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, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 000-51093
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KEARNY FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
UNITED STATES 22-3803741
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
120 Passaic Ave., Fairfield, New Jersey 07004-3510
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 973-244-4500
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: May 15, 2006.
$0.10 par value common stock - 72,737,500 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, 2006 and June 30, 2005 (Unaudited) 1
Consolidated Statements of Income for the Three Months and Nine
Months Ended March 31, 2006 and 2005 (Unaudited) 2-3
Consolidated Statements of Comprehensive Income for the Three
Months and Nine Months Ended March 31, 2006 and 2005 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2006 and 2005 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7-10
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-23
Item 3: Quantitative and Qualitative Disclosure About Market Risk 24-25
Item 4: Controls and Procedures 26
PART II - OTHER INFORMATION 27-28
SIGNATURES 29
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands, Unaudited)
March 31, June 30,
2006 2005
----------- -----------
Assets
------
Cash and amounts due from depository institutions $ 19,531 $ 16,683
Interest-bearing deposits in other banks 258,830 123,182
----------- -----------
Cash and cash equivalents 278,361 139,865
Securities available for sale 18,279 33,591
Investment securities held to maturity 210,818 470,098
Loans receivable, including net deferred loan costs of $997 and $815 668,382 563,434
Less: Allowance for loan losses (5,649) (5,416)
----------- -----------
Loans receivable, net 662,733 558,018
----------- -----------
Mortgage-backed securities held to maturity 709,388 758,121
Premises and equipment 36,125 34,977
Federal Home Loan Bank of New York stock ("FHLB") 5,174 11,361
Interest receivable 8,191 10,430
Goodwill 82,263 82,263
Bank Owned Life Insurance 14,500 3,981
Other assets 8,361 4,300
----------- -----------
Total assets $ 2,034,193 $ 2,107,005
=========== ===========
Liabilities and stockholders' equity
------------------------------------
Liabilities
-----------
Deposits:
Non-interest bearing $ 57,336 $ 56,142
Interest bearing 1,401,499 1,472,635
----------- -----------
Total deposits 1,458,835 1,528,777
Advances from FHLB 61,254 61,687
Advance payments by borrowers for taxes 5,051 4,627
Other liabilities 6,055 6,432
----------- -----------
Total liabilities 1,531,195 1,601,523
----------- -----------
Stockholders' equity
Preferred stock $0.10 par value, 25,000,000 shares authorized; none
issued and outstanding - -
Common stock $0.10 par value, 75,000,000 shares authorized;
72,737,500 and 72,737,500 issued and outstanding 7,274 7,274
Paid in capital 208,747 207,838
Retained earnings - substantially restricted 305,798 301,857
Unearned Employee Stock Ownership Plan shares (15,881) (16,972)
Unearned Incentive Plan stock (2,819) -
Accumulated other comprehensive income (121) 5,485
----------- -----------
Total stockholders' equity 502,998 505,482
----------- -----------
Total liabilities and stockholders' equity $ 2,034,193 $ 2,107,005
=========== ===========
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,
------------------- ------------------
2006 2005 2006 2005
-------- -------- -------- --------
Interest income:
Loans $ 9,109 $ 7,188 $ 25,774 $ 21,641
Mortgage-backed securities 8,253 8,342 25,239 25,289
Investment and available for sale
securities 3,228 4,122 11,919 12,217
Other interest earning assets 1,866 1,424 3,490 1,670
-------- -------- -------- --------
Total interest income 22,456 21,076 66,422 60,817
-------- -------- -------- --------
Interest expense:
Deposits 8,759 6,739 25,696 19,037
Borrowings 1,005 1,025 2,733 3,004
-------- -------- -------- --------
Total interest expense 9,764 7,764 28,429 22,041
-------- -------- -------- --------
Net interest income 12,692 13,312 37,993 38,776
Provision for loan losses 106 (110) 245 7
-------- -------- -------- --------
Net interest income after provision
for loan losses 12,586 13,422 37,748 38,769
-------- -------- -------- --------
Non-interest income:
Fees and service charges 225 246 791 702
Gain on the sale of available for
sale securities 938 - 1,024 71
Miscellaneous 366 244 924 623
-------- -------- -------- --------
Total non-interest income 1,529 490 2,739 1,396
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits 6,975 5,165 18,338 15,159
Net occupancy expense of
premises 836 924 2,521 2,298
Equipment 1,174 1,051 3,306 2,880
Advertising 353 244 1,063 820
Federal insurance premium 140 138 410 416
Amortization of intangible assets 159 159 477 477
Directors' compensation 631 223 1,443 670
Miscellaneous 1,151 906 3,377 2,647
-------- -------- -------- --------
Total non-interest expense 11,419 8,810 30,935 25,367
-------- -------- -------- --------
Income before income taxes 2,696 5,102 9,552 14,798
Income taxes 250 1,276 1,816 3,984
-------- -------- -------- --------
Net income $ 2,446 $ 3,826 $ 7,736 $ 10,814
======== ======== ======== ========
See notes to consolidated financial statements.
-2-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Cont'd)
------------------------------------------
(In Thousands, Except Per Share Data, Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- --------------------
2006 2005 2006 2005
------- ------- ------- -------
Net income per common share:
Basic $ 0.03 $ 0.06 $ 0.11 $ 0.20
Diluted 0.03 0.06 0.11 0.20
Weighted average number of common shares outstanding:
Basic 71,004 59,170 71,034 53,627
Diluted 71,326 59,170 71,147 53,627
See notes to consolidated financial statements.
-3-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In Thousands, Unaudited)
Three Months Ended Nine Months Ended
March 31, December 31,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net income $ 2,446 $ 3,826 $ 7,736 $ 10,814
-------- -------- -------- --------
Other comprehensive income (loss), net of income taxes:
Gross realized holdings (gain) on
securities available for sale (8,438) - (8,524) (71)
Income tax expense 2,953 - 2,983 25
Gross unrealized holdings gain
(loss) on securities available
for sale 28 (2,668) (99) 84
Deferred income tax benefit
(expense) (10) 934 34 (29)
-------- -------- -------- --------
Other comprehensive income (loss) (5,467) (1,734) (5,606) 9
-------- -------- -------- --------
Comprehensive income $ (3,021) $ 2,092 $ 2,130 $ 10,823
======== ======== ======== ========
See notes to consolidated financial statements.
-4-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands, Unaudited)
Nine Months Ended
March 31,
----------------------
2006 2005
--------- ---------
Cash flows from operating activities:
Net income $ 7,736 $ 10,814
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 1,411 1,080
Net amortization of premiums, discounts and loan fees and costs 602 565
Deferred income taxes 1,480 (1,553)
Amortization of intangible assets 477 477
Provision for loan losses 245 7
Realized gain on sale of securities available for sale (8,844) (71)
Realized loss on sale of securities held to maturity 7,821 -
Decrease in interest receivable 2,239 962
Decrease (increase) in other assets (3,459) 2,387
Realized loss on sale of real estate owned 35 -
Increase (decrease) in interest payable 52 (19)
Increase (decrease) in other liabilities (759) 1,653
Increase in cash surrender value of bank owned life insurance (311) (113)
ESOP, stock option plan and incentive plan expenses 3,261 -
--------- ---------
Net cash provided by operating activities 11,986 16,189
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (215) (143)
Proceeds from sale of securities available for sale 15,750 1,115
Proceeds from sale of securities held to maturity 241,206 -
Purchases of investment securities held to maturity (4,000) (33,189)
Proceeds from calls and maturities of investment securities held to
maturity 11,199 15,386
Proceeds from repayments of investment securities held to maturity 3,066 3,421
Purchase of loans (13,178) -
Net increase in loans receivable (91,670) (10,211)
Proceeds from sale of real estate owned 65 -
Purchases of mortgage-backed securities held to maturity (92,464) (88,081)
Principal repayments on mortgage-backed securities held to maturity 140,468 131,110
Additions to premises and equipment (2,559) (8,845)
Purchase of FHLB stock (3,083) -
Redemption of FHLB stock 9,270 -
Purchase of bank owned life insurance (10,208) -
--------- ---------
Net cash provided by (used in) investing activities $ 203,647 $ 10,563
--------- ---------
See notes to consolidated financial statements.
