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 March 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
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KEARNY FINANCIAL CORP.
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(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: May 1, 2007.
$0.10 par value common stock - 71,602,437 shares outstanding
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition
at March 31, 2007 and June 30, 2006 (Unaudited) 1
Consolidated Statements of Income for the Three Months and Nine Months
Ended March 31, 2007 and 2006 (Unaudited) 2-3
Consolidated Statements of Changes in Stockholders' Equity for the Nine
Months Ended March 31, 2007 and 2006 (Unaudited) 4-7
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2007 and 2006 (Unaudited) 8-9
Notes to Consolidated Financial Statements 10-17
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-31
Item 3: Quantitative and Qualitative Disclosure About Market Risk 32-33
Item 4: Controls and Procedures 34
PART II - OTHER INFORMATION 35-37
SIGNATURES 38
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands, Except Share Data, Unaudited)
March 31, June 30,
2007 2006
(As restated)
----------- -----------
Assets
------
Cash and amounts due from depository institutions $ 17,231 $ 22,563
Interest-bearing deposits in other banks 260,254 207,716
----------- -----------
Cash and Cash Equivalents 277,485 230,279
Securities available for sale (amortized cost $91,281 and $227,598) 90,882 222,793
Loans receivable, including net deferred loan costs of $1,529 and $1,087 823,554 709,064
Less allowance for loan losses (5,856) (5,451)
----------- -----------
Net Loans Receivable 817,698 703,613
Mortgage-backed securities available for sale (amortized cost $668,630
and $689,962) 663,487 670,329
Premises and equipment 35,650 35,941
Federal Home Loan Bank of New York ("FHLB") stock 5,161 5,406
Interest receivable 7,817 8,836
Goodwill 82,263 82,263
Bank owned life insurance 15,020 14,628
Other assets 12,276 17,685
----------- -----------
Total Assets $ 2,007,739 $ 1,991,773
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits:
Non-interest bearing $ 57,521 $ 61,080
Interest-bearing 1,409,185 1,382,658
----------- -----------
Total Deposits 1,466,706 1,443,738
Advances from FHLB 55,646 61,105
Advance payments by borrowers for taxes 5,198 5,232
Other liabilities 6,602 6,564
----------- -----------
Total Liabilities 1,534,152 1,516,639
----------- -----------
Stockholders' Equity
--------------------
Preferred stock $0.10 par value, 25,000,000 shares authorized; none issued
and outstanding - -
Common stock $0.10 par value, 75,000,000 shares authorized; 72,737,500 shares
issued; 71,602,437 and 72,737,500 shares, respectively, outstanding 7,274 7,274
Paid-in capital 196,699 192,534
Retained earnings 305,675 306,728
Unearned Employee Stock Ownership Plan shares; 1,442,627 shares
and 1,551,732 shares (14,426) (15,517)
Treasury stock, at cost; 1,135,063 shares and 0 shares (18,034) -
Accumulated other comprehensive (loss) (3,601) (15,885)
----------- -----------
Total Stockholders' Equity 473,587 475,134
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,007,739 $ 1,991,773
=========== ===========
See notes to consolidated financial statements.
1
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands, Except Per Share Data, Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Interest Income:
Loans $ 11,658 $ 9,108 $ 33,044 $ 25,773
Mortgage-backed securities 8,095 8,253 24,193 25,239
Securities:
Taxable 351 1,328 1,141 6,183
Tax-exempt 825 1,901 4,086 5,737
Other interest-earning assets 3,229 1,866 9,065 3,490
-------- -------- -------- --------
Total Interest Income 24,158 22,456 71,529 66,422
-------- -------- -------- --------
Interest Expense:
Deposits 12,150 8,759 34,991 25,696
Borrowings 754 1,005 2,412 2,733
-------- -------- -------- --------
Total Interest Expense 12,904 9,764 37,403 28,429
-------- -------- -------- --------
Net Interest Income 11,254 12,692 34,126 37,993
Provision for Loan Losses 101 106 378 245
-------- -------- -------- --------
Net Interest Income after Provision
for Loan Losses 11,153 12,586 33,748 37,748
-------- -------- -------- --------
Non-Interest Income:
Fees and service charges 188 225 692 791
(Loss) Gain on sale of securities (97) 937 55 1,023
Miscellaneous 392 367 1,076 925
-------- -------- -------- --------
Total Non-Interest Income 483 1,529 1,823 2,739
-------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 7,070 6,964 20,623 18,310
Net occupancy expense of
premises 895 836 2,594 2,521
Equipment 1,098 1,174 3,274 3,306
Advertising 362 353 1,164 1,063
Federal insurance premium 144 140 428 410
Amortization of intangible assets 159 159 477 477
Directors' compensation 544 631 1,762 1,443
Miscellaneous 1,030 1,162 3,277 3,405
-------- -------- -------- --------
Total Non-Interest Expenses 11,302 11,419 33,599 30,935
-------- -------- -------- --------
Income before Income Taxes 334 2,696 1,972 9,552
Income Taxes 92 250 257 1,816
-------- -------- -------- --------
Net Income $ 242 $ 2,446 $ 1,715 $ 7,736
======== ======== ======== ========
2
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
---------------------------------------------
(In Thousands, Except Per Share Data, Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -------------------
2007 2006 2007 2006
------- ------- ------- -------
Net Income per Common Share:
Basic $ 0.00 $ 0.03 $ 0.02 $ 0.11
Diluted 0.00 0.03 0.02 0.11
Weighted Average Number of
Common Shares Outstanding:
Basic 69,012 70,918 69,343 71,006
Diluted 69,293 71,034 69,664 71,051
Dividends Declared Per Common
Share $ 0.05 $ 0.05 $ 0.15 $ 0.19
See notes to consolidated financial statements.
3
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Nine Months Ended March 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 Income (Loss) Total
-------- -------- --------- ------------ --------- --------- ------------- --------
Balance - June 30, 2005 72,738 $7,274 $207,838 $301,857 $(16,972) $ - $ 5,485 $505,482
--------
Comprehensive income:
Net income - - - 7,736 - - - 7,736
Realized gain on securities available
for sale, net of income tax of $358 - - - - - - (665) (665)
Unrealized loss on securities available
for sale, net of deferred income tax
benefit of $8,617 - - - - - - (16,003) (16,003)
--------
Total Comprehensive income (8,932)
--------
Refund of common stock offering
expense - - 3 - - - - 3
ESOP shares committed to be released
(108 shares) - - 271 - 1,091 - - 1,362
Stock option transactions - - 713 - - - - 713
Treasury stock purchases (178) - - - - (2,268) - (2,268)
Treasury stock reissued to restricted
stock plan 178 - (2,268) - - 2,268 - 0
Restricted stock plan shares purchased
(135 shares) - - (1,815) - - - - (1,815)
Restricted stock plan shares earned
(97 shares) - - 1,186 - - - - 1,186
4
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Nine Months Ended March 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 Income (Loss) Total
-------- -------- --------- ------------ --------- --------- ------------- --------
Cash dividends declared ($0.19/share) - - - (3,795) - - - (3,795)
------- ------ -------- -------- -------- -------- -------- --------
Balance - December 31, 2005 72,738 $7,274 $205,928 $305,798 $(15,881) $ 0 $(11,183) $491,936
======= ====== ======== ======== ======== ======== ======== ========
5
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Nine Months Ended March 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 Income (Loss) Total
------ ------ ------- -------- ------ ----- ------------- -----
Balance - June 30, 2006 (As restated) 72,737 $7,274 $192,534 $306,728 $(15,517) $ - $(15,885) $475,134
--------
Comprehensive income:
Net income - - - 1,715 - - - 1,715
Realized gain on securities available
for sale, net of income tax of $19 - - - - - - (36) (36)
Unrealized gain on securities available
for sale, net of deferred income tax
cost of $6,633 - - - - - - 12,320 12,320
--------
Total Comprehensive income 13,999
--------
ESOP shares committed to be released
(108 shares) - - 576 - 1,091 - - 1,667
Stock option transactions - - 1,494 - - - - 1,494
Treasury stock purchases (1,144) - - - - (18,169) - (18,169)
Treasury stock reissued 9 - (27) - - 135 - 108
Restricted stock plan shares
purchased (54 shares) - - (789) - - - - (789)
Restricted stock plan shares earned
(201 shares) - - 2,477 - - - - 2,477
Tax benefit related to vesting of
restricted stock - - 434 - - - - 434
6
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Nine Months Ended March 31, 2007
(In Thousands, Except Per Share Data, Unaudited)
Accumulated
Accumulated
Common Stock Unearned Other
----------------- Paid-In Retained ESOP Treasury Comprehensive
Shares Amount Capital Earnings Shares Stock Income (Loss) Total
------ ------ ------- -------- ------ ----- ------------- -----
Cash dividends declared ($0.15/share) - - - (2,768) - - - (2,768)
------ ------ -------- -------- -------- -------- -------- --------
Balance - March 31, 2007 71,602 $7,274 $196,699 $305,675 $(14,426) $(18,034) $ (3,601) $473,587
====== ====== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
7
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands, Unaudited)
Nine Months Ended
March 31,
----------------------
2007 2006
--------- ---------
Cash Flows from Operating Activities:
Net income $ 1,715 $ 7,736
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 1,462 1,411
Net amortization of premiums, discounts and loan fees and costs 678 602
Deferred income taxes 1,031 1,480
Amortization of intangible assets 477 477
Provision for loan losses 378 245
Realized gains on sale of securities available for sale (55) (1,023)
Increase in cash surrender value of bank owned life insurance (392) (311)
ESOP, stock option plan and restricted stock plan expenses 5,638 3,261
Realized loss on sale of real estate owned - 35
Realized gain on disposition of premises and equipment (3) -
Decrease in interest receivable 1,019 2,239
Increase in other assets (2,714) (3,459)
(Decrease) increase in interest payable (3) 52
Increase (decrease) in other liabilities 60 (1,012)
--------- ---------
Net Cash Provided by Operating Activities 9,291 11,733
--------- ---------
Cash Flows from Investing Activities:
Purchases of securities available for sale (286) (215)
Proceeds from sale of securities available for sale 131,383 256,956
Purchases of securities held to maturity - (4,000)
Proceeds from calls and maturities of securities available for sale 3,894 1,210
Proceeds from calls and maturities of securities held to maturity - 9,989
Proceeds from repayments of securities available for sale 1,395 729
Proceeds from repayments of securities held to maturity - 2,337
Purchase of loans (71,377) (14,640)
Net increase in loans receivable (43,287) (90,208)
Proceeds from sale of real estate owned - 65
Purchases of mortgage-backed securities available for sale (81,703) (27,699)
Purchases of mortgage-backed securities held to maturity - (64,765)
Principal repayments on mortgage-backed securities available for sale 102,545 36,039
Principal repayments on mortgage-backed securities held to maturity - 104,429
Additions to premises and equipment (1,189) (2,559)
Proceeds from cash settlement on premises and equipment 21 -
Purchase of FHLB stock - (3,083)
Redemption of FHLB stock 245 9,270
Purchase of bank owned life insurance - (10,208)
--------- ---------
Net Cash Provided by Investing Activities $ 41,641 $ 203,647
--------- ---------
8
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
(In Thousands, Unaudited)
Nine Months Ended
March 31,
--------------------------
2007 2006
----------- -----------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits $ 22,933 $ (69,993)
Repayment of FHLB advances (5,459) (433)
(Decrease) increase in advance payments by borrowers for taxes (34) 424
Refund of common stock offering expense - 3
Dividends paid to minority stockholders of Kearny Financial Corp. (2,750) (2,802)
Increase in treasury stock due to purchase of Kearny Financial Corp.
