Filed pursuant to Rule 424(b)(3)
File No. 333-118815
Interests in
Kearny Federal Savings Bank
Employees' Savings and Profit Sharing Plan and Trust
and
Offering of 488,038 Shares of
Common Stock, $.10 par value per share,
of
Kearny Financial Corp.
This prospectus supplement relates to the offer and sale to
participants in the Kearny Federal Savings Bank Employees' Savings and Profit
Sharing Plan and Trust of participation interests and shares of Kearny Financial
Corp.
In connection with the initial public offering of common stock of
Kearny Financial Corp., the plan has been amended to permit the investment of
plan assets in various participant directed investment alternatives, including
investment in the stock of Kearny Financial Corp. Your eligibility to purchase
stock utilizing your 401(k) Plan assets is determined based upon your stock
subscription rights as a depositor of Kearny Federal Savings Bank. Participation
in the 401(k) Plan does not give you any special rights to purchase stock in the
initial public offering. You may direct the trustee of the plan to purchase the
stock with plan assets which are attributable to you as a participant. This
prospectus supplement relates to your decision whether or not to invest all or a
portion of your plan funds in Kearny Financial Corp. common stock.
If you direct the trustee to invest all or a portion of your plan funds
in Kearny Financial Corp. common stock in the initial public offering, the price
paid for such shares will be $10.00 per share. This price is the price that will
be paid by all other persons who purchase shares of Kearny Financial Corp.
common stock in the initial public offering.
If you direct the trustee to invest all or a portion of your plan funds
in Kearny Financial Corp. common stock after the initial public offering, shares
purchased for your account in open market transactions, and the price paid for
such shares will be the market price at the time of the purchase, which may be
more or less than the initial public offering price of $10.00 per share.
The prospectus of Kearny Financial Corp., dated December 28, 2004 which
is attached to this prospectus supplement, includes detailed information
regarding Kearny Financial Corp. common stock, and the financial condition,
results of operation, and business of Kearny. This prospectus supplement
provides information regarding the plan. You should read this prospectus
supplement together with the prospectus and keep both for future reference.
Please refer to Risk Factors beginning on page 12 of the prospectus.
These securities have not been approved or disapproved by the
Securities and Exchange Commission, the Office of Thrift Supervision, or any
other federal agency or any state securities commission, nor has such
commission, office, or other agency or any state securities commission passed
upon the accuracy or adequacy of this prospectus supplement. Any representation
to the contrary is a criminal offense.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
The date of this prospectus supplement is December 28, 2004.
TABLE OF CONTENTS
The Offering......................................................................................................1
Securities Offered.......................................................................................1
Election to Purchase Stock in the Initial Offering.......................................................1
Value of Participation Interests.........................................................................2
Purchase Price of Kearny Financial Corp. Common Stock....................................................2
Method of Directing Investments..........................................................................3
Time for Directing Investment............................................................................3
Irrevocability of Investment Direction...................................................................3
Direction to Purchase the Stock After the Initial Offering...............................................3
Nature of Each Participant's Interest in
Kearny Financial Corp. Common Stock.............................................................4
Voting and Tender Rights of the Stock....................................................................4
Minimum Investment.......................................................................................4
Description of the Plan...........................................................................................4
General..................................................................................................4
Eligibility and Participation............................................................................5
Contributions and Benefits Under the Plan................................................................5
Limitations on Contributions.............................................................................5
Investment of Plan Assets................................................................................6
Performance of Previous Funds............................................................................8
Performance of Employer Stock Fund.......................................................................8
Benefits Under the Plan................................................................................. 9
Withdrawals and Distributions From the Plan............................................................. 9
Administration of the Plan............................................................................. 11
Reports to Plan Participants........................................................................... 11
Amendment and Termination.............................................................................. 12
Merger, Consolidation, or Transfer..................................................................... 12
Federal Income Tax Consequences.........................................................................12
Restrictions on Resale..................................................................................13
Additional Employee Retirement Income Security Act ("ERISA") Considerations.............................13
SEC Reporting and Short-Swing Profit Liability..........................................................13
Additional Information..................................................................................14
Legal Opinions...................................................................................................14
Investment Election Form.................................................................................Appendix-A
Change of Investment Allocation Form.....................................................................Appendix-B
Special Tax Notice Regarding Plan Payments...............................................................Appendix-C
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement
are participation interests in the plan and shares of Kearny Financial Corp.
common stock. Only employees of Kearny who meet the eligibility requirements
under the plan may participate. Information with regard to the plan is contained
in this prospectus supplement and information with regard to the stock offering
and the financial condition, results of operation, and business of Kearny is
contained in the attached prospectus.
Election to Purchase Stock in the Initial Offering
Your eligibility to purchase stock utilizing your 401(k) Plan assets is
determined based upon your stock subscription rights as a member of Kearny
Federal Savings Bank. Participation in the 401(k) Plan does not give you any
special rights to purchase stock in the initial public offering. You may direct
the trustee of the plan to invest all or part of the funds in your account in
the Employer Stock Fund. Based upon your election, the trustees of the plan will
subscribe for Kearny Financial Corp. shares in the initial offering. You also
will be permitted to direct ongoing purchases of the stock under the plan after
the initial offering. See "Direction to Purchase Stock After the Initial
Offering." The plan's trustee will follow your investment directions. Amounts
not transferred to the Employer Stock Fund will remain invested in the other
investment funds of the plan as directed by you. See "Investment of Plan
Assets." Your investment in the common stock of Kearny Financial Corp. in the
offering through the Kearny Financial Corp. Stock Fund available under the Plan
is subject to the purchase priorities contained in the plan of stock issuance of
Kearny Financial Corp.
All Plan participants are eligible to direct a transfer of funds to the
Kearny Financial Corp. Stock Fund. However, such directions are subject to the
purchase priorities in the plan of stock issuance as follows:
1. Eligible account holders
2. Tax-qualified employee benefit plans of Kearny Financial Corp., including
the employee stock ownership plan which we intend to adopt, and
3. Supplemental eligible account holders
An eligible account holder is a depositor whose deposit account(s)
totaled $50.00 or more on March 31, 2003. A supplemental eligible account holder
is a depositor whose deposit account(s) totaled $50.00 or more on September 30,
2004. If you fall into subscription offering categories (1) or (3), you have
subscription rights to purchase shares of Kearny Financial Corp. common stock in
the subscription offering and you may use funds in the Plan account to pay for
the shares of Kearny Financial Corp. common stock which you are eligible to
purchase. You may also be able to purchase shares of Kearny Financial Corp.
common stock in the subscription offering even though you are unable to purchase
through subscription offering categories (1) or (3) if Kearny Financial Corp.
determines to allow the Plan to purchase shares through subscription offering
category (2), reserved for its tax-qualified employee plans, including the
employee stock ownership plan which will be adopted by Kearny Financial Corp. in
1
connection with the offering. The trustee of the Kearny Financial Corp. Stock
Fund will purchase common stock in accordance with your directions. No later
than the closing date of the subscription offering period, the amount that you
elect to transfer from your existing account balances for the purchase of common
stock in the offering will be removed from your existing accounts and
transferred to an interest-bearing account, pending the closing of the offering.
At the close of the offering, and subject to a determination as to whether all
or any portion of your order may be filed (based on your purchase priority and
whether the offering is oversubscribed), all or a portion of the amount that you
have transferred to purchase stock in the offering will be applied to the common
stock purchase.
In the event the offering is oversubscribed, i.e. there are more orders
for common stock than shares available for sale in the offering, and the trustee
is unable to use the full amount allocated by you to purchase common stock in
the offering, the amount that cannot be invested in common stock will be
reinvested in the investment funds of the Plan. The amount that cannot be
applied to the purchase of common stock in the offering and any interest your
account earned, pending investment in common stock, will be reinvested in
accordance with your then existing investment election (in proportion to your
investment direction for future contributions). If you fail to direct the
investment of your account balances towards the purchase of any shares in
connection with the offering, your account balances will remain in the
investment funds of the Plan as previously directed by you.
Value of Participation Interests
As of December 28, 2004, the total market value of the assets of the
plan equaled $4,880,388. The plan administrator has informed each participant of
the value of his or her account in the plan as of January 3, 2005. The value of
the plan assets represents your past contributions to the plan, employer
matching contributions, profit-sharing contributions, plus or minus earnings or
losses on contributions, less withdrawals and loans. You may direct up to 100%
of the value of your account assets to invest in the Employer Stock Fund.
However, in connection with the initial offering of the stock, if you elect to
purchase the stock, you will be required to invest a minimum amount of your
account assets in the Employer Stock Fund.
Purchase Price of Kearny Financial Corp. Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
the stock issued in the initial offering will be used by the trustee to purchase
shares of Kearny Financial Corp. common stock. The price paid for such shares of
the stock will be $10.00. This price is the price that will be paid by all other
persons who purchase shares of the stock in the initial offering.
Your account assets directed for investment in the Employer Stock Fund
after the initial offering shall be invested by the trustee to purchase shares
of Kearny Financial Corp. common stock in open market transactions. The price
paid by the trustee for shares of the Kearny Financial Corp. common stock in the
initial offering, or otherwise, will not exceed "adequate consideration" as
defined in Section 3(18) of the Employee Retirement Income Security Act.
2
Method of Directing Investments
Appendix A of this prospectus supplement includes an investment
election form for you to direct a transfer to the Employer Stock Fund in the
initial offering of all or a portion of your account under the plan. Appendix B
of this prospectus supplement includes Pentegra's change of investment
allocation form which is to be used to direct future contributions to the
Employer Stock Fund after the initial offering.
If you wish to invest all or part of your account in the Employer Stock
Fund in the initial offering you need to complete Appendix A. Additionally, you
may indicate the directed investment of future contributions under the plan for
investment in the Employer Stock Fund. If you wish to direct investment of
future contributions in the Employer Stock Fund, you need to complete Appendices
A and B. If you do not wish to make an investment election, you do not need to
take any action.
Time for Directing Investment
The deadline for submitting your direction to invest funds in the
Employer Stock Fund in order to purchase the stock issued in the initial
offering is noon on January 21, 2005. If you want to invest in the Employer
Stock Fund, you must return the attached form to Kim Manfredo of Kearny by noon
on January 21, 2005.
After the initial offering, you will still be able to direct the
investment of your account under the plan in the Employer Stock Fund and in
other investment alternatives.
Irrevocability of Investment Direction
The direction to invest your plan funds in the Employer Stock Fund in
the initial offering cannot be changed after you have turned in your forms.
However, you will be able to direct your account to purchase the stock after the
initial offering by directing amounts in your account into the Employer Stock
Fund.
Direction to Purchase the Stock After the Stock Offering
Following completion of the stock offering, you will be permitted to
direct that a certain percentage of your interest in the trust fund (up to 100%)
be transferred to the Employer Stock Fund and invested in Kearny Financial Corp.
common stock, or to the other investment funds available under the plan.
Alternatively, you may direct that a certain percentage of your interest in the
Employer Stock Fund be transferred to the trust fund to be invested in the other
investment funds available in accordance with the terms of the plan. You can
direct future contributions made to the plan by you or on your behalf to be
invested in the Employer Stock Fund. Following your initial election, the
allocation of your interest in the Employer Stock Fund may be changed daily by
filing a change of investment allocation form with the plan administrator or by
calling Pentegra's voice response unit at (800) 433-4422 and changing your
investment allocation by phone or by internet at www.Pentegra.com
3
Nature of Each Participant's Interest in Kearny Financial Corp. Common Stock
The trustee will hold Kearny Financial Corp. common stock in the name
of the plan. Each participant has an allocable interest in the investment funds
of the plan but not in any particular assets of the plan. Accordingly, a
specific number of shares of the stock will not be directly attributable to the
account of any individual participant. Dividend rights associated with the stock
held by the Employer Stock Fund will be allocated to the Employer Stock Fund.
Any increase (or decrease) in the value of the fund as a result of dividend
rights will be reflected in each participant's allocable interest in the
Employer Stock Fund.
Voting and Tender Rights of the Stock
You will direct the trustee of the plan about how to vote your Kearny
Financial Corp. shares. If you do not give voting instruction or tender
instruction to the trustee, the trustee will vote or tender those shares within
its discretion as a fiduciary under the plan or as directed by the plan
administrator.
Minimum Investment
The minimum investment of assets directed by a participant for the
purchase of the stock in the initial offering is $250.00, and investments must
be in increments of $10.00. Funds may be directed for the purchase of the stock
attributable to your account regardless of whether your account assets are 100%
vested at the time of your investment election. There is no minimum level of
investment after the initial offering for investment in the Employer Stock Fund.
DESCRIPTION OF THE PLAN
General
Kearny adopted a 401(k) plan effective July 1, 2000. Effective October
1, 2004, Kearny amended and restated its old plan into the new plan in order to
include the Employer Stock Fund as an investment alternative. The new plan is a
deferred compensation arrangement established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code. The plan will be submitted to the IRS for a determination by the IRS that
the plan is qualified under Section 401(a) of the Internal Revenue Code and that
its trust is qualified under Section 501(a) of the Internal Revenue Code. Kearny
intends for the plan, in operation, to comply with the requirements under
Section 401(a) and Section 401(k) of the Internal Revenue Code. Kearny will
adopt any amendments to the plan that may be necessary to ensure the continued
qualified status of the plan under the Internal Revenue Code and other federal
regulations.
Employee Retirement Income Security Act. The plan is an "individual
------------------------------------------
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act. As such, the plan is subject to all
of the provisions of Title I (Protection of Employee Benefit Rights) and Title
II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of the
act, except the funding requirements contained in Part 3 of Title I of the act,
which do not apply to an individual account plan (other than a money purchase
plan). The plan is not subject to Title IV (Plan Termination Insurance) of the
act. Neither the funding requirements contained in Part 3 of Title I of the act
nor the plan
4
termination insurance provisions contained in Title IV of the act will be
extended to participants or beneficiaries under the plan.
Federal tax law imposes substantial restrictions on your right to
withdraw amounts held under the plan before your termination of employment with
Kearny. Federal law may also impose a 10% excise tax on withdrawals you make
from the plan before you reach the age of 59 1/2, regardless of whether the
withdrawal occurs during or after your employment with Kearny.
Full Text of Plan. The following portions of this prospectus supplement
-----------------
are summaries of provisions in the plan. They are not complete and are qualified
in their entirety by the full text of the plan. You may obtain copies of the
full plan by sending a request to Kim Manfredo at Kearny. You should carefully
read the full text of the plan document to understand your rights and
obligations under the plan.
Eligibility and Participation
You may participate in the plan on the first day of the month after
completing 1,000 hours of service during a 12-month period with Kearny. As of
November 18, 2004, there were 243 employees eligible to participate in the plan
and 220 employees had elected to participate. The plan year is January 1 to
December 31.
Contributions and Benefits Under the Plan
Plan Participant Contributions. You can contribute to the plan on a
--------------------------------
pretax basis. Contributions are automatically deducted from your salary each pay
period. Salary means base salary plus overtime. When you contribute on a pretax
basis, you pay no federal income tax on your deferrals until you withdraw money
from the plan. You are permitted amounts of not less than 1% and not more than
75% of your annual base salary to the plan excluding bonuses and commissions.
You may change the amount of your contributions at any time and your changes
will be effective on the first day of the following pay period.
Kearny Contributions. Kearny may match your contribution to the plan,
---------------------
but we are not obligated to match your contributions. Kearny currently matches
100% of your contributions up to 3% of your salary. Kearny contributions are
subject to revision by us.
Limitation on Contributions
Limitation on Employee Salary Deferral. Although you may contribute up
--------------------------------------
to 75% of your pay to the plan, federal tax law limits the dollar amount of your
annual contribution to $14,000 in 2005. If you are age 50 or more you can make
catch-up contributions of $4,000 in 2005. The Internal Revenue Service
periodically adjusts this limit for inflation. Contributions in excess of this
limit and earnings on those contributions generally will be returned to you by
April 15 of the year following your contribution, and they will be subject to
regular federal income taxes.
Limitation on Annual Additions and Benefits. Under federal tax law,
----------------------------------------------
your contributions and our contributions to the plan may not exceed the lesser
of 100% of your annual pay, or $42,000.
5
Contributions that we make to any other retirement program that we sponsor may
also count against these limits.
Special Rules About Highly-Paid Employees. Special provisions of the
------------------------------------------
Internal Revenue Code limit contributions by employees who receive annual pay
greater than $95,000. If you are in this category, some of your contribution may
be returned if your contribution, when measured as a percentage of your pay, is
substantially higher than the contributions made by other employees.
If your annual pay is less than $135,000, we may be required to make a
minimum contribution to the plan of 3% of your annual pay if the plan is
considered to be a "top heavy" plan under federal tax law. The plan is
considered "top heavy" if, in any year, the value of the plan accounts of
employees making more than $135,000 represent more than 60 percent of the value
of all accounts.
Investment of Plan Assets
All amounts credited to your plan account are held in trust. A trustee
appointed by Kearny's Board of Directors administers the trust and invests the
plan assets. The plan offers the following investment choices:
S&P 500 Stock Fund: Invests in the stocks of a broad array of
established U.S. companies. Its objective is long-term: to earn higher returns
by investing in the largest companies in the U.S. economy.
Stable Value Fund: Invests primarily in Guaranteed Investment Contracts
and Synthetic Guaranteed Investment Contracts. Its objective is
short-to-intermediate term: to achieve a stable return over short to
intermediate periods of time while preserving the value of a participant's
investment.
S&P MidCap Stock Fund: Invests in the stocks of mid-sized U.S.
companies. Its objective is long- term: to earn higher returns which reflect the
growth potential of such companies.
Money Market Fund: Invests in a broad range of high-quality short-term
instruments. Its objective is short-term: to achieve competitive short-term
rates of return while preserving the value of the participant's principal.
Government Bond Fund: Invests in U.S. Treasury bonds with maturities of
20 years or more. Its objective is long-term: to earn a higher level of income
along with the potential for capital appreciation.
Income Plus Asset Allocation Fund: Invests approximately 80% of its
portfolio in a combination of stable value investments and U.S. bonds. The
balance is invested in U.S. and international stocks. Its objective is
intermediate-term: to preserve the value of a participant's investment over
short periods of time and to offer some potential for growth.
Growth and Income Asset Allocation Fund: Invests in U.S. domestic and
international stocks, U.S. domestic bonds, and stable value investments. Its
objective is intermediate-term: to provide a balance between the pursuit of
growth and protection from risk.
6
Growth Asset Allocation Fund: Invests the majority of its assets in
stocks -- domestic as well as international. Its objective is long-term: to
pursue high growth of a participant's investment over time.
International Stock Fund: Invests in over 1,000 foreign stocks in 20
countries. Its objective is long-term: to offer the potential return of
investing in the stocks of established non-U.S. companies, as well as the
potential risk-reduction of broad diversification.
Russell 2000 Stock Fund: Invests in most, or all, of the same stocks
held in the Russell 2000 Index. Its objective is long-term: to earn high returns
in smaller U.S. companies by matching its benchmark, the Russell 2000 Index.
S&P 500/Growth Stock Fund: Invests in most, or all, of the stocks held
in the S&P/BARRA Growth Index which are large-capitalization growth stocks. Its
objective is long-term: to match its benchmark, the S&P/BARRA Growth Index.
S&P 500/Value Stock Fund: Invests in most, or all, of the stocks held
in the S&P/BARRA Value Index which are large-capitalization value stocks. Its
objective is long-term: to match its benchmark, the S&P/BARRA Value Index.
Nasdaq 100 Stock Fund: The fund is intended for long-term investors
seeking to capture the growth potential of the 100 largest and most actively
traded non-financial companies on the Nasdaq Stock Market. The Fund's benchmark
is the Nasdaq 100 Index.
Employer Stock Fund. The Employer Stock Fund invests primarily in the
common stock of Kearny Financial Corp.
7
Performance of Previous Funds
The annual percentage return on these funds for calendar years 2003,
2002 and 2001 was approximately:
Fund 2003 2002 2001
---- ---- ---- ----
Money Market Fund 0.9% 1.6% 4.0%
Stable Value Fund 4.3% 5.3% 5.7%
Government Bond Fund 1.3% 16.4% 3.2%
S&P 500 Stock Fund 28.0% (22.4%) (12.3%)
S&P MidCap Stock Fund 35.1% (15.0%) ( 0.9%)
International Stock Fund 37.1% (18.5%) (22.0%)
Income Plus Asset Allocation Fund 11.7% (2.6%) 1.7%
Growth Asset Allocation Fund 28.3% (18.8%) (14.0%)
Growth & Income Asset Allocation Fund 19.7% (10.3%) (5.2%)
Russell 2000 Stock Fund 46.0% (20.7%) 2.0%
S&P 500/Growth Stock Fund 24.9% (24.0%) (13.3%)
S&P 500/Value Stock Fund 30.6% (21.2%) (12.2%)
Nasdaq 100 Stock Fund 48.3% (37.6%) (32.7%)
Employer Stock Fund N/A N/A N/A
Performance of the Employer Stock Fund
The Employer Stock Fund is invested in the common stock of Kearny
Financial Corp. As of the date of this prospectus supplement, none of the shares
of common stock have been issued or are outstanding and there is no established
market for the Kearny Financial Corp. common stock. Accordingly, there is no
record of the investment performance of the Employer Stock Fund. Performance of
the Employer Stock Fund depends on a number of factors, including the financial
condition and profitability of Kearny Financial Corp. and market conditions for
Kearny Financial Corp. common stock generally.
Please note that investment in the Employer Stock Fund is not an
investment in a savings account or certificate of deposit, and such investment
in Kearny Financial Corp. common stock through the Employer Stock Fund is not
insured by the FDIC or any other regulatory agency. Further, no assurances can
be given with respect to the price at which the stock may be sold in the future.
8
Investments in the Employer Stock Fund may involve certain special
risks relating to investments in the common stock of Kearny Financial Corp. For
a discussion of these risk factors, see "Risk Factors" beginning on page 12 of
the prospectus.
Benefits Under the Plan
Vesting. The contributions that you make in the plan are fully vested
-------
and cannot be forfeited. You are 100% vested in our matching contributions. You
vest in employer supplemental contributions as follows:
Withdrawals and Distributions From the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH KEARNY FINANCIAL CORP. A SUBSTANTIAL FEDERAL TAX PENALTY MAY
ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE
59 1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER
EMPLOYMENT WITH KEARNY FINANCIAL CORP. OR AFTER TERMINATION OF EMPLOYMENT.
Withdrawals Before Termination of Employment. Your plan account
------------------------------------------------
provides you with a source of retirement income. But, while you are employed by
Kearny, if you need funds from your account before retirement, you may be
eligible to receive either an in-service withdrawal, or (from your pre-tax
contributions) a hardship distribution or a loan. You can apply for a hardship
distribution or a loan from the plan by contacting Kim Manfredo at Kearny. In
order to qualify for a hardship withdrawal, you must have an immediate and
substantial need to meet certain expenses, like a mortgage payment or medical
bill, and have no other reasonably available resources to meet your financial
need. If you qualify for a hardship distribution, the trustee will make the
distribution proportionately from the investment funds in which you have
invested your account balance. Hardship withdrawals (except for medical expenses
exceeding 7.5% of your adjusted gross income) and in-service withdrawals are
subject to the 10% early distribution penalty. Loans are not subject to the 10%
early distribution penalty.
Participants' pre-tax elective deferrals may not be distributed earlier
than upon separation from service, death, disability, or attainment of age 59
1/2.
You may make voluntary withdrawals of your pre-tax elective deferrals
and earnings thereon as of December 31, 1988 only in the event of hardship or
attainment of age 59 1/2. You may withdraw earnings after December 31, 1988 only
in the event of attainment of age 59 1/2. You may also make withdrawals of your
employee rollover contributions and the earnings thereon, and of employer
matching contributions, if any, and the earnings thereon. You may make not more
than one voluntary withdrawal from your account in a Plan Year.
In general, employer contributions credited on your behalf will not be
available for in-service withdrawal until such employer contributions have been
invested in the Plan for at least 2 years or you
9
have been a participant in the Plan for at least 5 years or in the event of your
death, disability, retirement, attainment of age 59 1/2 or termination of
employment.
Distributions Upon Termination for Any Other Reason. If you terminate
----------------------------------------------------
employment with Kearny for any reason other than retirement, disability or death
and your account balance exceeds $500, the trustee will distribute your benefits
to you the later of the April 1 of the calendar year after you turn age 70 1/2
or when you retire, unless you request otherwise. You may elect to maintain your
account balance in the plan for as long as Kearny maintains the plan or you may
elect one or more of the forms of distribution available under the plan. If your
account balance does not exceed $500, the trustee will generally distribute your
benefits to you as soon as administratively practicable following termination of
employment.
Distributions Upon Disability. If you can no longer work because of a
------------------------------
disability, as defined in the plan, you may withdraw your total account balance
under the plan and have that amount paid to you in accordance with the terms of
the plan. If you later become reemployed after you have withdrawn some or all of
your account balance, you may not repay to the plan any withdrawn amounts.
Withdrawal Upon Death. If you die while you are a participant in the
----------------------
Plan, the value of your entire account will be payable to your beneficiary. You
may elect to have your beneficiary receive distribution in 5 annual installments
(10 if your spouse is your beneficiary, provided that your spouse's remaining
life expectancy is at least 10 years). If such an election is not in effect at
the time of your death, your beneficiary may elect to receive the benefit in the
form of annual installments over a period not to exceed 5 years (10 years if
your spouse is your beneficiary, provided that your spouse's remaining life
expectancy is at least 10 years) or make withdrawals as often as once per year,
except that any balance remaining must be withdrawn by the 5th anniversary (10th
anniversary if your spouse is your beneficiary, provided that your spouse's
remaining life expectancy is at least 10 years) of your death.
Distributions of the Stock of Kearny Financial Corp. If you receive a
-----------------------------------------------------
distribution from the plan and assets under the plan have been directed by you
to be invested in the Employer Stock Fund, you may have those assets distributed
in kind in the form of stock of Kearny Financial Corp.
Form of Benefits. Payment of your benefits upon your retirement,
-----------------
disability, or other termination of employment will be made either in a lump sum
payment or installments.
If you die before receiving benefits pursuant to your retirement,
disability, or termination of employment, your beneficiary will receive a lump
sum payment, unless the payment would exceed $500 and an election is made for
annual installments up to 5 years. Your spouse can receive payments for up to 10
years.