-5-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
----------------------------------------------
(In Thousands, Unaudited)
Nine Months Ended
March 31,
-----------------------
2006 2005
--------- ---------
Cash flows from financing activities:
Net decrease in deposits $ (69,993) $ (86,485)
Repayment of FHLB advances (433) (408)
Net change in short-term borrowings from FHLB - (12,000)
Increase in advance payments by borrowers for taxes 424 107
Proceeds from the issuance of common stock - 197,138
Refund of common stock offering expenses 3 -
Purchase of common stock of Kearny Financial Corp. for treasury (2,268) -
Purchase of common stock of Kearny Financial Corp. for Incentive
Plan (1,815) -
Dividends paid to minority stockholders of Kearny Financial Corp. (3,055) -
--------- ---------
Net cash (used in) provided by financing activities $ (77,137) $ 98,352
--------- ---------
Net increase in cash and cash equivalents $ 138,496 $ 125,104
Cash and cash equivalents - beginning 139,865 39,488
--------- ---------
Cash and cash equivalents - ending $ 278,361 $ 164,592
========= =========
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes, net of refunds $ 4,528 $ 1,688
========= =========
Interest $ 28,377 $ 22,060
========= =========
Supplemental disclosure of non-cash transactions:
Cash dividend declared $ 993 $ -
========= =========
See notes to consolidated financial statements.
-6-
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of Kearny Financial
Corp. (the "Company"), its wholly owned subsidiaries, Kearny Federal Savings
Bank (the "Bank") and Kearny Financial Securities, Inc., and the Bank's wholly
owned subsidiaries, KFS Financial Services, Inc. and Kearny Federal Investment
Corp. The Company conducts its business principally through the Bank. Management
eliminated all significant inter-company accounts and transactions during
consolidation.
2. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and Regulation S-X and do not include
information or footnotes necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, all
adjustments (consisting of normal adjustments) necessary for a fair presentation
of the consolidated financial statements have been included. The results of
operations for the three and nine month periods ended March 31, 2006, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other period.
In March 2004, the EITF reached a consensus on Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides guidance on other-than-temporary impairment models for
marketable debt and equity securities accounted for under SFAS 115 and
non-marketable equity securities accounted for under the cost method. The EITF
developed a basic three-step model to evaluate whether an investment is
other-than-temporarily impaired. In November 2005, the FASB approved the
issuance of FASB Staff Position FAS No. 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
FSP addresses when an investment is considered impaired, whether the impairment
is other-than-temporary and the measurement of an impairment loss. The FSP also
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary. The FSP
is effective for reporting periods beginning after December 15, 2005 with
earlier application permitted. For the Company, the effective date was January
1, 2006. The adoption of this accounting principle did not have a significant
impact on our financial position or results of operations as the Company
determined that there were no marketable debt or equity securities impacted by
other-than-temporary impairment during the three months ended March 31, 2006.
3. EARNINGS PER SHARE
------------------
Basic earnings per share or EPS equals net income available to common
stockholders divided by the weighted-average number of common shares
outstanding. If potentially dilutive contracts exist such as stock options, or
their equivalent, diluted EPS is also included, calculated using the treasury
stock method. Using this approach, assume there was an exercise of an option at
the beginning of the period, or date of grant, if later. Furthermore, assume
that the proceeds received from the exercise of the option provide funds to buy
treasury stock at the average market price for the period. Finally, assume that
the exercise will only occur if the average market price of the underlying
shares during the period is greater than the exercise price of the option. The
weighted average number of common shares outstanding is increased by the number
of shares assumed issued owing to the exercise of options, or their equivalent,
reduced by the assumed treasury shares purchased.
-7-
The calculation of basic and diluted net income per common share excludes Kearny
Federal Savings Bank Employee Stock Ownership Plan (the "ESOP") shares that have
not been previously allocated to participants or have not been committed to be
released for allocation to participants. The 10,000 shares issued to Kearny MHC
in connection with the Company's reorganization in 2001 were "replaced" with
50,916,250 shares, or 70% of the shares issued in the Company's initial public
offering. This transaction is analogous to a stock split or significant stock
dividend, therefore, net income per common share for those shares have been
retroactively restated for all periods presented.
4. DIVIDEND WAIVER
---------------
During the quarter ended March 31, 2006, the federally chartered mutual holding
company of the Company ("Kearny MHC"), waived its right, upon non-objection from
the Office of Thrift Supervision ("OTS"), to receive cash dividends of
$2,546,000 paid during the quarter and cash dividends of $2,546,000 declared
during the quarter, on the shares of Company common stock it owns. Furthermore,
OTS advised Kearny MHC that it would not object to dividend waivers for the
quarters ending March 31, 2006, June 30, 2006 and September 30, 2006, provided
OTS does not subsequently determine that the proposed waivers are detrimental to
the safe and sound operation of the Bank.
5. STOCK COMPENSATION PLANS
------------------------
The Company has two stock-related compensation plans: stock options and
restricted stock awards. At the annual meeting held on October 24, 2005,
stockholders of the Company approved the Kearny Financial Corp. 2005 Stock
Compensation and Incentive Plan. The plan authorizes the award of up to
3,564,137 shares as stock options and 1,425,655 shares as restricted stock
awards. On October 24, 2005, non-employee directors received in aggregate
1,069,240 options and 427,696 shares of restricted stock. On December 5, 2005,
certain officers of the Company and Bank received in aggregate 2,305,000 options
and 910,000 shares of restricted stock. The Company adopted SFAS No. 123R upon
approval of the Plan, and began to expense the fair value of all options over
their vesting periods and began to expense the fair value of all share-based
compensation granted over the requisite service periods.
SFAS No. 123R also requires the Company to realize as a financing cash flow
rather than an operating cash flow, as previously required, the benefits of
realized tax deductions in excess of previously recognized tax benefits on
compensation expense (which was $0 for the nine months ended March 31, 2006). In
accordance with Staff Accounting Bulletin ("SAB") No. 107, the Company
classified share-based compensation for employees within salaries and employee
benefits to correspond with the same line item as the cash compensation paid to
employees. The Company classified share-based compensation for non-employee
directors within directors' compensation to correspond with the same line item
as the cash compensation paid to non-employee directors.
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 fiscal 2006 option grants using the
Black-Sholes option-pricing model. Since there is no historical information on
the volatility of our 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.
-8-
Management used the following assumptions to estimate the fair values of options
granted:
Three Months Ended Nine Months Ended
March 31, 2006 March 31, 2006
----------------------- -----------------------
Weighted average risk-free interest rate 4.53% 4.53%
Expected dividend yield 1.62% 1.62%
Weighted average volatility factor of the expected
market price of the Company's common stock 18.00% 18.00%
Weighted average expected life of the options 6.50 years 6.50 years
Restricted shares generally vest in full after five years. The product of the
number of shares granted and the grant date market price of the Company's common
stock determine the fair value of restricted shares under the Company's
restricted stock plans. Management recognizes compensation expense for the fair
value of restricted shares on a straight-line basis over the requisite service
period of five years.
During the three months ended March 31, 2006, the Company recorded $1.3 million
of share-based compensation expense, comprised of stock option expense of
$498,000 and restricted stock expense of $825,000. During the nine months ended
March 31, 2006, the Company recorded $1.9 million of share-based compensation
expense, comprised of stock option expense of $713,000 and restricted stock
expense of $1.2 million. The Company estimates it will record share-based
compensation expense of approximately $3.2 million in fiscal 2006.
The following is a summary of the Company's stock option activity and related
information for its option plans for the nine months ended March 31, 2006:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Options Exercise Contractual Value
(000's) Price Term (000's)
------------ ------------ ------------ ------------
Outstanding at June 30, 2005 - -
Granted 3,374 $12
Exercised - -
Forfeited - -
------
Outstanding at March 31, 2006 3,374 $12 9.6 years $4,682
======
Exercisable at March 31, 2006 - - N/A N/A
The weighted average fair value of stock options granted during the nine months
ended March 31, 2006 was $2.95.
The following is a summary of the status of the Company's non-vested options as
of March 31, 2006 and changes during the nine months ended March 31, 2006:
Weighted
Average
Options Grant Date
(000's) Fair Value
--------- ----------
Non-vested at June 30, 2005 - -
Granted 3,374 $12
Exercised - -
Forfeited - -
------
Non-vested at March 31, 2006 3,374 $12
======
Expected future compensation expense relating to the 3.4 million non-vested
options outstanding as of March 31, 2006 is $9.3 million over a weighted average
period of 4.6 years.