common stock (18,169) (2,268)
Treasury stock reissued 108 -
Purchase of common stock of Kearny Financial Corp. for restricted
stock plan (789) (1,815)
Tax benefit related to vesting of restricted stock 434 -
----------- -----------
Net Cash (Used in) Financing Activities $ (3,726) $ (76,884)
----------- -----------
Net Increase in Cash and Cash Equivalents $ 47,206 $ 138,496
Cash and Cash Equivalents - Beginning 230,279 139,865
----------- -----------
Cash and Cash Equivalents - Ending $ 277,485 $ 278,361
=========== ===========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the year for:
Income taxes, net of refunds $ 1,313 $ 4,528
=========== ===========
Interest $ 37,406 $ 28,377
=========== ===========
Supplemental Disclosure of Non-Cash Transactions:
Cash dividend declared $ 960 $ 993
=========== ===========
Reclassification of securities and mortgage-backed securities from
held to maturity to available for sale at estimated fair value (As of
quarter ended March 31, 2006) $ - $ 1,163,875
=========== ===========
See notes to consolidated financial statements.
9
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. PRINCIPLES OF CONSOLIDATION
-------------------------------
The consolidated financial statements include the accounts of Kearny Financial
Corp. (the "Company"), its wholly-owned subsidiaries, Kearny Federal Savings
Bank (the "Bank") and Kearny Financial Securities, Inc., and the Bank's
wholly-owned subsidiaries, KFS Financial Services, Inc. and Kearny Federal
Investment Corp. The Company conducts its business principally through the Bank.
Management prepared the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
including the elimination of all significant inter-company accounts and
transactions during consolidation.
2. BASIS OF PRESENTATION
-------------------------
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and Regulation S-X and do not include
information or footnotes necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, all
adjustments (consisting of normal adjustments) necessary for a fair presentation
of the consolidated financial statements have been included. The results of
operations for the three and nine month periods ended March 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, 2006
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 2006 consolidated financial statement,
including the notes thereto included in the Company's annual report on Form
10-K.
3. NET INCOME PER COMMON SHARE
-------------------------------
Basic earnings per share ("EPS") is based on the weighted average number of
common shares actually outstanding adjusted for Employee Stock Ownership Plan
shares not yet committed to be released and unvested restricted stock awards.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock, such as unvested restricted stock awards
and outstanding stock options, were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. Diluted EPS is calculated by adjusting the weighted average number of
shares of common stock outstanding to include the effect of contracts or
securities exercisable or which could be converted into common stock, if
dilutive, using the treasury stock method. Shares issued and reacquired during
any period are weighted for the portion of the period they were outstanding.
10
The following is a reconciliation of the numerator and denominators of the basic
and diluted earnings per share computations:
Three Months Ended Nine Months Ended
March 31, 2007 March 31, 2007
-------------------------------------- ------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
Net income $242 $1,715
==== ======
Basic earnings per share,
income available to
common stockholders $242 69,012 $0.00 $1,715 69,343 $0.02
===== =====
Effect of dilutive securities:
Stock options - 115 - 101
Restricted stock awards - 166 - 220
---- ------ ------ ------
$242 69,293 $0.00 $1,715 69,664 $0.02
==== ====== ===== ====== ====== =====
Three Months Ended Nine Months Ended
March 31, 2006 March 31, 2006
-------------------------------------- ------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
Net income $2,446 $7,736
====== ======
Basic earnings per share,
income available to
common stockholders $2,446 70,918 $0.03 $7,736 71,006 $0.11
===== =====
Effect of dilutive securities:
Stock options - - - -
Restricted stock awards - 116 - 45
---- ------ ------ ------
$2,446 71,034 $0.03 $7,736 71,051 $0.11
====== ====== ===== ====== ====== =====
4. DIVIDEND WAIVER
-------------------
During the quarter ended March 31, 2007, the federally chartered mutual holding
company of the Company ("Kearny MHC"), waived its right, in accordance with the
non-objection previously granted by the Office of Thrift Supervision ("OTS"), to
receive cash dividends of approximately $2.5 million declared during the
quarter, on the shares of Company common stock it owns. Furthermore, in December
2006, the OTS advised Kearny MHC that it would not object to dividend waivers
for the quarters ending June 30, 2007 and September 30, 2007, provided the OTS
does not subsequently determine that the proposed waivers are detrimental to the
safe and sound operation of the Bank.
5. STOCK COMPENSATION PLANS
----------------------------
At the annual meeting held on October 24, 2005, stockholders of the Company
approved the Kearny Financial Corp. 2005 Stock Compensation and Incentive Plan.
The Plan authorizes the award of up to 3,564,137 shares as stock options and
1,425,655 shares as restricted stock awards. On October 24, 2005,
11
non-employee directors received in aggregate 1,069,240 options and 427,696
shares of restricted stock. On December 5, 2005, certain officers of the Company
and the Bank received in aggregate 2,305,000 options and 910,000 shares of
restricted stock. The Company adopted SFAS No. 123(R) upon approval of the Plan,
and began to expense the fair value of all options over their vesting periods
and began to expense the fair value of all share-based compensation granted over
the requisite service periods.
SFAS No. 123(R) also requires the Company to realize as a financing cash flow
rather than an operating cash flow, as previously required, the benefits of
realized tax deductions in excess of previously recognized tax benefits on
compensation expense (which was $434,000 for the nine months ended March 31,
2007). In accordance with Staff Accounting Bulletin ("SAB") No. 107, the Company
classified share-based compensation for employees within salaries and employee
benefits to correspond with the same line item as the cash compensation paid to
employees. The Company classified share-based compensation for non-employee
directors within directors' compensation to correspond with the same line item
as the cash compensation paid to non-employee directors.
Employee options and non-employee director options generally vest over a
five-year service period. Management recognizes compensation expense for all
option grants over the awards' respective requisite service periods. Management
estimated the fair values relating to all of the fiscal 2006 option grants using
the Black-Sholes option-pricing model. Since there is no historical information
on the volatility of the Company's stock, management based expectations about
future volatility on the average volatilities of similar entities for an
appropriate period following their initial public offering. Thus, calculations
to determine the stock volatility of mutual holding companies converted since
1995, and a subset of the first group, all mutual holding companies that
converted after 2000, were used to derive the one and three-year Beta for
purposes of identifying a reasonable volatility factor. Management estimated the
expected life of the options assuming that they must be no less than the vesting
period, five years, and no greater than their contractual life, ten years, in
conjunction with an evaluation of the grantees' ages and lengths of service. The
10-year Treasury yield in effect at the time of the grant provides the risk-free
rate for periods within the contractual life of the option. Management
recognizes compensation expense for the fair values of these awards, which have
graded vesting, on a straight-line basis over the requisite service period of
the awards.
Management used the following assumptions to estimate the fair values of options
granted:
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Weighted average risk-free interest rate - - - 4.53%
Expected dividend yield - - - 1.62%
Weighted average volatility factor of the expected
market price of the Company's common stock - - - 18.00%
Weighted average expected life of the options - - - 6.50 years
Restricted shares generally vest in full after five years. The product of the
number of shares granted and the grant date market price of the Company's common
stock determine the fair value of restricted shares. Management recognizes
compensation expense for the fair value of restricted shares on a straight-line
basis over the requisite service period of five years.