Nonalienation of Benefits. Except with respect to federal income tax
--------------------------
withholding and as provided with respect to a qualified domestic relations
order, as defined in the Internal Revenue Code, benefits payable under the plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the plan shall be void.
10
Plan Loans. You may borrow money from the vested portion of your
-----------
account. The minimum amount you may borrow is $1,000. The maximum amount is 50%
of your vested account balance. You may never borrow more than $50,000 minus the
highest outstanding balance on any individual loan during the last 12 months.
You may take up to five years to repay a general purpose loan. If you
are using the loan to purchase your primary residence, a repayment period of 15
years is permissible. You must repay the loan through payroll deductions.
If you fail to make any loan repayment when due, your loan will be in
default. The full amount of the loan will be due and payable by the last day of
the calendar quarter following the calendar quarter which contains the due date
of the last monthly installment payment. If the outstanding balance of the loan
is in default and is not repaid in the aforementioned time period, you will be
considered to have received a distribution of said amount.
Administration of the Plan
Effective October 1, 2004, Kearny will administer the plan. The Bank of
New York will serve as trustee and custodian for all investment funds under the
plan except the Employer Stock Fund. John N. Hopkins, John Mazur and Matthew
McClane will serve as trustees with respect to the Employer Stock Fund during
the initial public offering by Kearny Financial Corp. After the stock of Kearny
Financial Corp. begins trading, the Bank of New York also will be the trustee
for the Employer Stock Fund. The plan administrator is responsible for the
administration of the plan, interpretation of the provisions of the plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the plan, and preparation and filing of all returns and reports relating to the
plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to participants, beneficiaries
and others under the Employee Retirement Income Security Act.
The trustee receives and holds the contributions to the plan in trust
and distributes them to participants and beneficiaries in accordance with the
terms of the plan and the directions of the plan administrator. The trustee is
responsible for investment of the assets of the trust. The address of the plan
administrator and the trustee for the Employer Stock Fund is 401k Plan
Administrator c/o Kearny Federal Savings Bank, 120 Passaic Avenue, Fairfield,
New Jersey 07004. The address of the Bank of New York is One Wall Street, New
York, New York, 10286.
Reports to Plan Participants
The plan administrator will furnish to each participant a statement at
least quarterly showing:
o the balance in your account as of the end of that period;
o the amount of contributions allocated to your account for that period; and
o the adjustments to your account to reflect earnings or losses (if any).
11
If you invest in the Employer Stock Fund, you will also receive a copy
of Kearny Financial Corp.'s Annual Report to Stockholders and a proxy statement
related to stockholder meetings.
Amendment and Termination
It is the intention of Kearny to continue the plan indefinitely.
Nevertheless, Kearny, within its sole discretion may terminate the plan at any
time. If the plan is terminated in whole or in part, then regardless of other
provisions in the plan, you will have a fully vested interest in your accounts.
Kearny reserves the right to make, from time to time, any amendment or
amendments to the plan that do not cause any part of the trust to be used for,
or diverted to, any purpose other than the exclusive benefit of participants or
their beneficiaries; provided, however, that Kearny may make any amendment it
determines necessary or desirable, with or without retroactive effect, to comply
with the Employee Retirement Income Security Act.
Merger, Consolidation, or Transfer
In the event of the merger or consolidation of the plan with another
plan, or the transfer of the trust assets to another plan, the plan requires
that each participant would (if either the plan or the other plan then be
terminated) receive a benefit immediately after the merger, consolidation, or
transfer that is equal to or greater than the benefit he or she would have been
entitled to receive immediately before the merger, consolidation, or transfer
(if the plan had then terminated).
Federal Income Tax Consequences
The following discussion is only a brief summary of certain federal
income tax aspects of the plan. You should not rely on this summary as a
complete or definitive description of the material federal income tax
consequences relating to the plan. At the time you receive a distribution from
the plan, you will receive a tax notice which conforms to the IRS safe harbor
explanation of the distribution in accordance with IRS Notice 2002-3. The tax
rules that affect your benefits under the plan change frequently and may vary
based on your individual situation. This summary also does not discuss how state
or local tax laws affect your plan benefits. We urge you to consult your tax
advisor with respect to any distribution from the plan and transactions
involving the plan.
Federal tax law provides the participants under the plan with a number
of special benefits:
(1) you pay no current income tax on your contributions or Kearny
contributions; and
(2) the earnings on your plan accounts are not taxable until you
receive a distribution.
These benefits are conditioned on the plan's compliance with special
requirements of federal tax law. We intend to satisfy all of the rules that
apply to the plan. However, if the rules are not satisfied, the special tax
benefits available to the plan may be lost.
Special Distribution Rules. If you turned 50 before 1986, you may be
eligible to spread the taxes on the distribution over as much as 10 years. You
should consult with your tax advisor to determine if you are eligible for this
special tax benefit and whether it is appropriate to your financial needs.
Kearny Financial Corp. Common Stock Included in Lump Sum Distribution.
If a distribution of all of your benefits includes shares of Kearny Financial
Corp. common stock, you will generally not
12
be taxed on the increase in the value of the stock since its purchase until you
sell the stock. You will be taxed on the amount of the distribution equal to
your original cost for the stock when you receive your distribution.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. You may roll over virtually all distributions from the plan to
retirement programs sponsored by other employers or to an individual retirement
account. We will provide you with detailed information on how to roll over a
distribution when you are eligible to receive benefits under the plan.
Restrictions on Resale
If you are an "affiliate" of Kearny Financial Corp. or Kearny Federal
Savings Bank, you may be subject to special rules under federal securities laws
that affect your ability to sell shares you hold in the Employer Stock Fund.
Directors, officers and substantial shareholders of Kearny Financial Corp. are
generally considered "affiliates." Any person who may be an "affiliate" of
Kearny may wish to consult with counsel before transferring any common stock
they own. If you are not considered an "affiliate" of Kearny you may freely sell
any shares of Kearny Financial Corp. common stock distributed to you under the
plan, either publicly or privately.
Additional Employee Retirement Income Security Act ("ERISA") Considerations
As noted above, the Plan is subject to certain provisions of ERISA,
including special provisions relating to control over the Plan's assets by
participants and beneficiaries. The Plan's feature that allows you to direct the
investment of your account balances is intended to satisfy the requirements of
section 404(c) of ERISA relating to control over plan assets by a participant or
beneficiary. The effect of this is two-fold. First, you will not be deemed a
"fiduciary" because of your exercise of investment discretion. Second, no person
who otherwise is a fiduciary, such as Kearny Financial Corp., the Plan
administrator, or the Plan's trustee is liable under the fiduciary
responsibility provision of ERISA for any loss which results form your exercise
of control over the assets in your Plan account.
Because you will be entitled to invest all of or a portion of your
account balance in the Plan in Kearny Financial Corp. common stock, the
regulations under Section 404(c) of the ERISA require that the Plan establish
procedures that ensure the confidentiality of your decision to purchase, hold,
or sell employer securities, except to the extent that disclosure of such
information is necessary to comply with federal or state laws not preempted by
ERISA. These regulations also require that your exercise of voting and similar
rights with respect to the common stock to be conducted in a way that ensures
the confidentiality of your exercise of these rights.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors, and persons beneficially owning
more than 10% of public companies such as Kearny Financial Corp. Section 16(a)
of the Securities Exchange Act of 1934 requires the filing of reports of
beneficial ownership. Within 10 days of becoming an officer, director or person
beneficially owning more than 10% of the shares of Kearny Financial Corp., a
Form 3 reporting initial beneficial ownership must be filed with the Securities
and Exchange Commission. Changes in beneficial ownership, such as purchases,
sales and gifts generally must be reported periodically, either on a Form 4
within 2 business days after the change occurs, or annually on a Form 5 within
45 days after the close of Kearny Financial Corp.'s fiscal year. Discretionary
transactions in and beneficial ownership of the Common Stock through
13
the Kearny Financial Corp. Stock Fund of the Plan by officers, directors and
persons beneficially owning more than 10% of the common stock of Kearny
Financial Corp. generally must be reported to the Securities and Exchange
Commission by such individuals.
In addition to the reporting requirements described above, section
16(b) of the Securities Exchange Act of 1934 provides for the recovery by Kearny
Financial Corp. of profits realized by an officer, director or any person
beneficially owning more than 10% of Kearny Financial Corp.'s common stock
resulting from non-exempt purchases and sales of Kearny Financial Corp.'s common
stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide
exemptions from the profit recovery provisions of section 16(b) for all
transactions in employer securities within an employee benefit plan, provided
certain requirements are met. These requirements generally involve restrictions
upon the timing of elections to acquire or dispose of employer securities for
the accounts of section 16(b) persons.
Except for distributions of common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, persons affected by section 16(b) are required to hold shares of Common
Stock distributed from the Plan for six months following such distribution and
are prohibited form directing additional purchases of units within the Kearny
Financial Corp. stock fund for six months after receiving such a distribution.
Additional Information
This prospectus supplement dated December 28, 2004, is part of the
prospectus of Kearny Financial Corp. dated December 28, 2004. This prospectus
supplement shall be delivered to plan participants together with the prospectus
and is not complete unless it is accompanied by the prospectus.
LEGAL OPINIONS
The validity of the issuance of the common stock will be passed upon by
Malizia Spidi & Fisch, PC, Washington, D.C., which acted as special counsel for
Kearny Financial Corp. in connection with the initial public offering by Kearny
Financial Corp.
14
Appendix-A: Investment Election Form
Appendix-A
----------
KEARNY FEDERAL SAVINGS BANK
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND TRUST
----------------------------------------------
Participant Voluntary Investment Election Form
----------------------------------------------
Name of Plan Participant:
------------------------------------------
Social Security Number:
------------------------------------------
1. Instructions.
------------
In connection with the initial public offering of Kearny Financial
Corp., Kearny has adopted the Kearny Federal Savings Bank Employees' Savings and
Profit Sharing Plan and Trust to permit plan participants to direct all, or a
portion, of the assets attributable to their participant accounts into a new
fund: the Employer Stock Fund. The assets attributable to a participant's
account that are transferred at the direction of the participant into the
Employer Stock Fund will be used to purchase shares of common stock of Kearny
Financial Corp. to be issued in the initial stock offering of Kearny Financial
Corp.
To direct a transfer of all or a part of the funds credited to your
account to the Employer Stock Fund, you should complete this form and return it
to Kim Manfredo at Kearny Federal Savings Bank, at 120 Passaic Avenue,
Fairfield, New Jersey 07004 who will retain this form and return a copy to you.
If you need any assistance in completing this form, please contact Kim Manfredo
at (973) 244-4554. If you do not complete and return this form by January 21,
2005, at noon, the funds credited to your account under the plan will continue
to be invested in accordance with your prior investment direction, or in
accordance with the terms of the plan if no investment direction has been
provided.
2. Investment Directions.
---------------------
As a participant in the plan, I hereby voluntarily elect to direct the
trustee of the plan to invest the below indicated dollar sum of my participant
account balance under the plan as indicated below.
I hereby voluntarily elect and request to direct investment of the
below indicated dollar amount of my participant account funds for the purchase
of the common stock to be issued in Kearny Financial Corp.'s initial offering
(minimum investment of $250.00; rounded to the nearest $10.00 increment; maximum
investment permissible is 50,000 shares of common stock or $500,000):
$___________. Enter your $ level of requested purchase through the plan. Such
amount may not exceed the vested portion of assets held under the plan for you.
Please note that the actual number of shares of common stock purchased on your
behalf under the plan may be limited or reduced in accordance with the plan of
stock issuance of Kearny Financial Corp. based upon the total number of shares
of common stock subscribed for by other parties. On the attached Appendix-B,
please indicate from which funds such investments should be transferred. Only
available funds may be used for purchase.
All other funds in my participant account will remain invested as
previously requested. All future contributions under the plan will continue to
be invested as previously requested or as revised by me at a later date.
3. Acknowledgment.
--------------
I fully understand that this self-directed portion of my participant
account does not share in the overall net earnings, gains, losses, and
appreciation or depreciation in the value of assets held by the plan's other
investment funds, but only in my account's allocable portion of such items from
the directed investment account invested in the common stock. I understand that
the plan's trustee, in complying with this election and in following my
directions for the investment of my account, is not responsible or liable in any
way for the expenses or losses that may be incurred by my account assets
invested in common stock under the Employer Stock Fund.
I further understand that this one time election shall become
irrevocable by me upon execution and submission of this Investment Form. Only
----
properly signed forms delivered to the plan trustee on or before January 21,
--------------------------------------------------------------------------------
2005, at noon, will be honored.
-------------------------------
The undersigned participant acknowledges that he or she has received
the prospectus of the Kearny Financial Corp., dated December 28, 2004, the
prospectus supplement dated December 28, 2004, regarding the Kearny Federal
Savings Bank Employees' Savings and Profit Sharing Plan and Trust as adopted by
Kearny Federal Savings Bank and this Investment Form. The undersigned hereby
acknowledges that the shares of common stock to be purchased with the funds
noted above are not savings accounts or deposits and are not insured by the
Federal Deposit Insurance Corporation, Bank Insurance Fund, the Savings
Association Insurance Fund, or any other governmental agency. Investment in the
common stock will expose the undersigned to the investment risks and potential
fluctuations in the market price of the common stock. Investment in the common
stock does not offer any guarantees regarding maintenance of the principal value
of such investment or any projections or guarantees associated with future value
or dividend payments with respect to the common stock. The undersigned hereby
voluntarily makes and consents to this investment election and voluntarily
signed his (her) name as of the date listed below. If you so elect, you may
choose not to make any investment decision at this time.
I UNDERSTAND THAT BY EXECUTING THIS ORDER I DO NOT WAIVE ANY RIGHTS AFFORDED TO
ME BY THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934.
-------------------- ---------- ------------------------ ---------
Witness Date Participant Date
For the Trustee For the Plan Administrator
-------------------- ---------- ------------------------ ---------
Date Date
2
Appendix-B: Change of Investment Allocation Form
Appendix-B
----------
Change of Investment Allocation Form
Kearny Financial Corp.
CHANGE OF INVESTMENT ALLOCATION
-------------------------------
1. Member Data
--------------------------------------------------------------------------------
Print your full name above (Last, first, middle initial) Social Security Number
--------------------------------------------------------------------------------
Street Address City Zip
2. Instructions
Kearny Federal Savings Bank Employees' Savings and Profit Sharing Plan and Trust
is giving members a special opportunity to invest their 401(k) account balances
in a new investment fund - the Employer Stock Fund - which is comprised
primarily of common stock issued by Kearny Financial Corp. in connection with
the initial stock offering of Kearny Financial Corp. The percentage of a
member's account transferred at the direction of the member into the Employer
Stock Fund will be used to purchase shares of the common stock during the
initial offering of Kearny Financial Corp. Please review the prospectus and the
prospectus supplement before making any decision.
In the event of an oversubscription in the offering so that the total amount you
allocate to the Employer Stock Fund can not be used by the trustee to purchase
the common stock, your account will be reinvested in the other funds of the plan
as previously directed in your last investment election. If no investment
election is provided, your account will be invested in the Money Market Fund.
Investing in the common stock entails some risks, and we encourage you to
discuss this investment decision with your spouse and investment advisor. The
plan trustee and the plan administrator are not authorized to make any
representations about this investment other than what appears in the prospectus
and prospectus supplement, and you should not rely on any information other than
what is contained in the prospectus and prospectus supplement. For a discussion
of certain factors that should be considered by each member in deciding whether
to invest in the common stock, see "Risk Factors" beginning on page 12 of the
prospectus. Any shares purchased by the plan pursuant to your election will be
subject to the conditions or restrictions otherwise applicable to the common
stock, as discussed in the prospectus and prospectus supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
To direct a transfer of all or part of the funds credited to your accounts to
the Employer Stock Fund, you should complete and file this form with Kim
Manfredo, of Kearny Federal Savings Bank no later than January 21, 2005 at noon.
If you need any assistance in completing this form, please contact Kim Manfredo
at (973) 244-4554. If you do not complete and return this form to Kim Manfredo
by January 21, 2005 at noon, the funds credited to your account under the plan
will continue to be invested in accordance with your prior investment direction,
or in accordance with the terms of the plan if no investment direction has been
provided by you.
Notwithstanding the election made in Appendix-A for purchases of the
Employer Stock Fund, your purchase of Kearny Financial Corp. Stock will be
limited to the amounts available in the following funds. No purchases of the
Employer Stock Fund will be made with insufficient funds in any funds.
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following funds, to the extent
permissible, be transferred out of the specified fund and invested in the
Employer Stock Fund as follows:
Dollar Amount
to be
Fund transferred
S&P 500 Stock Fund.................................... __________
Russell 2000 Stock Fund............................... __________
S&P 500/Growth Stock Fund............................. __________
S&P 500/Value Stock Fund.............................. __________
Stable Value Fund..................................... __________
S&P MidCap Stock Fund................................. __________
Money Market Fund..................................... __________
Government Bond Fund.................................. __________
International Stock Fund.............................. __________
Income Plus Fund...................................... __________
Growth & Income Fund.................................. __________
Growth Fund........................................... __________
Nasdaq 100 Stock Fund................................. __________
Total (Important!).......................... __________
(The Total should equal the total dollar amount on Page 1 of Appendix-A.)
Note: The total amount transferred may not exceed the total value of your
accounts.
4. Investment Directions (Applicable to Future Contributions Only) I hereby
revoke any previous investment instructions and now direct that any future
contributions and/or loan repayments, if any, made by me or on my behalf by
Kearny Financial Corp. including those contributions and/or repayments received
by Kearny Federal Savings Bank Employees' Savings and Profit Sharing Plan and
Trust during the same reporting period as this form, be invested in the
following funds (in whole percentages). If I elect to invest in the common stock
of Kearny Financial Corp., such future contributions or loan repayments, if any,
will be invested in the Employer Stock Fund the month following the conclusion
of the stock offering. Please read "Notes" on the following page before
completing.
2
Fund Percentage
---- ----------
S&P 500 Stock Fund................................... ____ %
Russell 2000 Stock Fund.............................. ____ %
S&P 500/Growth Stock Fund............................ ____ %
S&P 500/Value Stock Fund............................. ____ %
Stable Value Fund.................................... ____ %
S&P MidCap Stock Fund................................ ____ %
Money Market Fund.................................... ____ %
Government Bond Fund................................. ____ %
International Stock Fund............................. ____ %
Income Plus Fund..................................... ____ %
Growth & Income Fund................................. ____ %
Growth Fund.......................................... ____ %
Employer Stock Fund.................................. ____ %
Nasdaq 100 Stock Fund................................ ____ %
Total (Important!)............................ 100%
Notes: No amounts invested in the Stable Value Fund may be transferred
directly to the Money Market Fund. Stable Value Fund amounts invested
in the S&P 500 Stock Fund, Russell 2000 Stock Fund, S&P 500/Growth
Stock Fund, S&P 500/Value Stock Fund, S&P MidCap Stock Fund, Government
Bond Fund, International Stock Fund, Income Plus Fund, Growth & Income
Fund, Growth Fund, Nasdaq 100 Stock Fund and/or Employer Stock Fund,
for a period of three months may be transferred to the Money Market
Fund upon the submission of a separate Change of Investment Allocation
Form. The percentage that can be transferred to the Money Market Fund
may be limited by any amounts previously transferred from the Stable
Value Fund that have not satisfied the equity wash requirement. Such
amounts will remain in either the S&P 500 Stock Fund, Russell 2000
Stock Fund, S&P 500/Growth Stock Fund, S&P 500/Value Stock Fund, S&P
MidCap Stock Fund, Government Bond Fund, International Stock Fund,
Income Plus Fund, Growth & Income Fund, Growth Fund, Nasdaq 100 Stock
Fund and/or Employer Stock Fund and a separate direction to transfer
them to the Money Market Fund will be required when they become
available.
5. Participant Signature and Acknowledgment - Required
By signing this Change of Investment Allocation form, I authorize and direct the
plan administrator and trustee to carry out my instructions. If investing in the
Employer Stock Fund, I acknowledge that I have been provided with and read a
copy of the prospectus and prospectus supplement relating to the issuance of the
common stock. I am aware of the risks involved in the investment in the common
stock, and understand that the trustee and plan administrator are not
responsible for my choice of investment.
3
MEMBER'S SIGNATURE
I understand that the above directed change(s) will be processed within one to
five days of the form being received by Pentegra. I further understand that if I
do not complete either Section 3 or Section 4, no change will be made to my
current directions for future contributions or accumulated balances,
respectively.
--------------------------------------- -------------------
Signature of Member Date
Pentegra Services, Inc. is hereby authorized to make the above listed change(s)
to this member's record.
On behalf of the above named member, I certify that the signature above is that
of the participant making this request.
--------------------------------------- -------------------
Signature of Kearny Federal Savings Bank Date
Authorized Representative
Please complete and return by noon on January 21, 2005
4
Appendix-C: Special Tax Notice Regarding Plan Payments
Appendix-C
----------
SPECIAL TAX NOTICE REGARDING PLAN PAYMENTS
This notice explains how you can continue to defer federal income tax
on your retirement savings in the Kearny Federal Savings Bank Employees' Savings
and Profit Sharing Plan and Trust (the "Plan") and contains important
information you will need before you decide how to receive your Plan benefits.
This notice is provided to you by Kearny Federal Savings Bank (your
"Plan Administrator") because all or part of the payment that you will soon
receive from the Plan may be eligible for rollover by you or your Plan
Administrator to a traditional IRA or an eligible employer plan. A rollover is a
payment by you or the Plan Administrator of all or part of your benefit to
another plan or IRA that allows you to continue to postpone taxation of that
benefit until it is paid to you. Your payment cannot be rolled over to a Roth
IRA, a SIMPLE IRA, or a Coverdell Education Savings Account (formerly known as
an education IRA). An "eligible employer plan" includes a plan qualified under
section 401(a) of the Internal Revenue Code, including a 401(k) plan,
profit-sharing plan, defined benefit plan, stock bonus plan, and money purchase
plan; a section 403(a) annuity plan; a section 403(b) tax-sheltered annuity; and
an eligible section 457(b) plan maintained by a governmental employer
(governmental 457 plan).
An eligible employer plan is not legally required to accept a rollover.
Before you decide to roll over your payment to another employer plan, you should
find out whether the plan accepts rollovers and, if so, the types of
distributions it accepts as a rollover. You should also find out about any
documents that are required to be completed before the receiving plan will
accept a rollover. Even if a plan accepts rollovers, it might not accept
rollovers of certain types of distributions, such as after-tax amounts. If this
is the case, and your distribution includes after-tax amounts, you may wish
instead to roll your distribution over to a traditional IRA or split your
rollover amount between the employer plan in which you will participate and a
traditional IRA. If an employer plan accepts your rollover, the plan may
restrict subsequent distributions of the rollover amount or may require your
spouse's consent for any subsequent distribution. A subsequent distribution from
the plan that accepts your rollover may also be subject to different tax
treatment than distributions from this Plan. Check with the administrator of the
plan that is to receive your rollover prior to making the rollover.
If you have additional questions after reading this notice, you can
contact your plan administrator, Albert Gossweiler at (973) 244-4509.
SUMMARY
There are two ways you may be able to receive a Plan payment that is
eligible for rollover:
(1) Certain payments can be made directly to a traditional IRA that you
establish or to an eligible employer plan that will accept it and hold it for
your benefit ("DIRECT ROLLOVER"); or
(2) The payment can be PAID TO YOU.
1
If you choose a DIRECT ROLLOVER:
* Your payment will not be taxed in the current year and no
income tax will be withheld.
* You choose whether your payment will be made directly to your
traditional IRA or to an eligible employer plan that accepts
your rollover. Your payment cannot be rolled over to a Roth
IRA, a SIMPLE IRA, or a Coverdell Education Savings Account
because these are not traditional IRAs.
* The taxable portion of your payment will be taxed later when
you take it out of the traditional IRA or the eligible
employer plan. Depending on the type of plan, the later
distribution may be subject to different tax treatment than it
would be if you received a taxable distribution from this
Plan.
If you choose to have a Plan payment that is eligible for rollover PAID
TO YOU:
* You will receive only 80% of the taxable amount of the
payment, because the Plan Administrator is required to
withhold 20% of that amount and send it to the IRS as income
tax withholding to be credited against your taxes.
* The taxable amount of your payment will be taxed in the
current year unless you roll it over. Under limited
circumstances, you may be able to use special tax rules that
could reduce the tax you owe. However, if you receive the
payment before age 59 1/2, you may have to pay an additional
10% tax.
* You can roll over all or part of the payment by paying it to
your traditional IRA or to an eligible employer plan that
accepts your rollover within 60 days after you receive the
payment. The amount rolled over will not be taxed until you
take it out of the traditional IRA or the eligible employer
plan.
* If you want to roll over 100% of the payment to a traditional
IRA or an eligible employer plan, you must find other money to
replace the 20% of the taxable portion that was withheld. If
you roll over only the 80% that you received, you will be
taxed on the 20% that was withheld and that is not rolled
over.
YOUR RIGHT TO WAIVE THE 30-DAY NOTICE PERIOD. Generally, neither a
direct rollover nor a payment can be made from the Plan until at least 30 days
after your receipt of this notice. Thus, after receiving this notice, you have
at least 30 days to consider whether or not to have your withdrawal directly
rolled over. If you do not wish to wait until this 30-day notice period ends
before your election is processed, you may waive the notice period by making an
affirmative election indicating whether or not you wish to make a direct
rollover. Your withdrawal will then be processed in accordance with your
election as soon as practical after it is received by the Plan Administrator.
2
MORE INFORMATION
I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER
II. DIRECT ROLLOVER
III. PAYMENT PAID TO YOU
IV. SURVIVING SPOUSES, ALTERNATE PAYEES, AND OTHER BENEFICIARIES
I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER
Payments from the Plan may be "eligible rollover distributions." This
means that they can be rolled over to a traditional IRA or to an eligible
employer plan that accepts rollovers. Payments from a plan cannot be rolled over
to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account. Your Plan
Administrator should be able to tell you what portion of your payment is an
eligible rollover distribution.
The following types of payments cannot be rolled over:
PAYMENTS SPREAD OVER LONG PERIODS. You cannot roll over a payment if it
is part of a series of equal (or almost equal) payments that are made at least
once a year and that will last for:
* your lifetime (or a period measured by your life expectancy), or
* your lifetime and your beneficiary's lifetime (or a period measured
by your joint life expectancies), or
* a period of 10 years or more.