-9-
The following is a summary of the status of the Company's restricted shares as
of March 31, 2006 and changes during the nine months ended March 31, 2006:
Weighted
Restricted Average
Shares Grant Date
(000's) Fair Value
---------- ----------
Non-vested at June 30, 2005 - -
Granted 1,338 $12
Exercised - -
Forfeited - -
------
Non-vested at March 31, 2006 1,338 $12
======
Expected future compensation expense relating to the 1.3 million restricted
shares at March 31, 2006 is $15.3 million over a weighted average period of 4.6
years.
6. STOCK REPURCHASE PLAN
---------------------
On November 9, 2005, the Company announced that it received regulatory approval
to begin the purchase of up to 1,425,655 shares or approximately 2% of the
outstanding shares of its common stock in open market transactions for use in
funding the Company's 2005 Stock Compensation and Incentive Plan previously
approved by stockholders. In December 2005, the Company purchased 177,664 shares
at a total cost of $2,268,000, or approximately $12.76 per share. Temporarily,
the repurchased shares appeared as treasury stock in the Consolidated Statement
of Financial Condition as of December 31, 2005, pending completion of a trust
arrangement to administer restricted stock awards granted under the 2005 Stock
Compensation and Incentive Plan.
In March 2006, the Company delivered to the trustee for the 2005 Stock
Compensation and Incentive Plan, 177,664 reissued treasury shares. In March
2006, the Company purchased 134,800 shares at a total cost of $1,815,000, or
approximately $13.46 per share. Upon settlement, the Company delivered the
shares to the trustee for the 2005 Stock Compensation and Incentive Plan.
-10-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Forward-Looking Statements
This Form 10-Q may include certain forward-looking statements based on current
management expectations. The actual results of Kearny Financial Corp. (the
"Company") could differ materially from those management expectations. Factors
that could cause future results to vary from current management expectations
include, but are not limited to, general economic conditions, legislative and
regulatory changes, monetary and fiscal policies of the federal government,
changes in tax policies, rates and regulations of federal, state and local tax
authorities. Additional potential factors include changes in interest rates,
deposit flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of loan and
investment portfolios of Kearny Federal Savings Bank, the Company's wholly-owned
subsidiary, (the "Bank"). Other factors that could cause future results to vary
from current management expectations include changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. Further description of the risks and uncertainties to the
business are included in the Company's other filings with the Securities and
Exchange Commission.
Comparison of Financial Condition at March 31, 2006 and June 30, 2005
Total assets decreased by $72.8 million, or 3.5%, to $2.03 billion at March 31,
2006, from $2.11 billion at June 30, 2005, due primarily to decreases in
investment securities available for sale and held to maturity and
mortgage-backed securities held to maturity partially offset by an increase in
cash and cash equivalents, loans receivable, net, and bank owned life insurance.
Generally, cash and cash equivalents and cash flows from the securities
portfolio funded loan originations and deposit outflows during the nine months
ended March 31, 2006.
Cash and cash equivalents increased $138.5 million to $278.4 million at March
31, 2006, from $139.9 million at June 30, 2005. The Company continued to deploy
the proceeds from its initial public offering completed in February 2005,
primarily reinvesting cash and cash equivalents in the loan portfolio,
purchasing additional bank owned life insurance and funding deposit outflows. A
restructuring of the securities portfolio in late February 2006 generated $250.0
million, with excess liquidity invested in cash equivalents to take advantage of
current short-term interest rates. During the nine months ended March 31, 2006,
the Company paid quarterly cash dividends for the first time. The three
quarterly dividends totaled $3.1 million. Kearny MHC waived receipt of dividends
on the 50,916,250 shares of Company stock it holds.
The carrying value of securities available for sale decreased $15.3 million, or
45.5%, to $18.3 million at March 31, 2006, from $33.6 million at June 30, 2005.
The decrease was due to the sale of a $6.9 million government income fund
acquired during an earlier merger and the sale of 131,088 shares of Freddie Mac
common stock. The sales produced gains of $71,000 and $8.8 million,
respectively, with the latter being the first step in restructuring of the
securities portfolio executed in February 2006. Mark-to-market adjustments to
other investments in the available for sale portfolio during the nine months
ended March 31, 2006 resulted in a nominal improvement to their carrying value,
compared to the value of the portfolio as of June 30, 2005.
-11-
Investment securities held to maturity decreased $259.3 million, or 55.2%, to
$210.8 million at March 31, 2006, from $470.1 million at June 30, 2005. Prior to
February 2006, management reinvested cash from maturing securities back into the
portfolio, primarily in the tax-exempt municipal bond category. Most of the
decrease between June 30, 2005 and March 31, 2006 resulted from the sale of the
Bank's entire portfolio of government agency notes at a loss of $7.8 million.
This portfolio had an average yield of 3.20% and the sale was the second step in
the restructuring of the securities portfolio. The sale of this portfolio
together with the proceeds from the sale of the Freddie Mac common stock,
generated $250.0 million for reinvestment at current short-term interest rates
and funding of future loan originations.
Loans receivable, net of deferred fees and costs and the allowance for loan
losses, increased $104.7 million, or 18.8%, to $662.7 million at March 31, 2006,
from $558.0 million at June 30, 2005. The ratio of loans to deposits improved to
45.4% at March 31, 2006, from 36.5% at June 30, 2005. The increase came in
one-to-four family mortgage loans, particularly first mortgages and home equity
loans. There was substantial growth in all three categories of construction
loans: one-to-four family, multi-family and non-residential. There was also
substantial growth in commercial real estate mortgage loans. Commercial business
loans remained unchanged while home equity lines of credit showed a nominal
decrease, the only lending category to do so, during the nine months ended March
31, 2006.
Mortgage-backed securities held to maturity decreased $48.7 million, or 6.4%, to
$709.4 million at March 31, 2006, from $758.1 million at June 30, 2005. Cash
flows from monthly principal and interest payments funded loan originations and
deposit outflows during the nine months ended March 31, 2006. Though the
mortgage-backed securities portfolio decreased overall, there were purchases of
new positions totaling $92.5 million during the nine months ended March 31,
2006. The purchases were for the most part adjustable rate, sacrificing higher
yields on fixed rate securities in the short-term, for interest rate risk
protection in the future.
Bank owned life insurance ("BOLI") increased $10.5 million to $14.5 million at
March 31, 2006, from $4.0 million at June 30, 2005. The increase resulted from
the purchase of $10.2 million in additional policies and a $311,000 increase in
the cash surrender value of the insurance during the nine months ended March 31,
2006.
Deposits decreased $70.0 million, or 4.6%, to $1.46 billion at March 31, 2006,
from $1.53 billion at June 30, 2005. The competitive market for deposits made it
difficult for management to resist the pressure to increase the rates it paid on
deposits. During the quarter ended June 30, 2005, the Bank reacted to deposit
outflows by offering a premium short-term interest rate, which attracted new
money in the form of certificates of deposit. However, the Bank retreated from
that strategy during the quarters ended September 30, 2005 and December 31,
2005, due to the negative effect on the Bank's cost of funds. Management's goal
to slow the increase in the cost of funds caused by a rise in market interest
rates was not sustainable due to the continuing loss of certificates of deposit
as well as core deposits. In the quarter ended March 31, 2006, the Bank
introduced several deposit products designed to build core deposits, including
Star Banking and a high rate tiered money market account. Management also
adjusted interest rates on certificates of deposit to stabilize their rate of
attrition.
Federal Home Loan Bank advances decreased $433,000, to $61.3 million at March
31, 2006, from $61.7 million at June 30, 2005. The decrease resulted from
scheduled monthly principal payments on amortizing advances. Twice during the
nine months ended March 31, 2006, the Bank activated its overnight line of
credit with the Federal Home Loan Bank of New York to meet liquidity needs.
Management used proceeds from the Company's initial public offering and from the
February 2006 restructuring of the securities portfolio to repay the borrowed
money.
-12-
Stockholders' equity decreased $2.5 million, to $503.0 million at March 31,
2006, from $505.5 million at June 30, 2005. The decrease was primarily the
result of a reduction in accumulated other comprehensive income, net of income
taxes, due to the sale of the Freddie Mac common stock in the securities
available for sale portfolio. The purchase of Company stock contributed to the
incentive plan trust and common stock cash dividends of $0.05 per share paid
during the quarters ended September 30, 2005 and December 31, 2005 and $0.05 per
share cash dividend declared during the quarter ended March 31, 2006 also
contributed to the decrease. Partially offsetting the decrease in stockholders'
equity was net income recorded during the nine months ended March 31, 2006, the
release of unearned ESOP shares and transactions resulting from the stock option
plan approved at the Company's annual meeting held in October 2005. In the
quarter ended March 31, 2006, the Company reissued to the incentive plan trust,
shares of treasury stock purchased during the quarter ended December 31, 2005.