During the three months ended March 31, 2007, the Company recorded stock option
expense of $498,000 and restricted stock expense of $825,000. During the nine
months ended March 31, 2007, the Company recorded stock option expense of $1.5
million and restricted stock expense of $2.5 million. The Company
12
estimates it will record in aggregate an additional $1.3 million of stock option
and restricted stock expenses during the remainder of fiscal 2007.
The following is a summary of the status of the Company's outstanding stock
options as of March 31, 2007 and stock option activity and related information
during the nine months ended March 31, 2007:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Options Exercise Contractual Value
(000's) Price Term (000's)
------------ ------------ ------------ ------------
Outstanding at June 30, 2006 3,374 $12.34
Granted - -
Exercised (9) $12.71 $14
Forfeited - -
-----
Outstanding at March 31, 2007 3,365 $12.34 8.6 years $6,861
=====
Exercisable at March 31, 2007 666 $12.34 8.6 years $1,361
The following is a summary of the status of the Company's unexercisable options
as of March 31, 2007 and changes during the nine months ended March 31, 2007:
Weighted
Average
Options Grant Date
(000's) Fair Value
------------ ------------
Unexercisable at June 30, 2006 3,374 $2.95
Granted - -
Vested (675) $2.95
Forfeited - -
----- -----
Unexercisable at March 31, 2007 2,699 $2.95
===== =====
As of March 31, 2007, expected future compensation expense attributed to the 2.7
million unexercisable options outstanding is $7.3 million over 3.6 years.
Upon exercise of options, management expects to draw on treasury stock as the
source of the shares.
The following is a summary of the status of the Company's outstanding restricted
share awards as of March 31, 2007 and changes during the nine months ended March
31, 2007:
Weighted
Restricted Average
Shares Grant Date
(000's) Fair Value
------------ ------------
Non-vested at June 30, 2006 1,338 $12.34
Granted - -
Vested (268) $12.34
Forfeited - -
----- ------
Non-vested at March 31, 2007 1,070 $12.34
===== ======
As of March 31, 2007, expected future compensation expense attributed to the 1.1
million non-vested restricted shares outstanding at that date is $12.0 million
over 3.6 years.
13
6. STOCK REPURCHASE PLANS
--------------------------
On July 18, 2006, the Company announced that the Board of Directors authorized a
stock repurchase plan to acquire up to 1,091,063 shares, or 5% of the Company's
outstanding common stock held by persons other than Kearny MHC. This stock
repurchase plan commenced after the Company completed its purchase of shares in
the open market to fund awards under the Company's 2005 Stock Compensation and
Incentive Plan. During the nine months ended March 31, 2007, a total of
1,091,063 shares were purchased under the plan at a cost of $17.4 million, or
approximately $15.95 per share.
On January 18, 2007, the Company announced that the Board of Directors
authorized an additional stock repurchase plan to acquire up to 1,036,634
shares, or 5% of the Company's outstanding stock held by persons other than
Kearny MHC. Such purchases will be made from time to time in the open market or
in privately negotiated stock purchases, based on stock availability, price and
the Company's financial performance. It is anticipated that purchases will be
made during the next twelve months, although no assurance can be given as to
when they will be made or to the total number of shares that will be purchased.
During the three months ended March 31, 2007, the Company purchased 52,500
shares at a cost of $771,000, or approximately $14.68 per share.
7. BENEFIT PLANS - COMPONENTS OF NET PERIODIC COST
---------------------------------------------------
Benefit Equalization Plan net periodic pension expense was as follows:
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- ---------------
2007 2006 2007 2006
---- ---- ---- ----
(In Thousands) (In Thousands)
Service cost $ 15 $ 15 $ 45 $ 45
Interest cost 44 44 132 132
Amortization of unrecognized past service
costs (3) (3) (9) (9)
Amortization of unrecognized net actuarial
loss 46 46 138 138
----- ----- ----- -----
Net periodic pension expense $ 102 $ 102 $ 306 $ 306
===== ===== ===== =====
Postretirement Welfare Plan net periodic postretirement benefit cost was as
follows:
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- ---------------
2007 2006 2007 2006
---- ---- ---- ----
(In Thousands) (In Thousands)
Service cost $ 8 $ 6 $24 $18
Interest cost 7 6 21 18
Amortization of unrecognized past service
liability 2 3 6 9
--- --- --- ---
Net periodic postretirement benefit cost $17 $15 $51 $45
=== === === ===
14
Directors' Consultation and Retirement Plan net periodic plan cost was as
follows:
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- ---------------
2007 2006 2007 2006
---- ---- ---- ----
(In Thousands) (In Thousands)
Service cost $ 34 $ 32 $102 $ 96
Interest cost 34 29 102 87
Amortization of unrecognized transition
obligation 11 11 33 33
Amortization of unrecognized past service
liability 15 15 45 45
---- ---- ---- ----
Net periodic postretirement benefit cost $ 94 $ 87 $282 $261
==== ==== ==== ====
8. NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
companies recognize in their financial statements the impact of a tax position,
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact of adopting FIN 48 on our
financial statements.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently evaluating the
potential impact, if any, of the adoption of FASB Statement No. 157 on our
consolidated financial condition, results of operations and cash flows.
On September 29, 2006, the Financial Accounting Standards Board "FASB" issued
SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans ("SFAS 158"), which amends SFAS 87 and SFAS 106 to require
recognition of the over funded or under funded status of pension and other
postretirement benefit plans on the balance sheet. Under SFAS 158, gains and
losses, prior service costs and credits, and any remaining transition amounts
under SFAS 87 and SFAS 106 that have not yet been recognized through net
periodic benefit cost will be recognized in accumulated other comprehensive
income, net of tax effects, until they are amortized as a component of net
periodic cost. The measurement date -- the date at which the benefit obligation
and plan assets are measured -- is required to be the company's fiscal year end.
SFAS 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 15, 2008. We are currently
evaluating the potential impact, if any, of the adoption of FASB Statement No.
158 on our consolidated financial condition and results of operations.
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
15
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 disclosures are required in fiscal years beginning after December
15, 2007, with early adoption permitted. The Company does not believe that the
implementation of this guidance will have a material impact on the Company's
consolidated financial statements.
On September 7, 2006, the Task Force reached a conclusion on EITF Issue No.
06-5, "Accounting for Purchases of Life Insurance - Determining the Amount That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance" ("EITF 06-5"). The scope of EITF
06-5 consists of six separate issues relating to accounting for life insurance
policies purchased by entities protecting against the loss of "key persons." The
six issues are clarifications of previously issued guidance on FASB Technical
Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect it to have a material impact on
the Company's consolidated financial statements.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements"
(EITF 06-10). 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 March 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for Income
Tax Benefits of Dividends on Share-Based Payment Awards." EITF 06-11 requires
companies to recognize the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees
for non-vested equity-classified employee share-based payment awards as an
increase to additional paid-in capital. EITF 06-11 is effective for fiscal years
beginning after September 15, 2007. The Company does not expect EITF 06-11 will
have a material impact on its financial position, results of operations or cash
flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement 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 our consolidated financial
statements.
16
9. RESTATEMENT
---------------
As previously reported, the Company intends to file restated Consolidated
Statement of Financial Condition for the fiscal year ended June 30, 2006 and
quarterly periods ended March 31, 2006 and September 30, 2006. The effect of
this change is that the securities and mortgage-backed securities are now
reported at fair value instead of at amortized cost, which results in a change
in the value of these assets previously reported on the Consolidated Statements
of Financial Condition at March 31, 2006, June 30, 2006 and September 30, 2006.
Carrying these securities at fair value will impact the accumulated other
comprehensive income (loss), which is a component of stockholders' equity. The
adjustments to be made to the financial statements are non-cash in nature and do
not result in changes to the income statements or previously reported total net
income for any period.
The following table presents changes to the Consolidated Statement of Financial
Condition at June 30, 2006 resulting from the restatement:
June 30, June 30,
2006 2006
(As previously (As restated)
reported)
-----------------------------
(In Thousands)
Securities available for sale 18,346 222,793
Securities held to maturity 209,048 -
Mortgage-backed securities available for sale - 670,329
Mortgage-backed securities held to maturity 689,962 -
Other assets 9,203 17,685
Total Assets 2,007,525 1,991,773
Accumulated other comprehensive (loss) (133) (15,885)
Total Stockholders' Equity 490,886 475,134
Total Liabilities and Stockholders' Equity 2,007,525 1,991,773
10. SUBSEQUENT EVENT
---------------------
On April 30, 2007, the bank entered into a severance agreement with a senior
officer of the Bank. The officer will receive a severance payment of $264,000,
payable over the next 14 months. Management will record a charge to income of
$264,000 during the quarter ending June 30, 2007.
17
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 March 31, 2007 and June 30, 2006
Total assets increased $15.9 million or 0.8%, to $2.01 billion at March 31,
2007, from $1.99 billion at June 30, 2006, due primarily to a $114.1 million
increase in net loans receivable and a $47.2 million increase in cash and cash
equivalents and to a lesser degree, a $19.0 million increase in the fair value
of the securities and mortgage-backed securities portfolios. Partially
offsetting these increases were decreases totaling $157.7 million in the
amortized cost of the securities and mortgage-backed securities portfolios due
to calls and maturities, repayments and sales of securities.
