average
interest-bearing liabilities
15
during the quarter ended December 31, 2007 were $1.45 billion or $31.0 million
less than average interest-bearing liabilities of $1.48 billion during the
quarter ended December 31, 2006. Average interest-bearing deposits decreased,
partially offset by an increase in average borrowings. The effect was an
increase in cost, but less than what would have occurred had the borrowings not
replaced certificates of deposits as a funding source. The ratio of average
interest-earning assets to average interest-bearing liabilities was 126.3%
during the quarter ended December 31, 2007, compared to 126.6% during the
quarter ended December 31, 2006.
Interest Income. Total interest income increased $524,000 or 2.2%, to $24.6
million during the quarter ended December 31, 2007, from $24.1 million during
the quarter ended December 31, 2006. The increase in interest income resulted
from increases in interest on loans and mortgage-backed securities partially
offset by decreases in interest from securities and other interest-earning
assets.
Interest income from loans receivable increased $2.8 million or 25.2%, to $13.9
million during the quarter ended December 31, 2007, from $11.1 million during
the quarter ended December 31, 2006 due primarily to growth in the portfolio as
well as an improvement in yield. Average loans receivable increased $182.0
million to $954.1 million during the quarter ended December 31, 2007, from
$772.1 million during the quarter ended December 31, 2006. Consistent with the
Bank's business plan, management continued to emphasize growth of the loan
portfolio to increase interest income. Average loans receivable constituted
52.1% of average interest-earning assets during the quarter ended December 31,
2007, compared to 41.2% during the quarter ended December 31, 2006. The yield on
average loans receivable increased ten basis points to 5.84% during the quarter
ended December 31, 2007, compared to 5.74% during the quarter ended December 31,
2006. The improvement in yield was aided by growth in the potentially higher
yielding nonresidential and multi-family mortgage categories, with the average
balance of the two types increasing $47.0 million or 34.5%, to $183.2 million in
aggregate, year-over-year. By comparison, the average balance of one-to-four
family mortgages increased $121.9 million or 24.6%, to $616.6 million
year-over-year.
Interest income from mortgage-backed securities increased $506,000 or 6.3%, to
$8.6 million during the quarter ended December 31, 2007, compared to $8.1
million during the quarter ended December 31, 2006 due to increases in yield and
average mortgage-backed securities. Average mortgage-backed securities increased
$14.5 million to $689.8 million during the quarter ended December 31, 2007, from
$675.3 million during the quarter ended December 31, 2006. The yield on average
mortgage-backed securities increased 20 basis points to 4.98% during the quarter
ended December 31, 2007, from 4.78% during the quarter ended December 31, 2006.
To the extent that the Bank did not need the funds for loan originations,
management reinvested cash flows from principal and interest payments into
additional mortgage-backed securities, which contributed to the increase in the
average balance year-over-year. During the quarter ended September 30, 2007,
management implemented a nominal leverage strategy utilizing a part of the
proceeds from Federal Home Loan Bank advances to fund the purchase of $24.8
million of 15 year and 20 year fixed rate mortgage-backed securities, which
contributed to the increase in the average balance and yield. Rate adjustments
on pass-through certificates containing adjustable rate mortgages and higher
coupons on securities recently purchased compared to purchases in the year-ago
quarter also contributed to the increase in yield.
Interest income from securities decreased $1.2 million or 69.5%, to $539,000
during the quarter ended December 31, 2007, from $1.8 million during the quarter
ended December 31, 2006 due to a decrease in average securities partially offset
by an increase in yield. Average securities decreased $126.8 million to $46.7
million during the quarter ended December 31, 2007, compared to $173.5 million
during the quarter ended December 31, 2006. The decrease in the average balance
was due primarily to the sales of municipal bonds, totaling $131.3 million
during the fiscal year ended June 30, 2007, and $44.1 million during the six
months ended December 31, 2007. Average tax-exempt securities decreased $124.3
16
million to $23.4 million while average taxable securities decreased $2.5 million
to $23.3 million, year-over-year. The proceeds from the sales of the bonds were
utilized primarily to fund loan originations and deposit outflows. As for the
remaining municipal bond portfolio, management will continue to assess its value
given the improvement in pre-tax income and declining interest rates versus a
preference for securities that provide a steady cash flow. The yield on average
securities improved 54 basis points from 4.07% for the quarter ended December
31, 2006, to 4.61% for the quarter ended December 31, 2007. The higher yield on
the securities portfolio resulted primarily from the sale of the lower yielding
municipal bonds.
Interest income from other interest-earning assets, primarily cash and cash
equivalents, decreased $1.6 million or 50.0%, to $1.6 million during the quarter
ended December 31, 2007, from $3.2 million during the quarter ended December 31,
2006. The decrease was due to a decrease in average other interest-bearing
assets as well as a decrease in yield. There was a $113.8 million decrease in
average other interest-earning assets to $140.5 million during the quarter ended
December 31, 2007, from $254.3 million during the quarter ended December 31,
2006. Average cash and cash equivalents decreased, partially offset by an
increase in average Federal Home Loan Bank ("FHLB") capital stock. The cash and
cash equivalents were used primarily to fund loan originations and deposit
outflows. FHLB capital stock increased due to the increase in FHLB advances.