REQUIRED MINIMUM PAYMENTS. Beginning when you reach age 70 1/2 or
retire, whichever is later, a certain portion of your payment cannot be rolled
over because it is a "required minimum payment" that must be paid to you.
Special rules apply if you own more than 5% of your employer.
HARDSHIP DISTRIBUTIONS. A hardship distribution cannot be rolled over.
ESOP DIVIDENDS. Cash dividends paid directly to you on employer stock
held in an employee stock ownership plan cannot be rolled over.
CORRECTIVE DISTRIBUTIONS. A distribution that is made to correct a
failed nondiscrimination test or because legal limits on certain contributions
were exceeded cannot be rolled over.
3
LOANS TREATED AS DISTRIBUTIONS. The amount of a plan loan that becomes
a taxable deemed distribution because of a default cannot be rolled over.
However, a loan offset amount is eligible for rollover, as discussed in Part III
below. Ask the Plan Administrator of this Plan if distribution of your loan
qualifies for rollover treatment.
The Plan Administrator of this Plan should be able to tell you if your
payment includes amounts which cannot be rolled over.
II. DIRECT ROLLOVER
A DIRECT ROLLOVER is a direct payment of the amount of your Plan
benefits to a traditional IRA or an eligible employer plan that will accept it.
You can choose a DIRECT ROLLOVER of all or any portion of your payment that is
an eligible rollover distribution, as described in Part I above. You are not
taxed on any taxable portion of your payment for which you choose a DIRECT
ROLLOVER until you later take it out of the traditional IRA or eligible employer
plan. In addition, no income tax withholding is required for any taxable portion
of your Plan benefits for which you choose a DIRECT ROLLOVER. This Plan might
not let you choose a DIRECT ROLLOVER if your distributions for the year are less
than $200.
DIRECT ROLLOVER to a Traditional IRA. You can open a traditional IRA to
receive the direct rollover. If you choose to have your payment made directly to
a traditional IRA, contact an IRA sponsor (usually a financial institution) to
find out how to have your payment made in a direct rollover to a traditional IRA
at that institution. If you are unsure of how to invest your money, you can
temporarily establish a traditional IRA to receive the payment. However, in
choosing a traditional IRA, you may wish to make sure that the traditional IRA
you choose will allow you to move all or a part of your payment to another
traditional IRA at a later date, without penalties or other limitations. See IRS
Publication 590, Individual Retirement Arrangements, for more information on
traditional IRAs (including limits on how often you can roll over between IRAs).
DIRECT ROLLOVER to a Plan. If you are employed by a new employer that
has an eligible employer plan, and you want a direct rollover to that plan, ask
the plan administrator of that plan whether it will accept your rollover. An
eligible employer plan is not legally required to accept a rollover. Even if
your new employer's plan does not accept a rollover, you can choose a DIRECT
ROLLOVER to a traditional IRA. If the employer plan accepts your rollover, the
plan may provide restrictions on the circumstances under which you may later
receive a distribution of the rollover amount or may require spousal consent to
any subsequent distribution. Check with the plan administrator of that plan
before making your decision.
DIRECT ROLLOVER of a Series of Payments. If you receive a payment that
can be rolled over to a traditional IRA or an eligible employer plan that will
accept it, and it is paid in a series of payments for less than 10 years, your
choice to make or not make a DIRECT ROLLOVER for a payment will apply to all
later payments in the series until you change your election. You are free to
change your election for any later payment in the series.
CHANGE IN TAX TREATMENT RESULTING FROM A DIRECT ROLLOVER. The
tax treatment of any payment from the eligible employer plan or traditional IRA
receiving your DIRECT ROLLOVER might be different than if you received your
benefit in a taxable distribution
4
directly from the Plan. For example, if you were born before January 1, 1936,
you might be entitled to ten-year averaging or capital gain treatment, as
explained below. However, if you have your benefit rolled over to a section
403(b) tax-sheltered annuity, a governmental 457 plan, or a traditional IRA in a
DIRECT ROLLOVER, your benefit will no longer be eligible for that special
treatment. See the sections below entitled "Additional 10% Tax if You Are under
Age 59 1/2" and "Special Tax Treatment if You Were Born before January 1, 1936."
III. PAYMENT PAID TO YOU
If your payment can be rolled over (see Part I above) and the payment
is made to you in cash, it is subject to 20% federal income tax withholding on
the taxable portion (state tax withholding may also apply). The payment is taxed
in the year you receive it unless, within 60 days, you roll it over to a
traditional IRA or an eligible employer plan that accepts rollovers. If you do
not roll it over, special tax rules may apply.
Income Tax Withholding:
MANDATORY WITHHOLDING. If any portion of your payment can be rolled
over under Part I above and you do not elect to make a DIRECT ROLLOVER, the Plan
is required by law to withhold 20% of the taxable amount. This amount is sent to
the IRS as federal income tax withholding. For example, if you can roll over a
taxable payment of $10,000, only $8,000 will be paid to you because the Plan
must withhold $2,000 as income tax. However, when you prepare your income tax
return for the year, unless you make a rollover within 60 days (see "Sixty-Day
Rollover Option" below), you must report the full $10,000 as a taxable payment
from the Plan. You must report the $2,000 as tax withheld, and it will be
credited against any income tax you owe for the year. There will be no income
tax withholding if your payments for the year are less than $200.
VOLUNTARY WITHHOLDING. If any portion of your payment is taxable but
cannot be rolled over under Part I above, the mandatory withholding rules
described above do not apply. In this case, you may elect not to have
withholding apply to that portion. If you do nothing, an amount will be taken
out of this portion of your payment for federal income tax withholding. To elect
out of withholding, ask the Plan Administrator for the election form and related
information.
SIXTY-DAY ROLLOVER OPTION. If you receive a payment that can be rolled
over under Part I above, you can still decide to roll over all or part of it to
a traditional IRA or to an eligible employer plan that accepts rollovers. If you
decide to roll over, you must contribute the amount of the payment you received
to a traditional IRA or eligible employer plan within 60 days after you receive
the payment. The portion of your payment that is rolled over will not be taxed
until you take it out of the traditional IRA or the eligible employer plan.
You can roll over up to 100% of your payment that can be rolled over
under Part I above, including an amount equal to the 20% of the taxable portion
that was withheld. If you choose to roll over 100%, you must find other money
within the 60-day period to contribute to the traditional IRA or the eligible
employer plan, to replace the 20% that was withheld. On the other hand, if you
roll over only the 80% of the taxable portion that you received, you will be
taxed on the 20% that was withheld.
5
EXAMPLE: The taxable portion of your payment that can be rolled over
under Part I above is $10,000, and you choose to have it paid to you. You will
receive $8,000, and $2,000 will be sent to the IRS as income tax withholding.
Within 60 days after receiving the $8,000, you may roll over the entire $10,000
to a traditional IRA or an eligible employer plan. To do this, you roll over the
$8,000 you received from the Plan, and you will have to find $2,000 from other
sources (your savings, a loan, etc.). In this case, the entire $10,000 is not
taxed until you take it out of the traditional IRA or an eligible employer plan.
If you roll over the entire $10,000, when you file your income tax return you
may get a refund of part or all of the $2,000 withheld.
If, on the other hand, you roll over only $8,000, the $2,000 you did
not roll over is taxed in the year it was withheld. When you file your income
tax return, you may get a refund of part of the $2,000 withheld. (However, any
refund is likely to be larger if you roll over the entire $10,000.)
ADDITIONAL 10% TAX IF YOU ARE UNDER AGE 59 1/2. If you receive a
payment before you reach age 59 1/2 and you do not roll it over, then, in
addition to the regular income tax, you may have to pay an extra tax equal to
10% of the taxable portion of the payment. The additional 10% tax generally does
not apply to (1) payments that are paid after you separate from service with
your employer during or after the year you reach age 55, (2) payments that are
paid because you retire due to disability, (3) payments that are paid as equal
(or almost equal) payments over your life or life expectancy (or your and your
beneficiary's lives or life expectancies), (4) dividends paid with respect to
stock by an employee stock ownership plan (ESOP) as described in Code section
404(k), (5) payments that are paid directly to the government to satisfy a
federal tax levy, (6) payments that are paid to an alternate payee under a
qualified domestic relations order, or (7) payments that do not exceed the
amount of your deductible medical expenses. See IRS Form 5329 for more
information on the additional 10% tax.
SPECIAL TAX TREATMENT IF YOU WERE BORN BEFORE JANUARY 1, 1936.
If you receive a payment from a plan qualified under section 401(a) or a section
403(a) annuity plan that can be rolled over under Part I and you do not roll it
over to a traditional IRA or an eligible employer plan, the payment will be
taxed in the year you receive it. However, if the payment qualifies as a "lump
sum distribution," it may be eligible for special tax treatment. (See also
"Employer Stock or Securities", below.) A lump sum distribution is a payment,
within one year, of your entire balance under the Plan (and certain other
similar plans of the employer) that is payable to you after you have reached age
59 1/2 or because you have separated from service with your employer (or, in the
case of a self-employed individual, after you have reached age 59 1/2 or have
become disabled). For a payment to be treated as a lump sum distribution, you
must have been a participant in the Plan for at least five years before the year
in which you received the distribution. The special tax treatment for lump sum
distributions that may be available to you is described below.
TEN-YEAR AVERAGING. If you receive a lump sum distribution and you were
born before January 1, 1936, you can make a one-time election to figure the tax
on the payment by using "10-year averaging" (using 1986 tax rates). Ten-year
averaging often reduces the tax you owe.
6
There are other limits on the special tax treatment for lump sum
distributions. For example, you can generally elect this special tax treatment
only once in your lifetime, and the election applies to all lump sum
distributions that you receive in that same year. You may not elect this special
tax treatment if you rolled amounts into this Plan from a 403(b) tax-sheltered
annuity contract, a governmental 457 plan, or from an IRA not originally
attributable to a qualified employer plan. If you have previously rolled over a
distribution from this Plan (or certain other similar plans of the employer),
you cannot use this special averaging treatment for later payments from the
Plan. If you roll over your payment to a traditional IRA, governmental 457 plan,
or 403(b) tax-sheltered annuity, you will not be able to use special tax
treatment for later payments from that IRA, plan, or annuity. Also, if you roll
over only a portion of your payment to a traditional IRA, governmental 457 plan,
or 403(b) tax-sheltered annuity, this special tax treatment is not available for
the rest of the payment. See IRS Form 4972 for additional information on lump
sum distributions and how you elect the special tax treatment.
EMPLOYER STOCK OR SECURITIES. There is a special rule for a payment
from the Plan that includes employer stock (or other employer securities). To
use this special rule, 1) the payment must qualify as a lump sum distribution,
as described above, except that you do not need five years of plan
participation, or 2) the employer stock included in the payment must be
attributable to "after-tax" employee contributions, if any. Under this special
rule, you may have the option of not paying tax on the "net unrealized
appreciation" of the stock until you sell the stock. Net unrealized appreciation
generally is the increase in the value of the employer stock while it was held
by the Plan. For example, if employer stock was contributed to your Plan account
when the stock was worth $1,000 but the stock was worth $1,200 when you received
it, you would not have to pay tax on the $200 increase in value until you later
sold the stock.
You may instead elect not to have the special rule apply to the net
unrealized appreciation. In this case, your net unrealized appreciation will be
taxed in the year you receive the stock, unless you roll over the stock. The
stock can be rolled over to a traditional IRA or another eligible employer plan,
either in a direct rollover or a rollover that you make yourself. Generally, you
will no longer be able to use the special rule for net unrealized appreciation
if you roll the stock over to a traditional IRA or another eligible employer
plan.
If you receive only employer stock in a payment that can be rolled
over, no amount will be withheld from the payment. If you receive cash or
property other than employer stock, as well as employer stock, in a payment that
can be rolled over, the 20% withholding amount will be based on the entire
taxable amount paid to you (including the value of the employer stock determined
by excluding the net unrealized appreciation). However, the amount withheld will
be limited to the cash or property (excluding employer stock) paid to you.
If you receive employer stock in a payment that qualifies as a lump sum
distribution, the special tax treatment for lump sum distributions described
above (such as 10-year averaging) also may apply. See IRS Form 4972 for
additional information on these rules.
REPAYMENT OF PLAN LOANS. If your employment ends and you have an
outstanding loan from your Plan, your employer may reduce (or "offset") your
balance in the Plan by the amount of the loan you have not repaid. The amount of
your loan offset is treated as a distribution to you at the time of the offset
and will be taxed unless you roll over an amount equal to the
7
amount of your loan offset to another qualified employer plan or a traditional
IRA within 60 days of the date of the offset. If the amount of your loan offset
is the only amount you receive or is treated as having received, no amount will
be withheld from it. If you receive other payments of cash or property from the
Plan, the 20% withholding amount will be based on the entire amount paid to you,
including the amount of the loan offset. The amount withheld will be limited to
the amount of other cash or property paid to you (other than any employer
securities). The amount of a defaulted plan loan that is a taxable deemed
distribution cannot be rolled over.
IV. SURVIVING SPOUSES, ALTERNATE PAYEES, AND OTHER
BENEFICIARIES
In general, the rules summarized above that apply to payments to
employees also apply to payments to surviving spouses of employees and to
spouses or former spouses who are "alternate payees." You are an alternate payee
if your interest in the Plan results from a "qualified domestic relations
order," which is an order issued by a court, usually in connection with a
divorce or legal separation.
If you are a surviving spouse or an alternate payee, you may choose to
have a payment that can be rolled over, as described in Part I above, paid in a
DIRECT ROLLOVER to a traditional IRA or to an eligible employer plan or paid to
you. If you have the payment paid to you, you can keep it or roll it over
yourself to a traditional IRA or to an eligible employer plan. Thus, you have
the same choices as the employee.
If you are a beneficiary other than a surviving spouse or an alternate
payee, you cannot choose a direct rollover, and you cannot roll over the payment
yourself.
If you are a surviving spouse, an alternate payee, or another
beneficiary, your payment is generally not subject to the additional 10% tax
described in Part III above, even if you are younger than age 59 1/2.
If you are a surviving spouse, an alternate payee, or another
beneficiary, you may be able to use the special tax treatment for lump sum
distributions and the special rule for payments that include employer stock, as
described in Part III above. If you receive a payment because of the employee's
death, you may be able to treat the payment as a lump sum distribution if the
employee met the appropriate age requirements, whether or not the employee had 5
years of participation in the Plan.
HOW TO OBTAIN ADDITIONAL INFORMATION
This notice summarizes only the federal (not state or local) tax rules
that might apply to your payment. The rules described above are complex and
contain many conditions and exceptions that are not included in this notice.
Therefore, you may want to consult with the Plan Administrator or a professional
tax advisor before you take a payment of your benefits from your Plan. Also, you
can find more specific information on the tax treatment of payments from
qualified employer plans in IRS Publication 575, Pension and Annuity Income, and
IRS Publication 590, Individual Retirement Arrangements. These publications are
available from your local IRS office, on the IRS's Internet Web Site at
www.irs.gov, or by calling 1-800-TAX-FORMS.
8
Filed pursuant to Rule 424(b)(3)
File No. 333-118815
PROSPECTUS
KEARNY FINANCIAL CORP.
(Holding Company for Kearny Federal Savings Bank)
Up to 18,975,000 Shares of Common Stock (subject to increase to up to
21,821,250 shares)
Kearny Financial Corp. is offering common stock for sale. The shares we
are offering will represent 30% of the outstanding common stock of Kearny
Financial Corp. Kearny MHC, the federally chartered mutual holding company
parent of Kearny Financial Corp., will own 70% of the outstanding common stock
of Kearny Financial Corp. after completion of this offering. We have received
approval to have our common stock listed for trading on the Nasdaq National
Market under the symbol "KRNY."
If you are or were a depositor of Kearny Federal Savings Bank or West
Essex Bank:
o You may have priority rights to purchase shares of common stock.
If you are a participant in the Kearny Federal Savings Bank 401(k)
Savings and Profit Sharing Plan:
o You may direct that all or part of your current account balances
in this plan be invested in shares of common stock. You will be
receiving separately a supplement to this prospectus that
describes your rights under this plan.
If you fit neither of the categories above, but are interested in
purchasing shares of our common stock:
o You may have an opportunity to purchase shares of common stock
after priority orders are filled.
We are offering up to 18,975,000 shares of common stock for sale on a
best efforts basis, subject to certain conditions. We must sell a minimum of
14,025,000 shares to complete the offering. We may sell up to 21,821,250 shares
without resoliciting subscribers as a result of regulatory considerations,
demand for the shares or changes in market conditions. The offering is expected
to expire at 12:00 noon, Eastern time, on January 28, 2005. We may extend this
expiration date without notice to you until March 14, 2005, unless the Office of
Thrift Supervision approves a later date.
Sandler O'Neill & Partners, L.P. will use its best efforts to assist us
in our selling efforts, but is not required to purchase any of the common stock
that is being offered for sale. Purchasers will not pay a commission to purchase
shares of common stock in the offering. All shares offered for sale are offered
at a price of $10.00 per share.
The minimum purchase is 25 shares. Once submitted, orders are
irrevocable unless the offering is terminated or extended beyond March 14, 2005.
If the offering is extended beyond March 14, 2005, subscribers will have the
right to modify or rescind their purchase orders. Funds received before
completion of the offering will be held in an escrow account and will earn
interest at our passbook savings rate. If we terminate the offering, or if we
extend the offering beyond March 14, 2005 and you rescind your order, we will
promptly return your funds with interest.
This investment involves a degree of risk,
including the possible loss of principal.
Please read Risk Factors beginning on page 12.
OFFERING SUMMARY
Price Per Share: $10.00
Maximum, As
Minimum Maximum Adjusted
------- ------- --------
Number of shares.................... 14,025,000 18,975,000 21,821,250
Gross proceeds...................... $140,250,000 $189,750,000 $218,212,500
Estimated offering expenses(1)...... $ 2,585,000 $ 3,041,000 $ 3,303,000
Estimated net proceeds.............. $137,665,000 $186,709,000 $214,909,500
Estimated net proceeds per share.... $ 9.82 $ 9.84 $ 9.85
--------------
(1) Includes an underwriting commission payable to Sandler O'Neill & Partners,
L.P. of 1% of the aggregate amount of common stock sold in the subscription
and community offerings. For information regarding compensation to be
received by Sandler O'Neill & Partners, L.P., please see Plan of
Distribution/Marketing Arrangements on page 133.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
Sandler O'Neill & Partners, L.P.
For assistance, please contact the stock information center at (866) 424-2161
The date of this prospectus is December 28, 2004
[Map of branch locations]
TABLE OF CONTENTS
Page
----
Summary.................................................................. 1
Risk Factors............................................................ 12
A Warning About Forward-Looking Statements.............................. 18
Selected Financial and Other Data....................................... 19
Use of Proceeds......................................................... 21
Our Policy Regarding Dividends ......................................... 22
Market for the Stock.................................................... 22
Capitalization.......................................................... 23
Pro Forma Data.......................................................... 24
Historical and Pro Forma Capital Compliance............................. 31
Management's Discussion and Analysis
of Financial Condition and Results of Operations................... 33
Business of Kearny MHC.................................................. 63
Business of Kearny Financial Corp....................................... 63
Business of Kearny Federal Savings Bank ................................ 64
Regulation.............................................................. 92
Taxation............................................................... 103
Management............................................................. 104
The Stock Offering..................................................... 118
Restrictions on Acquisition of Kearny Financial Corp.................... 138
Description of Capital Stock............................................ 140
Legal and Tax Opinions.................................................. 141
Experts................................................................. 141
Registration Requirements............................................... 141
Where You Can Find Additional Information............................... 141
Index to Consolidated Financial Statements.............................. 143
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SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read this entire document carefully, including the
consolidated financial statements and the notes to the consolidated financial
statements beginning on page F-1 of this document.
Kearny Financial Corp., Kearny MHC and Kearny Federal Savings Bank
Kearny Financial Corp. is a federally-chartered corporation organized
in March 2001 for the purpose of acquiring all of the capital stock that Kearny
Federal Savings Bank issued in its mutual holding company reorganization. Kearny
Financial Corp.'s principal executive offices are located at 120 Passaic Avenue,
Fairfield, New Jersey 07004 and the telephone number is (973) 244-4500.
Currently, all of the outstanding stock of Kearny Federal Savings Bank is held
by Kearny Financial Corp. and all of the outstanding stock of Kearny Financial
Corp. is held by Kearny MHC.
Kearny MHC is a federally-chartered mutual holding company that was
formed in 2001 in connection with the mutual holding company reorganization.
Kearny MHC has not engaged in any significant business since its formation in
2001. So long as Kearny MHC is in existence, it will at all times own a majority
of the outstanding stock of Kearny Financial Corp. After completion of the
offering, Kearny MHC will own 70% of the outstanding stock of Kearny Financial
Corp. We anticipate that the primary business activity of Kearny MHC going
forward will be to own a majority of Kearny Financial Corp.'s stock.
Kearny Federal Savings Bank is a federally-chartered stock savings
bank. It was originally founded in 1884 and received its federal charter in
1941. Kearny Federal Savings Bank's deposits are federally insured by the
Savings Association Insurance Fund as administered by the Federal Deposit
Insurance Corporation. Kearny Federal Savings Bank is regulated by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation. The Office of
Thrift Supervision also regulates Kearny MHC and Kearny Financial Corp. as
savings and loan holding companies.
During recent years we have experienced significant growth, completing
three whole bank acquisitions and the assumption of deposits of a branch office
of another financial institution. These transactions added a total of $936.0
million in assets to Kearny Financial Corp., more than doubling total assets,
which grew from $793.2 million at June 30, 1998 to $1.90 billion at September
30, 2004. At September 30, 2004, we had deposits of $1.51 billion and
stockholders' equity of $297.8 million.
Our assets are invested primarily in investment securities and
mortgage-backed securities. At September 30, 2004, the securities portfolios
totaled $1.21 billion while loans receivable, net of deferred fees and the
allowance for loan losses, were $515.2 million. Kearny Federal Savings Bank
offers traditional retail banking services, one- to four-family residential
mortgage loans, multi-family and commercial mortgage loans, construction loans,
commercial business loans and home equity loans and lines of credit. Kearny
Federal Savings Bank currently operates from its main office in Kearny, New
Jersey, and twenty-four branch offices located in Bergen, Hudson, Passaic,
Morris, Middlesex, Essex, Union and Ocean Counties, New Jersey.
The Corporate Structure Following the Offering.
Kearny Financial Corp. is offering shares representing 30% of the
outstanding stock of Kearny Financial Corp. after the completion of the
offering. The shares are being offered to certain depositors of Kearny Federal
Savings Bank, the employee stock ownership plan of Kearny Federal Savings Bank
and
1
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possibly to the general public, to the extent shares are available. See Persons
Who May Order Stock in the Offering on page 3 and Conduct of the Offering on
page 119. Kearny MHC will own the remaining 70% of the outstanding stock of
Kearny Financial Corp. The following chart shows the corporate structure after
completion of the stock offering.
---------- -----------------------------------------------
Kearny MHC Minority Stockholders of Kearny Financial Corp.
---------- -----------------------------------------------
| |
| |
| 70% | 30%
| |
| |
| |
---------------------------------------------------
Kearny Financial Corp.
---------------------------------------------------
|
|
| 100%
|
|
---------------------------------------------------
Kearny Federal Savings Bank
---------------------------------------------------
Use of the Proceeds Raised from the Sale of Stock.
Kearny Financial Corp. will use 50% of the net proceeds from the
offering to make a capital contribution to Kearny Federal Savings Bank.
Concurrent with the offering, Kearny Financial Corp. will also lend Kearny
Federal Savings Bank's employee stock ownership plan cash from subscriptions
received to enable the plan to buy up to 8% of the shares sold in the offering.
The balance of the proceeds will be retained by Kearny Financial Corp. and used
for general business purposes, which may include investment in securities,
repurchasing shares of its common stock, paying cash dividends or supporting
acquisitions.
The capital contribution from Kearny Financial Corp. to Kearny Federal
Savings Bank will provide the bank with additional equity capital, which will
support future growth and expanded operations. While Kearny Federal Savings Bank
currently exceeds the regulatory capital requirements to be considered well
capitalized, the sale of shares of Kearny Financial Corp. common stock, coupled
with the accumulation of earnings, less dividends or other reductions in capital
from year to year, provides a means for the orderly preservation and expansion
of our capital base. If we expand our business as we currently plan, Kearny
Federal Savings Bank will need the additional capital to remain well capitalized
under regulatory capital requirements.
The funds received by Kearny Federal Savings Bank will be used for
general business purposes, including originating loans and purchasing
securities. We intend to increase the balance of our loan portfolio relative to
the size of our securities portfolio, however, such a change will take time and
in the near future our assets will continue to consist primarily of securities.
We intend to continue investing in securities of the same type we currently hold
and to continue Kearny Federal Savings Bank's current mix of deposit and loan
products.
In addition to building our core banking business through internal
growth and de novo branching, we will also actively consider expansion
opportunities such as the acquisition of branches and other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. We may also pursue other business activities, including possibly
offering asset management services, acquiring a title insurance company and/or
acquiring a mortgage banking operation. There are, however, no current
understandings, arrangements or agreements for these activities and we cannot
assure you that we will commence such activities. See Use of Proceeds on page
21.
2
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Persons Who May Order Stock in the Offering.
Note: Subscription rights are not transferable, and persons with subscription
rights may not subscribe for shares for the benefit of any other person. If you
violate this prohibition, you may lose your rights to purchase shares and may
face criminal prosecution and/or other sanctions.
We have granted rights to subscribe for shares of Kearny Financial
Corp. common stock in a subscription offering to the following persons in the
following order of priority:
o Priority 1 - depositors of Kearny Federal Savings Bank at the close of
business on March 31, 2003 with deposits of at least $50.00. Former
depositors of West Essex Bank, which was acquired by Kearny Federal Savings
Bank in July 2003, will be treated as Eligible Account Holders if they had
deposits with West Essex Bank at the close of business on March 31, 2003 of
at least $50.00.
o Priority 2 - the tax qualified employee stock benefit plans of Kearny
Federal Savings Bank.
o Priority 3 - depositors of Kearny Federal Savings Bank at the close of
business on September 30, 2004 with deposits of at least $50.00.
o Priority 4 - depositors of Kearny Federal Savings Bank at the close of
business on November 30, 2004.
If we receive subscriptions for more shares than are to be sold in this
offering, we may be unable to fill, or may only partially fill, your order.