Comparison of Operating Results for the Three Months Ended March 31, 2006 and
2005
General. Net income for the quarter ended March 31, 2006 was $2.4 million, a
decrease of $1.4 million, or 36.8%, from $3.8 million for the quarter ended
March 31, 2005. The decrease in net income resulted primarily from an increase
in non-interest expense, particularly salaries and employee benefits, directors'
compensation and miscellaneous expenses. A decrease in net interest income and
an increase in the provision for loan losses also contributed to the decrease in
net income.
Net Interest Income. Net interest income for the three months ended March 31,
2006 was $12.7 million, a decrease of $620,000, or 4.7%, compared to $13.3
million for the three months ended March 31, 2005. A large decrease in the net
interest rate spread was partially offset by a substantial increase in the ratio
of average interest-earning assets to average interest-bearing liabilities,
which helped to keep the net interest margin virtually unchanged,
year-over-year. The effect of the Bank's recent restructuring of the securities
portfolio was significant enough to relieve pressure on the Bank's net interest
margin, which was narrowing due to interest-bearing liabilities re-pricing at a
rate faster than interest-earning assets during the last twelve months.
The net interest rate spread decreased 38 basis points to 2.12% for the quarter
ended March 31, 2006, from 2.50% for the quarter ended March 31, 2005. During
the quarter ended March 31, 2006, interest-bearing liabilities continued to
re-price faster than interest-earning assets. The cost of average
interest-bearing liabilities increased 87 basis points, from 1.76% for the three
months ended March 31, 2005, to 2.63% for the three months ended March 31, 2006.
With respect to the two components of interest-bearing liabilities, the cost of
deposits increased faster than the cost of borrowings, year-over-year, reversing
the trend from the quarter ended December 31, 2005. During the quarter ended
March 31, 2006, the yield on average interest-earning assets increased 49 basis
points, to 4.75% for the quarter ended March 31, 2006, from 4.26% for the
quarter ended March 31, 2005. The sale of the Bank's entire portfolio of
government agency notes, which had an average yield of 3.20% and the subsequent
reinvestment of the proceeds, played an important role in stabilizing the net
interest margin. The net interest margin decreased one basis point to 2.68% for
the three months ended March 31, 2006, compared with 2.69% for the three months
ended March 31, 2005. The net interest margin for the quarter ended December 31,
2005 was 2.61%.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased from 112.32% for the quarter ended March 31, 2005, to
127.52% for the quarter ended March 31, 2006. The primary reason for the
increase in the ratio was the infusion of cash resulting from the Company's
initial public offering completed in February 2005. Average interest-bearing
liabilities for the quarter ended March 31, 2005 also included funds from
over-subscriptions to the Company's initial public offering, until refunded to
depositors.
-13-
Interest Income. Total interest income increased $1.4 million, or 6.6%, to $22.5
million for the three months ended March 31, 2006, from $21.1 million for the
three months ended March 31, 2005. Average interest-earning assets decreased
$87.6 million, or 4.4%, to $1.89 billion for the quarter ended March 31, 2006,
from $1.98 billion for the quarter ended March 31, 2005. Management attributes
the increase in interest income, to an increase in the yield on average
interest-earning assets, partially offset by a decrease in average
interest-earning assets. Virtually every category of interest-earning assets
recorded an improvement in yield compared to a year ago. Average
interest-earning assets for the quarter ended March 31, 2005 also included funds
from over-subscriptions to the Company's initial public offering, until refunded
to depositors.
Interest income on loans receivable increased $1.9 million, or 26.4%, to $9.1
million for the three months ended March 31, 2006, from $7.2 million for the
three months ended March 31, 2005. The average balance of loans receivable
increased $138.5 million, or 27.1%, to $649.4 million for the quarter ended
March 31, 2006, from $510.9 million for the quarter ended March 31, 2005. The
yield on average loans receivable decreased two basis points, from 5.63% for the
quarter ended March 31, 2005, to 5.61% for the quarter ended March 31, 2006. The
weighted average interest rate of recent loan originations continued to lag
behind the weighted average interest rate of recent loans paid in full, but the
gap is narrowing. Upward rate adjustments on adjustable rate and floating rate
loans in the Bank's portfolio are also contributing to a stabilization of the
yield on average loans receivable. A major marketing effort started in 2005,
continued during the quarter ended March 31, 2006, contributing to the increase
in the average balance of loans receivable.
Interest income on mortgage-backed securities held to maturity decreased
$89,000, virtually unchanged at $8.3 million for the three months ended March
31, 2006, compared to $8.3 million for the three months ended March 31, 2005.
The average balance of mortgage-backed securities decreased $11.0 million, or
1.5%, to $713.6 million for the quarter ended March 31, 2006, from $724.6
million for the quarter ended March 31, 2005. The yield on average
mortgage-backed securities increased to 4.63% for the three months ended March
31, 2006, from 4.60% for the three months ended March 31, 2005. The decrease in
the average balance of mortgage-backed securities, year-over-year, resulted from
the redeployment of monthly principal and interest payments into loan
originations and to fund deposit outflows. The increase in yield resulted from
upward rate adjustments on underlying adjustable rate loans. Mortgage-backed
securities purchased in recent years were for the most part adjustable rate,
sacrificing higher yields on fixed rate securities in the short-term for
interest rate risk protection in the future.
Interest income on investment securities available for sale and held to maturity
decreased $894,000, or 21.8%, to $3.2 million for the quarter ended March 31,
2006, from $4.1 million for the quarter ended March 31, 2005. The average
balance of investment securities decreased $131.1 million, or 26.8%, to $357.2
million for the quarter ended March 31, 2006, compared to $488.3 million for the
quarter ended March 31, 2005. The decrease in the average balance was due
primarily to the sale of the Bank's entire portfolio of government agency notes
and Freddie Mac common stock in February 2006. Prior to the sale, management
reinvested cash from maturing securities back into the portfolio, primarily in
the tax-exempt municipal bond category, which featured nominally higher coupons
as well as higher tax equivalent yields. The yield improved 24 basis points from
3.38% for the three months ended March 31, 2005, to 3.62% for the three months
ended March 31, 2006. The higher yield on investment securities resulted from
the sale of the government agency notes, which provided an average yield of
3.20%.
Interest income on other interest-earning assets increased $442,000, or 31.6%,
to $1.9 million for the quarter ended March 31, 2006, from $1.4 million for the
quarter ended March 31, 2005. This was a result of a significant increase in the
average yield partially offset by a decrease in the average balance of other
interest-earning assets. There was a 212 basis point increase in the yield on
average other interest-earning assets to 4.35% for the quarter ended March 31,
2006, from 2.23% for the quarter ended March 31, 2005,
-14-
due to rising short-term interest rates. There was an $83.9 million decrease in
the average balance of other interest-earning assets to $171.5 million for the
three months ended March 31, 2006, from $255.4 million for the three months
ended March 31, 2005. The average balance of other interest-earning assets
decreased due to a decrease in interest-earning deposits, the primary component
of other interest-earning assets, and a decrease in Federal Home Loan Bank of
New York ("FHLB") capital stock. Interest-earning deposits in the quarter ended
March 31, 2005 included the proceeds from the initial public offering completed
in February 2005, subsequently deployed into other earning assets, while FHLB
capital stock decreased due to a repurchase by FHLB to meet regulatory
requirements. Management reinvested the proceeds from the restructuring of the
securities portfolio in February 2006 in cash equivalents pending deployment
into other earning assets.
Interest Expense. Total interest expense increased $2.0 million, or 25.6%, to
$9.8 million for the three months ended March 31, 2006, from $7.8 million for
the three months ended March 31, 2005. The increase resulted primarily from an
increase in the cost of average interest-bearing liabilities, partially offset
by a decrease in the average balance of interest-bearing liabilities. There was
a 87 basis point increase in the cost of average interest-bearing liabilities to
2.63% for the three months ended March 31, 2006, from 1.76%, for the three
months ended March 31, 2005. The average balance of interest-bearing liabilities
decreased $278.6 million, or 15.8%, to $1.48 billion for the quarter ended March
31, 2006, from $1.76 billion for the quarter ended March 31, 2005.