With a 100 basis point reduction in the federal funds rate between mid-September
and December 31, 2007, the yield on average interest-earning assets decreased 56
basis points to 4.42% during the quarter ended December 31, 2007 from 4.98%
during the same quarter a year ago.
Interest Expense. Total interest expense increased $45,000 or 0.3%, virtually
unchanged year-over-year at $12.9 million. The cost of average interest-bearing
liabilities increased nine basis points to 3.57%, partially offset by a $31.8
million decrease in average interest-bearing liabilities to $1.45 billion during
the quarter ended December 31, 2007 compared to $1.48 billion during the year
earlier quarter.
Interest expense from deposits decreased $1.1 million or 9.1%, to $11.0 million
during the quarter ended December 31, 2007, from $12.1 million during the
quarter ended December 31, 2006. The decrease resulted primarily from a decrease
in average interest-bearing deposits, partially offset by an increase in the
cost of deposits. The cost of average interest-bearing deposits increased eight
basis points to 3.48% during the quarter ended December 31, 2007, from 3.40%
during the quarter ended December 31, 2006. Average interest-bearing deposits
decreased $161.9 million to $1.26 billion during the quarter ended December 31,
2007, from $1.42 billion during the quarter ended December 31, 2006. Average
interest-bearing demand deposit accounts increased $19.4 million to $149.3
million and their cost increased eight basis points to 1.97%. The increase was
due primarily to an increase in tiered money market deposit accounts, a popular
core deposit product. Average savings accounts decreased $34.6 million to $302.2
million and their cost decreased one basis point to 1.11%. Traditional savings
accounts continued to suffer attrition as depositors transferred funds to
alternative investments, including the Bank's own tiered money market deposit
account. Average certificates of deposit decreased $146.7 million to $809.5
million while their cost increased 23 basis points to 4.64%. Though most
certificates of deposit attracted by interest rate specials were either
withdrawn or re-priced lower at maturity, we retained a significant number of
non-promotional certificates of deposit, which re-priced higher at maturity,
leading to an increase in the cost of deposits. At December 31, 2006, the Bank
had $23.4 million of certificates of deposit with interest rates of less than
3.00%, $301.7 million of certificates of deposit with interest rates of between
3.00 - 3.99%, $259.9 million of certificates of deposit with interest rates of
between 4.00 - 4.99% and $368.7 million of certificates of deposit with interest
rates of between 5.00 - 5.99%. By December 31, 2007, the stratification adjusted
to $16.3 million, $55.1 million, $732.5 million and $7.7 million, respectively.
Given the Bank's liability sensitive interest rate risk profile with
approximately 83.4% of certificates of deposit maturing within one year, the
recent reductions in the federal funds rate, amounting to a 100 basis point cut
in aggregate, should contribute to a subsequent decrease in the cost of
deposits.
17
Interest expense from Federal Home Loan Bank borrowings increased $1.2 million
or 144.6%, to $2.0 million during the quarter ended December 31, 2007, from
$807,000 during the quarter ended December 31, 2006. Average borrowings
increased $130.9 million to $189.1 million during the quarter ended December 31,
2007, from $58.2 million during the quarter ended December 31, 2006. The cost of
average borrowings decreased 137 basis points to 4.18% during the quarter ended
December 31, 2007 from 5.55% during the quarter ended December 31, 2006. The
increase in borrowings resulted primarily from a need to replenish liquidity
utilized to fund loan originations and deposit outflows and make cash available
for potential implementation of growth and diversification strategies related to
execution of the Company's business plan. The Bank borrowed $100.0 million
during the quarter ended September 30, 2007 and an additional $100.0 million
during the quarter ended December 31, 2007 at a weighted average cost of 3.99%
and 3.59%, respectively. The advances were a cheaper funding source compared to
certificates of deposit.
Provision for Loan Losses. We charge provisions for loan losses to operations at
a level required to reflect credit losses in the loan portfolio that are both
probable and reasonable to estimate. Management, in determining the allowance
for loan losses, considers the losses inherent in the loan portfolio and changes
in the nature and volume of our loan activities, along with the general economic
and real estate market conditions. We utilize a two-tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of our loan portfolio as required by generally accepted accounting
principles and regulatory guidelines outlined in the Interagency Policy
Statement last updated in December 2006. We establish a specific loan loss
allowance for an impaired loan based on delinquency status, size of loan, type
of collateral and/or appraisal of the underlying collateral and financial
condition of the borrower. Management bases general loan loss allowances upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment
There was no provision for loan losses during the quarter ended December 31,
2007, compared to an $119,000 provision recorded during the quarter ended
December 31, 2006. The decision not to record a provision was based on slowing
growth in the loan portfolio as well as asset quality that continues to be good.
Non-performing loans were $1.1 million or 0.12%, of total loans of $966.5
million at December 31, 2007; $1.5 million or 0.17%, of total loans of $865.0
million at June 30, 2007 and $639,000 or 0.08%, of total loans of $798.1 million
at December 31, 2006. Of particular significance, the Bank does not originate or
purchase interest only mortgages, pay option adjustable rate mortgages or
sub-prime mortgages. The ratio of net charge-offs to average loans was zero
percent during each of the comparative periods.