Cash and cash equivalents increased $47.2 million or 20.5%, to $277.5 million at
March 31, 2007 from $230.3 million at June 30, 2006. The increase in cash and
cash equivalents resulted primarily from the sale of securities as well as
principal and interest payments and maturities from the securities and
mortgage-backed securities portfolios and to a lesser degree an increase in
deposits at the Bank, particularly in tiered money market accounts, as discussed
below. To the extent that the Bank does not need the funds for loan
originations, management expects to maintain liquidity at an elevated level as
long as the Treasury yield curve remains inverted or flat in order to take
advantage of the high short term interest rates resulting from the current yield
curve.
The amortized cost of securities decreased by $136.3 million or 59.9%, to $91.3
million at March 31, 2007, compared to $227.6 million at June 30, 2006. Between
June 30, 2006 and March 31, 2007, the fair value of the securities portfolio
increased by $4.4 million and was $90.9 million at March 31, 2007. During the
quarter ended March 31, 2007, management continued to sell securities from the
municipal bond portfolio selling bonds with a par value of $25.7 million,
recording a loss of $97,000. Since the sale of the bonds began in October 2006,
a total of $131.7 million of bonds have been sold as of March 31, 2007, for a
gain of $55,000. A decline in pre-tax income reduces the advantage of holding
tax-exempt instruments and the portfolio's yield continues to be substantially
below market. The municipal bond portfolio was $195.7 million at June 30, 2006,
with a weighted average yield of 3.78%. At March 31, 2007, the Bank's remaining
municipal bond portfolio was $67.2 million with a weighted average yield of
3.72%. During the nine months ended March 31, 2007, there was also a call of a
$2.0 million trust
18
preferred security. Management utilized cash flows from principal and interest
payments to fund loan originations during the nine month period.
Loans receivable, net of deferred fees and costs and the allowance for loan
losses, increased $114.1 million or 16.2%, to $817.7 million at March 31, 2007,
compared to $703.6 million at June 30, 2006. The increase resulted from
management's focus on increasing the Bank's loan portfolio while reducing its
dependence on securities to generate interest income. Total loans constituted
40.9% of assets at March 31, 2007, compared to 35.5% at June 30, 2006. By
comparison, the securities and mortgage-backed securities portfolios constituted
37.6% of assets at March 31, 2007, compared to 44.8% at June 30, 2006.
One-to-four family residential first mortgage loans, the Bank's largest category
increased by $64.1 million to $529.9 million at March 31, 2007. Nonresidential
mortgages increased by $37.1 million to $133.1 million at March 31, 2007.
Multi-family mortgages increased by $6.5 million to $17.5 million at March 31,
2007. Home equity loans increased by $15.0 million to $108.6 million at March
31, 2007. Commercial loans decreased by $1.6 million and totaled $1.6 million at
March 31, 2007. There was a nominal decrease in home equity lines of credit of
$472,000 to $12.5 million at March 31, 2007. Construction loans outstanding and
gross construction loans decreased $6.5 million to $15.6 million and $10.6
million to $22.9 million, respectively at March 31, 2007. Virtually the entire
decrease in gross construction loans occurred in the nonresidential category. To
supplement the Bank's in-house loan originations, the Bank purchases mortgages
from several mortgage companies, with $71.4 million of one-to-four family
residential mortgage loans purchased during the nine months ended March 31,
2007. The Bank has not originated or purchased any interest only mortgages, pay
option adjustable rate mortgages or sub-prime mortgages.
The amortized cost of mortgage-backed securities decreased $21.4 million or
3.1%, to $668.6 million at March 31, 2007, from $690.0 million at June 30, 2006.
Between June 30, 2006 and March 31, 2007, the fair value of the mortgage-backed
securities portfolio increased by $14.6 million and was $663.5 million at March
31, 2007. Management reinvested approximately $81.7 million of cash flows from
the mortgage-backed securities portfolio during the nine months ended March 31,
2007, purchasing $22.7 million in fixed rate Community Reinvestment Act ("CRA")
eligible issues and $59.0 million in issues in which the underlying loans are
3/1 or 5/1 adjustable rate mortgages. Excluding the CRA eligible issues, which
the Bank purchases to meet its CRA investments requirement, it has been
management's policy for several years to purchase only adjustable rate issues,
preferably seasoned such that the conversion to a one-year adjustable product
may be less than three or five years away. Management's redeployment of cash
flows from principal and interest payments to fund loan originations contributed
to the decrease in the size of the mortgage-backed securities portfolio.
Premises and equipment was virtually unchanged at $35.7 million at March 31,
2007 compared to $35.9 million at June 30, 2006, as depreciation nominally
exceeded the cost of additions to fixed assets. The most significant addition to
premises and equipment during the period was completion of renovations at the
Bank's retail branch in Old Tappan, New Jersey at a cost of approximately
$371,000.
Bank owned life insurance increased $392,000 or 2.7%, to $15.0 million at March
31, 2007 compared to $14.6 million at June 30, 2006, due to an increase in the
cash surrender value of the underlying insurance policies.
Deposits increased $23.0 million or 1.6%, to $1.47 billion at March 31, 2007,
compared to $1.44 billion at June 30, 2006. During the nine months ended March
31, 2007, certificates of deposit and interest-bearing demand deposits,
particularly tiered money market deposit accounts, increased approximately $53.0
million and $26.2 million, to $936.1 million and $148.3 million, respectively;
while savings deposits decreased approximately $52.7 million to $324.7 million
and non-interest-bearing deposits
19
decreased $3.6 million to $57.5 million. The threat of loss of deposits to
competitors, both core deposits and certificates of deposit, necessitated the
continuance of promotional interest rates during most of the nine month period
ended March 31, 2007 to counteract promotions offered by other financial
institutions in the Bank's market area, however, mid-way through the quarter
ended December 31, 2006, management began to back away from this strategy in an
attempt to mitigate margin compression resulting from the increased cost of
deposits from promotional interest rates. Beginning in the quarter ending June
30, 2007, certificates of deposit with the highest interest rates begin to
mature. Management anticipates that deposit pricing in the marketplace will
become less competitive and expects that this will help the Bank to retain a
significant percentage of the maturing accounts. However, the Bank's current
substantial liquidity position should help management deal with any deposit
attrition.
Federal Home Loan Bank advances decreased $5.5 million or 9.0%, to $55.6 million
at March 31, 2007, compared to $61.1 million at June 30, 2006. The reduction in
borrowings resulted from the maturity of a $5.0 million advance, with an
interest rate of 5.90%, and scheduled principal payments on amortizing advances.
During the nine months ended March 31, 2007, stockholders' equity decreased $1.5
million or 0.3%, to $473.6 million at March 31, 2007 compared to $475.1 million
at June 30, 2006. The decrease was primarily the result of the purchase of
Company common stock partially offset by an increase in accumulated other
comprehensive income. The Company purchased 54,314 shares at a cost of $789,000
for the restricted stock plan and purchased 1,143,563 shares at a cost of $18.2
million as treasury shares. Accumulated other comprehensive loss decreased by
$12.3 million as a result of an increase in the fair value of securities and
mortgage-backed securities available for sale between June 30, 2006 and March
31, 2007. Cash dividends of $0.15 per share totaling $2.8 million in aggregate
also contributed to the decrease in stockholders' equity. The Company's current
regular quarterly dividend is $0.05 per share. Partially offsetting the decrease
in stockholders' equity was net income of $1.7 million recorded during the
period, the release of $1.7 million of Employee Stock Ownership Plan shares, the
release of $2.5 million of restricted stock plan shares, a $1.5 million
adjustment to equity for expensing stock options, a tax benefit of $434,000
recorded due to vesting of restricted stock and $108,000 due to treasury stock
reissued.
Comparison of Operating Results for the Three Months Ended March 31, 2007 and
2006
General. Net income for the quarter ended March 31, 2007 was $242,000 or less
than $0.01 per share, a decrease of $2.2 million or 91.7%, from $2.4 million or
$0.03 per share for the quarter ended March 31, 2006. The decrease in net income
resulted primarily from decreases in net interest income and non-interest income
partially offset by a nominal decrease in non-interest expense.
Net Interest Income. Net interest income for the three months ended March 31,
2007 was $11.3 million, a decrease of $1.4 million or 11.0%, compared to $12.7
million for the three months ended March 31, 2006. The decrease in net interest
income was due to a significant increase in interest expense partially offset by
an increase in interest income.
The Bank's net interest rate spread decreased 41 basis points to 1.70% for the
quarter ended March 31, 2007, from 2.11% for the quarter ended March 31, 2006.
As of December 31, 2006, the most recent date for which the Bank has data,
re-pricing interest-bearing liabilities are expected to exceed re-pricing
interest-earning assets expressed as a percentage of total assets by
approximately 16% over the next twelve months. Management does not believe that
there has been a material change in the Bank's interest rate sensitivity during
the three months ended March 31, 2007. The Bank continued to be liability
sensitive during the quarter ended March 31, 2007 due primarily to maturing
certificates of deposit. The cost of average interest-bearing liabilities
increased 89 basis points, from 2.63% for the three months
20
ended March 31, 2006, to 3.52% for the three months ended March 31, 2007. By
comparison, the yield on average interest-earning assets increased 47 basis
points, from 4.75% for the three months ended March 31, 2006, to 5.22% for the
three months ended March 31, 2007.
The Bank's net interest margin decreased 25 basis points to 2.43% for the three
months ended March 31, 2007, compared with 2.68% for the three months ended
March 31, 2006. Average interest-earning assets during the quarter ended March
31, 2007 were $1.85 billion or $39.5 million less than average interest-earning
assets of $1.89 billion during the quarter ended March 31, 2006. The decrease
resulted in part from use of cash to reduce borrowings as well as fund stock
repurchases. Average interest-bearing liabilities during the quarter ended March
31, 2007 were $1.47 billion or $15.9 million less than average interest-bearing
liabilities of $1.48 billion during the quarter ended March 31, 2006. The ratio
of average interest-earning assets to average interest-bearing liabilities was
126.2% for the quarter ended March 31, 2007, compared to 127.5% for the quarter
ended March 31, 2006.