Interest expense on deposits increased $2.1 million, or 31.3%, to $8.8 million
for the three months ended March 31, 2006, from $6.7 million for the three
months ended March 31, 2005. The increase resulted primarily from an increase in
the cost of average interest-bearing deposits, which more than offset a decrease
in the average balance of interest-bearing deposits. The cost of average
interest-bearing deposits increased 88 basis points to 2.49% for the quarter
ended March 31, 2006, from 1.61% for the quarter ended March 31, 2005. The
average balance of interest-bearing deposits decreased $266.2 million, to $1.41
billion for the three months ended March 31, 2006, from $1.67 billion for the
three months ended March 31, 2005. Average interest-bearing deposits for the
quarter ended March 31, 2005 also included funds from over-subscriptions to the
Company's initial public offering, until refunded to depositors. The competitive
market for deposits made it difficult for management to resist the pressure to
increase the rates it pays on deposits. During the quarter ended June 30, 2005,
the Bank reacted by offering a premium short-term interest rate, which attracted
new money in the form of certificates of deposit. However, the Bank retreated
from that strategy during the quarters ended September 30, 2005 and December 31,
2005, due to the negative effect on its cost of funds. Management's goal to slow
the increase in the cost of funds caused by a rise in market interest rates was
not sustainable due to the continuing loss of certificates of deposit as well as
core deposits. In the quarter ended March 31, 2006, the Bank introduced several
deposit products designed to build core deposits, including Star Banking and a
high rate tiered money market account. Management also adjusted interest rates
on certificates of deposit to stabilize their rate of attrition.
Interest expense on Federal Home Loan Bank advances decreased $20,000, to $1.0
million for the quarter ended March 31, 2006, from $1.0 million for the quarter
ended March 31, 2005. The average balance decreased $12.4 million, or 14.0%, to
$76.1 million for the three months ended March 31, 2006, from $88.5 million for
the three months ended March 31, 2005, which was more than enough to offset an
increase in the cost of average borrowings. The cost of average borrowings
increased 65 basis points to 5.28% from 4.63%, year-over-year. The decrease in
the average balance resulted from the repayment of short-term advances obtained
to fund the purchase of securities, subsequently paid off with proceeds from the
initial public offering completed in February 2005. The cost of average
borrowings increased due to the repayment of the short-term, low cost advances,
leaving mostly higher rate long-term advances on the Bank's books. During the
quarter ended March 31, 2006, the Bank activated its overnight line of credit
with the Federal Home Loan Bank of New York to meet liquidity needs. Management
used proceeds from the restructuring of the securities portfolio to repay the
borrowed money.
-15-
Provision for Loan Losses. The provision for loan losses increased $216,000, to
$106,000 for the quarter ended March 31, 2006, from a $110,000 reduction
recorded during the quarter ended March 31, 2005. Management attributes the
increase primarily to growth in the loan portfolio. Total loans increased to
$667.4 million at March 31, 2006, from $632.7 million at December 31, 2005.
Non-performing loans were $1.4 million, or 0.21% of total loans at March 31,
2006, as compared to $1.2 million, or 0.19% of total loans at December 31, 2005.
The allowance for loan losses as a percentage of total loans outstanding was
0.85% at March 31, 2006 and 1.04% at March 31, 2005, reflecting allowance
balances of $5.6 million and $5.4 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. We maintained
the allowance for loan losses as of March 31, 2006 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 $101,000, to $591,000 for the three months ended
March 31, 2006, compared to $490,000 for the three months ended March 31, 2005.
The increase in non-interest income attributed to fees, service charges and
miscellaneous income was due primarily to income of $93,000 realized from
additional bank owned life insurance purchased between July and December 2005
and non-recurring loan fees of $12,000 nominally offset by lower fee income from
the Bank's retail branch system.
There was non-interest income of $938,000 from a net gain on the sale of
securities attributed to the restructuring of the securities portfolio during
the quarter ended March 31, 2006. The sale of 131,088 shares of Freddie Mac
common stock produced a gain of $8.8 million while the sale of the portfolio of
government agency notes produced a loss of $7.8 million. There was no such gain
or loss recorded in the quarter ended March 31, 2005.
Non-Interest Expense. Total non-interest expense increased $2.6 million, or
29.5%, to $11.4 million for the three months ended March 31, 2006, from $8.8
million for the three months ended March 31, 2005. The increase consisted
primarily of increases in salaries and employee benefits and directors'
compensation, nominal increases in equipment expense and advertising expense and
higher miscellaneous expenses. There was a nominal decrease in the net occupancy
expense of premises.
Salaries and employee benefits increased $1.8 million, or 34.6%, to $7.0 million
for the quarter ended March 31, 2006, compared to $5.2 million for the quarter
ended March 31, 2005. Management attributes the increase primarily to stock
benefit plans approved at the Company's first annual meeting held in October
2005, which resulted in an expense of $933,000 during the quarter ended March
31, 2006. The quarter ended March 31, 2006 contained for the first time a full
quarter's expense attributed to the restricted stock plan and the stock option
plan. The quarter ended March 31, 2006 included employee stock ownership plan
("ESOP") compensation expense of $497,000; while the quarter ended March 31,
2005 did not include this expense category. The Bank established the ESOP in
conjunction with the initial public offering completed in February 2005,
purchasing 1.7 million shares. Increases totaling $380,000 occurred in all other
components of salaries and employee benefits, including compensation expense,
pension expense, other benefits expense and payroll taxes expense during the
quarter ended March 31, 2006.
An increase of $123,000, year-over-year, in equipment expense resulted from
higher maintenance expense, depreciation expense and increased costs related to
data processing. The Bank continued to focus on system risk assessment and
intrusion protection for its computer network.
-16-
Advertising expense increased $109,000, compared to the same period in the prior
year, due to an extensive advertising campaign associated with the introduction
of the Bank's Star Banking product. This new relationship based retail-banking
product, designed to build core deposits, bundles services and deposit products
together with the Bank's Internet banking and bill-paying tools.
Directors' compensation increased $408,000, to $631,000 during the quarter ended
March 31, 2006, from $223,000 in the quarter ended March 31, 2005. The increase
resulted primarily from stock benefit plans approved at the Company's annual
meeting with the distribution of awards to outside directors occurring in
October 2005. The expense recorded in the quarter attributed to the restricted
stock plan and the stock option plan was $390,000.
Miscellaneous expenses increased $245,000, or 27.0%, to $1.2 million for the
quarter ended March 31, 2006, compared to $906,000 for the quarter ended March
31, 2005. Miscellaneous expenses included audit and accounting services expense,
which increased $72,000 to $139,000 and expenses of $68,000 attributed to the
Company's prior and upcoming annual meetings. Audit and accounting services
expense includes expenses attributed to compliance with Section 404 of the
Sarbanes-Oxley Act. These expenses were in large part due to becoming a public
company. All other elements of non-interest expense totaled $944,000 for the
three months ended March 31, 2006; an increase of $105,000, or 12.5%, from
$839,000 for the three months ended March 31, 2005.
Provision for Income Taxes. The provision for income taxes decreased $1.0
million to $250,000 for the quarter ended March 31, 2006, from $1.3 million for
the quarter ended March 31, 2005. The effective income tax rate was 9.3% for the
three months ended March 31, 2006, as compared to 25.0% for the three months
ended March 31, 2005. Management attributes the lower effective income tax rate
primarily to a significant decrease in pre-tax income, $2.7 million for the
quarter ended March 31, 2006 compared to $5.1 million for the quarter ended
March 31, 2005.
Comparison of Operating Results for the Nine Months Ended March 31, 2006 and
2005
General. Net income for the nine months ended March 31, 2006 was $7.7 million, a
decrease of $3.1 million, or 28.7%, from $10.8 million for the nine months ended
March 31, 2005. The decrease in net income resulted from an increase in
non-interest expense, particularly salaries and employee benefits and directors'
compensation, and to a lesser degree, net occupancy expense of premises,
equipment expense, advertising expense and miscellaneous expenses. A nominal
decrease in net interest income and an increase in the provision for loan losses
also contributed to the decrease in net income.
Net Interest Income. Net interest income for the nine months ended March 31,
2006 was $38.0 million, a decrease of $783,000, or 2.0%, compared to $38.8
million for the nine months ended March 31, 2005. Despite an increase in the
ratio of average interest-earning assets to interest-bearing liabilities, it was
not enough to offset a decrease in the net interest rate spread and net interest
margin. A flat yield curve during the twelve months between March 31, 2005 and
March 31, 2006 hindered the Bank's efforts to offset increasing interest
expense. As a result, interest income lost ground to interest expense,
year-over-year. The Bank's recent restructuring of the securities portfolio
occurred too close to the end of the 2006 period to significantly affect the
results for the nine months ended March 31, 2006 compared to the nine months
ended March 31, 2005.