The allowance for loan losses as a percentage of total loans outstanding was
0.64% at December 31, 2007, 0.70% at June 30, 2007 and 0.72% at December 31,
2006, reflecting allowance balances of $6.1 million, $6.0 million and $5.8
million, respectively. The allowance for loan losses as a percentage of
non-performing loans was 540.8% at December 31, 2007, 406.3% at June 30, 2007
and 900.6% at December 31, 2006. There were no material charge-offs or
recoveries recorded against the allowance for loan losses during the quarter
ended December 31, 2007 compared to a recovery of $27,000 during the year
earlier quarter.
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
18
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, 2007 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 and service charges
from the Bank's retail operations and other miscellaneous income increased
$51,000 or 8.2%, to $671,000 during the quarter ended December 31, 2007 compared
to $620,000 during the quarter ended December 31, 2006. Fees and service charges
increased $51,000 due primarily to the overdraft privilege program introduced in
May 2007. Miscellaneous income was unchanged year-over-year.
There was a loss on sale of securities available for sale of $2,000 during the
quarter ended December 31, 2007 compared to a gain of $152,000 recorded during
the quarter ended December 31, 2006.
Non-Interest Expense. Non-interest expense decreased $1.1 million or 9.8%, to
$10.1 million during the quarter ended December 31, 2007, from $11.2 million
during the quarter ended December 31, 2006. The decrease in non-interest expense
resulted primarily from a decrease in salaries and employee benefits of
$744,000. Also contributing were decreases in advertising expense and
amortization of intangible assets of $254,000 and $99,000, respectively and
reductions in equipment expense, directors' compensation and miscellaneous
expense totaling $64,000 in aggregate. Partially offsetting the decrease was an
increase in net occupancy expense of premises of $61,000.
Salaries and employee benefits decreased $744,000 or 11.0%, to $6.0 million
during the quarter ended December 31, 2007, compared to $6.7 million during the
quarter ended December 31, 2006. The component of salaries and benefits with the
most significant reduction was pension plan expense, which decreased $518,000.
Effective July 1, 2007, the Company implemented a freeze on all future benefit
accruals under the Bank's non-contributory defined benefit pension plan and
related benefit equalization plan. The freeze provides additional flexibility in
controlling the costs associated with the plans while still preserving the
participants' earned and vested benefits. Stock benefits plan expense decreased
$76,000 due to a forfeiture of unvested restricted stock and unvested stock
options in the prior year. Employee Stock Ownership Plan expense decreased
$122,000 due to a decrease in the average market price of the Company's common
stock. The remaining components of salaries and benefits expense in the
aggregate were virtually unchanged; with normal salary increases partially
offset by a decision by the President and CEO of the Company and the Bank, John
N. Hopkins, that he would voluntarily forgo the cash bonus payment approved by
the Compensation Committee in November 2007. Mr. Hopkins was motivated to do so
as part of the Company's overall cost cutting effort. In December 2006, Mr.
Hopkins received a cash bonus payment of $90,000. Normal salary increases were
also partially offset by a reduction in staff, due to routine attrition and a
conscious decision not to replace those employees.
Net occupancy expense of premises increased $61,000 or 7.3%, to $902,000 during
the quarter ended December 31, 2007 from $841,000 during the quarter ended
December 31, 2006 due to increases in rent expense, net, repairs and maintenance
expense, property taxes expense and utilities expense partially offset by
decreases in other components of net occupancy expense of premises.
Advertising expense decreased $254,000 or 62.1%, to $155,000 during the quarter
ended December 31, 2007 from $409,000 during the quarter ended December 31,
2006. The decrease in advertising expense between the comparative quarters was
due primarily to limiting marketing to loan products, though also at a reduced
rate given the slowing demand for loans, to the exclusion of deposit products
during the current quarter. This trend will probably change due to recent
reductions in the federal funds rate, which appear to be lowering interest rates
in the marketplace, thus making our interest rate offerings more competitive.
19
The $99,000 decrease in the amortization of intangible assets to $60,000 was due
to the completion of amortization of an intangible asset acquired during the
purchase of West Essex Bank in 2003. Miscellaneous expense was virtually
unchanged at $1.2 million during the quarters ended December 31, 2007 and 2006.
Provision for Income Taxes. The provision for income taxes increased $768,000 to
$857,000 during the quarter ended December 31, 2007, from $89,000 during the
quarter ended December 31, 2006. The effective tax rate was 38.4% during the
quarter ended December 31, 2007, compared to 14.0% during the quarter ended
December 31, 2006. The effective tax rate increased due to a reduction in
interest from tax-exempt instruments as a percentage of pre-tax income as net
income increased. Tax-exempt interest was 9.1% of income before taxes during the
quarter ended December 31, 2007 compared to 216.4% during the quarter ended
December 31, 2006. During the fiscal year ended June 30 2007, the decision to
sell municipal bonds was prompted by the below market yield on such bonds as
well as the overall decline in the Company's pre-tax income, which reduces the
advantage of holding tax-exempt instruments. With respect to the remaining
municipal bond portfolio, management will continue to assess its value given the
improvement in pre-tax income and declining interest rates versus a preference
for securities that provide a steady cash flow.