Shares will be allocated in order of the priorities described above under a
formula outlined in the plan of stock issuance. If we increase the number of
shares to be sold above 18,975,000, Kearny Federal Savings Bank's employee stock
ownership plan will have the first priority right to purchase any shares
exceeding that amount to the extent that its subscription has not previously
been filled. Any shares remaining will be allocated in the order of the
priorities described above. See The Stock Offering - Subscription Offering and
Subscription Rights for a description of the allocation procedure.
We may offer shares not sold in the subscription offering to the
general public in a community offering. In the community offering, we will give
a preference first to natural persons who reside in Bergen, Hudson, Passaic,
Morris, Monmouth, Middlesex, Essex, Union and Ocean Counties, New Jersey, and
second to other residents of New Jersey. This part of the offering may commence
concurrently with the subscription offering or any time thereafter and may
terminate at any time without notice but no later than March 14, 2005.
Shares not sold in the subscription or community offering may be
offered for sale in a syndicated community offering, which would be an offering
to the general public on a best efforts basis managed by Sandler O'Neill &
Partners, L.P. This part of the offering may terminate at any time without
notice but no later than March 14, 2005.
You cannot transfer your subscription rights. If you attempt to
transfer your rights, you may lose the right to purchase shares and may be
subject to criminal prosecution and/or other sanctions. With the exception of
IRA and Keogh account stock purchases, shares purchased in the subscription
offering must be registered in the names of all depositors on the qualifying
account(s). Deleting names of depositors or adding non-depositors or otherwise
altering the form of beneficial ownership of a qualifying account will result in
the loss of your subscription rights.
We have the right to reject any orders for stock in the community
offering and syndicated community offering. We have described the offering in
greater detail beginning on page 118.
3
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Deadline for Ordering Stock.
The subscription offering will expire at 12:00 noon, Eastern time, on
January 28, 2005. We may extend this expiration date without notice to you for
up to 45 days, until March 14, 2005. Once submitted, your order is irrevocable
unless the offering is extended beyond March 14, 2005. We may request permission
from the Office of Thrift Supervision to extend the offering beyond March 14,
2005, but in no event may the offering be extended beyond June 7, 2006. If the
offering is extended beyond March 14, 2005, we will notify each subscriber and
subscribers will have the right to confirm, modify or rescind their
subscriptions. If an affirmative response is not received prior to the
expiration of the resolicitation period, a subscriber's subscription will be
cancelled and funds will be returned with interest.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
Purchase Limitations.
Limitations on the purchase of stock in the offering have been set by
the plan of stock issuance adopted by our Board of Directors. These limitations
include the following:
o The minimum purchase is 25 shares.
o The maximum number of shares of stock that any individual (or individuals
through a single account) may purchase is 50,000 shares.
o The maximum number of shares of stock that any individual may purchase
together with any associate or group of persons acting in concert is 75,000
shares.
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. Thus, we may increase or
decrease the purchase limitations. In the event the maximum purchase limitation
is increased, persons who subscribed for the maximum will be notified and
permitted to increase their subscription.
How to Purchase Stock in the Offering.
If you want to place an order for shares in the offering, you must
complete an original stock order form and send it to us together with full
payment. You must sign the certification that is on the reverse side of the
stock order form. We must receive your stock order form before the end of the
subscription offering or the end of the community offering, as appropriate. Once
we receive your order, you cannot cancel or change it without our consent.
To ensure that we properly identify your subscription rights, you must
provide on your stock order form all of the information requested for each of
your deposit accounts as of the eligibility dates. If you fail to do so, your
subscription may be reduced or rejected if the offering is oversubscribed.
We may, in our sole discretion, reject orders received in the community
offering either in whole or in part. If your order is rejected in part, you
cannot cancel the remainder of your order.
You may pay for shares in the subscription offering or the community
offering in any of the following ways:
o In cash, if delivered in person.
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o By check or money order made payable to Kearny Financial Corp.
o By authorizing withdrawal from an account at Kearny Federal Savings Bank.
To use funds in an IRA or Keogh account at Kearny Federal Savings Bank, you
must transfer your account to an unaffiliated institution or broker. Please
contact the stock information center as soon as possible for assistance.
We will pay interest on your subscription funds from the date we
receive your funds until the offering is completed or terminated. All funds
authorized for withdrawal from deposit accounts with us will earn interest at
the applicable account rate until the offering is completed or terminated. If,
as a result of a withdrawal from a certificate of deposit, the balance falls
below the minimum balance requirement, the remaining funds will be transferred
to a savings account and will earn interest at our regular passbook savings
rate. There will be no early withdrawal penalty for withdrawals from
certificates of deposit used to pay for stock. Funds received in the
subscription offering will be held in a segregated deposit account at Kearny
Federal Savings Bank established to hold funds received as payment for shares.
We may, at our discretion, determine during the offering period that it is in
the best interest of Kearny Federal Savings Bank to hold subscription funds in
an escrow account at another insured financial institution instead of at Kearny
Federal Savings Bank.
Receiving a Prospectus and an Order Form.
The subscription offering will expire at 12:00 noon, Eastern time, on
January 28, 2005. We may extend this expiration date without notice to you for
up to 45 days, until March 14, 2005. If a community offering is held, it may
terminate at any time without notice but no later than March 14, 2005. To ensure
that each purchaser in the subscription and community offerings receives a
prospectus at least 48 hours before the expiration date, in accordance with Rule
15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed any
later than five days prior to this expiration date or otherwise distributed any
later than two days prior to this expiration date. Execution of the order form
will confirm receipt of delivery in accordance with Rule 15c2-8. Order forms
will only be distributed with a prospectus.
Conditions to Completing the Offering.
We are conducting the offering under the terms of our plan of stock
issuance. We cannot complete the offering unless:
o we sell at least the minimum number of shares offered; and
o we receive the final approval of the Office of Thrift Supervision to
complete the offering.
How We Determined the Offering Range and the $10.00 Price Per Share.
The independent appraisal by RP Financial, LC, dated as of November 26,
2004, established the pro forma market value of Kearny Financial Corp. This
appraisal was based on our financial condition and results of operations and
considered the effect of the additional capital to be raised in the stock
offering. The per share price was set at $10.00 because it is the price most
commonly used in stock offerings involving mutual-to-stock conversions and stock
issuances by financial institutions in the mutual holding company form of
organization. After taking into account our current financial condition, the
appraisal and our business plans, our Board of Directors decided to offer for
sale to public stockholders 30% of the total shares to be outstanding after the
offering, with the remaining 70% of the total shares to be outstanding after the
offering to be held by Kearny MHC, our parent mutual holding company.
The appraisal incorporated an analysis of a peer group of publicly
traded mid-tier thrift holding company subsidiaries of mutual holding companies
that RP Financial deemed comparable to us. This
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analysis included an evaluation of the average and median price-to-earnings,
price-to-book value and price- to-tangible book value ratios indicated by the
market prices of the peer group companies. RP Financial applied the peer group's
pricing ratios, as adjusted for certain qualitative valuation factors to account
for differences between the peer group and us, to our pro forma earnings, book
value and tangible book value in order to derive our estimated pro forma market
value.
RP Financial has estimated that as of November 26, 2004, the pro forma
market value of Kearny Financial Corp. ranged from a minimum of $467.5 million
to a maximum of $632.5 million. Based on this valuation and the $10.00 per share
price, the number of shares of common stock to be issued by Kearny Financial
Corp. and outstanding upon completion of the offering will range from a minimum
of 46,750,000 shares to a maximum of 63,250,000 shares. Kearny Financial Corp.
is offering for sale 30% of these shares, or between 14,025,000 and 18,975,000
shares. Kearny MHC will own between 32,725,000 and 44,275,000 shares, or 70%, of
Kearny Financial Corp. at the completion of the stock offering.
Stock Trading Multiples of Mutual Holding Companies. The following
table presents the pricing ratios for the peer group of publicly traded mid-tier
thrift holding company subsidiaries of mutual holding companies and the pro
forma pricing ratios for Kearny Financial Corp. as calculated by RP Financial in
its appraisal report dated November 26, 2004.
Price-to-earnings Price-to-book Price-to-tangible
multiple(1) value ratio book value ratio
-------- ----------- ----------------
Kearny Financial Corp. (pro forma)(2)
Minimum.............................. 32.9x 112.7% 141.2%
Midpoint............................. 38.8x 126.3% 156.5%
Maximum.............................. 44.8x 138.5% 169.8%
Maximum, as adjusted................. 51.7x 151.5% 183.8%
Valuation of peer group companies
as of November 26, 2004 (3)
Average.............................. 25.4x 236.3% 261.6%
Median............................... 25.1x 225.0% 259.7%
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(1) The price-to-earnings multiples set forth in the above table do not reflect
the recognition of compensation expense in connection with stock options.
New accounting guidance issued by the Financial Accounting Standards Board
in December 2004 requires the recognition of compensation expense related
to stock options outstanding based upon the fair value of such awards at
the date of grant over the period that such awards are earned. The
implementation of this accounting guidance will have a significant impact
on pricing ratios of Kearny Financial Corp. and will likely have a
significant impact on the peer group companies as well. The pro forma
information presented on pages 24 to 30 reflects an estimated expense for
the stock option plan that may be adopted by Kearny Financial Corp. and the
resulting effect on the pro forma price-to-earnings multiples for Kearny
Financial Corp.
(2) Based on Kearny Financial Corp.'s financial data as of and for the twelve
months ended September 30, 2004.
(3) Reflects earnings for the most recent 12-month period for which data was
publicly available.
For a summary of selected pricing ratios for the peer group mid-tier
thrift holding companies on a fully-converted basis and the resulting
fully-converted pro forma pricing ratios for Kearny Financial Corp., please see
the table on page 132.
The independent appraisal is not necessarily indicative of the
post-stock offering trading value. Do not assume or expect that the valuation of
Kearny Financial Corp. as indicated above means that the common stock will trade
at or above the $10.00 purchase price after the stock offering is completed.
The amount of common stock being offered may be increased by up to 15%
without notice to persons who have subscribed for stock, so that a total of
21,821,250 shares would be sold in the offering.
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We received authorization from the Office of Thrift Supervision to conduct the
stock offering on December 28, 2004. The independent appraisal must be updated
before we can complete the stock offering and such updated appraisal will be
subject to the further approval of the Office of Thrift Supervision. If the
updated independent valuation would result in more than 21,821,250 shares being
sold, we would notify persons who have subscribed for stock and they would have
the opportunity to confirm, change or cancel their subscription orders.
After-Market Performance Information Provided by Independent Appraiser.
The following table, prepared by our independent appraiser, presents
for all mutual holding company reorganizations with a "first-step" minority
stock issuance from January 1, 2002 to November 26, 2004, the percentage stock
appreciation from the initial trading date of the offering to the dates shown in
the table. The table also presents the average and median percentage stock
appreciation for the January 1, 2002 to November 26, 2004 time frame and for the
January 1, 2004 to November 26, 2004 time frame. This information relates to
stock appreciation experienced by other companies that reorganized in different
markets and that may have issued more or less than 30% of their common stock to
the public. In addition, the companies may have no similarities to Kearny with
regard to the market in which Kearny competes, earnings quality and growth
potential, among other factors. The information shown in the following table was
not included in the appraisal report, however, the appraisal prepared by RP
Financial did consider the aftermarket trading experience of transactions that
closed within the three months prior to the November 26, 2004 valuation date
used in the appraisal.
This table is not intended to indicate how our stock may perform.
Furthermore, this table presents only short-term price performance and may not
be indicative of the longer-term stock price performance of these companies. The
increase in any particular company's stock price is subject to various factors,
including, but not limited to, the amount of proceeds a company raises, the
company's historical and anticipated operating results, the nature and quality
of the company's assets, the company's market area, and the quality of
management and management's ability to deploy proceeds (such as through loans
and investments, the acquisition of other financial institutions or other
businesses, the payment of dividends and common stock repurchases). In addition,
stock prices may be affected by general market and economic conditions, the
interest rate environment, the market for financial institutions and merger or
takeover transactions, the presence of professional and other investors who
purchase stock on speculation, as well as other unforeseeable events not in the
control of management. Before you make an investment decision, we urge you to
carefully read this prospectus, including, but not limited to, the Risk Factors
beginning on page 12.
"First-Step" Mutual Holding Company Offerings with
Completed Closing Dates between January 1, 2002 and November 26, 2004
Price Performance from Initial Trading Date
-------------------------------------------
Transaction Closing Date 1 day 1 week 1 month November 26, 2004
----------- ------------ ----- ------ ------- -----------------
PSB Holdings, Inc. (MHC) 10/5/04 5.0% 6.0% 5.0% 20.0%
Atlantic Coast Federal Corp. (MHC) 10/5/04 17.5% 23.1% 30.0% 41.5%
Naugatuck Valley Financial Corp. (MHC) 10/1/04 8.0% 8.1% 8.0% 10.0%
SI Financial Group, Inc. (MHC) 10/1/04 12.0% 10.6% 10.3% 21.0%
First Federal Financial Services (MHC) 6/29/04 15.0% 22.5% 35.0% 47.5%
Monadnock Community (MHC) 6/29/04 3.8% 0.0% -3.8% 28.8%
Wawel Savings Bank (MHC) 4/1/04 29.5% 25.0% 12.5% 15.0%
Osage Federal Financial, Inc. (MHC) 4/1/04 20.0% 22.5% 9.5% 20.0%
K-Fed Bancorp (MHC) 3/31/04 34.9% 29.3% 15.9% 52.5%
Citizens Community Bancorp (MHC) 3/30/04 23.7% 27.5% 18.0% 50.0%
Clifton Savings Bancorp, Inc. (MHC) 3/4/04 22.5% 40.9% 32.9% 26.2%
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"First-Step" Mutual Holding Company Offerings with
Completed Closing Dates between January 1, 2002 and November 26, 2004
Price Performance from Initial Trading Date
-------------------------------------------
Transaction Closing Date 1 day 1 week 1 month November 26, 2004
----------- ------------ ----- ------ ------- -----------------
Cheviot Financial Corp. (MHC) 1/6/04 33.2% 33.5% 34.2% 15.0%
Flatbush Federal Bancorp, Inc. (MHC) 10/21/03 63.8% 56.3% 63.8% 46.9%
ASB Holding Company (MHC) 10/3/03 62.0% 69.0% 67.5% 75.0%
Synergy Financial Group (MHC) 9/18/02 29.3% 27.0% 27.0% N/A(1)
Minden Bancorp (MHC) 7/2/02 19.5% 19.5% 18.5% 99.0%
New England Bancshares (MHC) 6/4/02 23.0% 23.5% 23.5% 98.5%
Partners Trust Financial Group (MHC) 4/4/02 42.5% 48.5% 49.8% N/A(1)
Price Performance from Initial Trading Date
-------------------------------------------------
1 day 1 week 1 month November 26, 2004
----- ------ ------- -----------------
Offerings with closing dates between
January 1, 2002 and November 26, 2004:
Average 25.8% 27.4% 25.4% 41.7%
Median 22.8% 24.3% 21.0% 35.1%
Offerings with closing dates between
January 1, 2004 and November 26, 2004:
Average 18.8% 20.8% 17.3% 29.0%
Median 18.8% 22.8% 14.2% 23.6%
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(1) These companies completed a "second-step" mutual to stock conversion prior
to November 26, 2004 and no longer exist as mutual holding companies, so no
stock appreciation information is available for that date.
Data presented in the table reflects a small number of transactions.
While stock prices of reorganizing institutions have, on average, increased for
the limited period presented, there can be no assurance that our stock price
will appreciate the same amount, if at all. There can also be no assurance that
our stock price will not trade below $10.00 per share. The substantial proceeds
raised as a percentage of pro forma stockholders' equity may have a negative
effect on our stock price performance. See Risk Factors - After this offering,
our return on equity will be low compared to other companies. This could
negatively impact the price of our stock. In addition, the transactions from
which the data are derived occurred primarily during a falling interest rate
environment, during which the market for financial institution stocks typically
increases. If interest rates rise, our net interest income and the value of our
assets likely would be reduced, negatively affecting our stock price. See Risk
Factors - An increase in interest rates is expected to adversely affect our
earnings.
Stock Benefit Plans for Management.
In order to align our employees' and directors' interests closer to our
stockholders' interests, we intend to establish certain benefit plans that use
our stock as compensation. We intend to establish an employee stock ownership
plan for the exclusive benefit of participating employees of Kearny Federal
Savings Bank. We also intend to adopt a stock option plan and a restricted stock
plan for the benefit of directors and officers following the offering. In no
event will these plans be adopted sooner than six months subsequent to the
completion of the offering. Under the current regulations of the Office of
Thrift Supervision, the stock option and restricted stock plans must be approved
by a majority of the total votes eligible to be cast by our stockholders, other
than Kearny MHC, unless we obtain a waiver from the Office of Thrift Supervision
allowing approval by a majority of votes cast, other than by Kearny MHC. The
plans and the approval of the plans will comply with all of the then applicable
Office of Thrift Supervision regulations. Officers, directors, and employees
will not be required to pay cash for shares received under
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the employee stock ownership plan or shares received under the restricted stock
plan, but will be required to pay the exercise price to exercise stock options.
The following table presents information regarding the participants in
each plan, the percentage of total outstanding shares after the offering,
including and excluding the shares held by Kearny MHC, and the dollar value of
the stock for our employee stock ownership plan and stock-based incentive plans.
It is assumed that the value of the stock in the table is $10.00 per share.
Stock options will be granted with a per share exercise price at least equal to
the market price of our common stock on the date of grant. The value to the
recipient will be equal to the difference between the fair market value and the
exercise price. Accordingly, the value of a stock option will depend upon
changes, if any, in the price of our common stock during the period in which the
stock option may be exercised. The table below assumes that 55,000,000 shares,
the midpoint of the offering range, are outstanding, including 16,500,000 shares
held by public stockholders and 38,500,000 shares held by Kearny MHC upon
completion of the stock offering.
Percentage of Percentage
Total Shares of Shares
Estimated Number Issued, Sold to
Individuals Value of of Shares/ Including Public
Eligible Shares/Options Options at Shares Stockholders
to Receive at Midpoint of Midpoint of Held by in the
Awards Offering Range Offering Range Kearny MHC Offering
------ -------------- -------------- ---------- --------
Employee stock ownership plan...... Officers $13,200,000 1,320,000 2.4% 8.0%
and
Employees
Restricted stock plan awards....... Officers 10,780,000 1,078,000 1.96% 6.53%
and
Directors
Stock options...................... Officers 10,672,200(1) 2,695,000 4.9% 16.3%
and
Directors
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(1) Assumes that each option has a value of $3.96. This estimated value was
determined using the Black-Scholes-Merton option pricing formula using the
following assumptions: (i) the trading price on date of grant was $10.00
per share; (ii) exercise price is equal to the trading price on the date of
grant; (iii) dividend yield of 0%; (iv) expected life of 10 years; (v)
expected volatility of 16.57%; and risk-free interest rate of 4.27%.
Because there is currently no market for Kearny Financial Corp.'s common
stock, the assumed expected volatility is based on the SNL Financial MHC
index. If the fair market value per share on the date of grant is different
than $10.00, or if the assumptions used in the option pricing formula are
different from those used in preparing this pro forma data, the value of
the options and the related expense recognized will be different. There can
be no assurance that the actual fair market value per share on the date of
grant, and correspondingly the exercise price of the options, will be
$10.00 per share.
See Management - Potential Stock Benefit Plans on page 113 and Pro
Forma Data on pages 24 to 30 for more information about the stock benefit plans.
Proposed Stock Purchases by Management.
While no formal decisions have been made, preliminary indications are
that our directors and executive officers and their associates will purchase
approximately 573,000 shares of common stock in the offering, which represents
1.2%, 1.0 and 0.9% of the total shares to be outstanding after the offering at
the minimum, midpoint and maximum of the offering range, respectively, including
shares issued to Kearny MHC, and 4.1%, 3.5% and 3.0% of the total number of
shares to be sold to public stockholders at the minimum, midpoint and maximum of
the offering range, respectively.
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Our Policy Regarding Dividends.
We intend to pay dividends but have not yet established a definitive
dividend policy or determined the amount or timing of cash dividends that Kearny
Financial Corp. may pay after the offering. The timing, amount and frequency of
dividends will be determined by the Board of Directors. There are also
restrictions on our ability to pay dividends. See Our Policy Regarding Dividends
on page 22.
If we pay dividends to stockholders of Kearny Financial Corp., it is
anticipated that any dividends payable to Kearny MHC would be waived. Under
Office of Thrift Supervision regulations, these dividend waivers would not
result in dilution to public stockholders in the event that Kearny MHC converts
to stock form in the future. See Regulation - Regulation of Kearny Financial
Corp. on page 100.
Market for Kearny Financial Corp.'s Common Stock.
We have received approval to have our common stock listed for trading
on the Nasdaq National Market under the symbol "KRNY." Sandler O'Neill currently
intends to become a market maker in the common stock, but it is under no
obligation to do so. We cannot assure you that other market makers will be
obtained or that an active and liquid trading market for the shares of common
stock will develop or if developed, will be maintained. After shares of the
common stock begin trading, you may contact a stock broker to buy or sell
shares.
Restrictions on the Acquisition of Kearny Financial Corp. and Kearny Federal
Savings Bank.
Federal regulations, as well as provisions contained in the charter and
bylaws of Kearny Financial Corp. and Kearny Federal Savings Bank, restrict the
ability of any person, firm or entity to acquire Kearny Financial Corp., Kearny
Federal Savings Bank, or their capital stock. These restrictions include the
requirement that a potential acquirer of common stock obtain the prior approval
of the Office of Thrift Supervision before acquiring in excess of 10% of the
voting stock of Kearny Financial Corp. or Kearny Federal Savings Bank. Because a
majority of the shares of outstanding common stock of Kearny Financial Corp.
must be owned by Kearny MHC, any acquisition of Kearny Financial Corp. must be
approved by Kearny MHC, and Kearny MHC would not be required to pursue or
approve a sale of Kearny Financial Corp. even if such sale were favored by a
majority of Kearny Financial Corp.'s public stockholders. Additionally, Office
of Thrift Supervision regulations prohibit anyone from acquiring Kearny
Financial Corp. for a period of three years following the offering, unless such
prohibition is waived by the Office of Thrift Supervision.
Tax Effects of the Offering.
The minority stock offering will not be a taxable transaction for
purposes of federal or state income taxes for Kearny MHC, Kearny Financial
Corp., Kearny Federal Savings Bank or persons eligible to subscribe for stock in
the offering. See Material Federal and State Tax Consequences of the Offering on
page 136.
Possible Conversion of Kearny MHC to Stock Form.
In the future, Kearny MHC may convert from the mutual holding company
form of organization, wherein a majority of the outstanding stock is held by the
mutual holding company, to a corporation with 100% of its shares held by public
stockholders. This type of conversion transaction is commonly known as a
"second-step conversion." In a second-step conversion, members of Kearny MHC
would have subscription rights to purchase common stock of the successor full
stock corporation and the public stockholders of Kearny Financial Corp. would be
entitled to exchange their shares of common stock for an equal percentage of
shares of the successor full stock corporation. Kearny Financial Corp.'s public
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stockholders, therefore, would own approximately the same percentage of the
successor resulting entity as they owned before the second-step conversion. This
percentage may be adjusted to reflect any assets owned by Kearny MHC. The Board
of Directors has no current plans to undertake a second-step conversion
transaction.
Risk Factors.
This investment entails various risks including the possible loss of
principal. You may not be able to sell the stock at or above the $10.00 offering
price. You should carefully read the information under Risk Factors beginning on
page 12.
For assistance, please contact the stock information center at (866)
424-2161. The stock information center's hours of operation are generally 10:00
a.m. to 4:00 p.m., Eastern time, Monday through Friday. The stock information
center is closed on weekends and holidays.
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RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
An increase in interest rates is expected to adversely affect our earnings.
Our earnings largely depend on our net interest income, which could be
negatively affected by changes in interest rates. Net interest income is the
difference between:
o the interest income we earn on our interest-earning assets, such as
mortgage loans and investment securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
The rates we earn on our assets are generally fixed for a contractual
period of time. We, like many savings institutions, have liabilities that
generally have shorter contractual maturities than our assets or no contractual
maturities, such as savings and money market deposits. This imbalance can create
significant earnings volatility, because market interest rates change over time.
In addition, short-term and long-term interest rates do not necessarily change
at the same time or at the same rate.
In a period of rising interest rates, the interest income earned on our
assets may not increase as rapidly as the interest paid on our liabilities. We
are vulnerable to volatility in our earnings as a result of an increase in
interest rates because the majority of our interest-earning assets are
long-term, fixed rate assets. At September 30, 2004, 84.9% of our loans with
contractual maturities of greater than one year had fixed rates of interest, and
79.1% of our total loans had contractual maturities of ten or more years. At
September 30, 2004, we held $724.9 million of mortgage-backed securities,
representing 38.1% of our assets. We invest generally in fixed-rate securities
and substantially all of our mortgage-backed securities at September 30, 2004
had contractual maturities of ten or more years. In an increasing rate
environment, our cost of funds is expected to increase more rapidly than the
yields earned on our loan portfolio and securities portfolio because our primary
source of funds is deposits with generally shorter maturities than the
maturities on our loans and investment securities. This is expected to cause a
narrowing of our net interest rate spread and is expected to cause a decrease in
our earnings.
In a period of falling interest rates, prepayments of loans and
mortgage-backed securities generally will increase as borrowers refinance their
debt in order to reduce their borrowing cost. This causes reinvestment risk,
because in a falling rate environment we are generally not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. A falling rate environment would result in a decrease in
rates we pay on deposits and borrowings, but the decrease in the cost of our
funds may not be as great as the decrease in the yields on our mortgage-backed
securities and loan portfolios. This could cause a narrowing of our net interest
rate spread and could cause a decrease in our earnings.
We are further exposed to interest rate risk due to the large portion
of our total deposits that are certificates of deposit. At September 30, 2004,
$869.2 million, or 57.5%, of our total deposits were certificates of deposit,
and of that amount $181.7 million were "jumbo" certificates of $100,000 or more.
Deposit inflows are significantly influenced by general interest rates and money
market conditions. The inflow of jumbo certificates of deposit and the retention
of such deposits upon maturity are particularly sensitive to general interest
rates and money market conditions, making jumbo certificates of deposit
traditionally a more volatile source of funding than core deposits. In order to
retain jumbo certificates of deposit, we may have to pay a premium rate,
resulting in an increase in our cost of funds. In a rising rate
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environment, we may be unwilling or unable to pay a competitive rate. To the
extent that such deposits do not remain with us, they may need to be replaced
with borrowings which could increase our cost of funds and negatively impact our
interest rate spread.