The net interest rate spread decreased 50 basis points to 2.10% for the nine
months ended March 31, 2006, from 2.60% for the nine months ended March 31,
2005. Interest rate sensitivity during the nine months ended March 31, 2006,
compared to the nine months ending March 31, 2005, reflected a substantial
negative gap, with interest-bearing liabilities re-pricing faster than
interest-earning assets. However, the narrowing of the spread slowed from 56
basis points at the six- month interval, year-over-
-17-
year, to 50 basis points at the nine-month interval, year-over-year. The yield
on average interest-earning assets increased 20 basis points, to 4.62% for the
nine months ended March 31, 2006, from 4.42% for the nine months ended March 31,
2005. At the same time, the cost of average interest-bearing liabilities
increased 70 basis points, from 1.82% for the nine months ended March 31, 2005,
to 2.52% for the nine months ended March 31, 2006. With respect to the two
components of interest-bearing liabilities, the cost of borrowings increased
faster than the cost of deposits, year-over-year. The net interest margin
decreased 18 basis points to 2.64% for the nine months ended March 31, 2006,
compared with 2.82% for the nine months ended March 31, 2005.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased from 113.57% for the nine months ended March 31, 2005, to
127.64% for the nine months ended March 31, 2006. The primary reason for the
increase in the ratio was the infusion of cash resulting from the Company's IPO
completed in February 2005. Between the comparative periods, including the nine
months ended March 31, 2006, the Bank focused on deploying the proceeds from the
Company's IPO, primarily in loans receivable.
Interest Income. Total interest income increased $5.6 million, or 9.2%, to $66.4
million for the nine months ended March 31, 2006, from $60.8 million for the
nine months ended March 31, 2005. Average interest-earning assets increased
$80.4 million, or 4.4%, to $1.92 billion for the nine months ended March 31,
2006, from $1.84 billion for the nine months ended March 31, 2005. An increase
in average interest-earning assets and an increase in the yield on average
interest-earning assets provided the stimulus for the increase in interest
income. There was growth, year-over-year, in the average balances of most
interest-earning asset categories: particularly loans receivable, net, and to a
lesser degree in mortgage-backed securities held to maturity and other
interest-earning assets. There was some shrinkage in the average balance of
investment securities held to maturity and available for sale, year-over-year.
Generally, the growth resulted from the infusion of cash from the Company's IPO.
The average yields on loans receivable and mortgage-backed securities were
lower, but higher for investment securities and other interest-earning assets,
year-over-year.
Interest income on loans receivable increased $4.2 million, or 19.4%, to $25.8
million for the nine months ended March 31, 2006, from $21.6 million for the
nine months ended March 31, 2005. The average balance of loans receivable
increased $101.0 million, or 19.8%, to $612.2 million for the nine months ended
March 31, 2006, from $511.2 million for the nine months ended March 31, 2005.
There was a three basis point decrease in the yield on average loans receivable
to 5.61% for the nine months ended March 31, 2006, from 5.64% for the nine
months ended March 31, 2005. Early in 2005, the Bank launched a major marketing
effort designed to take advantage of a strong housing market. This marketing
program significantly boosted loan originations, which contributed to the
increase in the average balance of loans receivable. The marketing program is
continuing. The weighted average interest rate of loan originations continued to
lag behind the weighted average interest rate of recent loans paid in full, but
the gap is narrowing. Upward rate adjustments on adjustable rate and floating
rate loans in the Bank's portfolio are also contributing to a stabilization of
the yield on average loans receivable.
Interest income on mortgage-backed securities held to maturity decreased a
nominal $50,000, virtually unchanged at $25.2 million for the nine months ended
March 31, 2006, compared to $25.3 million for the nine months ended March 31,
2005. The average balance of mortgage-backed securities increased $4.2 million,
or 0.6%, to $737.0 million for the nine months ended March 31, 2006, from $732.8
million for the nine months ended March 31, 2005. The yield on average
mortgage-backed securities decreased to 4.57% for the nine months ended March
31, 2006, from 4.60% for the nine months ended March 31, 2005. The increase in
the average balance of mortgage-backed securities, year-over-year, resulted from
reinvestment of monthly principal and interest payments into new mortgage-backed
securities. The decrease in yield resulted from the reinvestment of monthly
principal payments from higher coupon mortgage-backed securities into new lower
yielding securities, which occurred in a relatively lower
-18-
interest rate environment. Of the $92.5 million in new positions purchased
during the nine months ended March 31, 2006, most were adjustable rate, due to
management's concerns about rising interest rates. By sacrificing higher yields
on fixed rate securities in the short-term, the Bank gained some interest rate
risk protection in the portfolio for the future.
Interest income on investment securities available for sale and held to maturity
decreased $298,000, or 2.4%, to $11.9 million for the nine months ended March
31, 2006, from $12.2 million for the nine months ended March 31, 2005. The
average balance of investment securities decreased $36.3 million, or 7.5%, to
$449.8 million for the nine months ended March 31, 2006, compared to $486.1
million during the prior year. The yield improved from 3.35% for the nine months
ended March 31, 2005, to 3.53% for the nine months ended March 31, 2006. The
decrease in the average balance of investment securities, year-over-year,
resulted from the sale of the Bank's entire portfolio of government agency notes
and Freddie Mac common stock in February 2006. Prior to the sale, management
reinvested cash from maturing securities back into the portfolio, primarily in
the tax-exempt municipal bond category. The higher yield on investment
securities resulted from the sale of the government agency notes, which provided
an average yield of 3.20% and reinvestment of earlier maturities into tax-exempt
municipal bonds featuring nominally higher coupons as well as higher tax
equivalent yields.
Interest income on other interest-earning assets increased $1.8 million to $3.5
million for the nine months ended March 31, 2006, from $1.7 million for the nine
months ended March 31, 2005. This was a result of a 185 basis point increase in
the yield on average other interest-earning assets to 3.95% for the nine months
ended March 31, 2006, from 2.10% for the nine months ended March 31, 2005, due
to rising short-term interest rates. Also contributing to the increase was an
$11.7 million increase in the average balance of other interest-earning assets
to $117.9 million for the nine months ended March 31, 2006, from $106.2 million
for the nine months ended March 31, 2005. The average balance of other
interest-earning assets increased due to an increase of $14.2 million in
interest-earning deposits from $94.8 million to $109.0 million, which consisted
of cash received from the IPO completed in February 2005. There was a decrease
of $2.6 million to $8.8 million in the average balance of FHLB capital stock,
another component of interest-earning assets, which decreased due to a stock
repurchase by FHLB to meet regulatory requirements. Management reinvested the
proceeds from the restructuring of the securities portfolio in February 2006 in
cash equivalents pending deployment into other earning assets.
Interest Expense. Total interest expense increased $6.4 million, or 29.1%, to
$28.4 million for the nine months ended March 31, 2006, from $22.0 million for
the nine months ended March 31, 2005. The increase resulted primarily from an
increase in the cost of average interest-bearing liabilities, partially offset
by a decrease in the average balance of interest-bearing liabilities. There was
a 70 basis point increase in the cost of average interest-bearing liabilities to
2.52% for the nine months ended March 31, 2006, from 1.82% for the nine months
ended March 31, 2005. The average balance of interest-bearing liabilities
decreased $115.2 million, or 7.1%, to $1.50 billion for the nine months ended
March 31, 2006, from $1.62 billion for the nine months ended March 31, 2005.
Interest expense on deposits increased $6.7 million, or 35.3%, to $25.7 million
for the nine months ended March 31, 2006, from $19.0 million for the nine months
ended March 31, 2005. The increase resulted primarily from an increase in the
cost of average interest-bearing deposits, partially offset by a decrease in the
average balance of interest-bearing deposits. The cost of average
interest-bearing deposits increased 73 basis points to 2.39% for the nine months
ended March 31, 2006, from 1.66% for the nine months ended March 31, 2005. The
average balance of interest-bearing deposits decreased $96.1 million, or 6.3%,
to $1.44 billion for the nine months ended March 31, 2006, from $1.53 billion
for the nine months ended March 31, 2005. The competitive market for deposits
made it difficult for management to resist the pressure to increase the rates it
pays on deposits. During the quarter ended June 30, 2005, the Bank reacted by
offering a premium short-term interest rate, which attracted new money in the
form of
-19-
certificates of deposit. However, the Bank retreated from that strategy during
the quarters ended September 30, 2005 and December 31, 2005, due to the negative
effect on its cost of funds. Management's goal to slow the increase in the cost
of funds caused by a rise in market interest rates was not sustainable due to
the continuing loss of certificates of deposit as well as core deposits. In the
quarter ended March 31, 2006, the Bank introduced several deposit products
designed to build core deposits, including Star Banking and a high rate tiered
money market account. Management also adjusted interest rates on certificates of
deposit to stabilize their rate of attrition.