Comparison of Operating Results for the Six months Ended December 31, 2007 and
2006
General. Net income for the six months ended December 31, 2007 was $2.4 million
or $0.03 per diluted share, an increase of $933,000 or 63.3%, from $1.5 million
or $0.02 per diluted share for the six months ended December 31, 2006. The
increase in net income year-over-year resulted from increases in net interest
income and non-interest income, and decreases in the provision for loan losses
and non-interest expense, partially offset by an increase in income taxes.
Net Interest Income. Net interest income for the six months ended December 31,
2007 was $23.0 million, an increase of $163,000 or 0.7%, compared to $22.9
million for the six months ended December 31, 2006. The increase in net interest
income was due to an increase in interest income, partially offset by an
increase in interest expense.
The Company's net interest rate spread increased five basis points to 1.79%
during the six months ended December 31, 2007 from 1.74% during the six months
ended December 31, 2006. Year-over-year, the yield on average interest-earning
assets increased 28 basis points to 5.36% while the cost of average
interest-bearing liabilities increased 23 basis points to 3.57%. The increase in
the yield on average interest-earning assets was due to increases in the yields
on average loans receivable, mortgage-backed securities and securities,
partially offset by a decrease in the yield on other interest-earning assets.
The cost of average interest-bearing liabilities increased due to an increase in
the cost of average interest-bearing deposits, partially offset by a decrease in
the cost of average borrowings. The Bank's cumulative gap position or timing
mismatch of potential re-pricing of assets and liabilities continues to be
liability sensitive. At December 31, 2006, the Bank's cumulative gap was
approximately -16%. At September 30, 2007, the Bank's cumulative gap was
approximately -15%. Management does not believe that there has been a material
adverse change in the Bank's cumulative gap during the three months ended
December 31, 2007. Recent reductions in the federal funds rate should bring an
improvement in net interest income as the cost of interest-bearing deposits
begins to decline. However, slowing loan originations may mean that liquidity
will remain high; as a consequence the declining yield on cash equivalents,
which may fall quickly as interest rates fall, could mitigate the improvement in
net interest income.
The Company's net interest margin increased 12 basis points to 2.57% during the
six months ended December 31, 2007, compared with 2.45% during the six months
ended December 31, 2006. Average
20
interest-earning assets during the six months ended December 31, 2007 were $1.79
billion or $72.0 million less than average interest-earning assets of $1.86
billion during the six months ended December 31, 2006. Average securities and
other interest-earning assets decreased, partially offset by an increase in
average loans receivable, which had a favorable impact on yield. The decrease in
average interest-earning assets resulted in part from the use of cash to fund
deposit outflows and stock repurchases. Average interest-bearing liabilities
during the six months ended December 31, 2007 were $1.40 billion or $66.6
million less than average interest-bearing liabilities of $1.47 billion during
the six months ended December 31, 2006. Average interest-bearing deposits
decreased, partially offset by an increase in average borrowings. In the current
interest rate environment management considers Federal Home Loan Bank advances
to be a favorable alternative to certificates of deposit as a funding source.
The ratio of average interest-earning assets to average interest-bearing
liabilities was 128.1% during the six months ended December 31, 2007, compared
to 127.2% during the six months ended December 31, 2006.
Interest Income. Total interest income increased $653,000 or 1.4%, to $48.0
million during the six months ended December 31, 2007, from $47.4 million during
the six months ended December 31, 2006. The increase in interest income resulted
from increases in interest on loans and mortgage-backed securities partially
offset by decreases in interest from securities and other interest-earning
assets.
Interest income from loans receivable increased $5.7 million or 26.6%, to $27.1
million during the six months ended December 31, 2007, from $21.4 million during
the six months ended December 31, 2006 due primarily to growth in the portfolio
as well as an improvement in yield. Average loans receivable increased $180.7
million to $930.4 million during the six months ended December 31, 2007, from
$749.7 million during the six months ended December 31, 2006. In keeping with
the Bank's business plan, management continued to emphasize growth of the loan
portfolio to increase interest income, year-over-year. Average loans receivable
constituted 51.9% of average interest-earning assets during the six months ended
December 31, 2007, compared to 40.2% during the six months ended December 31,
2006. The yield on average loans receivable increased 12 basis points to 5.83%
during the six months ended December 31, 2007, compared to 5.71% during the six
months ended December 31, 2006. The improvement in yield was due in part to
growth in the nonresidential and multi-family mortgage categories, with the
average balance increasing in aggregate $51.4 million to $177.3 million, a
change of 40.8% year-over-year. By comparison, the average balances outstanding
of one-to-four family mortgages increased $116.4 million or 24.0%, to $600.8
million year-over-year.
Interest income from mortgage-backed securities increased $688,000 or 4.3%, to
$16.8 million during the six months ended December 31, 2007, compared to $16.1
million during the six months ended December 31, 2006 due primarily to an
increase in yield. Average mortgage-backed securities were virtually unchanged
at $679.8 million during the six months ended December 31, 2007 compared to
$679.5 million during the six months ended December 31, 2006. Generally,
management reinvested cash flows from principal and interest payments into the
mortgage-backed securities portfolio to supplement slowing loan originations.