Kearny Federal Savings Bank monitors its interest rate sensitivity
through the use of an asset/liability management model which estimates the
change in its net portfolio value (defined as the current market value of
assets, less the current market value of liabilities, plus or minus the current
value of off-balance sheet items) in the event of a range of assumed changes in
market interest rates. Our net portfolio value analysis, as calculated by the
Office of Thrift Supervision using information as of September 30, 2004, showed
that in an immediate and permanent 2.0% increase in interest rates, our net
portfolio value would be expected to decrease by 30%. This analysis also
indicated that as of September 30, 2004 an immediate and permanent 2.0% increase
in interest rates would cause an approximately 14% decrease in our net interest
income. See Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management of Interest Rate Risk and Market Risk on page
56.
We may not be able to successfully implement our plans for growth or continue to
experience the same rate of growth that we have had in the past, and we may not
be able to successfully manage our future growth.
Over the past several years, we have experienced rapid and significant
growth. Between March 1999 and July 2003, we completed three whole bank
acquisitions and the assumption of deposits of a branch of another financial
institution. These transactions added a total of $936.0 million in assets, more
than doubling our total assets, which grew from $793.2 million at June 30, 1998
to $1.90 billion at September 30, 2004. In addition to building our core banking
business through internal growth and de novo branching in the future, we will
also actively consider expansion opportunities such as the acquisition of
branches and other financial institutions. There can be no assurance, however,
that we will continue to experience such rapid growth, or any growth, in the
future. We may have difficulty finding suitable sites for de novo branches and
identifying and successfully acquiring branches or other financial institutions.
Furthermore, there are many challenges associated with integrating
merged institutions and it requires time to adjust to expanded operations, so we
cannot assure you that we will be able to adequately and profitably manage our
possible future growth. In order to effectively manage any future growth, as
well as to comply with the additional requirements that we will be subject to as
a publicly-traded company following the offering, we may need to make changes to
our administrative and operational infrastructure, including adopting new
policies and procedures and improving our financial and management controls and
processes and reporting systems. As a result, we may need to add more staff
and/or reassign or increase the responsibilities of our existing officers and
key employees. We cannot assure you that we will be able to take the steps
necessary to effectively manage our possible future growth or that we will not
have to incur additional expenditures beyond current projections to support such
growth.
A portion of our total loan portfolio consists of multi-family and commercial
real estate loans and commercial business loans, and we intend to continue our
origination of such loans after the offering at the same level, if not higher.
The repayment risk related to these types of loans is considered to be greater
than the risk related to one- to four-family residential loans.
At September 30, 2004, our loan portfolio included $86.8 million of
multi-family and commercial real estate loans and commercial business loans, or
16.7% of our total loan portfolio. It is our intention to continue to originate
these types of loans at the same percentage level, if not higher.
Unlike one- to four-family residential mortgage loans, which generally
are made on the basis of the borrower's ability to make repayment from his or
her employment and other income and which are secured by real property with
values that tend to be more easily ascertainable, the repayment of multi-family
and
13
commercial real estate loans and commercial business loans typically is
dependent on the successful operations and income stream of the borrowers'
business and the real estate securing the loan as collateral, which can be
significantly affected by economic conditions. In addition, these loans
generally carry larger balances to single borrowers or related groups of
borrowers than one- to four-family loans. Any late payments or the failure to
repay such loans would hurt our earnings. See Business of Kearny Federal Savings
Bank - Lending Activities - Multi-family and Commercial Real Estate Mortgage
Loans on page 69.
Strong competition within our market area may limit our growth and
profitability.
Competition in the banking and financial services industry in New Jersey is
intense. In our market area, we compete with commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms operating
locally and elsewhere. Many of these competitors have substantially greater
resources and lending limits than we do and offer services that we do not or
cannot provide. This competition has made it more difficult for us to make new
loans and more difficult to retain deposits. Price competition for loans might
result in us originating fewer loans, or earning less on our loans, and price
competition for deposits might result in us reducing our total deposits or
paying more on our deposits. There are large competitors operating throughout
our total market area, including Bank of America, Commerce Bank, Wachovia Bank
and PNC Bank, and we also face strong competition from other community-based
financial institutions. Our deposit market share in New Jersey was only 0.7% at
June 30, 2004, a reduction from 0.8% at June 30, 2003, and the largest deposit
share in any county in which we have branches was 2.5% at June 30, 2004 in
Bergen County, down from 2.8% at June 30, 2003.
Our business is geographically concentrated in New Jersey and a downturn in
conditions in the state could have an adverse impact on our profitability.
A substantial majority of our loans are to individuals and businesses
in New Jersey. Any decline in the economy of the state could have an adverse
impact on our earnings. Because we have a significant amount of real estate
loans, decreases in local real estate values could adversely affect the value of
property used as collateral. Adverse changes in the economy may also have a
negative effect on the ability of our borrowers to make timely repayments of
their loans, which would have an adverse impact on our earnings.
We have recently opened a new administrative building and intend to construct
new buildings for certain new and existing branch locations. We will continue to
actively consider opportunities for de novo branching. Costs related to these
buildings and expansion plans will negatively impact earnings in future periods.
Our non-interest expense for the year ended June 30, 2004 and the
quarter ended September 30, 2004, does not reflect the impact of our new 53,000
square feet administrative building in Fairfield, New Jersey. We began moving
management staff and administrative operations into parts of this building in
October 2004 and completed the move-in phase in December 2004. The total cost of
this building is expected to be approximately $13.5 million, which cost will be
capitalized and amortized over a forty-year period. Additionally, it is
estimated that the annual operating expense of this new building, excluding
depreciation, will be approximately $450,000. We expect to open a de novo branch
office in Lacey, New Jersey in the first quarter of 2005, with a total cost of
approximately $2.3 million. During 2005, we also plan to replace three office
locations with new buildings, at an estimated cost of approximately $1.9 million
per branch. Furthermore, in December of 2004, we acquired a 3.7 acre parcel of
land in West Caldwell, New Jersey for approximately $2.3 million. We intend to
construct a branch office at this location and subdivide and lease to third
parties the portion of land not used for the branch building. Costs for these
branch constructions will be capitalized and the related amortization will
impact earnings going forward. Additional expenses related to the planned
expansion of our operations through de novo branching or the acquisition of
branches or other financial institutions could also adversely impact earnings in
future periods.
14
After this offering, our return on equity will be low compared to other
companies. This could negatively impact the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. It will take a significant period of time to prudently invest
this capital. For the quarter ended September 30, 2004, our annualized return on
average equity was 5.16%. On a pro forma basis assuming that 18,975,000 shares
had been sold at the beginning of the year, our annualized return on pro forma
equity for the quarter ended September 30, 2004 would be approximately 2.78%. As
a result, our return on equity, which is the ratio of our earnings divided by
our average equity capital, will be lower than that of many similar companies.
To the extent that the stock market values a company based in part on its return
on equity, our low return on equity relative to our peer group could negatively
affect the trading price of our stock.
At September 30, 2004, our securities portfolio was 63.6% and our loan
portfolio was 27.1% of our total assets. Because securities generally yield a
lower rate than loans, our asset composition is likely to cause our earnings to
be lower than financial institutions that have a higher proportionate amount of
their assets in loans. Although we are seeking to increase our loan
originations, it will take a significant period of time to change our relative
balances of loans versus securities.
Additional public company and annual stock employee compensation and benefit
expenses following the offering may reduce our profitability and stockholders'
equity.
Following the offering, our non-interest expense is likely to increase
as a result of the financial accounting, legal and various other additional
expenses usually associated with operating as a public company. We also will
recognize additional annual employee compensation and benefit expenses stemming
from the shares granted to employees, officers and directors under new benefit
plans. These additional expenses will adversely affect our profitability and
stockholders' equity. We cannot predict the actual amount of the new
stock-related compensation and benefit expenses because applicable accounting
standards require that they be based on the fair market value of the shares of
common stock at specific points in the future; however, we expect them to be
material. We will recognize expense for our employee stock ownership plan when
shares are committed to be released to participants' accounts and would
recognize expenses for restricted stock awards over the vesting period of awards
made to recipients. In addition, the Financial Accounting Standards Board has
announced a change in the required accounting methods applicable to stock
options effective after June 15, 2005. Under such accounting requirements, we
will be required to recognize compensation expense related to stock options
outstanding based upon the fair value of such awards at the date of grant over
the period that such awards are earned. These expenses in the first year
following the offering have been estimated to be approximately $4.5 million at
the maximum of the offering as set forth in the pro forma financial information
under Pro Forma Data on pages 24 to 30 assuming the $10.00 per share purchase
price as fair market value. Actual expenses, however, may be higher or lower,
depending on the price of our common stock. For further discussion of these
plans, see Management - Potential Stock Benefit Plans on page 113.
The implementation of stock-based benefit plans may dilute your ownership
interest in Kearny Financial Corp.
We intend to adopt a stock option plan and a restricted stock plan
following the stock offering. These stock benefit plans will be funded through
either open market purchases or from the issuance of authorized but unissued
shares. Stockholders would experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options and awards made under
the restricted stock plan. The use of newly issued shares of stock to fund the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.92%. The use of newly
issued shares of stock to fund exercises of options granted under the stock
option plan instead of open market purchases
15
would dilute the voting interests of existing stockholders by approximately
4.67%. See Management - Potential Stock Benefit Plans on page 113.
Persons who purchase stock in the offering will own a minority of Kearny
Financial Corp.'s common stock and will not be able to exercise voting control
over most matters put to a vote of stockholders, including any proposal
regarding the acquisition of Kearny Financial Corp.
Kearny MHC will own a majority of Kearny Financial Corp.'s common stock
after the offering. The Board of Directors of Kearny MHC is also the Board of
Directors of Kearny Financial Corp. and will be able to exercise voting control
over most matters put to a vote of stockholders. For example, Kearny MHC may
exercise its voting control to prevent a sale or merger transaction in which
stockholders could receive a premium for their shares, to elect directors or to
approve employee benefit plans.
Provisions in our charter and bylaws limit the rights of stockholders, may deter
potential takeovers and may reduce the trading price of our stock.
Provisions in our charter and bylaws may make it difficult and
expensive to pursue a change in control or takeover attempt that our Board of
Directors opposes. As a result, you may not have an opportunity to participate
in such a transaction, and the trading price of our stock may not rise to the
level of other institutions that are more vulnerable to hostile takeovers. Such
provisions include:
o the election of directors to staggered three-year terms;
o provisions restricting the calling of special meetings of
stockholders;
o the absence of cumulative voting by stockholders in elections of
directors; and
o advance notice requirements for stockholder nominations and new
business.
See Restrictions on Acquisition of Kearny Financial Corp. - Charter and Bylaws
of Kearny Financial Corp. on page 138.
Office of Thrift Supervision policy on remutualization transactions could
prohibit acquisition of Kearny Financial Corp., which may adversely affect our
stock price.
Current Office of Thrift Supervision regulations permit a mutual
holding company to be acquired by a mutual institution in a remutualization
transaction. The possibility of a remutualization transaction has resulted in a
degree of takeover speculation for mutual holding companies that is reflected in
the per share price of mutual holding companies' common stocks. However, the
Office of Thrift Supervision has issued a policy statement indicating that it
views remutualization transactions as raising significant issues concerning
disparate treatment of minority stockholders and mutual members of the target
entity and raising issues concerning the effect on the mutual members of the
acquiring entity. Under certain circumstances, the Office of Thrift Supervision
intends to give these issues special scrutiny and reject applications providing
for the remutualization of a mutual holding company unless the applicant can
clearly demonstrate that the Office of Thrift Supervision's concerns are not
warranted in the particular case. Should the Office of Thrift Supervision
prohibit or otherwise restrict these transactions in the future, our stock price
may be adversely affected.
We have broad discretion in allocating the proceeds of the offering. Our failure
to effectively utilize such proceeds would reduce our profitability.
We intend to contribute approximately 50% of the net proceeds of the
offering to Kearny Federal Savings Bank. We may use the remaining net proceeds
to repurchase common stock, purchase investment securities, finance the
acquisition of other financial institutions or other businesses that are related
to banking or for other general corporate purposes. We expect to use a portion
of the net proceeds to fund the purchase
16
by Kearny Federal Savings Bank's employee stock ownership plan of shares in the
offering. Kearny Federal Savings Bank may use the proceeds it receives to fund
new loans, purchase investment securities, establish or acquire new branches,
acquire financial institutions or other businesses that are related to banking
or for general corporate purposes. We have not allocated specific amounts of
proceeds for any of these purposes, and we will have significant flexibility in
determining how much of the net proceeds we apply to different uses and the
timing of such applications. Our failure to utilize these funds effectively
would reduce our profitability.
Our stock price may decline when trading commences.
We cannot guarantee that if you purchase shares in the offering that
you will be able to sell them at or above the $10.00 purchase price. After the
shares of our common stock begin trading, the trading price of the common stock
will be determined by the marketplace, and will be influenced not only by our
results but by many factors outside of our control, including prevailing
interest rates, investor perceptions and general industry, geopolitical and
economic conditions. Publicly traded stocks, including stocks of financial
institutions, have recently experienced substantial market price volatility.
These market fluctuations might not be related to the operating performance of
particular companies whose shares are traded.
17
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and operating
strategies;
o statements regarding the quality of our loan and investment portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o changes in the interest rate environment that reduce our interest margins
or reduce the fair value of financial instruments;
o increased competitive pressures among financial services companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our business;
o adverse changes in the securities markets;
o our ability to successfully manage our growth;
o changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board or the Public
Company Accounting Oversight Board; and
o our ability to enter into new markets and/or expand product offerings
successfully and take advantage of growth opportunities.
Any of the forward-looking statements that we make in this prospectus
and in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Consequently, no
forward-looking statement can be guaranteed.
18
SELECTED FINANCIAL AND OTHER DATA
The following financial information and other data in this section for
the years ended June 30, 2004, 2003 and 2002 is derived from Kearny Financial
Corp.'s audited consolidated financial statements and should be read together
with the consolidated financial statements and the notes thereto beginning on
page F-1 of this document. The information at and for the years ended June 30,
2001 and 2000 is derived from unaudited consolidated financial statements of
Kearny Financial Corp. The information at and for the three months ended
September 30, 2004 and 2003 is unaudited. However, in the opinion of management,
all adjustments, consisting solely of normal recurring adjustments, necessary
for a fair presentation of the results of operations for the unaudited periods
have been made. The selected operating data presented below for the three months
ended September 30, 2004 are not necessarily indicative of the results that may
be expected for the full year or any other period. Kearny Financial Corp.
acquired Pulaski Bancorp, Inc. in October 2002 and West Essex Bancorp, Inc. in
July 2003. For an explanation of the accounting treatment of the acquisitions,
see Note 2 to the consolidated financial statements and Recent Acquisitions on
page 34.
At At June 30,
Balance Sheet Data: September 30, -------------------------------------------------------------
2004 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Assets.................................... $1,904,209 $1,936,518 $1,996,482 $1,905,638 $1,756,257 $1,680,846
Loans receivable, net..................... 515,196 505,794 509,161 591,142 602,182 591,950
Mortgage-backed securities
held to maturity........................ 724,876 771,353 681,619 968,516 689,204 484,971
Securities available for sale............. 41,335 41,564 37,840 39,679 42,367 36,166
Investment securities held to maturity.... 445,769 435,870 287,321 139,446 193,955 470,219
Cash and cash equivalents................. 36,863 39,488 325,657 97,030 159,901 22,655
Goodwill.................................. 82,263 82,263 31,746 15,600 17,911 20,222
Deposits.................................. 1,510,810 1,537,510 1,613,684 1,479,729 1,342,107 1,260,846
Federal Home Loan Bank advances........... 84,100 94,234 75,749 112,080 112,109 138,051
Total stockholders' equity................ 297,802 293,505 295,669 302,454 290,110 272,808
For the Three Months
Ended September 30, For the Year Ended June 30,
------------------------- -------------------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
------- ------- ---------- ---------- --------- --------- ---------
(In thousands)
Summary of Operations:
Interest income......................... $19,907 $19,656 $ 78,654 $ 96,492 $ 106,162 $ 114,566 $ 110,890
Interest expense........................ 7,103 9,158 32,100 44,695 54,443 67,318 60,818
------- ------- --------- --------- --------- --------- ---------
Net interest income..................... 12,804 10,498 46,554 51,797 51,719 47,248 50,072
Provision for loan losses............... 151 - - - 3 162 102
------- ------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses....................... 12,653 10,498 46,554 51,797 51,716 47,086 49,970
Non-interest income..................... 494 438 1,560 1,847 1,765 1,523 2,045
Merger related expenses................. - 592 592 14,921 619 - -
Non-interest expense, excluding
merger related expenses............... 7,789 7,151 28,880 29,431 28,446 27,519 25,879
------- ------- --------- --------- --------- --------- ---------
Income before income taxes.............. 5,358 3,193 18,642 9,292 24,416 21,090 26,136
Provisions for income taxes............. 1,562 958 5,745 5,237 7,926 6,823 8,815
------- ------- --------- --------- --------- --------- ---------
Net income.............................. $ 3,796 $ 2,235 $ 12,897 $ 4,055 $ 16,490 $ 14,267 $ 17,321
======= ======= ========= ========= ========= ========= =========
Per Share Data:
Net income per share - basic............ $379.60 $223.50 $1,289.70 $ 337.52 $1,294.02 $1,119.43 $1,356.54
Net income per share - diluted.......... $379.60 $223.50 $1,289.70 $ 336.06 $1,287.13 $1,116.48 $1,356.37
Weighted average number of common
shares outstanding - basic.......... 10,000 10,000 10,000 12,014 12,743 12,745 12,769
Weighted average number of common
shares outstanding - diluted........ 10,000 10,000 10,000 12,066 12,811 12,779 12,770
19
For the Three Months
Ended September 30, At or For the Year Ended June 30,
------------------------- ---------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
------ ------ ------ ------ ------ ------ -----
Per Share Data:
Cash dividends per share (1) ........ $ -- $ -- $ -- $ 82.07 $ 98.80 $ 79.56 $ 64.77
Dividend payout ratio (2) ........... 0.00% 0.00% 0.00% 24.32% 7.63% 7.11% 4.77%
Performance Ratios:
Return on average assets
(net income divided by
average total assets) ............ 0.79% 0.46% 0.67% 0.21% 0.91% 0.83% 1.03%
Return on average equity
(net income divided by
average equity) ................... 5.16 3.19 4.52 1.38 5.55 4.96 6.45
Net interest rate spread ............ 2.65 2.06 2.37 2.36 2.35 2.08 2.45
Net interest margin on average
interest-earnings assets .......... 2.87 2.30 2.59 2.75 2.95 2.86 3.11
Average interest-earning
assets to average
interest-bearing liabilities ...... 114.31 112.13 112.46 116.54 119.58 119.17 117.56
Efficiency ratio (Non-interest
expense divided by the sum
of net interest income and
non-interest income) .............. 58.57 70.80 61.25 82.68 54.34 56.42 49.66
Non-interest expense to ............. 1.62 1.58 1.52 2.26 1.60 1.60 1.54
average assets
Asset Quality Ratios:(3)
Non-performing loans to total loans . 0.48 0.53 0.46 0.57 0.55 0.53 0.55
Non-performing assets to total assets 0.14 0.14 0.13 0.16 0.18 0.20 0.27
Net charge-offs to average
loans outstanding .................. 0.00 0.00 0.01 0.00 0.00 0.01 0.06
Allowance for loan losses to
total loans .................... 1.02 1.05 1.01 1.01 0.87 0.85 0.86
Allowance for loan losses to
non-performing loans ........... 213.65 198.62 220.96 177.64 157.24 160.52 155.56
Capital Ratios:
Average equity to average
assets (average equity divided
by average total assets) .......... 15.30 14.25 14.73 14.97 16.38 16.70 15.99
Equity to assets at period end ...... 15.64 14.47 15.16 14.81 15.87 16.52 16.23
Tangible equity to tangible
assets at period end ........... 11.73 10.56 11.29 13.31 15.02 15.46 14.97
Number of Offices:
Offices (including offices
acquired in mergers) ........... 25 25 25 25 24 23 23
----------------
(1) Cash dividends paid per share represents the aggregate of dividends paid by
Kearny Financial Corp., West Essex Bancorp, Inc., and Pulaski Bancorp, Inc.
to the minority stockholders of West Essex Bancorp, Inc. and Pulaski
Bancorp, Inc. divided by the outstanding shares of Kearny Financial Corp.
common stock.
(2) Represents cash dividends declared per share divided by net income per
common share.
(3) Asset quality ratios are period end ratios.
20
USE OF PROCEEDS
We are conducting this stock offering principally to raise capital to
support our anticipated future growth. The net proceeds will depend on the
expenses incurred by us in connection with the offering and the total number of
shares of stock issued in the offering, which will depend on the independent
valuation and market considerations. Although the actual net proceeds from the
sale of the common stock cannot be determined until the offering is completed,
we estimate that net proceeds from the sale of common stock will be between
$137.7 million at the minimum and $186.7 million at the maximum of the offering
range (and $214.9 million at the maximum, as adjusted, if the independent
valuation is increased by 15%).
Kearny Financial Corp. intends to use the net proceeds from the
offering as follows:
MAXIMUM,
MINIMUM MIDPOINT MAXIMUM As Adjusted
--------------------- ----------------------- ---------------------- ----------------------
Percent Percent Percent Percent
of Net of Net of Net of Net
Amount Proceeds Amount Proceeds Amount Proceeds Amount Proceeds
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Gross offering proceeds......... $140,250 $165,000 $189,750 $218,213
Less offering expenses.......... (2,585) (2,813) (3,041) (3,303)
------- ------- ------- -------
Estimated net proceeds....... 137,665 100.0% 162,187 100.0% 186,709 100.0% 214,910 100.0%
Less:
Investment in Kearny
Federal Savings Bank........ 68,833 50.0% 81,094 50.0% 93,355 50.0% 107,455 50.0%
Loan to employee
stock ownership plan....... 11,220 8.2% 13,200 8.1% 15,180 8.1% 17,457 8.1%
------- ------- ------- -------
Proceeds retained by
Kearny Financial Corp........ $57,612 41.8% $67,893 41.9% $78,174 41.9% $89,998 41.9%
====== ====== ====== ======
We will use 50% of the net proceeds from the offering to make a capital
contribution to Kearny Federal Savings Bank. We will also lend the Kearny
Federal Savings Bank's employee stock ownership plan cash to enable the plan to
buy up to 8% of the shares sold in the offering. If the employee stock ownership
plan does not purchase common stock in the offering, it may purchase shares of
common stock in the open market after the stock offering. If the purchase price
of the common stock is higher than $10 per share, the amount of proceeds
required for the purchase by the employee stock ownership plan will increase and
the resulting stockholders' equity will decrease. The balance of the net
proceeds will be retained by Kearny Financial Corp. and used for general
business purposes, which may include investment in securities, repurchasing
shares of our common stock, paying cash dividends or supporting acquisitions.
However, under current regulations of the Office of Thrift Supervision, we may
not repurchase shares of our common stock during the first year following the
offering, except where extraordinary circumstances exist and with prior
regulatory approval. We will initially invest these proceeds in short to
intermediate term investment securities.
The funds received by Kearny Federal Savings Bank will be used for
general business purposes, including originating loans and purchasing
securities. In addition to building our core banking business through internal
growth and de novo branching, we will also actively consider expansion
opportunities such as the acquisition of branches and of other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. There can be no assurance that we will be successful in
implementing this growth strategy. We may have difficulty finding suitable sites
for de novo branches and identifying and successfully acquiring branches or
other financial institutions. We may also pursue other business activities,
including possibly offering asset management services, acquiring a title
insurance company and/or acquiring
21
a mortgage banking operation. There are, however, no current understandings,
arrangements or agreements for these activities and we cannot assure you that we
will commence such activities.
The net proceeds may vary significantly because total expenses of the
stock offering may be significantly more or less than those estimated. The net
proceeds will also vary if the number of shares to be issued in the stock
offering is adjusted to reflect a change in the estimated pro forma market value
of Kearny Financial Corp. Payments for shares made through withdrawals from
existing deposit accounts at Kearny Federal Savings Bank will not result in the
receipt of new funds for investment but will result in a reduction of Kearny
Federal Savings Bank's deposits and interest expense as funds are transferred
from interest-bearing certificates or other deposit accounts.
OUR POLICY REGARDING DIVIDENDS
We intend to pay dividends but have not yet established a definitive
dividend policy or determined the amount or timing of cash dividends that Kearny
Financial Corp. may pay after the offering. Future declarations of dividends by
the Board of Directors will depend on a number of factors, including investment
opportunities, growth objectives, financial condition, profitability, tax
considerations, minimum capital requirements, regulatory limitations, stock
market characteristics and general economic conditions. The timing, frequency
and amount of dividends will be determined by the Board. There can be no
assurance that dividends will in fact be paid on the stock or that, if paid,
dividends will not be reduced or eliminated in future periods.
Kearny Financial Corp.'s ability to pay dividends may also depend on
the receipt of dividends from Kearny Federal Savings Bank, which is subject to a
variety of regulatory limitations on the payment of dividends. See Regulation -
Regulation of Kearny Federal Savings Bank - Dividend and Other Capital
Distribution Limitations on page 96. Furthermore, as a condition to the Office
of Thrift Supervision giving its authorization to conduct the stock offering,
Kearny Financial Corp. has agreed that it will not initiate any action within
one year of completion of the stock offering in the furtherance of payment of a
special distribution or return of capital to stockholders of Kearny Financial
Corp.
If Kearny Financial Corp. pays dividends to its stockholders, it is
anticipated that dividends payable to Kearny MHC would be waived. Under Office
of Thrift Supervision regulations, public stockholders would not be diluted for
any dividends waived by Kearny MHC in the event that Kearny MHC converts to
stock form. See Regulation - Regulation of Kearny Financial Corp. on page 100.
MARKET FOR THE STOCK
There is not, at this time, any market for Kearny Financial Corp.'s
stock. We have received approval to have our common stock listed for trading on
the Nasdaq National Market under the symbol "KRNY." Sandler O'Neill & Partners,
L.P. has advised us that it intends to make a market in our common stock
following the offering, but it is under no obligation to do so.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of our stock
at any particular time may be limited. Under such circumstances, you could have
difficulty selling your shares of common stock. We cannot assure you that an
active and liquid trading market for the shares of common stock will develop or,
if developed, will be maintained. Nor can we assure you that, if you purchase
shares of common stock in the offering, you will be able to sell them at a price
equal to or above $10.00 per share.