Interest Income. Total interest income increased $1.7 million or 7.6%, to $24.2
million for the three months ended March 31, 2007, from $22.5 million for the
three months ended March 31, 2006. Year-over-year, interest income from loans
and other interest-earning assets increased while interest from mortgage-backed
securities and securities decreased as a result of a shift in assets into loans.
Interest income from loans receivable increased $2.6 million or 28.6%, to $11.7
million for the three months ended March 31, 2007, from $9.1 million for the
three months ended March 31, 2006 due to growth in the portfolio as well as an
improvement in yield. The average balance of loans receivable increased $156.4
million to $811.4 million during the quarter ended March 31, 2007, from $655.0
million during the quarter ended March 31, 2006. Management continued to focus
on increasing the Bank's loan portfolio while reducing its dependence on
securities to generate interest income. Loans receivable represented 43.8% of
average interest-earning assets for the quarter ended March 31, 2007, as
compared to 34.6% for the same quarter a year ago. By comparison, the average
securities and mortgage-backed securities portfolios constituted 42.3% of
average interest-earning assets for the quarter ended March 31, 2007, as
compared to 56.3% for the quarter ended March 31, 2006. The yield on average
loans receivable increased 19 basis points to 5.75% for the quarter ended March
31, 2007, compared to 5.56% for the quarter ended March 31, 2006. The
improvement in yield year-over-year was due in part to growth in the
nonresidential mortgage category.
Interest income from mortgage-backed securities decreased $158,000 or 1.9%, to
$8.1 million for the three months ended March 31, 2007, compared to $8.3 million
for the three months ended March 31, 2006 due to a reduction in the portfolio
partially offset by an improvement in yield. The average balance of
mortgage-backed securities decreased $43.6 million to $670.0 million for the
quarter ended March 31, 2007, from $713.6 million for the quarter ended March
31, 2006. The yield on average mortgage-backed securities increased 20 basis
points to 4.83% for the three months ended March 31, 2007, from 4.63% for the
three months ended March 31, 2006. The decrease in the average balance of
mortgage-backed securities, year-over-year, resulted from utilization of
principal and interest payments to fund loan originations. The increase in yield
resulted from rate adjustments on pass-through certificates containing
adjustable rate mortgages. Excluding fixed rate CRA eligible issues, management
purchases only 3/1 and 5/1 adjustable rate pass-through certificates, preferably
seasoned such that the conversion to a one-year adjustable product may be less
than three or five years away.
Interest income from securities decreased $2.0 million or 62.5%, to $1.2 million
for the quarter ended March 31, 2007, from $3.2 million for the quarter ended
March 31, 2006 due to a significant reduction in the portfolio partially offset
by an improvement in yield. The average balance of securities decreased $239.1
million to $112.8 million for the quarter ended March 31, 2007, compared to
$351.9 million for the quarter ended March 31, 2006. The decrease in the average
balance was due primarily to the sale of
21
the Bank's entire portfolio of government agency notes and Freddie Mac common
stock in February 2006. Those sales were followed by the sale of municipal bonds
totaling $131.7 million between October 2006 and March 2007, including $25.7
million in the current quarter. The yield on average securities improved 50
basis points from 3.67% for the three months ended March 31, 2006, to 4.17% for
the three months ended March 31, 2007. The higher yield on the securities
portfolio resulted from the sale of the government agency notes and municipal
bonds. The yield on the notes was 3.22% at the time of their sale. The yield on
the bonds was 3.78% at June 30, 2006, with the remaining balance of the
portfolio yielding 3.72% at March 31, 2007.
Interest income from other interest-earning assets increased $1.3 million or
68.4%, to $3.2 million for the quarter ended March 31, 2007, from $1.9 million
for the quarter ended March 31, 2006. This was a result of a significant
increase in the average balance of other interest-earning assets as well as an
improvement in yield. There was an $86.9 million increase in the average balance
of other interest-earning assets to $258.4 million for the three months ended
March 31, 2007, from $171.5 million for the three months ended March 31, 2006.
There was a 65 basis point increase in the yield on average other
interest-earning assets to 5.00% for the quarter ended March 31, 2007, from
4.35% for the quarter ended March 31, 2006, due to increases in short-term
interest rates year-over-year, particularly the rate paid on overnight deposits.
The increase can also be attributed to an increase in the dividend yield on
Federal Home Loan Bank ("FHLB") of New York capital stock. The average balance
of other interest-earning assets increased due to an increase in
interest-earning deposits in other banks, partially offset by a decrease in the
average balance of FHLB capital stock as a result of the lower balance of FHLB
advances. Year-over-year, the average balance of interest-earning deposits
increased $87.6 million to $253.2 million while the average balance of FHLB
capital stock decreased $679,000 to $5.2 million. To the extent not required to
fund loan originations, management reinvested cash flows from the securities and
mortgage-backed securities portfolios into cash equivalents pending redeployment
into other interest-earning assets.
Interest Expense. Total interest expense increased $3.1 million or 31.6%, to
$12.9 million for the three months ended March 31, 2007, from $9.8 million for
the three months ended March 31, 2006. Year-over-year, there was a significant
increase in interest expense attributed to deposits and a nominal decrease in
interest expense from borrowings.
Interest expense from deposits increased $3.4 million or 38.6%, to $12.2 million
for the three months ended March 31, 2007, from $8.8 million for the three
months ended March 31, 2006. The increase resulted primarily from an increase in
the cost of average interest-bearing deposits plus a nominal increase in the
average balance of interest-bearing deposits. The cost of average
interest-bearing deposits increased 95 basis points to 3.44% for the quarter
ended March 31, 2007, from 2.49% for the quarter ended March 31, 2006. An
accelerating increase in the Bank's cost of deposits year-over-year, slowed
during the quarter ended December 31, 2006 and the current quarter as the
intense competition on the pricing of certificates of deposit eased. The average
balance of interest-bearing deposits increased $4.5 million, virtually unchanged
at $1.41 billion for the three months ended March 31, 2007 and the three months
ended March 31, 2006.
Interest expense from FHLB advances decreased $251,000 or 25.0%, to $754,000 for
the quarter ended March 31, 2007, from $1.0 million for the quarter ended March
31, 2006 due to a decrease in average borrowings partially offset by an increase
in cost. Average borrowings decreased $20.4 million to $55.7 million for the
three months ended March 31, 2007, from $76.1 million for the three months ended
March 31, 2006. The decrease in the average balance resulted from scheduled
principal payments on amortizing advances, the maturity of a $5.0 million
advance in November 2006 and the absence of overnight borrowings. There were
overnight borrowings on the Bank's books during the first two months of the
comparative quarter. The cost of average borrowings increased 13 basis points to
5.41% for the quarter ended March 31, 2007 from 5.28% for the quarter ended
March 31, 2006, due to the inexpensive
22
overnight borrowings during the comparative quarter, relative to the interest
rates on the long-term advances on the Bank's books during both quarters.
Provision for Loan Losses. The provision for loan losses decreased $5,000 to
$101,000 for the quarter ended March 31, 2007, as compared to $106,000 during
the quarter ended March 31, 2006. The provisions during both quarters resulted
primarily from growth in the loan portfolio. Total loans increased to $822.0
million at March 31, 2007 from $798.1 million at December 31, 2006. Asset
quality continued to be strong as non-performing loans were $1.1 million or
0.13% of total loans at March 31, 2007; though not as good as the $639,000 or
0.08% of total loans reported at December 31, 2006. The allowance for loan
losses as a percentage of total loans outstanding was 0.71% at March 31, 2007
and 0.72% at December 31, 2006, reflecting allowance balances of $5.9 million
and $5.8 million, respectively.
Management assesses the allowance for loan losses monthly. Management uses
available information to recognize losses on loans, however, additional loan
loss provisions may be necessary in the future, based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses and may
require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. The allowance
for loan losses as of March 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, service charges and
miscellaneous income decreased $12,000 or 2.0%, to $580,000 for the quarter
ended March 31, 2007 from $592,000 for the quarter ended March 31, 2006. Fees
and service charges from operations and the Bank's retail branch network were
lower by $37,000 but miscellaneous income increased $25,000 compared to the year
earlier quarter. Management plans to introduce an overdraft privilege program
for the Bank's retail customers in May 2007 as a way of increasing fee income.
There was a loss on the sale of securities during the quarter ended March 31,
2007 of $97,000 due to the sale of municipal bonds with a par value of $25.7
million. There was a $937,000 net gain on the sale of securities attributed to a
restructuring of the securities portfolio during the quarter ended March 31,
2006.
Non-Interest Expense. Total non-interest expense decreased $117,000 or 1.0%, to
$11.3 million for the three months ended March 31, 2007, from $11.4 million for
the three months ended March 31, 2006. The decrease resulted primarily from
decreases in equipment expense, directors' compensation and miscellaneous
expense partially offset by increases in salaries and employee benefits, net
occupancy expense of premises and a nominal increase in advertising expense.