The yield on average mortgage-backed securities increased 20 basis points to
4.94% during the six months ended December 31, 2007, from 4.74% during the six
months ended December 31, 2006. During the quarter ending September 30, 2007,
management implemented a nominal leverage strategy utilizing a part of the
proceeds from Federal Home Loan Bank advances to fund the purchase of $24.8
million of 15 year and 20 year fixed rate mortgage-backed securities, which
contributed to the increase in yield. Rate adjustments on pass-through
certificates containing adjustable rate mortgages and higher coupons on
securities purchased during the six months ended December 31, 2007 compared to
purchases during the six months ended December 31, 2006 also contributed to the
increase in yield. However, falling interest rates could negatively impact the
portfolio yield in the future due to the emphasis on purchasing adjustable rate
product. During the six months ending December 31, 2007, $55.2 million or 57.9%
of the mortgage-backed securities purchased were adjustable rate product.
21
Interest income from securities decreased $2.6 million or 63.4%, to $1.4 million
during the six months ended December 31, 2007, from $4.1 million during the six
months ended December 31, 2006 due to a decrease in average securities partially
offset by an improvement in yield. Average securities decreased $134.7 million
to $65.4 million during the six months ended December 31, 2007, compared to
$200.1 million during the six months ended December 31, 2006. The decrease in
the average balance was due primarily to the sales of municipal bonds, totaling
$131.3 million during the fiscal year ended June 30, 2007, and $44.1 million
during the six months ended December 31, 2007. Average tax-exempt securities
decreased $131.8 million to $41.9 million while average taxable securities
decreased $2.9 million to $23.5 million, year-over-year. To the extent not
required to fund loan originations, management reinvested the proceeds from the
sales into cash equivalents pending redeployment into other interest-earning
assets. The yield on average securities improved 36 basis points from 4.05% for
the six months ended December 31, 2006, to 4.41% for the six months ended
December 31, 2007. The higher yield on the securities portfolio resulted
primarily from the sale of the lower yielding municipal bonds as well as rate
adjustments on pass-through certificates containing Small Business
Administration adjustable rate loans and adjustable rate trust preferred
securities.
Interest income from other interest-earning assets decreased $3.1 million or
53.4%, to $2.7 million during the six months ended December 31, 2007, from $5.8
million during the six months ended December 31, 2006. The decrease was due to a
decrease in average other interest-bearing assets, primarily cash and cash
equivalents, as well as a decrease in yield. There was a $118.4 million decrease
in average other interest-earning assets to $116.3 million during the six months
ended December 31, 2007, from $234.7 million during the six months ended
December 31, 2006. For the most part, management utilized the cash and cash
equivalents to fund loan originations and deposit outflows. Partially offsetting
the decrease in cash and cash equivalents, average Federal Home Loan Bank
("FHLB") capital stock increased $3.3 million to $8.6 million due to the
increase in FHLB advances. With a 100 basis point reduction in the federal funds
rate between mid-September and December 2007, the yield on average
interest-earning assets decreased 34 basis points to 4.63% during the six months
ended December 31, 2007 compared to 4.97% during the same period in the prior
year.
Interest Expense. Total interest expense increased $490,000 or 2.0%, to $25.0
million during the six months ended December 31, 2007, from $24.5 million during
the six months ended December 31, 2006. The cost of average interest-bearing
liabilities increased 23 basis points to 3.57%, partially offset by a $66.6
million decrease in average interest-bearing liabilities to $1.40 billion during
the six months ended December 31, 2007 compared to $1.47 billion during the year
earlier six month period.
Interest expense from deposits decreased $617,000 or 2.7%, to $22.2 million
during the six months ended December 31, 2007, from $22.8 million during the six
months ended December 31, 2006. The decrease resulted primarily from a decrease
in average interest-bearing deposits, partially offset by an increase in the
cost of deposits. The cost of average interest-bearing deposits increased 25
basis points to 3.50% during the six months ended December 31, 2007, from 3.25%
during the six months ended December 31, 2006. Average interest-bearing deposits
decreased $135.0 million to $1.27 billion during the six months ended December
31, 2007, from $1.41 billion during the six months ended December 31, 2006.
Average interest-bearing demand deposit accounts increased $21.7 million to
$149.2 million while their cost increased 24 basis points to 2.03% due to tiered
money market deposit accounts introduced to attract core deposits. Average
savings accounts decreased $40.6 million to $308.3 million while their cost
decreased three basis points to 1.10% as depositors transferred funds to
alternative investments, including the Bank's own tiered money market deposit
account. Average certificates of deposit decreased $116.1 million to $813.4
million while their cost increased 43 basis points to 4.67%. Management
discontinued offering interest rate specials on certificates of deposit during
the quarter ended December 31, 2006. During the subsequent year, including the
six months ended December 31, 2007 most certificates of deposits attracted by
interest rate specials were either withdrawn or re-priced lower at maturity. We
22
retained a significant number of certificates of deposit, which were not the
product of interest rate specials. Those accounts generally re-priced higher
when they renewed at maturity. Given the Bank's interest rate risk profile, a
reduction in interest rates and restoration of a more normal yield curve should
aid in improving our profitability. With approximately 83.4% of certificates of
deposit maturing within one year, the recent reductions in the federal funds
rate, amounting to a 100 basis point cut in aggregate, should contribute to a
subsequent decrease in the cost of deposits.