22
CAPITALIZATION
Set forth below is the historical capitalization as of September 30,
2004 of Kearny Financial Corp. and the pro forma capitalization of Kearny
Financial Corp. as of September 30, 2004 after giving effect to the offering.
The table also gives effect to the assumptions set forth under Pro Forma Data on
pages 24 to 30. A change in the number of shares sold in the offering may
materially affect the pro forma capitalization.
Pro Forma Capitalization at September 30, 2004
-------------------------------------------------------------
Kearny Maximum,
Financial Minimum Midpoint Maximum as adjusted
Corp. 14,025,000 16,500,000 18,975,000 21,821,250
Historical, at shares sold shares sold shares sold shares sold
September 30, at $10.00 at $10.00 at $10.00 at $10.00
2004 per share per share per share per share(1)
---- --------- --------- --------- ------------
(In thousands)
Deposits(2).................................... $1,510,810 $1,510,810 $1,510,810 $1,510,810 $1,510,810
Borrowed funds................................. 84,100 84,100 84,100 84,100 84,100
---------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds.............. $1,594,910 $1,594,910 $1,594,910 $1,594,910 $1,594,910
========== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock, $0.10 par value,
25,000,000 shares authorized;
none to be issued.......................... - - - - -
Common stock, $0.10 par value,
75,000,000 shares authorized,
assuming shares outstanding
as shown(3)(4)(5).......................... 1 4,675 5,500 6,325 7,274
Additional paid-in capital(3)(4)(5)............ 499 133,490 157,187 180,884 208,136
Retained earnings.............................. 286,755 286,755 286,755 286,755 286,755
Accumulated other comprehensive
income, net of tax.......................... 10,547 10,547 10,547 10,547 10,547
Less:
Common stock acquired by
employee stock ownership plan(6)........... - (11,220) (13,200) (15,180) (17,457)
Common stock acquired by restricted
stock plan(7)............................. - (9,163) (10,780) (12,397) (14,257)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity..................... $ 297,802 $ 415,084 $ 436,009 $ 456,934 $ 480,998
========== ========== ========== ========== ==========
------------
(1) As adjusted to give effect to an increase in the number of shares sold
which could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. Any withdrawals would reduce pro forma deposits by
an amount equal to the withdrawals.
(3) Pro forma data includes shares to be held by Kearny MHC after completion of
the stock offering. Kearny MHC is currently the sole stockholder of Kearny
Financial Corp. and holds 10,000 shares of common stock of Kearny Financial
Corp. Upon completion of the offering, Kearny MHC will hold 70% of the
total shares of Kearny Financial Corp. to be outstanding.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plan that may be adopted by Kearny Financial
Corp. and presented for approval by the stockholders after the offering. An
amount equal to 4.9% of the total number of shares outstanding after the
offering, including the shares held by Kearny MHC, would be reserved for
issuance upon the exercise of options to be granted under the stock option
plan following the stock offering. See Management - Potential Stock Benefit
Plans - Stock Option Plan on page 113.
23
(5) The historical additional paid-in capital amount represents the initial
capitalization of the mid-tier holding company upon its formation in 2001
($500,000 was received by Kearny Financial Corp. for the 10,000 shares
issued to Kearny MHC). The pro forma additional paid-in capital amounts
include this initial $500,000 capitalization. The pro forma additional
paid-in capital amounts are net of stock offering expenses and represent
the amount paid for the shares sold in the offering at $10.00 per share,
less the par value of outstanding shares. Because Kearny Financial Corp. is
selling only 30% of the total shares to be outstanding upon completion of
the offering, the additional paid-in capital represents the net proceeds
for the sale of those shares, less the par value of all of the shares
outstanding upon completion of the offering including the shares that will
be held by Kearny MHC. For example, at the midpoint, 55,000,000 shares will
be outstanding upon completion of the offering, 30% of which (16,500,000
shares) would have been sold at $10.00 per share for gross proceeds of
$165,000,000. With estimated stock offering expenses of $2,813,000 at the
midpoint, estimated net proceeds are $162,187,000. The additional paid-in
capital at the midpoint represents the net proceeds of $162,187,000 plus
the existing capital of $500,000 (totaling $162,687,000) less the par value
of 55,000,000 shares, or $5,500,000, resulting in additional paid-in
capital of $157,187,000.
(6) Assumes that 8% of the shares sold in the offering will be purchased by the
employee stock ownership plan, and that the funds used to acquire the
employee stock ownership plan shares will be borrowed from Kearny Financial
Corp., concurrent with the offering. For an estimate of the impact of the
loan on earnings, see Pro Forma Data on pages 24 to 30. Kearny Federal
Savings Bank intends to make scheduled discretionary contributions to the
employee stock ownership plan sufficient to enable the plan to service and
repay its debt over a ten year period. The amount of shares to be acquired
by the employee stock ownership plan is reflected as a reduction of
stockholders' equity. See Management - Potential Stock Benefit Plans -
Employee Stock Ownership Plan on page 113. If the employee stock ownership
plan is unable to purchase stock in the stock offering due to an
oversubscription in the offering by eligible account holders having first
priority, and the purchase price in the open market is greater than the
original $10.00 price per share, there will be a corresponding reduction in
stockholders' equity. See The Stock Offering - Subscription Offering -
Subscription Rights on page 119.
(7) Assumes that an amount equal to 1.96% of the total number of shares
outstanding after the offering, including the shares held by Kearny MHC, is
purchased by the restricted stock plan following the stock offering. The
stock purchased by the restricted stock plan is reflected as a reduction of
stockholders' equity. See footnote (2) to the table under Pro Forma Data on
pages 24 to 30.
PRO FORMA DATA
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. However, investable net proceeds to Kearny
Financial Corp. are currently estimated to be between $117.3 million at the
minimum and $159.1 million at the maximum of the offering range, respectively
(or $183.2 million at the maximum, as adjusted, if the independent valuation is
increased by 15%), based on the following assumptions:
o shares sold in the offering will be sold in either the subscription
offering or the community offering, with no shares being sold in a
syndicated community offering;
o an amount equal to the cost of purchasing 8% of the shares sold in the
offering will be loaned to the employee stock ownership plan to fund its
purchase at an assumed purchase price of $10.00 per share;
o an amount equal to 1.96% of the total number of outstanding shares,
including the shares held by Kearny MHC, will be acquired by the restricted
stock plan through open market purchases at an assumed purchase price of
$10.00 per share; and
o expenses of the offering, including the fees and expenses of Sandler
O'Neill & Partners, L.P., are estimated to be approximately $2.6 million at
the minimum and $3.0 million at the maximum of the offering range ($3.3
million at the maximum, as adjusted).
The following tables set forth Kearny Financial Corp.'s historical net
income and stockholders' equity prior to the offering and pro forma net income
and stockholders' equity giving effect to the offering. In preparing these
tables and in calculating pro forma data, we have made the following
assumptions:
24
o Pro forma earnings have been calculated assuming the stock had been sold at
the beginning of the period and the net proceeds had been invested at an
average yield of 2.16% for the three months ended September 30, 2004 and at
an average yield of 2.09% for the year ended June 30, 2004, respectively,
which approximates the yield on a one-year U.S. Treasury bill on September
30, 2004 and June 30, 2004, respectively. The yield on a one-year U.S.
Treasury bill, rather than an arithmetic average of the average yield on
interest-earning assets and the average rate paid on deposits, has been
used to estimate income on net proceeds because we believe that the
one-year U.S. Treasury bill rate is a more accurate estimate of the rate
that would be obtained on an investment of net proceeds from the offering.
The pro forma after-tax yield on the net proceeds is assumed to be 1.28%
for the three months ended September 30, 2004 and 1.24% for the year ended
June 30, 2004, respectively.
o We assumed that 8% of the shares sold in the offering were purchased in the
offering by Kearny Federal Savings Bank's employee stock ownership plan at
a price of $10.00 per share using funds borrowed from Kearny Financial
Corp. We assumed that Kearny Federal Savings Bank would make annual
contributions to the plan in an amount at least equal to the principal and
interest requirement of the loan. We have assumed a 10-year amortization
period for the loan. The stock acquired by the employee stock ownership
plan is reflected as a reduction of stockholders' equity. See Management -
Potential Stock Benefit Plans - Employee Stock Ownership Plan on page 113.
o We assumed that the stock option plan had been approved by stockholders of
Kearny Financial Corp. and that Kearny Financial Corp. had reserved for
future issuance upon the exercise of options to be granted under the plan
an amount of stock equal to 4.9% of the total number of shares outstanding
after the offering, including shares held by Kearny MHC, or 2,290,750,
2,695,000, 3,099,250 and 3,564,138 shares of stock, respectively, at the
minimum, midpoint, maximum and 15% above the maximum of the range. We
assumed that options for all shares reserved under the plan were granted to
plan participants at the beginning of the period and that 30% of the
options granted were non-qualified options for income tax purposes. We
assumed that the options would vest at a rate of 20% per year and that
compensation expense would be recognized on a straight-line basis over the
5-year vesting period. See Management - Potential Stock Benefit Plans -
Stock Option Plan on page 114.
o We assumed that the restricted stock plan had been approved by stockholders
of Kearny Financial Corp. and that the restricted stock plan had acquired
an amount of stock equal to 1.96% of the total number of shares outstanding
after the offering, including shares held by Kearny MHC, or 916,300,
1,078,000, 1,239,700 and 1,425,655 shares of stock, respectively, at the
minimum, midpoint, maximum and 15% above the maximum of the range at the
beginning of the periods presented through open market purchases at a price
of $10.00 per share using funds contributed to the restricted stock plan by
Kearny Federal Savings Bank. We assumed that all shares held by the plan
were granted to plan participants at the beginning of the period, that the
shares would vest at a rate of 20% per year and that compensation expense
will be recognized on a straight-line basis over the 5-year vesting period.
See Management - Potential Stock Benefit Plans - Restricted Stock Plan on
page 115.
o An effective tax rate of 40.85% is used in calculating the pro-forma net
income because that is the marginal effective tax rate. The effective tax
rates of 29.15% for the three months ended September 30, 2004 and 30.82%
for the year ended June 30, 2004 as stated in Note 15 to the consolidated
financial statements takes into account the effect of tax-exempt income
from obligations of state and political subdivisions.
o We did not include any withdrawals from deposit accounts to purchase shares
in the offering.
25
o Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of
stock, as adjusted in the pro forma net earnings per share to give effect
to the purchase of shares by the employee stock ownership plan.
o Pro forma stockholders' equity amounts have been calculated as if the stock
had been sold on September 30, 2004 and June 30, 2004, respectively, and no
effect has been given to the assumed earnings effect of the transaction.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if Kearny Financial Corp. were liquidated.
The pro forma data does not predict how much we will earn in the future. You
should not use the following information to predict future results of
operations.
The tables on the following pages summarize historical and pro forma
data of Kearny Financial Corp. at or for the three months ended September 30,
2004 and the year ended June 30, 2004, respectively, based on the assumptions
set forth above and in the notes to the tables and should not be used as a basis
for projections of market value of the stock following the stock offering. Pro
forma stockholders' equity per share does not take into account the effect of
intangible assets or the impact of the bad debt allowance if Kearny Financial
Corp. were liquidated. Pro forma tangible stockholders' equity per share does
take into account the effect of intangible assets.
26
At or For the Three Months Ended September 30, 2004
-----------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
14,025,000 16,500,000 18,975,000 21,821,250
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in thousands, except share and per share amounts)
Gross proceeds ..................................... $ 140,250 $ 165,000 $ 189,750 $ 218,213
Less expenses ...................................... (2,585) (2,813) (3,041) (3,303)
------------ ------------ ------------ ------------
Estimated net proceeds .......................... 137,665 162,187 186,709 214,910
Less ESOP funded by Kearny Financial Corp. ......... (11,220) (13,200) (15,180) (17,457)
Less restricted stock plan adjustment .............. (9,163) (10,780) (12,397) (14,257)
------------ ------------ ------------ ------------
Estimated investable net proceeds ............... $ 117,282 $ 138,207 $ 159,132 $ 183,196
============ ============ ============ ============
Net Income:
Historical ...................................... $ 3,796 $ 3,796 $ 3,796 $ 3,796
Pro forma income on net proceeds ................ 375 441 508 585
Pro forma ESOP adjustment(1) .................... (166) (195) (224) (258)
Pro forma option adjustment(2) .................. (398) (468) (538) (619)
Pro forma restricted stock plan adjustment(3) ... (271) (319) (367) (422)
------------ ------------ ------------ ------------
Pro forma net income(1)(2)(3)(4) ................ $ 3,336 $ 3,255 $ 3,175 $ 3,082
============ ============ ============ ============
Per share net income:
Historical ...................................... $ 0.08 $ 0.07 $ 0.06 $ 0.05
Pro forma income on net proceeds ................ 0.01 0.01 0.01 0.01
Pro forma ESOP adjustment(1) .................... (0.00) (0.00) (0.00) (0.00)
Pro forma option adjustment(2) .................. (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan adjustment(3) ... (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------
Pro forma net income per share .................. $ 0.07 $ 0.06 $ 0.05 $ 0.04
============ ============ ============ ============
Shares used in calculation of income per share(5) .. 45,642,025 53,696,500 61,750,975 71,013,621
Stockholders' equity:
Historical ...................................... $ 297,802 $ 297,802 $ 297,802 $ 297,802
Estimated net proceeds .......................... 137,665 162,187 186,709 214,910
Less: Common Stock acquired by the ESOP(1) ...... (11,220) (13,200) (15,180) (17,457)
Less: Common Stock acquired by the restricted
stock plan(3) .......................... (9,163) (10,780) (12,397) (14,257)
------------ ------------ ------------ ------------
Pro forma stockholders' equity(4) ............... $ 415,084 $ 436,009 $ 456,934 $ 480,998
Intangible assets ............................... 84,304 84,304 84,304 84,304
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity(4) ...... $ 330,780 $ 351,705 $ 372,630 $ 396,694
============ ============ ============ ============
Stockholders' equity per share:
Historical ...................................... $ 6.37 $ 5.41 $ 4.71 $ 4.09
Estimated net proceeds .......................... 2.94 2.95 2.95 2.95
Less: Common Stock acquired by the ESOP(1) ...... (0.24) (0.24) (0.24) (0.24)
Less: Common stock acquired by the restricted
stock plan(3) .......................... (0.20) (0.20) (0.20) (0.20)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per share ........ $ 8.87 $ 7.92 $ 7.22 $ 6.60
Intangible assets ............................... 1.80 1.53 1.33 1.16
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity per share $ 7.07 $ 6.39 $ 5.89 $ 5.44
============ ============ ============ ============
Offering price as a percentage of pro forma
stockholders' equity per share ................... 112.74% 126.26% 138.50% 151.52%
============ ============ ============ ============
Offering price as a percentage of pro forma tangible
stockholders' equity per share ................... 141.44% 156.49% 169.78% 183.82%
============ ============ ============ ============
Offering price to pro forma net income per share ... 35.71x 41.67x 50.00x 62.50x
Shares used in calculation of stockholders' equity
per share(5) ..................................... 46,750,000 55,000,000 63,250,000 72,737,500
27
------------
(1) The pro forma net earnings assumes: (i) that Kearny Federal Savings Bank's
contribution to the employee stock ownership plan for the principal portion
of the debt service requirement for the three months ended September 30,
2004 was made at the end of the period; and (ii) that 28,050, 33,000,
37,950 and 43,643 shares at the minimum, midpoint, maximum, and 15% above
the maximum of the range, respectively, were committed to be released
during the three months ended September 30, 2004, at an average fair value
of $10.00 per share and were accounted for as a charge to expense. If the
fair market value per share at the time shares are committed to be released
is different than $10.00 per share, the related expense recognized will be
different.
(2) The pro forma net income assumes that the options granted under the stock
option plan have a value of $3.96 per option, which was determined using
the Black-Scholes-Merton option pricing formula using the following
assumptions: (i) the trading price on date of grant was $10.00 per share;
(ii) exercise price is equal to the trading price on the date of grant;
(iii) dividend yield of 0%; (iv) expected life of 10 years; (v) expected
volatility of 16.57%; and risk-free interest rate of 4.27%. Because there
is currently no market for Kearny Financial Corp.'s common stock, the
assumed expected volatility is based on the SNL Financial MHC index. If the
fair market value per share on the date of grant is different than $10.00,
or if the assumptions used in the option pricing formula are different from
those used in preparing this pro forma data, the value of the options and
the related expense recognized will be different. There can be no assurance
that the actual fair market value per share on the date of grant, and
correspondingly the exercise price of the options, will be $10.00 per
share. The issuance of authorized but unissued shares of stock instead of
open market purchases to fund exercises of options granted under the stock
option plan would dilute the voting interests of existing stockholders by
approximately 4.67%. See Management - Potential Stock Benefit Plans - Stock
Option Plan on page 114.
(3) The issuance of authorized but unissued shares of stock to the restricted
stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.92%, pro forma net
income per share for the three months ended September 30, 2004 would be
$0.07, $0.06, $0.05 and $0.04 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, and pro forma stockholders'
equity per share at September 30, 2004 would be $8.90, $7.97, $7.28 and
$6.68 at the minimum, midpoint, maximum and 15% above the maximum of the
range, respectively. If the actual cost of the shares acquired by the
restricted stock plan is different than $10.00 per share, the expense
recognized will be different. There can be no assurance that stockholder
approval of the restricted stock plan will be obtained or that the actual
purchase price of the shares will be equal to $10.00 per share. See
Management - Potential Stock Benefit Plans - Restricted Stock Plan on page
115.
(4) The retained earnings of Kearny Financial Corp. and Kearny Federal Savings
Bank will continue to be substantially restricted after the stock offering.
See Our Policy Regarding Dividends on page 22 and Regulation - Regulation
of Kearny Federal Savings Bank - Dividends and Other Capital Distribution
Limitations on page 96.
(5) For purposes of calculating net income per share, only the employee stock
ownership plan shares committed to be released under the plan were
considered outstanding. For purposes of calculating stockholders' equity
per share, all employee stock ownership shares were considered outstanding.
We have also assumed that no options granted under the stock option plan
were exercised during the period and that the trading price of Kearny
Financial Corp. common stock at the end of the period was $10.00 per share.
Under this assumption, using the treasury stock method, no additional
shares of stock were considered to be outstanding for purposes of
calculating earnings per share or stockholders' equity per share.
28
At or For the Year Ended June 30, 2004
------------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
14,025,000 16,500,000 18,975,000 21,821,250
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in thousands, except share and per share amounts)
Gross proceeds ..................................... $ 140,250 $ 165,000 $ 189,750 $ 218,213
Less expenses ...................................... (2,585) (2,813) (3,041) (3,303)
------------ ------------ ------------ ------------
Estimated net proceeds .......................... 137,665 162,187 186,709 214,910
Less ESOP funded by Kearny Financial Corp. ......... (11,220) (13,200) (15,180) (17,457)
Less restricted stock plan adjustment .............. (9,163) (10,780) (12,397) (14,257)
------------ ------------ ------------ ------------
Estimated investable net proceeds ............... $ 117,282 $ 138,207 $ 159,132 $ 183,196
============ ============ ============ ============
Net Income:
Historical ...................................... $ 12,897 $ 12,897 $ 12,897 $ 12,897
Pro forma income on net proceeds ................ 1,450 1,709 1,967 2,265
Pro forma ESOP adjustment(1) .................... (664) (781) (898) (1,033)
Pro forma option adjustment(2) .................. (1,592) (1,873) (2,154) (2,477)
Pro forma restricted stock plan adjustment(3) ... (1,084) (1,275) (1,467) (1,687)
------------ ------------ ------------ ------------
Pro forma net income(1)(2)(3)(4) ................ $ 11,007 $ 10,677 $ 10,345 $ 9,965
============ ============ ============ ============
Per share net income:
Historical ...................................... $ 0.28 $ 0.24 $ 0.21 $ 0.18
Pro forma income on net proceeds ................ 0.03 0.03 0.03 0.03
Pro forma ESOP adjustment(1) .................... (0.01) (0.01) (0.01) (0.01)
Pro forma option adjustment(2) .................. (0.04) (0.04) (0.04) (0.04)
Pro forma restricted stock plan adjustment(3) ... (0.02) (0.02) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma net income per share .................. $ 0.24 $ 0.20 $ 0.17 $ 0.14
============ ============ ============ ============
Shares used in calculation of income per share(5) .. 45,684,100 53,746,000 61,807,900 71,079,085
Stockholders' equity:
Historical ...................................... $ 293,505 $ 293,505 $ 293,505 $ 293,505
Estimated net proceeds .......................... 137,665 162,187 186,709 214,910
Less: Common Stock acquired by the ESOP(1) ...... (11,220) (13,200) (15,180) (17,457)
Less: Common Stock acquired by the restricted
stock plan(3) .......................... (9,163) (10,780) (12,397) (14,257)
------------ ------------ ------------ ------------
Pro forma stockholders' equity(4) ............... 410,787 431,712 452,637 476,701
Intangible assets ............................... 84,463 84,463 84,463 84,463
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity(4) ...... $ 326,324 $ 347,249 $ 368,174 $ 392,238
============ ============ ============ ============
Stockholders' equity per share:
Historical ...................................... $ 6.28 $ 5.34 $ 4.64 $ 4.04
Estimated net proceeds .......................... 2.94 2.95 2.95 2.95
Less: Common Stock acquired by the ESOP(1) ...... (0.24) (0.24) (0.24) (0.24)
Less: Common stock acquired by the restricted
stock plan(3) .......................... (0.20) (0.20) (0.20) (0.20)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per share ........ 8.78 7.85 7.15 6.55
Intangible assets ............................... 1.81 1.54 1.34 1.16
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity per share $ 6.97 $ 6.31 $ 5.81 $ 5.39
============ ============ ============ ============
Offering price as a percentage of pro forma
stockholders' equity per share ................... 113.90% 127.39% 139.86% 152.67%
============ ============ ============ ============
Offering price as a percentage of pro forma tangible
stockholders' equity per share ................... 143.47% 158.48% 172.12% 185.53%
============ ============ ============ ============
Offering price to pro forma net income per share ... 41.67x 50.00x 58.82x 71.43x
Shares used in calculation of stockholders' equity
per share(5) ..................................... 46,750,000 55,000,000 63,250,000 72,737,500
29
--------------
(1) The pro forma net earnings assumes: (i) that Kearny Federal Savings Bank's
contribution to the employee stock ownership plan for the principal portion
of the debt service requirement for the year ended June 30, 2004 was made
at the end of the period; and (ii) that 112,200, 132,000, 151,800 and
174,570 shares at the minimum, midpoint, maximum, and 15% above the maximum
of the range, respectively, were committed to be released during the year
ended June 30, 2004, at an average fair value of $10.00 per share and were
accounted for as a charge to expense. If the fair market value per share at
the time shares are committed to be released is different than $10.00 per
share, the related expense recognized will be different.
(2) The pro forma net income assumes that the options granted under the stock
option plan have a value of $3.96 per option, which was determined using
the Black-Scholes-Merton option pricing formula using the following
assumptions: (i) the trading price on date of grant was $10.00 per share;
(ii) exercise price is equal to the trading price on the date of grant;
(iii) dividend yield of 0%; (iv) expected life of 10 years; (v) expected
volatility of 16.57%; and risk-free interest rate of 4.27%. Because there
is currently no market for Kearny Financial Corp.'s common stock, the
assumed expected volatility is based on the SNL Financial MHC index. If the
fair market value per share on the date of grant is different than $10.00,
or if the assumptions used in the option pricing formula are different from
those used in preparing this pro forma data, the value of the options and
the related expense recognized will be different. There can be no assurance
that the actual fair market value per share on the date of grant, and
correspondingly the exercise price of the options, will be $10.00 per
share. The issuance of authorized but unissued shares of stock instead of
open market purchases to fund exercises of options granted under the stock
option plan would dilute the voting interests of existing stockholders by
approximately 4.67%. See Management - Potential Stock Benefit Plans - Stock
Option Plan on page 114.
(3) The issuance of authorized but unissued shares of stock to the restricted
stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.92%, pro forma net
income per share for the year ended June 30, 2004 would be $0.24, $0.19,
$0.16 and $0.14 at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively, and pro forma stockholders' equity per share at
June 30, 2004 would be $8.81, $7.89, $7.21 and $6.62 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively. If
the actual cost of the shares acquired by the restricted stock plan is
different than $10.00 per share, the expense recognized will be different.
There can be no assurance that stockholder approval of the restricted stock
plan will be obtained or that the actual purchase price of the shares will
be equal to $10.00 per share. See Management - Potential Stock Benefit
Plans - Restricted Stock Plan on page 115.
(4) The retained earnings of Kearny Financial Corp. and Kearny Federal Savings
Bank will continue to be substantially restricted after the stock offering.
See Our Policy Regarding Dividends on page 22 and Regulation - Regulation
of Kearny Federal Savings Bank - Dividends and Other Capital Distribution
Limitations on page 96.
(5) For purposes of calculating net income per share, only the employee stock
ownership plan shares committed to be released under the plan were
considered outstanding. For purposes of calculating stockholders' equity
per share, all employee stock ownership shares were considered outstanding.
We have also assumed that no options granted under the stock option plan
were exercised during the period and that the trading price of Kearny
Financial Corp. common stock at the end of the period was $10.00 per share.
Under this assumption, using the treasury stock method, no additional
shares of stock were considered to be outstanding for purposes of
calculating earnings per share or stockholders' equity per share.
29
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents Kearny Federal Savings Bank's historical
and pro forma capital position relative to its regulatory capital requirements
as of September 30, 2004. Pro forma capital levels assume receipt by Kearny
Federal Savings Bank of 50% of the net proceeds. For a discussion of the
assumptions underlying the pro forma capital calculations presented below, see
Use of Proceeds, Capitalization and Pro Forma Data on pages 24 to 30. The
definitions of the terms used in the table are those provided in the capital
regulations issued by the Office of Thrift Supervision. For a discussion of the
capital standards applicable to Kearny Federal Savings Bank, see Regulation -
Regulation of Kearny Federal Savings Bank - Regulatory Capital Requirements on
page 94.