Salaries and employee benefits increased $106,000 or 1.5%, to $7.1 million for
the quarter ended March 31, 2007, compared to $7.0 million for the quarter ended
March 31, 2006. Compensation expense increased $45,000 to $3.5 million and
pension plan expense increased $15,000 to $663,000, both due to normal salary
increases. The current quarter included Employee Stock Ownership Plan expense of
$562,000, an increase of $65,000 due to an increase in the Company's average
stock price, year-over-year. Stock compensation plans expense was unchanged at
$933,000 and payroll taxes were virtually unchanged at $324,000. Other benefits
expense decreased $23,000 to $1.0 million.
In a Form 8-K filed April 19, 2007, the Company reported that the Board of
Directors of the Bank approved, effective July 1, 2007, "freezing" all future
benefit accruals under the Kearny Federal Savings Bank Pension Plan, a
non-contributory defined benefit pension plan. This action also includes
"freezing" the benefit accruals under the Benefits Equalization Plan related to
the defined benefit pension
23
plan. These actions are intended to provide the Company with additional
flexibility in managing the costs associated with the benefit plans while still
preserving all retirement plan participants' earned and vested benefits.
Management estimates that these actions will result in pre-tax expense
reductions of approximately $1.3 million and $226,000 for the defined benefit
pension plan and benefits equalization plan, respectively, during the year
ending June 30, 2008.
Net occupancy expense of premises increased $59,000 or 7.1%, to $895,000 for the
quarter ended March 31, 2007 from $836,000 for the quarter ended March 31, 2006.
The increase resulted principally from a $51,000 increase in property taxes
expense attributed to the Bank's facilities.
Equipment expense decreased $76,000 or 6.5%, to $1.1 million from $1.2 million
during the comparative quarter. Maintenance expense and service bureau expense
decreased $36,000 and $37,000, respectively, due to management's negotiation of
cost savings from the Bank's electronic data processing service providers as
well as the Bank's core processor. The tentative settlement of a long-standing
dispute with an electronic data processing service provider will result in an
expense of approximately $88,000 in the quarter ending June 30, 2007 for which
the vendor agrees to perform certain services.
Directors' compensation decreased $87,000 or 13.8%, to $544,000 during the
quarter ended March 31, 2007, compared to $631,000 in the quarter ended March
31, 2006. The decrease was due primarily to the Board of Directors' decision to
freeze its incentive compensation plan in December 2006.
Miscellaneous expense decreased $132,000 or 11.4%, to $1.0 million for the
quarter ended March 31, 2007, from $1.2 million for the quarter ended March 31,
2006. The most significant decreases were attributed to audit and accounting
services expense, printing and office supplies expense and annual meeting
expense, which decreased $49,000, $39,000 and $30,000, respectively. Audit and
accounting services expense declined due to lower costs associated with
Sarbanes-Oxley Act compliance. Reduced printing expense and annual meeting
expense resulted from the use of lower cost service providers for the 2006
annual meeting compared to the 2005 meeting. Several other miscellaneous expense
categories decreased a total of $56,000, including officers', directors' and
employee expense which decreased $23,000 due primarily to lower costs incurred
by the dining facility located in the Company's administrative building. These
decreases were partially offset by increases of $43,000 in other categories, the
largest being a $22,000 increase in loan expense. The increase in loan expense
was due primarily to an increase in servicing fees resulting from loans
purchased and serviced by others.
Provision for Income Taxes. The provision for income taxes decreased $158,000 or
63.2%, to $92,000 for the quarter ended March 31, 2007, from $250,000 for the
quarter ended March 31, 2006. The effective income tax rate was 27.5% for the
three months ended March 31, 2007, as compared to 9.3% for the three months
ended March 31, 2006. The effective tax rate increased due a decline in the
ratio of interest from tax-exempt instruments to pre-tax income, year-over-year.
Tax-exempt interest reduced the Company's federal income expense by
approximately $251,000 during the quarter ended March 31, 2007, compared to a
reduction of approximately $598,000 in the quarter ended March 31, 2006.
Management continued to liquidate the municipal bond portfolio due to the
decline in pre-tax income which reduces the advantage of holding tax-exempt
instruments as well as the portfolio's low yield.
Comparison of Operating Results for the Nine Months Ended March 31, 2007 and
2006
General. Net income for the nine months ended March 31, 2007 was $1.7 million or
$0.02 per share, a decrease of $6.0 million or 77.9%, from $7.7 million or $0.11
per share for the nine months ended March 31, 2006. The decrease in net income
resulted primarily from decreases in net interest income and non-interest income
and an increase in non-interest expense, particularly salaries and employee
benefits and directors' compensation due to the cost of stock compensation
plans.
24
Net Interest Income. Net interest income for the nine months ended March 31,
2007 was $34.1 million, a decrease of $3.9 million or 10.3%, compared to $38.0
million for the nine months ended March 31, 2006. The decrease in net interest
income was due to a significant increase in interest expense partially offset by
an increase in interest income.
The Bank's net interest rate spread decreased 37 basis points to 1.73% for the
nine months ended March 31, 2007, from 2.10% for the nine months ended March 31,
2006. The cost of average interest-bearing liabilities increased 88 basis
points, from 2.52% for the nine months ended March 31, 2006, to 3.40% for the
nine months ended March 31, 2007. During the nine months ended March 31, 2007,
the yield on average interest-earning assets increased 51 basis points to 5.13%
for the nine months ended March 31, 2007, from 4.62% for the nine months ended
March 31, 2006. Interest-bearing liabilities continued to re-price faster than
interest-earning assets during the nine months ended March 31, 2007. As of March
31, 2006, re-pricing interest-bearing liabilities were expected to exceed
re-pricing interest-earning assets expressed as a percentage of total assets by
approximately 19% over the next twelve months. This ratio improved to
approximately 16% as of December 31, 2006, the most recent date for which the
Bank has data, due to the redeployment of funds realized from the sale of
securities into cash and cash equivalents. Management does not believe that
there has been a material change in the Bank's interest rate sensitivity during
the three months ended March 31, 2007. The Bank continued to be liability
sensitive during the nine months ended March 31, 2007 due primarily to maturing
certificates of deposit. Promotional interest rates utilized to attract new
deposits, also affected the rollover rates on existing certificates of deposit,
generally pushing non-promotional interest rates higher in order to remain
competitive in the market place.
The Bank's net interest margin decreased 19 basis points to 2.45% for the nine
months ended March 31, 2007, compared with 2.64% for the nine months ended March
31, 2006. Average interest-earning assets during the nine months ended March 31,
2007 were $1.86 billion or $55.2 million less than average interest-earning
assets of $1.92 billion during the nine months ended March 31, 2006. The
decrease resulted in part from use of cash to fund deposit outflows and reduce
borrowings as well as fund stock repurchases. Average interest-bearing
liabilities during the nine months ended March 31, 2007 were $1.47 billion or
$35.5 million less than average interest-bearing liabilities of $1.50 billion
during the nine months ended March 31, 2006. The ratio of average
interest-earning assets to average interest-bearing liabilities was 126.9% for
the nine months ended March 31, 2007, compared to 127.6% for the nine months
ended March 31, 2006.
Interest Income. Total interest income increased $5.1 million or 7.7%, to $71.5
million for the nine months ended March 31, 2007, from $66.4 million for the
nine months ended March 31, 2006. Year-over-year, interest income from loans and
other interest-earning assets increased while interest from mortgage-backed
securities and securities decreased as a result of a shift in assets into loans.
Interest income from loans receivable increased $7.2 million or 27.9%, to $33.0
million for the nine months ended March 31, 2007, from $25.8 million for the
nine months ended March 31, 2006 due primarily to growth in the portfolio as
well as an improvement in yield. The average balance of loans receivable
increased $152.3 million to $770.0 million during the nine months ended March
31, 2007, from $617.7 million during the nine months ended March 31, 2006.
Management continued to implement the Bank's business plan which calls for
increasing the Bank's loan portfolio while reducing its dependence on securities
to generate interest income. Average loans receivable constituted 41.4% of
average interest-earning assets for the nine months ended March 31, 2007, as
compared to 32.2% for the same period a year ago. By contrast, average
securities and mortgage-backed securities represented 45.6% of average
interest-earning assets for the nine months ended March 31, 2007, as compared to
61.6% for the nine months ended March 31, 2006. During the nine months ended
March 31, 2007, the Bank purchased approximately $71.4 million in loans from
mortgage companies compared to
25
approximately $14.6 million during the same period a year earlier due to the
slowing real restate market, which affected the Bank's ability to originate
loans internally. The yield on average loans receivable increased 16 basis
points to 5.72% for the nine months ended March 31, 2007, compared to 5.56% for
the nine months ended March 31, 2006. The improvement in yield year-over-year
was due in part to growth in the nonresidential mortgage category.
Interest income from mortgage-backed securities decreased $1.0 million or 4.0%,
to $24.2 million for the nine months ended March 31, 2007, compared to $25.2
million for the nine months ended March 31, 2006 due to a reduction in the
portfolio partially offset by an improvement in yield. The average balance of
mortgage-backed securities decreased $60.6 million to $676.4 million for the
nine months ended March 31, 2007, from $737.0 million for the nine months ended
March 31, 2006. The yield on average mortgage-backed securities increased 20
basis points to 4.77% for the nine months ended March 31, 2007, from 4.57% for
the nine months ended March 31, 2006. To the extent not required to fund loan
originations, management reinvested cash flows from principal and interest
payments from mortgage-backed securities into cash equivalents pending
redeployment into other interest-earning assets, which contributed to the
decrease in the average balance year-over-year. The increase in yield resulted
from rate adjustments on pass-through certificates containing adjustable rate
mortgages. Excluding CRA eligible securities which are fixed rate, when
redeploying cash flows from the portfolio back into mortgage-backed securities,
management routinely reinvested in adjustable rate product, preferably seasoned
3/1 and 5/1 adjustable rate mortgages such that the first rate change date and
conversion to a one-year adjustable product may be less than three or five years
away. By sacrificing higher yields on fixed rate securities in the short-term,
the Bank gained some interest rate risk protection in the future.