Interest expense from Federal Home Loan Bank borrowings increased $1.1 million
or 64.7%, to $2.8 million during the six months ended December 31, 2007, from
$1.7 million during the six months ended December 31, 2006. Average borrowings
increased $68.4 million to $128.0 million during the six months ended December
31, 2007, from $59.6 million during the six months ended December 31, 2006. The
cost of average borrowings decreased 124 basis points to 4.32% during the six
months ended December 31, 2007 from 5.56% during the six months ended December
31, 2006. The increase in borrowings resulted primarily from a need to replenish
liquidity utilized to fund loan originations and fund deposit outflows and make
cash available for potential implementation of growth and diversification
strategies related to execution of the Company's business plan. The Bank
borrowed $200.0 million during the six months ended December 31, 2007 at a
weighted average cost of 3.79% resulting in the decrease in the cost of average
borrowings. The advances were determined to be a cheaper funding source compared
to certificates of deposit.
Provision for Loan Losses. We charge provisions for loan losses to operations at
a level required to reflect credit losses in the loan portfolio that are both
probable and reasonable to estimate. Management, in determining the allowance
for loan losses, considers the losses inherent in the loan portfolio and changes
in the nature and volume of our loan activities, along with the general economic
and real estate market conditions. We utilize a two-tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of our loan portfolio as required by generally accepted accounting
principles and regulatory guidelines outlined in the Interagency Policy
Statement last updated in December 2006. We establish a specific loan loss
allowance for an impaired loan based on delinquency status, size of loan, type
of collateral and/or appraisal of the underlying collateral and financial
condition of the borrower. Management bases general loan loss allowances upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment
The provision for loan losses decreased $183,000, to $94,000 during the six
months ended December 31, 2007, from a $277,000 provision recorded during the
six months ended December 31, 2006. Management attributes the decrease
principally to slowing growth in the loan portfolio and asset quality that
continues to be good. Non-performing loans were $1.1 million or 0.12%, of total
loans of $966.5 million at December 31, 2007; $1.5 million or 0.17%, of total
loans of $865.0 million at June 30, 2007 and $639,000 or 0.08%, of total loans
of $798.1 million at December 31, 2006. Of particular significance, the Bank
does not originate or purchase interest only mortgages, pay option adjustable
rate mortgages or sub-prime mortgages. The ratio of net charge-offs to average
loans was zero percent during each of the comparative periods.
The allowance for loan losses as a percentage of total loans outstanding was
0.64% at December 31, 2007, 0.70% at June 30, 2007 and 0.72% at December 31,
2006, reflecting allowance balances of $6.1 million, $6.0 million and $5.8
million, respectively. The allowance for loan losses as a percentage of
non-performing loans was 540.8% at December 31, 2007, 406.3% at June 30, 2007
and 900.6% at December 31, 2006. There were no material charge-offs or
recoveries recorded against the allowance for loan losses during the six months
ended December 31, 2007 compared to a recovery of $27,000 during the year
earlier period.
23
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, 2007 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 and service charges
from the Bank's retail operations and other miscellaneous income increased
$188,000 or 15.8%, to $1.4 million during the six months ended December 31, 2007
compared to $1.2 million during the six months ended December 31, 2006. Fees and
service charges increased $158,000 due primarily to the overdraft privilege
program introduced in May 2007. Miscellaneous income increased $30,000
year-over-year.
Non-interest income attributed to the gain on sale of securities available for
sale was $5,000 during the six months ended December 31, 2007 compared to a
$152,000 gain recorded during the six months ended December 31, 2006.
Non-Interest Expense. Non-interest expense decreased $1.8 million or 8.1%, to
$20.5 million during the six months ended December 31, 2007, from $22.3 million
during the six months ended December 31, 2006. The decrease in non-interest
expense resulted primarily from a decrease in salaries and employee benefits of
$1.2 million. Also contributing were decreases in advertising expense,
amortization of intangible assets and directors' compensation of $396,000,
$99,000 and $108,000, respectively, and reductions in equipment expense and
miscellaneous expense totaling $96,000 in aggregate. Partially offsetting the
decrease was an increase in net occupancy expense of premises of $93,000.
Salaries and employee benefits decreased $1.2 million or 8.9%, to $12.3 million
during the six months ended December 31, 2007, compared to $13.5 million during
the six months ended December 31, 2006. The component of salaries and benefits
with the most significant reduction was pension plan expense, which decreased
$887,000. Effective July 1, 2007, the Company implemented a freeze on all future
benefit accruals under the Bank's non-contributory defined benefit pension plan
and related benefit equalization plan. The freeze provides additional
flexibility in controlling the costs associated with the plans while still
preserving the participants' earned and vested benefits. Stock benefits plan
expense decreased $151,000 due to a forfeiture of unvested restricted stock and
unvested stock options in the prior year. Employee Stock Ownership Plan expense
decreased $189,000 due to a decrease in the average market price of the
Company's common stock. The remaining components of salaries and benefits
expense in the aggregate were virtually unchanged; with normal salary increases
partially offset by a decision by the President and CEO of the Company and the
Bank, John N. Hopkins, that he would voluntarily forgo the cash bonus payment
approved by the Compensation Committee in November 2007. Mr. Hopkins was
motivated to do so as part of the Company's overall cost cutting effort. Mr.