Pro Forma at September 30, 2004
-------------------------------------------------------------
Minimum Midpoint
Actual, at 14,025,000 shares sold 16,500,000 shares sold
September 30, 2004 at $10.00 per share at $10.00 per share
------------------------------ ------------------------------ --------------------------
Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
GAAP Capital(3)......................... $296,271 15.57% $344,721 17.57% $353,385 17.91%
Tangible Capital........................ $201,420 11.15% $249,870 13.40% $258,534 13.78%
Tangible Capital Requirement............ 27,085 1.50 27,980 1.50 28,140 1.50
------- ----- ------- ----- ------- -----
Excess.................................. $174,335 9.65% $221,890 11.90% $230,394 12.28%
======= ===== ======= ===== ======= =====
Core Capital............................ $201,420 11.15% $249,870 13.40% $258,534 13.78%
Core Capital Requirement(4)............. 54,170 3.00 55,960 3.00 56,280 3.00
------- ----- ------- ----- ------- -----
Excess.................................. $147,250 8.15% $193,910 10.40% $202,254 10.78%
======= ===== ======= ===== ======= =====
Total Risk-Based Capital(5)(6).......... $213,667 33.18% $262,117 39.96% $270,781 41.15%
Risk-Based Capital Requirement.......... 51,522 8.00 52,477 8.00 52,647 8.00
------- ----- ------- ----- ------- -----
Excess.................................. $162,145 25.18% $209,640 31.96% $218,134 33.15%
======= ===== ======= ===== ======= =====
Reconciliation of capital infused into
Kearny Federal Savings Bank:
Net proceeds infused.................... $ 68,833 $ 81,094
Less:
Common stock acquired by
employee stock ownership plan..... 11,220 13,200
Common stock acquired by
restricted stock plan............. 9,163 10,780
------- -------
Pro forma increase in GAAP and
regulatory capital................... $ 48,450 $ 57,114
======= =======
Pro Forma at September 30, 2004
----------------------------------------------------------
Maximum Maximum, as adjusted
18,975 shares sold 21,821,250 shares sold
at $10.00 per share at $10.00 per share (1)
------------------------- ---------------------------
Percentage Percentage
Amount of Assets (2) Amount of Assets (2)
------ ------------- ------ --------------
GAAP Capital(3)......................... $362,049 18.25% $372,012 18.64%
Tangible Capital........................ $267,198 14.16% $277,161 14.60%
Tangible Capital Requirement............ 28,300 1.50 28,483 1.50
Excess.................................. ------- ----- ------- -----
$238,898 12.66% $248,678 13.10%
======= ===== ======= =====
Core Capital............................ $267,198 14.16% $277,161 14.60%
Core Capital Requirement(4)............. 56,599 3.00 56,966 3.00
------- ----- ------- -----
$210,599 11.16% $220,195 11.60%
======= ===== ======= =====
Total Risk-Based Capital(5)(6).......... $279,445 42.33% $289,408 43.67%
Risk-Based Capital Requirement.......... 52,818 8.00 53,014 8.00
Excess.................................. ------- ----- ------- -----
$226,627 34.33% $236,394 35.67%
======= ===== ======= =====
Reconciliation of capital infused into
Kearny Federal Savings Bank:
Net proceeds infused....................
Less: $93,355 $107,455
Common stock acquired by
employee stock ownership plan.....
Common stock acquired by 15,180 17,457
restricted stock plan.............
12,397 14,257
Pro forma increase in GAAP and ------ ------
regulatory capital................... $65,778 $75,741
====== ======
31
---------------
(1) As adjusted to give effect to an increase in the number of shares issued
which could occur due to an increase in the offering range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
offerings.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
(3) Generally accepted accounting principles, referred to as "GAAP," capital
includes goodwill, intangible assets and unrealized gain (loss) on
available-for-sale securities, net, which are not included in regulatory
capital.
(4) The current Office of Thrift Supervision core capital requirement for
savings banks is 3% of total adjusted assets for thrifts that receive the
highest supervisory rating for safety and soundness and a 4% to 5% core
capital ratio requirement for all other thrifts. See Regulation -
Regulation of Kearny Federal Savings Bank - Regulatory Capital Requirements
on page 94.
(5) Assumes net proceeds are invested in assets that carry a 20%
risk-weighting. (6) The difference between core capital and risk-based
capital is attributable to the addition of accumulated other comprehensive
income of $7.0 million and the addition of general loan loss reserves of
$5.3 million.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Kearny Financial Corp.'s
consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of
operations. You should read the information in this section in conjunction with
Kearny Financial Corp.'s consolidated financial statements and accompanying
notes thereto beginning on page F-1 of this document, and the other statistical
data provided in this prospectus. Unless otherwise indicated, the financial
information presented in this section reflects the consolidated financial
condition and results of operations of Kearny Financial Corp. and its direct and
indirect subsidiaries.
Overview
Financial Condition and Results of Operations. Kearny Financial Corp.'s
results of operations depend primarily on its net interest income. Net interest
income is the difference between the interest income we earn on our
interest-earning assets and the interest we pay on our interest-bearing
liabilities. It is a function of the average balances of loans and investments
versus deposits and borrowed funds outstanding in any one period and the yields
earned on those loans and investments and the cost of those deposits and
borrowed funds.
Our interest-earning assets consist primarily of mortgage-backed
securities and investment securities, which comprised 64.5% of our total assets
at June 30, 2004 while our loan portfolio comprised 26.1% of our total assets.
This was a change from 50.4% and 25.5%, respectively, at June 30, 2003. The
largest change in our interest-earning assets between June 30, 2003 and June 30,
2004 was a $286.2 million, or 87.9%, decrease in cash and cash equivalents and
corresponding increases in the investment securities held to maturity and the
mortgage-backed securities held to maturity portfolios of $148.5 million and
$89.7 million, respectively. The shift from cash and cash equivalents into
securities was the result of management's decision to move assets from
interest-bearing deposits and securities purchased under agreements to resell
into higher yielding mortgage-backed and investment securities.
Our interest-bearing liabilities consist primarily of retail deposits
and borrowings from the Federal Home Loan Bank of New York. At June 30, 2004,
our total deposits were $1.54 billion, compared to $1.61 billion at June 30,
2003, and our Federal Home Loan Bank of New York borrowings were $94.2 million
compared to $75.7 million a year earlier. The primary factor for the decrease in
deposits was the runoff of certificates of deposit due to lower interest rates
paid as well as a movement by customers to alternative investment opportunities
in the marketplace. Federal Home Loan Bank advances increased in order to fund
the purchase of investment securities and mortgage-backed securities.
Our net interest income decreased by 10.0%, to $46.6 million for the
year ended June 30, 2004 from $51.8 million for the year ended June 30, 2003.
The net interest rate spread increased slightly to 2.37% for the year ended June
30, 2004 from 2.36% for 2003 as the decreases in the average cost of
interest-bearing liabilities and the average yield on interest-earning assets,
which resulted primarily from lower market interest rates prevailing during the
period, were nearly the same. Total interest income decreased 18.5% due to a
4.6% decrease in average balance of interest-earning assets and a 75 basis point
decrease in the average yield thereof, while total interest expense decreased
28.2%, primarily as a result of the 76 basis point decrease in the average cost
of interest-bearing liabilities.
Our results of operations also depend on our provision for loan losses,
non-interest income and non-interest expense. Non-interest income includes
service fees and charges, including income generated
33
by Kearny Federal Savings Bank's ATM network, and income on bank owned life
insurance. Non-interest expense includes salaries and employee benefits,
occupancy expenses and other general and administrative expenses. Non-interest
expense decreased significantly for 2004 compared to 2003, from $44.4 million
for 2003 to $29.5 million for 2004, primarily as a result of a $14.3 million
decrease in merger related expenses in connection with our acquisitions of
Pulaski Savings Bank and West Essex Bank. These expenses consisted mainly of the
payout of employment contracts, unexercised stock options, supplemental benefit
plans and incentive stock awards.
Net income for the year ended June 30, 2004 was $12.9 million, an
increase of $8.8 million, or 218.1%, from $4.1 million for 2003. The increase in
net income resulted primarily from the 33.6%, or $14.9 million decrease in
non-interest expense, which as discussed above was primarily due to
significantly lower merger related expenses recorded in 2004 as compared to
2003, partially offset by the 10.0%, or $5.2 million, decrease in net interest
income, which as discussed above is attributable in part to the 4.6%, or $87.3
million, decrease in average balance of interest-earning assets.
During the three months ended September 30, 2004, net income was $3.8
million, as compared to $2.2 million during the three months ended September 30,
2003. The increase resulted primarily from an increase in net interest income as
the interest rate spread and net interest margin for the three month period in
2004 improved by 59 basis points and 57 basis points, respectively, as compared
to the same period in 2003.
Our total assets decreased by $32.3 million, or 1.7%, to $1.90 billion
at September 30, 2004 from $1.94 billion at June 30, 2004, primarily due to a
$26.7 million net outflow of deposits and $10.1 million decrease in Federal Home
Loan Bank advances. The primary cause of the decrease in deposits was the runoff
of certificates of deposit due to lower interest rates paid as well as a
movement by customers to alternative investment opportunities in the
marketplace. A $46.5 million decrease in mortgage-backed securities as a result
of monthly principal payments was partially offset by increases of $9.4 million
in loans receivable, net and $9.9 million in investment securities. We used the
cash flow from the principal payments on mortgage-backed securities to fund the
aforementioned deposit outflow, reduce Federal Home Loan Bank advances, fund
loans receivable and purchase investment securities.
Stockholders' equity increased $4.3 million, or 1.5%, to $297.8 million
at September 30, 2004, from $293.5 million at June 30, 2004. The increase
primarily reflects net income of $3.8 million for the three months ended
September 30, 2004, along with an increase in accumulated other comprehensive
income of $501,000 resulting from an increase in the unrealized gain on
available for sale securities.
Recent Acquisitions. During recent years, we have implemented an
expansion strategy fueled primarily by acquisitions, and have experienced
significant growth with total assets growing from $793.2 million at June 30,
1998 to $1.90 billion at September 30, 2004, securities growing from $596.9
million at June 30, 1998 to $1.21 billion at September 30, 2004, loans
receivable, net growing from $152.1 million at June 30, 1998 to $515.2 million
at September 30, 2004 and total deposits growing from $608.9 million at June 30,
1998 to $1.51 billion at September 30, 2004. At June 30, 1998, we had five
branch offices and 75 employees, and at September 30, 2004 we had 25 branch
offices and 273 employees.
We completed our first whole bank acquisition in March 1999 with the
acquisition of 1st Bergen Bancorp and the merger of South Bergen Savings Bank
into Kearny Federal Savings Bank, adding $274.3 million in assets and four
branch offices, giving Kearny Federal Savings Bank a total of nine branch
offices following completion of this merger. In October 2002, Kearny Financial
Corp. acquired Pulaski Bancorp, Inc., and Pulaski Savings Bank was merged into
Kearny Federal Savings Bank. This transaction added
34
$286.7 million in assets and seven branch offices. Additionally, we completed
one deposit assumption in 1999 and opened a de novo branch in 2002. Our third
whole bank acquisition was completed in July 2003 with Kearny Financial Corp.'s
acquisition of West Essex Bancorp, Inc. and the merger of West Essex Bank into
Kearny Federal Savings Bank, adding $369.3 million in assets and eight branch
offices, bringing Kearny Federal Savings Bank's total offices to twenty-five.
The acquisitions of Pulaski Bancorp, Inc. and West Essex Bancorp, Inc.
involved institutions that were in the mutual holding company form of
organization, with the minority of stock held by public stockholders and the
majority of stock held by the mutual holding company. Accordingly, (i) the
merger of the mutual holding companies utilized the pooling-of-interests method
accounting, (ii) the acquisition of the mid-tier stock holding company's
minority shareholder interests was accounted for as the acquisition of
non-controlling minority interests, and (iii) the merger of the mid-tier holding
companies was accounted for as a combination of entities under common control.
Under pooling-of-interests accounting, the recorded assets and liabilities of
each of West Essex and Pulaski were carried forward to the combined corporation
at their recorded amounts; income of the combined corporation includes income of
each of West Essex and Pulaski for the entire fiscal year in which the
respective acquisitions occurred. The reported income of the separate
corporations for prior periods were combined and restated as income of the
combined corporation. Expenses incurred in connection with the acquisitions
constituted expenses for the accounting periods subsequent to the closing of the
acquisitions. The amounts paid to minority shareholders of Pulaski Bancorp, Inc.
and West Essex Bancorp, Inc. in excess of their interests in such companies were
recorded as goodwill. For additional information, see Note 2 to the consolidated
financial statements.
We intend to continue to grow. In addition to building our core banking
business through internal growth, we will also actively consider expansion
opportunities such as the acquisition of branches and other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. Furthermore, there can be no assurance that we will continue to
experience such rapid growth, or any growth, in the future. We may have
difficulty finding suitable sites for de novo branches and identifying and
successfully acquiring branches or other financial institutions.
Business Strategy. Our current business strategy is to seek to grow and
improve our profitability by:
o increasing the volume of our loan originations and the size of
our loan portfolio relative to our securities portfolio;
o increasing the origination of multi-family and commercial real
estate loans, construction loans and commercial business loans;
o building our core banking business through internal growth and de
novo branching, as well as actively considering expansion
opportunities such as the acquisition of branches and other
financial institutions;
o developing a sales culture by training and encouraging our branch
personnel to promote our existing products and services to our
customers; and
o maintaining high asset quality.
35
Our deposits have traditionally exceeded our loan originations, and we
have invested these deposits primarily in mortgage-backed securities and
investment securities. Following our acquisition of South Bergen Savings Bank in
1999, we began focusing on growing the size of our loan portfolio. Prior to that
time, our operations were more focused on obtaining deposits from the
communities in which we operated our five branch offices in Bergen and Hudson
counties and investing those funds in mortgage-backed and other securities. A
primary focus of our current business strategy will be to increase our volume of
loan originations and the size of our loan portfolio. There can be no assurance,
however, that we will be successful in this effort.
In an effort to develop our commercial business, we have recently added
four experienced business development officers who will focus on commercial loan
originations, and we will soon offer internet banking and cash management
services to our commercial customers. Our residential loan originations have
traditionally been largely advertising driven, but we plan to add regional loan
originators throughout our branch network who will seek to build our residential
loan portfolio.
Critical Accounting Policies
Our accounting policies are integral to understanding the results
reported and are described in detail in Note 1 to the consolidated financial
statements beginning on page F-1 of this document. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the consolidated statements of financial condition and revenues and expenses for
the periods then ended. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
changes relate to the determination of the allowance for loan losses, the
assessment of prepayment risks associated with mortgage-backed securities, the
evaluation of securities impairment and the impairment testing of goodwill.
Allowance for Loan Losses. The allowance for loan losses represents our
best estimate of losses known and inherent in our loan portfolio that are both
probable and reasonable to estimate. In determining the amount of the allowance
for loan losses, we consider the losses inherent in our loan portfolio and
changes in the nature and volume of our loan activities, along with general
economic and real estate market conditions. We use a two tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of our loan portfolio. We maintain a loan review system which allows
for a periodic review of our loan portfolio and the early identification of
potential impaired loans. Our system takes into consideration, among other
things, delinquency status, size of loans, type of collateral and financial
condition of the borrowers. Specific loan loss allowances are established for
identified loans based on a review of such information and/or appraisals of the
underlying collateral. General loan loss allowances are based upon a combination
of factors including, but not limited to, actual loan loss experience,
composition of the loan portfolio, current economic conditions and management's
judgment.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions for loan losses may be necessary
in order to increase the level of the allowance for loan losses. For example,
our evaluation of the allowance includes consideration of current economic
conditions, and a change in economic conditions could reduce the ability of our
borrowers to make timely repayments of their loans. This could result in
increased delinquencies and increased non-performing loans, and thus a need to
make increased provisions to the allowance for loan losses, which would be a
charge to income during the period the provision is made, resulting in a
reduction to our earnings. A change in economic
36
conditions could also adversely affect the value of the properties
collateralizing our real estate loans, resulting in increased charge-offs
against the allowance and reduced recoveries, and thus a need to make increased
provisions to the allowance for loan losses. Furthermore, a change in the
composition of our loan portfolio or growth of our loan portfolio could result
in the need for additional provisions.
Historically, we believe our estimates and assumptions in evaluating
the allowance for loan losses and setting the provision have been fairly
accurate. The decrease in the ratio of the allowance for loan losses to
non-performing loans to 213.65% at September 30, 2004 from 220.96% at June 30,
2004 is a result of a $148,000 increase in non-performing loans. The increase in
the ratio of the allowance for loan losses to non-performing loans to 220.96% at
June 30, 2004 from 177.64% at June 30, 2003 is a result of a $588,000 decrease
in non-performing loans.
Prepayment Risks Associated with Mortgage-backed Securities. At
September 30, 2004, June 30, 2004 and June 30, 2003, net premiums of
approximately $3.3 million, $3.6 million and $3.7 million, respectively, were
included in the carrying amounts of our mortgage-backed securities. We amortize
the premium included in the carrying amount over the average life of the
security. The mortgage-backed securities we hold in our portfolio are subject to
prepayment risk because changes in interest rates can affect the expected life
of these mortgage-backed securities. This means the level of prepayments must be
estimated in order to estimate the average life of mortgage-backed securities.
We evaluate the estimated average life of mortgage-backed securities on
a monthly basis and adjust the amortization speed to reflect any change in the
average life. Amortizing the premium faster results in a reduction of the yield
on the securities, whereas slowing the amortization increases the yield. A
reduction in the yield decreases our interest income on mortgage-backed
securities, while an increase in the yield increases our interest income on
mortgage-backed securities.
The assessment of the prepayment risks related to mortgage-backed
securities is highly dependent upon the prediction of trends in market interest
rates. A reduction in interest rates generally results in increased prepayments
of mortgage-backed securities, as borrowers refinance their debt in order to
reduce their borrowing cost. Correspondingly, an increase in interest rates
should result in decreased prepayments and fewer refinancings. Because changes
in interest rates can affect the average life of mortgage-backed securities,
this makes the estimation of the prepayment risk difficult. We address this
difficulty by adjusting the amortization speed monthly to reflect the current
average life.
Impairment Testing of Goodwill. Goodwill, representing the excess of
amounts paid over the fair value of net assets of the institutions acquired in
purchase transactions, is recorded at its fair value at the date of acquisition.
Through June 30, 2002, we amortized goodwill using the straight line method over
15 years. Effective July 1, 2002, we adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," under
which we no longer amortize goodwill, but test it annually for impairment.
Impairment exists when the carrying value of goodwill exceeds its implied fair
value. We would also test goodwill for impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount.
At September 30, 2004, June 30, 2004 and June 30, 2003, we reported
goodwill of $82.3 million, $82.3 million and $31.7 million, respectively. The
increase from 2003 to 2004 resulted from our acquisition of West Essex Bank in
which $50.5 million, the amount paid to minority stockholders of West Essex
Bancorp, Inc. in excess of their interest in the fair value of net assets of
West Essex Bancorp, Inc., was recorded as goodwill.
37
We have tested our goodwill and concluded that no impairment charges
were required to be recorded in the years ended June 30, 2004 and 2003. No
impairment test has been conducted since the test as of June 30, 2004, however,
as of September 30, 2004, we were not aware of any factors that would indicate
an impairment. Although the value of the goodwill was determined not to be
impaired at the date of the testing, the value of the goodwill can change in the
future. The value of the goodwill would be expected to decrease if there was a
significant decrease in the franchise value of Kearny Federal Savings Bank. If
an impairment loss is determined in the future, the loss will be reflected as an
expense for the period in which the impairment was determined, meaning that our
net income for that period would be reduced by the amount of the impairment
loss. Since beginning testing for impairment under SFAS 142 effective July 1,
2002, we have not had any impairment loss, thus we believe that historically,
our estimates and assumptions in evaluating the value of the goodwill have been
accurate.
Other-than-Temporary Impairment of Securities. We evaluate on a monthly
basis whether any securities are other-than-temporarily impaired. In making this
determination, we consider the extent and duration of the impairment, the nature
and financial health of the issuer, our ability and intent to hold securities
for a period of time sufficient to allow for any anticipated recovery in market
value and other factors relevant to specific securities, such as the credit risk
of the issuer and whether a guarantee or insurance applies to the security. This
evaluation method has not changed during the three fiscal years ended June 30,
2004 or the three month period ended September 30, 2004. If a security is
determined to be other-than-temporarily impaired, an impairment loss is charged
to income during the period the impairment loss is found to exist, resulting in
a reduction to our earnings for that period.
As of September 30, 2004 and June 30, 2004, we concluded that any
unrealized losses in the securities available for sale, mortgage-backed
securities held to maturity and investment securities held to maturity
portfolios were temporary in nature because they were primarily related to
market interest rates and not related to the underlying credit quality of the
issuers of the securities. Additionally, we have the intent and ability to hold
these investments for the time necessary to recover the amortized cost. Future
events that would materially change this conclusion and require an impairment
loss to be charged to operations include a change in the credit quality of the
issuers. We believe that historically, our estimates and assumptions in
evaluating whether any securities are other-than-temporarily impaired have been
accurate.
Effective June 30, 2004, we adopted Emerging Issues Task Force ("EITF")
Issuance No. 03-1, "The Meaning of Other than Temporary Impairment and Its
Application to Certain Investments," which requires quantitative and qualitative
disclosures for investment securities that are impaired at the balance sheet
date, but for which other-than-temporary impairment has not been recognized.
Under EITF 03-1, individual securities are considered impaired when fair value
is less than amortized cost. Adoption of EITF 03-01 has not changed our policies
for determining whether any securities are other-than-temporarily impaired.
Comparison of Financial Condition at September 30, 2004 and June 30, 2004
Our total assets decreased by $32.3 million, or 1.7%, to $1.90 billion
at September 30, 2004 from $1.94 billion at June 30, 2004, primarily due to a
$26.7 million net outflow of deposits and $10.1 million decrease in Federal Home
Loan Bank advances. Mortgage-backed securities held to maturity decreased $46.5
million, partially offset by growth of $9.4 million in loans receivable, net and
$9.9 million in investment securities held to maturity.
38
Mortgage-backed securities decreased $46.5 million, or 6.0%, to $724.9
million at September 30, 2004, from $771.4 million at June 30, 2004 as a result
of monthly principal payments. We used this cash flow to fund the aforementioned
deposit outflow, reduce Federal Home Loan Bank advances, fund loans receivable
and purchase investment securities held to maturity.
Loans receivable, net of deferred fees and the allowance for loan
losses, increased $9.4 million, or 1.9%, to $515.2 million at September 30,
2004, from $505.8 million at June 30, 2004. The increase came primarily in
one-to-four family mortgage loans, partially offset by decreases in commercial
business loans and construction loans.
Investment securities held to maturity increased $9.9 million, or 2.3%,
to $445.8 million at September 30, 2004, from $435.9 million at June 30, 2004.
The increase came exclusively in the tax-exempt category as we purchased
municipal securities during the three-month period.
Deposits, which decreased $26.7 million, or 1.7%, to $1.51 billion at
September 30, 2004, from $1.54 billion at June 30, 2004 were the most
significant cause of the decrease in total liabilities. The primary factor for
this decrease was the runoff of certificates of deposit due to lower interest
rates paid as well as a movement by customers to alternative investment
opportunities in the marketplace.
Federal Home Loan Bank advances decreased $10.1 million, or 10.7%, to
$84.1 million at September 30, 2004, from $94.2 million at June 30, 2004
primarily resulting from an advance that matured in July of 2004 that was not
renewed.
Stockholders' equity increased $4.3 million, or 1.5%, to $297.8 million
at September 30, 2004, from $293.5 million at June 30, 2004. The increase
primarily reflects net income of $3.8 million for the three months ended
September 30, 2004, along with an increase in accumulated other comprehensive
income of $501,000 resulting from an increase in the unrealized gain on
available for sale securities.
Comparison of Operating Results for the Three Months Ended September 30, 2004
and 2003
General. Net income for the three months ended September 30, 2004 was
$3.8 million, an increase of $1.6 million, or 72.7%, from $2.2 million for the
three months ended September 30, 2003. The increase in net income resulted
primarily from an increase in net interest income.
Net Interest Income. Net interest income increased by $2.3 million, or
21.9%, to $12.8 million for the three months ended September 30, 2004 from $10.5
million for the three months ended September 30, 2003. The net interest rate
spread increased to 2.65% for the three months ended September 30, 2004 from
2.06% for the three months ended September 30, 2003. The net interest margin
increased 57 basis points to 2.87% for the three months ended September 30, 2004
compared with 2.30% for the three months ended September 30, 2003.
The net interest rate spread primarily improved due to a 43 basis point
decrease in the cost of average interest-bearing liabilities to 1.82% for the
three months ending September 30, 2004, from 2.25% for the three months ending
September 30, 2003. The net interest rate spread also improved due to a 16 basis
point increase in the yield on average interest-earning assets to 4.47% for the
three months ending September 30, 2004, from 4.31% for the three months ending
September 30, 2003.
39
The increase in the net interest margin is largely reflective of the
increase in the ratio of average interest-earning assets to average
interest-bearing liabilities to 114.31% for the three months ended September 30,
2004, from 112.13% for the three months ended September 30, 2003.
Interest Income. Total interest income increased $251,000, or 1.3%, to
$19.9 million for the three months ended September 30, 2004, from $19.7 million
for the three months ended September 30, 2003. Average interest-earning assets
decreased $41.9 million, or 2.3%, to $1.78 billion for the three months ended
September 30, 2004, from $1.82 billion for the three months ended September 30,
2003. However, the aforementioned 16 basis points increase in yield offset the
decline in average interest-earning assets, leading to the increase in interest
income. We attribute the increase in interest income primarily to the
reinvestment of cash and cash equivalents in higher yielding loans receivable,
investment securities held to maturity and mortgage-backed securities held to
maturity.