Interest income from securities decreased $6.7 million or 56.3%, to $5.2 million
during the nine months ended March 31, 2007, from $11.9 million during the nine
months ended March 31, 2006 due to a significant reduction in the portfolio
partially offset by an improvement in yield. The average balance of securities
decreased $271.5 million to $171.4 million for the nine months ended March 31,
2007, compared to $442.9 million for the nine months ended March 31, 2006. The
decrease in the average balance was due primarily to the sale of the Bank's
entire portfolio of government agency notes, with an amortized cost of $249.0
million, and Freddie Mac common stock with a fair value of $8.9 million, in
February 2006. Those sales were followed by sales of municipal bonds, totaling
$131.7 million during the nine months ended March 31, 2007. 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. During the comparative period, management was still reinvesting cash
flows from maturing securities back into the portfolio, primarily in the
municipal bond category, due to nominally higher coupons as well as higher tax
equivalent yields. However, the advantage of holding tax-exempt instruments
gradually disappeared with declining pre-tax income. The yield on average
securities improved 48 basis points from 3.59% for the nine months ended March
31, 2006, to 4.07% for the nine months ended March 31, 2007. The higher yield on
the securities portfolio resulted from the sale of the government agency notes
and municipal bonds. The yield on the notes was 3.22% at the time of their sale.
The yield on the bonds was 3.78% at June 30, 2006, with the remaining balance of
the portfolio yielding 3.72% at March 31, 2007.
Interest income from other interest-earning assets increased $5.6 million or
160.0%, to $9.1 million for the nine months ended March 31, 2007, from $3.5
million for the nine months ended March 31, 2006. This was a result of a
significant increase in the average balance of other interest-earning assets as
well as an improvement in yield. There was a $124.5 million increase in the
average balance of other interest-earning assets to $242.4 million for the nine
months ended March 31, 2007, from $117.9 million for the nine months ended March
31, 2006. There was a 104 basis point increase in the yield on average other
interest-earning assets to 4.99% for the nine months ended March 31, 2007, from
3.95% for the nine months ended March 31, 2006, due to increases in short-term
interest rates year-over-year, particularly
26
the rate paid on overnight deposits as well as the dividend yield on Federal
Home Loan Bank ("FHLB") of New York capital stock. The average balance of other
interest-earning assets increased due to an increase in interest-earning
deposits of $128.2 million to $237.2 million, the primary component of other
interest-earning assets, partially offset by a decrease in FHLB capital stock of
$3.5 million to $5.3 million due to a repurchase by FHLB to meet regulatory
requirements. 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.
Interest Expense. Total interest expense increased $9.0 million or 31.7%, to
$37.4 million for the nine months ended March 31, 2007, from $28.4 million for
the nine months ended March 31, 2006. Year-over-year, there was a significant
increase in interest expense attributed to deposits and a nominal decrease in
interest expense from borrowings.
Interest expense from deposits increased $9.3 million or 36.2%, to $35.0 million
for the nine months ended March 31, 2007, from $25.7 million for the nine months
ended March 31, 2006. The increase resulted primarily from an increase in the
cost of average interest-bearing deposits, which more than offset a decrease in
the average balance of interest-bearing deposits. The cost of average
interest-bearing deposits increased 92 basis points to 3.31% for the nine months
ended March 31, 2007, from 2.39% for the nine months ended March 31, 2006. The
average balance of interest-bearing deposits decreased $27.1 million to $1.41
billion for the nine months ended March 31, 2007, from $1.43 billion for the
nine months ended March 31, 2006. During the year, management offered
promotional interest rates on selected certificates of deposit maturities and
tiered money market deposit accounts in an effort to retain and attract deposits
in the midst of intense competition in the marketplace. This strategy had a
significant effect on the Bank's cost of funds year-over-year. Midway through
the quarter ended December 31, 2006, management began to abandon this strategy
in an attempt to mitigate margin compression. With respect to the same period a
year ago, management reacted to competitive pressures in the marketplace earlier
in 2005 by offering a premium interest rate on 13 month certificates of deposit,
which attracted new money but then ceased offering promotional interest rates
due to the rising cost of funds until the June quarter, when loss of deposits
again became a concern.
Interest expense from Federal Home Loan Bank advances decreased $321,000 or
11.7%, to $2.4 million for the nine months ended March 31, 2007, from $2.7
million for the nine months ended March 31, 2006. Average borrowings decreased
$8.4 million to $58.3 million for the nine months ended March 31, 2007, from
$66.7 million for the nine months ended March 31, 2006. The cost of average
borrowings increased five basis points to 5.51% for the nine months ended March
31, 2007 from 5.46% for the nine months ended March 31, 2006. The decrease in
the average balance resulted from scheduled principal payments on amortizing
advances, the maturity of a $5.0 million advance in November 2006 and overnight
borrowings on the Bank's books during January and February 2006. The cost of
average borrowings increased due to the inexpensive overnight borrowings from a
year ago, relative to the interest rates on the long-term advances on the Bank's
books during both periods.
Provision for Loan Losses. The provision for loan losses increased $133,000, to
$378,000 for the nine months ended March 31, 2007, from a $245,000 provision
recorded during the nine months ended March 31, 2006. Management attributes the
increase principally to growth in the loan portfolio. Total loans increased to
$822.0 million at March 31, 2007 from $708.0 million at June 30, 2006. Asset
quality continued to be strong as non-performing loans were $1.1 million or
0.13% of total loans at March 31, 2007, as compared to $1.0 million or 0.14% of
total loans at June 30, 2006. The allowance for loan losses as a percentage of
total loans outstanding was 0.71% at March 31, 2007 and 0.77% at June 30, 2006,
reflecting allowance balances of $5.9 million and $5.5 million, respectively.
The increase in the allowance balance during the nine months ended March 31,
2007 included a recovery of $27,000 and no
27
charge-offs compared to a recovery and charge-offs of $5,000 and $17,000,
respectively, during the nine months ended March 31, 2006.
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 March 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, service charges and
miscellaneous income increased $52,000 or 3.0%, to $1.8 million during the nine
months ended March 31, 2007 compared to $1.7 million during the nine months
ended March 31, 2006. Fees and service charges from operations and the Bank's
retail branch network decreased by $99,000; during the nine months ended March
31, 2006, fees and service charges included non-recurring loan prepayment fees
of $85,000 compared to $1,000 in the current period. Miscellaneous income
increased $151,000 compared to the year earlier period. Income from bank owned
life insurance increased $62,000 due to the purchase of additional insurance
during the comparative period. There was also a loss on sale of real estate
owned of $35,000 recorded during the nine months ended March 31, 2006, with no
such loss in the current period.
There was a gain on sale of securities during the nine months ended March 31,
2007 of $55,000 compared to $1.0 million during the nine months ended March 31,
2006.
Non-Interest Expense. Total non-interest expense increased $2.7 million or 8.7%,
to $33.6 million for the nine months ended March 31, 2007, from $30.9 million
for the nine months ended March 31, 2006. The increase resulted primarily from
increases in salaries and employee benefits and directors' compensation and to a
lesser degree, increases in net occupancy expense of premises and advertising
expense partially offset by decreases in equipment expense and miscellaneous
expense.
Salaries and employee benefits increased $2.3 million or 12.6%, to $20.6 million
for the nine months ended March 31, 2007, compared to $18.3 million for the nine
months ended March 31, 2006. Management attributes the increase primarily to the
2005 Stock Compensation and Incentive Plan approved at the Company's annual
stockholders' meeting held in October 2005, which resulted in an expense of $2.8
million during the nine months ended March 31, 2007; a $1.6 million increase
compared to $1.2 million recorded in the nine months ended March 31, 2006. The
current nine months included Employee Stock Ownership Plan compensation expense
of $1.7 million, an increase of $287,000 compared to $1.4 million during the
nine months ended March 31, 2006 due to an increase in the average price of the
Company's stock, year-over-year. Other components of salaries and employee
benefits increased $438,000 compared to the prior year, including increases of
$125,000 and $52,000 in compensation expense and pension expense, respectively,
both due to normal salary increases, an increase in other benefits expense of
$217,000 due principally to employee health insurance and a $44,000 increase in
payroll taxes expense due primarily to vesting of restricted stock.
Net occupancy expense of premises increased $73,000 or 2.9%, to $2.6 million for
the nine months ended March 31, 2007 from $2.5 million for the nine months ended
March 31, 2006. Rental income from surplus retail branch space resulted in a
$30,000 decrease in rent expense, net, and repairs and maintenance expense
decreased $69,000. They were offset by increases in property taxes expense,
depreciation expense and utilities expense of $73,000, $58,000 and $42,000,
respectively. The Bank
28
leases surplus space in retail branch facilities in Springfield, River Vale and
the Pleasantdale office in West Orange.
Equipment expense decreased $32,000 or 1.0%, virtually unchanged at $3.3 million
year-over-year. A decrease in maintenance expense of $90,000 due to management's
negotiation of cost savings from the Bank's electronic data processing service
providers was partially offset by higher depreciation expense and service bureau
expense, which increased $5,000 and $52,000, respectively. The increase in
service bureau expense was due primarily to higher costs associated with the
Bank's core processor.