Hopkins previously received a cash bonus payment of $90,000 in December 2006.
Also normal salary increases were partially offset by a reduction in staff, due
to routine attrition and a conscious decision not to replace those employees.
Net occupancy expense of premises increased $93,000 or 5.5%, to $1.8 million
during the six months ended December 31, 2007 from $1.7 million during the six
months ended December 31, 2006 due to increases in rent expense, net, repairs
and maintenance expense, property taxes expense and utilities expense partially
offset by decreases in depreciation and other expenses.
24
Advertising expense decreased $396,000 or 49.4%, to $406,000 during the six
months ended December 31, 2007 from $802,000 during the six months ended
December 31, 2006. During the current period, management generally devoted the
Bank's advertising to loan products while temporarily discontinuing the
marketing of deposit products. This trend will probably change due to recent
reductions in the federal funds rate, which appear to be lowering interest rates
in the marketplace, thus making our interest rate offerings more competitive.
The $99,000 decrease in the amortization of intangible assets to $219,000 was
due to the completion of amortization of an intangible asset acquired during the
purchase of West Essex Bank in 2003.
Directors' compensation decreased $108,000 or 8.9%, to $1.1 million during the
six months ended December 31, 2007, compared to $1.2 million during the six
months ended December 31, 2006. Fees decreased $16,000 to $330,000 and other
directors' compensation decreased $92,000 to zero due primarily to freezing the
directors' incentive compensation plan.
Miscellaneous expense was virtually unchanged at $2.2 million during the six
months ended December 31, 2007 and 2006.
Provision for Income Taxes. The provision for income taxes increased $1.3
million to $1.5 million during the six months ended December 31, 2007, from
$165,000 during the six months ended December 31, 2006. The effective tax rate
was 37.7% during the quarter ended December 31, 2007, compared to 10.1% during
the quarter ended December 31, 2006. The effective tax rate increased due to a
reduction in interest from tax-exempt instruments as a percentage of pre-tax
income as net income increased. Tax-exempt interest was 19.5% of income before
taxes during the six months ended December 31, 2007 compared to 199.1% during
the six months ended December 31, 2006. During the fiscal year ended June 30,
2007, the decision to sell municipal bonds was prompted by the below market
yield on such bonds as well as the overall decline in the Company's pre-tax
income, which reduces the advantage of holding tax-exempt instruments. With
respect to the remaining municipal bond portfolio, management will continue to
assess its value given the improvement in pre-tax income and declining interest
rates versus a preference for securities that provide a steady cash flow.
Liquidity and Capital Resources
Liquidity, represented by cash and cash equivalents, is a product of the
Company's operating, investing and financing activities. For detail on
operating, investing and financing activities see the Consolidated Statements of
Cash Flows for the six months ended December 31, 2007. The 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, excess funds are invested 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.
25
During the fiscal year ended June 30, 2007 and continuing into the current
fiscal year, to the extent that the Bank did not need the funds for loan
originations, management maintained liquidity at an elevated level while the
Treasury yield curve remained inverted or flat. However, the 100 basis point
decrease in the federal funds rate prior to December 31, 2007 followed by the
125 basis point decrease in January 2008 caused the Treasury yield curve to
revert to its more traditional shape. As a consequence, despite the Bank's
business plan which calls for increasing the loan portfolio and reducing its
reliance on securities and other interest-earning assets to generate interest
income, management expects to redeploy excess liquidity into mortgage-backed
securities to supplement loan originations. Borrower demand has decreased due to
the slowing economy and is expected to remain sluggish for at least the balance
of 2008.
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, 2007,
the Bank had outstanding commitments to originate loans of $14.6 million,
commitments to fund the purchase of loans on a flow basis of $25.4 million,
construction loans in process of $10.4 million and unused lines of credit of
$28.1 million. At December 31, 2007, the Bank had $676.9 million of certificates
of deposit maturing within one year.
Deposits decreased $22.9 million to $1.32 billion at December 31, 2007, from
$1.34 billion at September 30, 2007. During the quarter, certificates of
deposit, savings deposits, interest-bearing demand accounts and
non-interest-bearing demand accounts decreased $14.0 million, $5.1 million, $2.3
million and $1.5 million, respectively. As expected, deposit attrition slowed
during the quarter due to the recent reductions in the federal funds rate by the
Federal Reserve Board of Governors, amounting to a 100 basis point cut in
aggregate, which appear to be gradually lowering interest rates in the
marketplace. Management believes the effect of additional interest rate cuts in
the marketplace and investor concerns about the direction of the stock market
may reverse the outflow of deposits during the next quarter.
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, we may replace the funds with borrowings. 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. The Bank borrowed $100.0 million in ten-year advances during
the quarter ended September 30, 2007 with $50.0 million callable after one year
and $50.0 million callable after two years. The Bank borrowed an additional
$100.0 in ten-year advances during the quarter ended December 31, 2007 with
$50.0 million callable after one year and $50.0 million after two years. The
current cost of long-term advances, relative to the cost of retail certificates
of deposit, makes them an attractive funding source. There was no need to make
use of overnight borrowings during the quarter ended December 31, 2007, due to
adequate liquidity.