Interest expense on Federal Home Loan Bank advances decreased $271,000, or 9.0%,
to $2.7 million for the nine months ended March 31, 2006, from $3.0 million for
the nine months ended March 31, 2005. The average balance decreased $19.2
million, or 22.4%, to $66.7 million for the nine months ended March 31, 2006,
from $85.9 million for the nine months ended March 31, 2005, which was more than
enough to offset an increase in the cost of average borrowings. The cost of
average borrowings increased 79 basis points to 5.46% from 4.67%,
year-over-year. The decrease in the average balance resulted from the repayment
of short-term advances obtained to fund the purchase of securities, subsequently
paid off with proceeds from the IPO completed in February 2005, plus scheduled
monthly principal payments on amortizing advances. The cost of average
borrowings increased due to the repayment of the short-term, low cost advances,
leaving mostly higher rate long-term advances on the Bank's books. Twice during
the nine months ended March 31, 2006, the Bank activated its overnight line of
credit with the Federal Home Loan Bank of New York to meet liquidity needs.
Provision for Loan Losses. The provision for loan losses increased $238,000, to
$245,000 for the nine months ended March 31, 2006, from $7,000 recorded during
the nine months ended March 31, 2005. Management attributes the increase
primarily to growth in the loan portfolio between the two periods. Total loans
increased to $667.4 million at March 31, 2006, from $562.6 million at June 30,
2005. Non-performing loans were $1.4 million, or 0.21% of total loans at March
31, 2006, as compared to $1.9 million, or 0.34% of total loans at June 30, 2005.
The allowance for loan losses as a percentage of total loans outstanding was
0.85% at March 31, 2006 and 0.96% at June 30, 2005, reflecting allowance
balances of $5.6 million and $5.4 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. We maintained
the allowance for loan losses as of March 31, 2006 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 $390,000, to $1.7 million for the nine months
ended March 31, 2006, from $1.3 million for the nine months ended March 31,
2005. The increase in non-interest income attributed to fees, service charges
and miscellaneous income was due primarily to income of $225,000 realized from
additional bank owned life insurance purchased between July and December 2005,
non-recurring loan fees, including prepayment penalties of $86,000 and increased
fee income from the Bank's retail branch system.
There was non-interest income from net gains on the sale securities of $1.0
million during the nine months ended March 31, 2006, compared to non-interest
income from gains on the sale of securities of $71,000 during the nine months
ended March 31, 2005. In the quarter ended March 31, 2006, the sale of 131,088
shares of Freddie Mac common stock produced a gain of $8.8 million while the
sale of the portfolio of government agency notes produced a loss of $7.9
million. There was also an $86,000 gain on the sale of a government income fund
recorded earlier in the year.
-20-
Non-Interest Expense. Total non-interest expense increased $5.5 million, or
21.7%, to $30.9 million for the nine months ended March 31, 2006, from $25.4
million for the nine months ended March 31, 2005. The increase consisted
primarily of an increase in salaries and employee benefits, net occupancy
expense of premises, equipment expense, advertising expense, directors'
compensation and miscellaneous expenses.
Salaries and employee benefits increased $3.1 million, or 20.4%, to $18.3
million for the nine months ended March 31, 2006, compared to $15.2 million for
the nine months ended March 31, 2005. Management attributes the increase
primarily to stock benefit plans approved at the Company's first annual meeting
held in October 2005, which resulted in an expense of $1.2 million recorded for
the nine months ended March 31, 2006. The distribution of restricted stock and
stock option awards to officers occurred in December 2005. Employee stock
ownership plan ("ESOP") compensation expense was $1.4 million. The Bank
established the ESOP in conjunction with the initial public offering completed
in February 2005, purchasing 1.7 million shares. The nine months ended March 31,
2005 did not include these expense categories. Compensation expense increased
$703,000, year-over-year, due to normal salary increases and additional
personnel hired to staff the Bank's 26th retail branch office, which opened in
Lanoka Harbor, New Jersey in October 2005. Other employee benefits expense
including employee health insurance and payroll taxes increased $451,000,
year-over-year. Pension expense decreased $607,000 from the same period in the
prior year, when the Bank recorded a special charge due to actuarial adjustments
resulting from lower than expected investment returns on plan assets and higher
required contributions resulting from the incremental effect of normal salary
increases.
Net occupancy expense of premises increased $223,000 to $2.5 million during the
nine months ended March 31, 2006 from $2.3 million for the nine months ended
March 31, 2005. Management attributes most of the increase to repairs and
maintenance expense and utilities expense associated with the operation of the
Bank's retail branch system. An increase in depreciation expense resulted from
the Company's headquarters building in Fairfield, New Jersey, which the Bank's
personnel did not fully occupy until November 2004. In December 2005, the Bank
began leasing space to a tenant, located in the building housing its
Springfield, New Jersey retail branch office, which will help mitigate the cost
of operating that location. The Bank may lease other surplus space to tenants in
the future.
An increase of $426,000, year-over-year, in equipment expense resulted from
higher depreciation expense and increased costs related to data processing,
including system risk assessment and intrusion protection for the Bank's
computer network, ATM support and Internet banking. Depreciation expense
increased due primarily to new furniture, fixtures and equipment located in the
Company's headquarters building.
Advertising expense increased $243,000, compared to the same period in the prior
year, due to an advertising campaign associated with the grand opening of the
Bank's 26th retail branch office in Lanoka Harbor, New Jersey in October 2005.
The Bank conducted an extensive marketing campaign to increase its loan
originations and an advertising campaign associated with the introduction of the
Bank's Star Banking product. This new relationship based retail-banking product,
designed to build core deposits, bundles services and deposit products together
with the Bank's Internet banking and bill-paying tools.
Directors' compensation increased $773,000, to $1.4 million during the nine
months ended March 31, 2006, from $670,000 for the nine months ended March 31,
2005. The increase resulted primarily from stock benefit plans approved at the
Company's annual meeting, with a $685,000 expense recorded for the nine months
ended March 31, 2006. Other fees, including an expense attributed to a
directors' incentive compensation plan, increased by $145,000. Advisory board
fees decreased $58,000 year-over-year, due to the expiration of obligations
resulting from the acquisition of Pulaski Bancorp in October 2002.
Miscellaneous expenses increased $730,000, or 28.1%, to $3.4 million for the
nine months ended March 31, 2006, compared to $2.6 million for the nine months
ended March 31, 2005. Miscellaneous expenses included professional fees
consisting of legal expense and audit and accounting services expense, which
-21-
increased $88,000 and $246,000, respectively, and expenses of $163,000
attributed to the Company's prior and upcoming annual meetings. These expenses
were in large part due to becoming a public company. Audit and accounting
services expense includes expenditures to assist the Company in compliance with
Section 404 of the Sarbanes-Oxley Act. All other elements of non-interest
expense totaled $2.6 million for the nine months ended March 31, 2006; an
increase of $232,000, or 9.7%, from $2.4 million for the nine months ended March
31, 2005.
Provision for Income Taxes. The provision for income taxes decreased $2.2
million to $1.8 million for the nine months ended March 31, 2006, from $4.0
million for the nine months ended March 31, 2005. The effective income tax rate
was 19.0% for the nine months ended March 31, 2006, compared to 26.9% for the
nine months ended March 31, 2005. Management attributes the lower effective
income tax rate to a significant decrease in pre-tax income, $9.6 million for
the nine months ended March 31, 2006 compared to $14.8 million for the nine
months ended March 31, 2005. During the nine months ended March 31, 2006, the
Company recorded adjustments attributed to filing its federal and state income
tax returns for the year ended June 30, 2005, reducing tax expense by $81,000,
which was another factor in the decrease of its effective tax rate.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a product of
its operating, investing and financing activities. The Bank's primary sources of
funds are deposits, amortization, prepayments and maturities of mortgage-backed
securities and outstanding loans, maturities of investment securities and funds
provided from operations. In addition, the Bank invests excess funds in
short-term interest-earning assets such as overnight deposits or U.S. agency
securities, which provide liquidity to meet lending requirements. While
scheduled payments from the amortization of loans and mortgage-backed securities
and maturing investment securities and short-term investments are relatively
predictable sources of funds, general interest rates, economic conditions and
competition greatly influence deposit flows and prepayments on loans and
mortgage-backed securities.