Advertising expense increased $101,000 or 9.5%, to $1.2 million, compared to
$1.1 million during the same period in the prior year, due to an extensive
advertising campaign to publicize promotional interest rates for certificates of
deposit, tiered money market deposit accounts and StarBanking, a bundled
services package. There were also extensive advertising campaigns focused on the
Bank's loan products.
Directors' compensation increased $319,000 or 22.1%, to $1.8 million during the
nine months ended March 31, 2007, compared to $1.4 million during the nine
months ended March 31, 2006. Stock compensation plans expense increased $486,000
due to the 2005 Stock Compensation and Incentive Plan approved at the Company's
annual stockholders' meeting held in October 2005. This increase was partially
offset by decreases in directors' fees and other directors' compensation of
$109,000 and $58,000, respectively. The Company's obligation to pay advisory
board fees in connection with its acquisition of West Essex Bancorp ended in
June 2006, which contributed to the decline in directors' fees. Other directors'
compensation decreased due primarily to the freezing of the directors' incentive
compensation plan during the quarter ended December 31, 2006.
Miscellaneous expense decreased $128,000 or 3.8%, to $3.3 million from $3.4
million, year-over-year. The two categories with the largest increases were
legal expense and loan expense, $77,000 and $56,000, respectively. Management
attributes the increase in legal expense to ongoing evaluation and
implementation of growth and diversification strategies related to execution of
the Company's business plan while the increase in loan expense resulted from
origination costs associated with growing the loan portfolio. The two categories
with the largest decreases were printing and office supplies expense, which
decreased $85,000 due to the use of lower cost service providers and
miscellaneous expense, which decreased $73,000. Miscellaneous expense during the
nine months ended March 31, 2006 included a settlement for $51,000 with the New
Jersey Division of Taxation resulting from a use tax audit covering the previous
five years.
Provision for Income Taxes. The provision for income taxes decreased $1.6
million or 88.9%, to $257,000 for the nine months ended March 31, 2007, from
$1.8 million for the nine months ended March 31, 2006. The effective tax rate
was 13.0% for the nine months ended March 31, 2007, as compared to 19.0% for the
nine months ended March 31, 2006. The effective tax rate declined due to
interest from tax exempt instruments becoming a greater percentage of net income
as net income declined. Tax-exempt interest reduced the Company's federal income
expense by approximately $1.2 million during the nine months ended March 31,
2007, compared to a reduction of approximately $1.8 million during the nine
months ended March 31, 2006. Management is liquidating the municipal bond
portfolio due to the decline in pre-tax income which reduces the advantage of
holding tax-exempt instruments as well as the portfolio's low yield.
29
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a product of
its operating, investing and financing activities. The Bank's primary sources of
funds are deposits, principal amortization, principal prepayments and maturities
of mortgage-backed securities and loans receivable; maturities of securities and
funds provided from operations. In addition, the Bank invests excess funds in
short-term interest-earning assets such as overnight deposits, which provide
liquidity to meet lending requirements. While scheduled payments from the
amortization of loans and mortgage-backed securities and maturing securities and
short-term investments are relatively predictable sources of funds, general
interest rates, economic conditions and competition greatly influence deposit
flows and prepayments on loans and mortgage-backed securities.
The Bank is required to have enough investments that qualify as liquid assets in
order to maintain sufficient liquidity to ensure a safe operation. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. The Bank attempts to
maintain adequate but not excessive liquidity, and liquidity management is both
a daily and long-term function of business management. However, to the extent
that the Bank does not need the funds for loan originations, management expects
to maintain liquidity at an elevated level as long as the Treasury yield curve
remains inverted or flat.
The Bank reviews cash flow projections regularly and updates them in order to
maintain liquid assets at levels believed to meet the requirements of normal
operations, including loan commitments and potential deposit outflows from
maturing certificates of deposit and savings withdrawals. At March 31, 2007, the
Bank had outstanding commitments to originate loans of $57.2 million,
commitments to fund the purchase of loans on a flow basis of $74.0 million,
construction loans in process of $7.2 million and unused lines of credit of
$26.4 million.
During the quarter ended June 30, 2006, management introduced promotional
interest rates for terms of five, nine and 13 months to retain and attract new
certificates of deposit. The Bank continued to offer the promotional interest
rates for certificates of deposit with those terms during the quarter ended
September 30, 2006 as well as a promotional interest rate for a tiered money
market deposit account. The program continued until midway through the quarter
ended December 31, 2006 when the Bank ceased to offer promotional interest rates
on certificates of deposit. Management reduced the interest rate tied to the
highest tier on the tiered money market deposit account several times during the
quarter ended March 31, 2007.
Certificates of deposit increased $53.0 million from $883.1 million at June 30,
2006 to $936.1 million at March 31, 2007 while interest-bearing transaction
accounts increased $26.2 million from $122.1 million at June 30, 2006 to $148.3
million at March 31, 2007, with most of the increase attributed to tiered money
market deposit accounts. Certificates of deposit scheduled to mature in one year
or less at March 31, 2007 totaled $810.9 million compared to $658.2 million at
June 30, 2006. Beginning in the quarter ending June 30, 2007, certificates of
deposit with the highest promotional interest rates begin to mature. Based on
historical experience and expectation of more realistic deposit pricing in the
marketplace, management believes that a significant portion of maturing deposits
will remain with the Bank. However, given management's more conservative pricing
strategy implemented in late October 2006, the Bank could face significant
deposit outflows during the next two quarters. The Bank's substantial liquidity
position, which includes $277.5 million in cash and cash equivalents at March
31, 2007, provides a cushion for deposit attrition, if it occurs.
Borrowings from the Federal Home Loan Bank ("FHLB") of New York are available to
supplement the Bank's liquidity position and to the extent that maturing
deposits do not remain with us, they may need to
30
be replaced with borrowings. At March 31, 2007, advances from the FHLB amounted
to $55.6 million. The Bank has the capacity to borrow additional funds from the
FHLB, through an overnight line of credit of $200.0 million or by taking
additional short-term or long-term advances.
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
March 31, 2007, Kearny Federal Savings Bank exceeded all capital requirements of
the Office of Thrift Supervision (the "OTS").
The following table sets forth the Bank's capital position at March 31, 2007, as
compared to the minimum regulatory capital requirements:
March 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) $ 365,090 44.51% $ 65,612 8.00% $ 82,015 10.00%
Tier 1 Capital
(to risk-weighted assets) $ 359,234 43.80% - - $ 49,209 6.00%
Core (Tier 1) Capital
(to adjusted total assets) $ 359,234 18.83% $ 57,223 3.00% $ 95,372 5.00%
Tangible Capital
(to adjusted total assets) $ 359,234 18.83% $ 28,612 1.50% - -
In December 2006, the Bank received approval from the Office of Thrift
Supervision for a $15.0 million capital distribution to the Company. The cash
dividend was paid in January 2007.
31
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.
32
The following table sets forth the Bank's NPV as of December 31, 2006, the most
recent date for which the Bank has received the Bank's NPV as calculated by the
OTS. Management does not believe that there has been a material adverse change
in the Bank's interest rate risk during the three months ended March 31, 2007.
At December 31, 2006
-------------------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
--------------------- ----------------------------------------
Net Portfolio Basis Point
Changes in Rates (1) $ Amount $ Change % Change Value Ratio Change
-------------------- -------- -------- -------- ----------- ------
(In Thousands)
+300 bp 318,583 -106,269 -25% 17.11% -431 bp
+200 bp 356,021 -68,831 -16% 18.69% -272 bp
+100 bp 390,887 -33,965 -8% 20.10% -131 bp
0 bp 424,852 - - 21.42% -
-100 bp 449,564 +24,712 +6% 22.32% +90 bp
-200 bp 466,448 +41,595 +10% 22.89% +148 bp
(1) The -300 bp scenario is not shown due to the low prevailing interest rate
environment.
This analysis also indicated that as of December 31, 2006 an immediate and
permanent 2.00% increase in interest rates would cause an approximately 9.38%
decrease in our net interest income.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV require the making of certain
assumptions, which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remains constant over the
measurement period. The model also assumes that a particular change in interest
rates reflects uniformly across the yield curve regardless of the duration to
maturity or re-pricing of specific assets and liabilities. Accordingly, although
the NPV measurements and net interest income models provide an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income and
will differ from actual results.
33
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.
34
PART II
ITEM 1. Legal Proceedings
-----------------
At March 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, 2006, previously filed with
the Securities and Exchange Commission.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
The following table reports information regarding
repurchases of the Company's common stock during the quarter
ended March 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
Period Purchased per Share Programs Programs (1)
--------------------------------------------------------------------------------
January 1-31, 2007 0 - 0 1,036,634
--------------------------------------------------------------------------------
February 1-28, 2007 21,000 $14.70 21,000 1,015,634
--------------------------------------------------------------------------------
March 1-31, 2007 31,500 $14.68 31,500 984,134
--------------------------------------------------------------------------------
Total 52,500 $14.68 52,500 -
--------------------------------------------------------------------------------
(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.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
35
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)
11.0 Statements re: computation of per share earnings (Filed herewith).
31.0 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.0 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
36
---------------------
(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).
37
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: May 10, 2007 By: /s/ John N. Hopkins
------------------- -------------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly authorized officer and principal
executive officer)
Date: May 10, 2007 By: /s/ William C. Ledgerwood
------------------- -------------------------------------------
William C. Ledgerwood
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
38