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, 2007, Kearny Federal Savings Bank exceeded all capital requirements
of the Office of Thrift Supervision (the "OTS").
26
The following table sets forth the Bank's capital position at December 31, 2007,
as compared to the minimum regulatory capital requirements:
December 31, 2007 (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) 351,966 39.41% $ 71,450 8.00% $ 89,312 10.00%
Tier 1 Capital
(to risk-weighted assets) 345,823 38.72% - - $ 53,587 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 345,823 18.04% $ 76,661 4.00% $ 95,826 5.00%
Tangible Capital
(to adjusted total assets) 345,823 18.04% $ 28,748 1.50% - -
In August 2007, the Bank received approval from the OTS for a $19.0 million
capital distribution to the Company. However, future dividend requests will
require closer OTS scrutiny due to the Bank's compressed earnings. The cash
dividend was paid in November 2007.
27
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.
28
The following table sets forth the Bank's NPV as of September 30, 2007, 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,
2007.
At September 30, 2007
------------------------------------------------------------------------------------------
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 286,609 -112,625 -28% 16.25% -479 bp
+200 bp 326,411 -72,823 -18% 18.04% -301 bp
+100 bp 364,755 -34,479 -9% 19.66% -138 bp
+50 bp 382,893 -16,341 -4% 20.40% -64 bp
0 bp 399,234 - - 21.04% -
-50 bp 413,156 +13,922 +3% 21.56% +52 bp
-100 bp 424,855 +25,621 +6% 21.99% +94 bp
-200 bp 440,094 +40,860 +10% 22.46% +142 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, 2007 an immediate and
permanent 2.0% increase in interest rates would cause an approximately 9.8%
decrease in our net interest income. Conversely, an immediate and permanent 2.0%
decrease in interest rates would cause an approximately 9.9% increase 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.
29
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.
30
PART II
ITEM 1. Legal Proceedings
-----------------
At December 31, 2007, 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, 2007, 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, 2007.
--------------------------------------------------------------------------------------------
Total Number of Maximum
Shares Number of
Purchased as Shares that
Total Part of Publicly May Yet Be
Number of Average Announced Purchased Under
Shares Price Paid Plans or the Plans or
Purchased per Share Program Programs (1)
--------------------------------------------------------------------------------------------
October 1-31, 2007 - - - 485,634
--------------------------------------------------------------------------------------------
November 1-30, 2007 79,700 $11.96 79,700 405,934
--------------------------------------------------------------------------------------------
December 1-31, 2007 127,700 $12.27 127,700 278,234
--------------------------------------------------------------------------------------------
Total 207,400 $12.15 207,400 278,234
--------------------------------------------------------------------------------------------
(1) On January 18, 2007, the Company announced a five percent stock repurchase
plan (approximately 1,036,634 shares). Such purchases are to be made from
time to time in the open market, based on stock availability, price and the
Company's financial performance. This program has no expiration date.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
31
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 22, 2007. There were outstanding
and entitled to vote at the Meeting 71,113,937 shares of
Common Stock of the Company, including 50,916,250 shares
held by Kearny MHC, the mutual holding company parent of the
Company. Kearny MHC voted its shares in favor of all
proposals. There were present at the meeting or by proxy the
holders of 68,074,723 shares of Common Stock representing
93.5% 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, 2008. The result of the voting
at the Meeting is as follows:
Proposal 1:
John J. Mazur, Jr. FOR: 67,551,371 WITHHELD: 523,352
Matthew T. McClane FOR: 67,553,574 WITHHELD: 521,149
John F. McGovern FOR: 67,561,518 WITHHELD: 513,205
Proposal 2:
Ratification of the appointment of Beard Miller Company LLP as independent auditor.
FOR: 67,790,951
AGAINST: 221,294
ABSTAIN: 62,478
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 Albert E. Gossweiler (1)
10.3 Employment Agreement between Kearny Federal Savings Bank and Sharon Jones (1)
10.4 Employment Agreement between Kearny Federal Savings Bank and William C. Ledgerwood (1)
10.5 Employment Agreement between Kearny Federal Savings Bank and Erika K. Parisi (1)
10.6 Employment Agreement between Kearny Federal Savings Bank and Patrick M. Joyce (1)
10.7 Employment Agreement between Kearny Federal Savings Bank and Craig L. Montanaro (2)
10.8 Directors Consultation and Retirement Plan (1)
10.9 Benefit Equalization Plan (1)
10.10 Benefit Equalization Plan for Employee Stock Ownership Plan (1)
10.11 Stock Option Plan (3)
10.12 Restricted Stock Plan (3)
10.13 Kearny Federal Savings Bank Director Life Insurance Agreement (4)
10.14 Kearny Federal Savings Bank Executive Life Insurance Agreement (4)
10.15 Kearny Financial Corp. Directors Incentive Compensation Plan (5)
11.0 Statement regarding computation of earnings per share (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).
(5) Incorporated by reference to the exhibit to the
Registrant's Form 8-K filed on December 9, 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 7, 2008 By: /s/ John N. Hopkins
----------------- ---------------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly authorized officer and principal
executive officer)
Date: February 7, 2008 By: /s/ William C. Ledgerwood
----------------- ---------------------------------------------
William C. Ledgerwood
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
34