The Bank is required to have enough investments that qualify as liquid assets in
order to maintain sufficient liquidity to ensure a safe operation. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. The Bank attempts to
maintain adequate but not excessive liquidity, and liquidity management is both
a daily and long-term function of business management.
The Bank reviews cash flow projections regularly and updates them in order to
maintain liquid assets at levels believed to meet the requirements of normal
operations, including loan commitments and potential deposit outflows from
maturing certificates of deposit and savings withdrawals. At March 31, 2006, the
Bank had outstanding commitments to originate loans of $74.6 million,
construction loans in process of $14.3 million and unused lines of credit of
$27.8 million.
Certificates of deposit increased during the quarter ended June 30, 2005, due to
a promotional short-term rate offered by the Bank. Deposits, primarily
certificates of deposit, decreased in the quarters ended September 30, 2005 and
December 31, 2005 as the Bank intentionally slowed increases in the rates it
pays on deposits relative to the pace of rising market interest rates.
Certificates of deposit continued to decrease, as well as core deposits, during
the quarter ended March 31, 2006. Management's goal to slow the increase in the
cost of funds was not sustainable. In the quarter ended March 31, 2006, the Bank
introduced several deposit products designed to build core deposits and adjusted
interest rates on certificates of deposit to stabilize their rate of attrition.
Certificates of deposit scheduled to mature in one year or less at March 31,
2006, totaled $716.7 million.
-22-
While deposits are the Bank's primary source of funds, the Bank also generates
cash through borrowings from the Federal Home Loan Bank of New York (the
"FHLB"). At March 31, 2006, advances from the FHLB amounted to $61.3 million.
The Bank has the capacity to borrow additional funds from the FHLB, through an
overnight line of credit or by taking additional long-term or short-term
advances. Because of continued strong loan demand and continued deposit
outflows, the Bank began utilizing the FHLB overnight line of credit during the
quarter ended March 31, 2006. Management used proceeds from the restructuring of
the securities portfolio in February 2006 to repay the borrowed money.
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, 2006, Kearny Federal Savings Bank exceeded all capital requirements of
the Office of Thrift Supervision (the "OTS").
The following table sets forth the Bank's capital position at March 31, 2006, as
compared to the minimum regulatory capital requirements:
March 31, 2006 (Unaudited)
-------------------------------------------------------------------------------
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Action Provisions
------------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------
(In Thousands)
Total Capital
(to risk-weighted assets) $ 371,730 49.68% $ 59,856 8.00% $ 74,820 10.00%
Tier 1 Capital
(to risk-weighted assets) 366,081 48.93% - - $ 44,892 6.00%
Core (Tier 1) Capital
(to adjusted total assets) $ 366,081 19.14% $ 57,366 3.00% $ 95,610 5.00%
Tangible Capital
(to adjusted total assets) $ 366,081 19.14% $ 28,683 1.50% - -
-23-
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Qualitative Analysis. The ability to maximize net interest income is largely
dependent upon the achievement of a positive interest rate spread sustainable
during fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities, which either re-price or mature within a given
period. The difference, or the interest rate re-pricing "gap", provides an
indication of the extent changes in interest rates may affect an institution's
interest rate spread. A positive gap exists when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive liabilities, and
a negative gap exists when the amount of interest rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets. Generally, during a period
of rising interest rates, a negative gap within shorter maturities would
adversely affect net interest income, while a positive gap within shorter
maturities would result in an increase in net interest income. During a period
of falling interest rates, a negative gap within shorter maturities would result
in an increase in net interest income while a positive gap within shorter
maturities would result in a decrease in net interest income.
Because the Bank's interest-bearing liabilities, which mature or re-price within
short periods exceed its interest-earning assets with similar characteristics,
material and prolonged increases in interest rates generally would adversely
affect net interest income, while material and prolonged decreases in interest
rates generally would have a positive effect on net interest income.
The Bank's Board of Directors established an Interest Rate Risk Management
Committee comprised of members of the board and management. The committee meets
quarterly to address management of the Bank's assets and liabilities, including
review of its short term liquidity position; loan and deposit pricing and
production volumes and alternative funding sources; current investments; average
lives, durations and re-pricing frequencies of loans and securities; and a
variety of other asset and liability management topics. The committee reports
the results of its quarterly review to the full board, which adjusts interest
rate risk policy and strategies, as it considers necessary and appropriate.
Quantitative Analysis. Management using the OTS model, which estimates the
change in the Bank's net portfolio value (the "NPV") over a range of interest
rate scenarios, monitors the Bank's interest rate sensitivity. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. OTS defines the NPV ratio, under any interest rate scenario, as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces its analysis based upon data submitted on the Bank's
quarterly Thrift Financial Reports. The following table sets forth the Bank's
NPV as of December 31, 2005, the most recent date for which the Bank has
received the Bank's NPV as calculated by the OTS. Management does not believe
that there has been a material adverse change in the Bank's interest rate risk
during the three months ended March 31, 2006.
At December 31, 2005
------------------------------------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
--------------------------------- ----------------------------------------------------
Net Portfolio Basis Point
Changes in Rates $ Amount $ Change % Change Value Ratio Change
----------------------- -------------- -------------- -------------- -------------- --------------
(In Thousands)
+300 bp 291,698 -145,551 -33% 15.84% -599 bp
+200 bp 340,194 -97,056 -22% 17.95% -388 bp
+100 bp 389,304 -47,945 -11% 19.97% -186 bp
0 bp 437,250 - - 21.83% -
-100 bp 476,615 +39,365 +9% 23.25% +143 bp
-200 bp 501,575 +64,325 +15% 24.09% +226 bp
-24-
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.
-25-
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.
-26-
PART II
ITEM 1. Legal Proceedings
-----------------
At March 31, 2006, neither the Company nor the Bank were
involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of
business, which involve amounts in the aggregate believed by
management to be immaterial to the financial condition of
the Company and the Bank.
ITEM 1A. Risk Factors
------------
Not applicable. Item 1A. to Part I of the Form 10-K was
effective as of December 1, 2005. The Company's fiscal year
end is June 30; therefore, it has not filed a Form 10-K
since Item 1A. became effective. The first time the
Company's Annual Report on Form 10-K will include "Item 1A.
Risk Factors" will be for the year ending June 30, 2006.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits
--------
The following Exhibits are filed as part of this report:
3.1 Charter of Kearny Financial Corp. (1)
3.2 By-laws of Kearny Financial Corp. (1)
4.0 Specimen Common Stock Certificate of Kearny Financial Corp. (1)
10.1 Employment Agreement between Kearny Federal Savings Bank and
John N. Hopkins (1)
10.2 Employment Agreement between Kearny Federal Savings Bank and
Allan Beardslee (1)
10.3 Employment Agreement between Kearny Federal Savings Bank and
Albert E. Gossweiler (1)
10.4 Employment Agreement between Kearny Federal Savings Bank and
Sharon Jones (1)
10.5 Employment Agreement between Kearny Federal Savings Bank and
William C. Ledgerwood (1)
10.6 Employment Agreement between Kearny Federal Savings Bank and
Erika Sacher Parisi (1)
10.7 Employment Agreement between Kearny Federal Savings Bank and
Patrick M. Joyce (1)
10.8 Directors Consultation and Retirement Plan (1)
10.9 Benefit Equalization Plan (1)
-27-
10.10 Benefit Equalization Plan for Employee Stock Ownership Plan (1)
10.11 2005 Stock Compensation and Incentive Plan (2)
11.0 Statements re: computation of per share earnings (Filed herewith).
31.0 Rule 13a-14(a)/15d-14(a) Certifications (Filed herewith).
32.0 Section 1350 Certifications (Filed herewith).
---------------------------------------------------------------------------
(1) Incorporated by reference to the identically numbered exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-118815).
(2) Incorporated by reference to the Registrant's definitive proxy statement filed
September 30, 2005 (File No. 000-51093).
-28-
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 15, 2006 By: /s/ John N. Hopkins
------------ -------------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly authorized officer and principal
executive officer)
Date: May 15, 2006 By: /s/ Albert E. Gossweiler
------------ -------------------------------------------
Albert E. Gossweiler
Senior Vice President and Chief Financial
Officer
(Principal financial officer)
-29-