Interest income on loans receivable decreased $527,000, or 6.9%, to
$7.1 million for the three months ended September 30, 2004, from $7.7 million
for the three months ended September 30, 2003. The average balance of loans
receivable increased $12.5 million, or 2.5%, to $510.7 million for the three
months ended September 30, 2004, from $498.2 million for the three months ended
September 30, 2003. However, a decrease in the average yield on loans receivable
to 5.59% for the three months ended September 30, 2004, from 6.15% for the three
months ended September 30, 2003, offset the increase in the average balance of
loans outstanding. An increased marketing effort contributed to the increase in
average loans receivable. The lower yield reflects generally lower interest
rates on originations and downward rate adjustments on adjustable rate and
floating rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, increased $783,000, or 24.3%, to $4.0 million for the three
months ended September 30, 2004 from $3.2 million for the three months ended
September 30, 2003. The increase resulted from an increase of $103.5 million, or
27.3%, in the average balance of investment securities to $482.0 million for the
three months ended September 30, 2004 from $378.5 million for the three months
ended September 30, 2003. However, a decrease in the average yield on investment
securities to 3.33% for the three months ended September 30, 2004, from 3.41%
for the three months ended September 30, 2003, partially offset the increase in
the average balance of investment securities. The increased average balance
reflects the reinvestment of cash flows from mortgage-backed securities held to
maturity as well as the redeployment of cash and cash equivalents. The lower
yield resulted from principal repayments on older higher yielding securities
while new purchases occurred in a lower interest rate environment.
Interest income on mortgage-backed securities held to maturity
increased $673,000, or 8.4%, to $8.6 million for the three months ended
September 30, 2004 from $8.0 million for the three months ended September 30,
2003. This was a result of a $95.3 million, or 14.4%, increase in the average
balance of mortgage-backed securities held to maturity to $755.0 million for the
three months ended September 30, 2004 from $659.7 million for the three months
ended September 30, 2003. The increase in the average balance more than offset
the decrease in the average yield to 4.58% for the three months ended September
30, 2004 from 4.84% for the three months ended September 30, 2003. The increase
in the average balance of mortgage-backed securities held to maturity resulted
from the redeployment of cash and cash equivalents. The decrease in yield
resulted from principal repayments received on older higher yielding securities
while new purchases occurred in a lower interest rate environment.
Interest income on other interest-earning assets decreased $678,000, or
85.5%, to $115,000 for the three months ended September 30, 2004 from $793,000
for the three months ended September 30, 2003. This was a result of a $200.0
million, or 100%, decrease in the average balance of securities
40
purchased under agreements to resell and a $53.3 million, or 60.7%, decrease in
the average balance of other interest-earning assets to $34.6 million for the
three months ended September 30, 2004 from $87.9 million for the three months
ended September 30, 2003. There was a 21 basis point increase in the average
yield on other interest-earning assets to 1.33% for the three months ended
September 30, 2004, from 1.12% for the three months ended September 30, 2003.
The substantial decrease in the average balances was due to the use of assets in
these categories to invest in higher yielding securities. We attribute the
improvement in yield to the dividend paid on Federal Home Loan Bank stock
relative to short term market interest rates.
Interest Expense. Total interest expense decreased $2.1 million, or
22.4%, to $7.1 million for the three months ended September 30, 2004 from $9.2
million for the three months ended September 30, 2003. The decrease resulted
primarily from a decrease in the average cost of interest-bearing liabilities to
1.82% for the three months ended September 30, 2004 from 2.25% for the three
months ended September 30, 2003. The average balance of interest-bearing
liabilities declined to $1.56 billion for the three months ended September 30,
2004 as compared to $1.63 billion for the three months ended September 30, 2003.
Average cost decreased due to lower market interest rates prevailing during the
period.
Interest expense on deposits decreased $2.0 million, or 24.7%, to $6.1
million for the three months ended September 30, 2004 from $8.1 million for the
three months ended September 30, 2003. Interest expense on deposits declined
primarily due to a decrease in the average cost of interest-bearing deposits to
1.66% for the three months ended September 30, 2004 from 2.09% for the three
months ended September 30, 2003 and a decrease in deposits. The average cost of
certificates of deposit declined to 2.11% from 2.49%, the average cost of
savings and club accounts declined to 1.03% from 1.54% and the average cost of
interest-bearing demand accounts increased from 0.71% to 0.72%. The average
balance of interest-bearing deposits decreased $78.4 million, or 5.1%, to $1.47
billion for the three months ended September 30, 2004 from $1.55 billion for the
three months ended September 30, 2003. Average certificates of deposit declined
to $884.7 million from $984.7 million, average savings and club accounts
increased to $481.7 million from $458.6 million and average interest-bearing
demand accounts decreased to $106.6 million from $108.0 million. We believe this
shift in deposit composition reflects a movement to alternative investment
opportunities in the marketplace as well as a shift to liquidity, while awaiting
possible future interest rate increases. We expect this shift in deposit
composition may continue to the extent that interest rates continue to remain
low. In our current estimation, we do not expect that the potential deposit
run-off, as a result of depositors moving to alternative investment
opportunities and shifting their assets into more liquid deposit categories
while awaiting possible future interest rate increases, will have a material
effect on our liquidity.
Interest expense on Federal Home Loan Bank advances decreased $75,000,
or 7.0%, to $991,000 for the three months ended September 30, 2004 from $1.1
million for the three months ended September 30, 2003. The average balance
increased $10.7 million, or 14.1%, to $86.1 million for the three months ended
September 30, 2004 from $75.4 million for the three months ended September 30,
2003. However, a decrease in the average cost to 4.60% for the three months
ended September 30, 2004 from 5.65% for the three months ended September 30,
2003 offset the increase in the average balance. The increase in the average
balance resulted from additional borrowings, but at a lower cost due to their
relatively short remaining term to maturity, in a continuing low interest rate
environment.
Provision for Loan Losses. We charge to operations provisions for loan
losses at a level required to reflect credit losses in the loan portfolio that
are both probable and reasonable to estimate. Management, in determining the
allowance for loan losses, considers the losses inherent in the loan
41
portfolio and changes in the nature and volume of our loan activities, along
with general economic and real estate market conditions. We utilize a two-tier
approach: (1) identification of impaired loans and establishment of specific
loss allowances on such loans; and (2) establishment of general valuation
allowances on the remainder of our loan portfolio. We establish a specific loan
loss allowance for an impaired loan based on delinquency status, size of loan,
type of collateral and/or appraisal of the underlying collateral and financial
condition of the borrower. We base general loan loss allowances upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment.
There was a $151,000 provision for loan losses made during the three
months ended September 30, 2004. Total loans increased to $519.7 million at
September 30, 2004 from $510.2 million at June 30, 2004. Non-performing loans
were $2.5 million, or 0.48%, of total loans at September 30, 2004, as compared
to $2.3 million, or 0.46%, of total loans at June 30, 2004. The allowance for
loan losses as a percentage of gross loans outstanding was 1.02% at September
30, 2004 and 1.01% at June 30, 2004, reflecting balances of $5.3 million and
$5.1 million, respectively.
Management assesses the allowance for loan losses monthly. While
management uses available information to recognize losses on loans, 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 September 30, 2004 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 increased $56,000, or 12.8%,
to $494,000 for the three months ended September 30, 2004 compared to $438,000
for the three months ended September 30, 2003. The increase was primarily the
result of a gain from the sale of a trust preferred security during the three
months ended September 30, 2004, offset by a reduction in fees and service
charge income due to the lower average balance of deposits for the three months
ended September 30, 2004 as compared to the 2003 period.
At September 30, 2004, we had a $3.9 million investment in bank owned
life insurance. The returns on the investment of the cash value of the policy
generate non-interest income. We acquired this investment in connection with our
acquisition of West Essex Bank in 2003; it covers the former president and chief
executive officer and former chief lending officer of West Essex Bank.
During the three months ending September 30, 2004, we recognized a
$71,000 gain, included in non-interest income, from the sale of a security in
our available for sale portfolio. There was no such gain recorded in the three
months ending September 30, 2003.
Non-Interest Expense. Excluding merger related expenses, non-interest
expense increased $638,000, or 8.9%, to $7.8 million for the three months ended
September 30, 2004, from $7.2 million for the three months ended September 30,
2003. The increase consisted primarily of a $458,000 increase in salaries and
employee benefits.
The merger related expenses of $592,000 recorded during the three
months ended September 30, 2003, consisted primarily of fees due to attorneys
and financial advisors.
42
Salaries and employee benefits increased $458,000, or 10.9%, to $4.7
million for the three months ended September 30, 2004, compared to $4.2 million
for the three months ended September 30, 2003. The increase was the result of
normal salary increases, increased benefit costs and hiring of additional staff,
including four business development officers. We anticipate higher benefits
costs during the remainder of fiscal 2005, as we expect to contribute
significantly more to fund the employee pension plan. The pension plan
contribution expense for the three months ended September 30, 2004 was $322,000,
as compared to $236,000 for the three months ended September 30, 2003. Our
revised estimate based on current information is that the pension plan
contribution expense for the quarter ending December 31, 2004 will be
approximately $947,000, and $635,000 per quarter for the quarters ending March
31, 2005 and June 30, 2005. The increase is due to lower than expected
investment returns on plan assets and higher required contributions resulting
from the incremental effect of normal salary increases.
All other elements of non-interest expense totaled $3.1 million for the
three months ended September 30, 2004; an increase of $180,000, or 6.1%, from
the $3.0 million total for the three months ended September 30, 2003. This
increase primarily reflects normal increases in the cost of office occupancy and
equipment.
Management expects increased expenses in the future because of the
establishment of the employee stock ownership plan and the potential stock
benefit plans, as well as increased costs associated with being a public company
such as periodic reporting, annual meetings, retention of a transfer agent and
professional fees.
Furthermore, non-interest expense for the three months ended September
30, 2004 does not reflect the impact of our new 53,000 square feet
administrative building in Fairfield, New Jersey. We estimate the total cost of
this building will be $13.5 million, including furniture, fixtures and
equipment; capitalizing the cost of the building, net of land, with amortization
taking place over forty years. Additionally, we estimate the annual operating
expense of this new building, excluding depreciation, will be approximately
$450,000. We expect to open a de novo branch office in Lacey, New Jersey in the
first quarter of 2005, with a total cost of approximately $2.3 million. During
2005, we also plan to replace three office locations with new buildings, at an
estimated cost of approximately $1.9 million per branch. Furthermore, in
December of 2004, we acquired a 3.7 acre parcel of land in West Caldwell, New
Jersey for approximately $2.3 million. We intend to construct a branch office at
this location and subdivide and lease to third parties the portion of land not
used for the branch building. Expenses related to the planned expansion of our
operations through de novo branching and the acquisition of branches or other
financial institutions could affect earnings in future periods.
Provision for Income Taxes. The provision for income taxes increased
$604,000, or 63.0%, to $1.6 million for the three months ended September 30,
2004 from $958,000 for the three months ended September 30, 2003. The effective
income tax rates were 29.2% for the three months ended September 30, 2004 as
compared to 30.0% for the three months ended September 30, 2003. We attribute
the increase in income tax expense to an increase in pre-tax income, which
increased $2.2 million, or 67.8%, to $5.4 million for the three months ended
September 30, 2004, from $3.2 million for the three months ended September 30,
2003.
Comparison of Financial Condition at June 30, 2004 and June 30, 2003
Our total assets decreased by $60.0 million, or 3.0%, to $1.94 billion
at June 30, 2004 from $2.0 billion at June 30, 2003, primarily due to a $76.2
million net outflow of deposits, partially offset by an $18.5 million increase
in Federal Home Loan Bank advances.
43
The decrease in total assets was most pronounced in cash and cash
equivalents, which decreased $286.2 million, or 87.9%, to $39.5 million at June
30, 2004 from $325.7 million at June 30, 2003, in order to offset the
aforementioned deposit outflow and to fund increases in the securities
portfolios. The securities portfolios, including both securities available for
sale and securities held to maturity, increased $242.0 million, or 24.0%, to
$1.25 billion at June 30, 2004, from $1.01 billion at June 30, 2003. Investment
securities held to maturity increased $148.6 million, or 51.7%, to $435.9
million at June 30, 2004, from $287.3 million at June 30, 2003. Mortgage-backed
securities held to maturity increased $89.8 million, or 13.2%, to $771.4 million
at June 30, 2004, from $681.6 million at June 30, 2003. In both cases, the
increases were the result of investing funds previously held in cash equivalents
in order to increase overall yield. We would not expect further similarly large
investments of the funds currently held in cash equivalents into the securities
portfolio since a sufficient amount of cash equivalents is necessary to maintain
sufficient liquidity.
Loans receivable decreased marginally to $505.8 million at June 30,
2004, from $509.2 million at June 30, 2003. One-to -four family residential
mortgage loans decreased by $8.2 million to $358.2 million from $366.4 million,
as repayments exceeded originations and purchases during the year ended June 30,
2004. Multi-family and commercial real estate mortgage loans increased by $12.3
million to $83.4 million, reflecting our strategy to build this part of our loan
portfolio.
The West Essex Bancorp, Inc. merger was consummated on July 1, 2003. As
a result, goodwill increased $50.6 million, or 159.6%, to $82.3 million at June
30, 2004, from $31.7 million at June 30, 2003. The $67.9 million deposit for
acquisition of West Essex Bancorp, Inc. at June 30, 2003 was paid to West Essex
stockholders.
Premises and equipment increased by $6.8 million, or 34.0%, to $26.6
million from $19.9 million. This increase resulted mainly from a $5.9 million
increase in construction in progress in connection with the construction of our
new 53,000 square feet administrative building in Fairfield, New Jersey. We
began moving management staff and administrative operations into parts of this
building in October 2004 and completed the move-in phase in December 2004.
Total deposits decreased by $76.2 million, or 4.7%, to $1.54 billion at
June 30, 2004, from $1.61 billion at June 30, 2003. The primary factor for this
decrease was the runoff of certificates of deposit due to lower interest rates
paid.
Federal Home Loan Bank advances increased $18.5 million, or 24.4%, to
$94.2 million at June 30, 2004 from $75.7 million at June 30, 2003. The increase
in Federal Home Loan Bank advances was used to fund the purchase of investment
securities and mortgage-backed securities held-to-maturity. New advances drawn
were fixed rate borrowings with maturities of less than one year.
Stockholders' equity decreased $2.2 million, or 0.7%, to $293.5 million
at June 30, 2004 from $295.7 million at June 30, 2003, primarily reflecting a
$17.3 million reduction related to the purchase, on July 1, 2003, of 100% of the
outstanding minority owned shares of West Essex Bancorp, Inc., partially offset
by net income of $12.9 million for the twelve months ended June 30, 2004, along
with an increase in accumulated other comprehensive income of $2.3 million
reflecting an increase in the unrealized gain on available for sale securities.
44
Comparison of Operating Results for the Years Ended June 30, 2004 and June 30,
2003
General. Net income for the year ended June 30, 2004 was $12.9 million,
an increase of $8.8 million, or 218.1%, from $4.1 million for 2003. The increase
in net income resulted primarily from a decrease in non-interest expense
primarily due to significantly lower merger related expenses recorded in 2004 as
compared to 2003, partially offset by a decrease in net interest income.
Net Interest Income. Net interest income decreased by $5.2 million, or
10.0%, to $46.6 million for the year ended June 30, 2004 from $51.8 million for
the year ended June 30, 2003. The net interest rate spread increased slightly to
2.37% for the year ended June 30, 2004 from 2.36% for 2003. The net interest
margin decreased 16 basis points to 2.59% for the year ended June 30, 2004
compared with 2.75% for the year ended June 30, 2003. The net interest rate
spread changed little as the 76 basis point reduction in the cost of
interest-bearing liabilities was closely matched by the 75 basis point decline
in the average yield on interest-earning assets. The decrease in the net
interest margin is largely reflective of the decrease in the ratio of
interest-earning assets to interest-bearing liabilities to 112.46% for the year
ended June 30, 2004, from 116.54% for the year ended June 30, 2003.
Interest Income. Total interest income decreased $17.8 million, or
18.5%, to $78.7 million for the year ended June 30, 2004, from $96.5 million for
the year ended June 30, 2003, due to decreases in average interest-earning
assets, which declined $87.3 million, or 4.6%, to $1.79 billion from $1.88
billion, and average yield, which declined to 4.38% from 5.13%.
Interest income on loans receivable decreased $7.8 million, or 21.3%,
to $28.9 million for the year ended June 30, 2004, from $36.7 million for the
year ended June 30, 2003. The primary factor for the decrease in interest income
on loans was a decrease in the average yield on loans to 5.79% for the year
ended June 30, 2004, from 6.71% for the year ended June 30, 2003 which was
accompanied by a $47.0 million decrease in the average balance of loans
receivable from $546.5 million for the year ended June 30, 2003, to $499.5
million for the year ended June 30, 2004. The decreased average balance reflects
the high pace of refinancing and prepayment activity which resulted from the low
interest rate environment and which exceeded origination volume. The lower yield
reflects generally lower interest rates on originations and downward rate
adjustments on adjustable rate and floating rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, increased $5.3 million, or 58.2%, to $14.4 million for the
year ended June 30, 2004 from $9.1 million for the year ended June 30, 2003. The
increase resulted from an increase of $171.6 million, or 67.6%, in the average
balance of investment securities to $425.3 million during the year ended June
30, 2004 from $253.7 million during the year ended June 30, 2003, partially
offset by a decrease in the average yield on investment securities to 3.39%
during the year ended June 30, 2004 from 3.60% during the year ended June 30,
2003. The lower yield reflects generally lower interest rates available on
securities purchased during the current year. The increased average balance
reflects the reinvestment of cash flows from repayments of loans and
mortgage-backed securities held to maturity, reflecting management's decision to
shift assets from those vulnerable to high prepayments, as well as the
redeployment of cash and cash equivalents, reflecting management's decision to
move assets from low yielding interest-bearing deposits and securities purchased
under agreements to resell into higher yielding securities.
Interest income on mortgage-backed securities decreased $13.8 million,
or 28.9%, to $34.0 million for the year ended June 30, 2004 from $47.8 million
for the year ended June 30, 2003. This was a result of a $162.9 million, or
18.6%, decrease in the average balance of mortgage-backed securities to $713.4
million during the year ended June 30, 2004 from $876.3 million during the year
ended June 30, 2003,
45
along with a decrease in the average yield to 4.76% during the year ended June
30, 2004 from 5.45% during the year ended June 30, 2003. The decrease in the
average balance of mortgage-backed securities was due to high repayment levels
due to accelerated prepayments and refinancing of the underlying mortgage loans,
with a significant portion of the cash flows being reinvested in investment
securities. The decline in yield resulted from principal repayments received on
older higher yielding securities while new purchases were made in a lower
interest rate environment.
Interest income on securities purchased under agreements to resell and
other interest-earning assets decreased $1.6 million, or 55.2%, to $1.3 million
for the year ended June 30, 2004 from $2.9 million for the year ended June 30,
2003. This was a result of a $49.0 million, or 23.9%, decrease in the average
balance of these assets to $156.3 million during the year ended June 30, 2004
from $205.3 million during the year ended June 30, 2003, along with a decrease
in the average yield to 0.85% during the year ended June 30, 2004 from 1.42%
during the year ended June 30, 2003. The decrease in the average balance was due
to the use of assets in these categories to invest in higher yielding securities
and to fund deposit outflows. The decline in yield resulted from lower
short-term market interest rates.
Interest Expense. Total interest expense decreased $12.6 million, or
28.2%, to $32.1 million for the year ended June 30, 2004 from $44.7 million for
the year ended June 30, 2003, primarily as a result of a decrease in the average
cost of interest-bearing liabilities to 2.01% during the year ended June 30,
2004 from 2.77% during the year ended June 30, 2003. The average balance of
interest-bearing liabilities declined slightly to $1.60 billion during the year
ended June 30, 2004 as compared to $1.61 billion during the year ended June 30,
2003. Average cost decreased due to lower market interest rates prevailing
during the period.
Interest expense on deposits decreased $11.8 million, or 29.6%, to
$28.1 million for the year ended June 30, 2004 from $39.9 million for the year
ended June 30, 2003, primarily due to a decrease in the average cost of
interest-bearing deposits to 1.85% during the year ended June 30, 2004 from
2.63% during the year ended June 30, 2003. The average cost of certificates of
deposit declined to 2.25% from 3.22%, the average cost of savings and club
accounts declined to 1.23% from 1.58%, and the average cost of interest-bearing
demand accounts declined to 0.80% from 1.09%. The average balance of
interest-bearing deposits remained relatively stable overall at $1.52 billion,
although a shift from certificates of deposit to savings and club and demand
accounts took place. Certificates of deposit declined to $963.1 million from
$1.0 billion, savings and club accounts increased to $448.5 million from $417.8
million, and interest-bearing demand accounts increased to $109.8 million from
$98.9 million. This shift in deposit composition reflects the impact of the
lower interest rate environment.
Interest expense on Federal Home Loan Bank advances decreased $769,000,
or 16.1%, to $4.0 million for the year ended June 30, 2004 from $4.8 million for
the year ended June 30, 2003, as a result of a decrease in the average balance
to $74.3 million during the year ended June 30, 2004 from $95.9 million during
the year ended June 30, 2003, which more than offset an increase in the average
cost to 5.40% during the year ended June 30, 2004 from 4.99% during the year
ended June 30, 2003. Both the decline in average balance and the increase in
average cost were the result of the repayment of lower cost short-term debt
during 2004.
Provision for Loan Losses. Provisions for loan losses are charged to
operations at a level required to reflect credit losses in the loan portfolio
that are both probable and reasonable to estimate. Management, in determining
the allowance for loan losses, considers the losses inherent in the loan
portfolio and changes in the nature and volume of our loan activities, along
with the general economic and real estate market conditions. We utilize a two
tier approach: (1) identification of impaired loans and
46
establishment of specific loss allowances on such loans; and (2) establishment
of general valuation allowances on the remainder of our loan portfolio. A
specific loan loss allowance is established for an impaired loan based on
delinquency status, size of loan, type of collateral and/or appraisal of the
underlying collateral and financial condition of the borrower. General loan loss
allowances are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of the loan portfolio, current
economic conditions and management's judgment.
There was no provision for loan losses made during the years ended June
30, 2004 and 2003. During the year ended June 30, 2004, total loans decreased
slightly to $510.2 million at June 30, 2004 from $512.4 million at June 30,
2003. Non-performing loans were $2.3 million, or 0.46%, of total loans at June
30, 2004, as compared to $2.9 million, or 0.57%, of total loans at June 30,
2003. The allowance for loan losses as a percentage of gross loans outstanding
was 1.01% at both June 30, 2004 and 2003, reflecting balances of $5.1 million
and $5.2 million, respectively. The increase in the ratio of the allowance for
loan losses to non-performing loans to 220.96% at June 30, 2004 from 177.64% at
June 30, 2003 is a result of a $588,000 decrease in non-performing loans from
$2.9 million at June 30, 2003 to $2.3 million at June 30, 2004.
Management assesses the allowance for loan losses monthly. While
management uses available information to recognize losses on loans, future loan
loss provisions may be necessary 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
June 30, 2004 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 decreased $287,000, or 15.5%,
to $1.6 million for the year ended June 30, 2004 compared to $1.8 million for
the year ended June 30, 2003. The decrease was primarily a result of a reduction
in fees and service charge income due to the deposit outflow experienced during
the year.
At June 30, 2004, we had a $3.8 million investment in bank owned life
insurance. The returns on the investment of the cash value of the policy
generate non-interest income. This investment was acquired in our acquisition of
West Essex Bank in 2003 and covers the former president and chief executive
officer and former chief lending officer of West Essex Bank.
Non-Interest Expense. Non-interest expense decreased $14.9 million, or
33.6%, to $29.5 million for the year ended June 30, 2004, from $44.4 million for
the year ended June 30, 2003. The decrease was primarily a result of decreases
of $14.3 million in merger related expenses and $440,000 in salaries and
employee benefits.
Merger related expenses decreased $14.3 million to $592,000 for the
year ended June 30, 2004, from $14.9 million for the year ended June 30, 2003.
Included in the amount recorded during the year ended June 30, 2003 are $12.3
million in expenses related to the payout of employment contracts, unexercised
stock options, supplemental benefit plans and incentive stock awards as a result
of both the Pulaski and West Essex mergers. The expenses recorded for the year
ended June 30, 2004, and the remaining expenses for the year ended June 30,
2003, consisted primarily of fees due to attorneys and financial advisors for
their work related to the mergers.
47
Salaries and employee benefits decreased $440,000, or 2.6%, to $16.5
million for the year ended June 30, 2004, compared to $17.0 million for the year
ended June 30, 2003. The decrease was the result of the elimination of several
management and non-management positions related to the merger with West Essex,
the impact of which more than offset normal increases in salary and benefit
levels.
All other elements of non-interest expense totaled $12.4 million for
the year ended June 30, 2004, a decrease of $111,000, or 0.9%, from the $12.5
million total for the year ended June 30, 2003. This decrease reflects costs
savings realized as a result of the West Essex merger, partially offset by
normal increases in these elements.
Management expects increased expenses in the future as a result of the
establishment of the employee stock ownership plan and the potential stock
benefit plans, as well as increased costs associated with being a public company
such as periodic reporting, annual meetings, retention of a transfer agent, and
professional fees.
Furthermore, non-interest expense for the year ended June 30, 2004 does
not reflect the impact of our new 53,000 square feet administrative building in
Fairfield, New Jersey. We began moving management staff and administrative
operations into parts of this building in October 2004 and completed the move-in
phase in December 2004. The total cost of this building is expected to be
approximately $13.5 million, which cost will be capitalized and amortized over a
forty-year period. Additionally, it is estimated that the annual operating
expense of this new building, excluding depreciation, will be approximately
$450,000. We expect to open a de novo branch office in Lacey, New Jersey in the
first quarter of 2005, with a total cost of approximately $2.3 million. During
2005, we also plan to replace three office locations with new buildings, at an
estimated cost of approximately $1.9 million per branch. Furthermore, in
December of 2004, we acquired a 3.7 acre parcel of land in West Caldwell, New
Jersey for approximately $2.3 million. We intend to construct a branch office at
this location and subdivide and lease to third parties the portion of land not
used for the branch building. Expenses related to the planned expansion of our
operations through de novo branching and the acquisition of branches or other
financial institutions could also impact earnings in future periods.
Provision for Income Taxes. The provision for income taxes increased
$508,000 to $5.7 million for the year ended June 30, 2004 from $5.2 million for
the year ended June 30, 2003. The effective income tax rates were 30.8% for the
year ended June 30, 2004 as compared to 56.4% for the year ended June 30, 2003.
The income tax expense for the year ended June 30, 2003 was higher than usual
due to the presence of non-deductible merger related costs and excess
compensation expenses, partially offset by a tax benefit related to a former
employee benefit plan. The impact of these items was to increase income tax
expense for the year ended June 30, 2003 by approximately $1.9 million.
Excluding these items, the effective tax rate for the year ended June 30, 2003
would have been 36.2%.
Comparison of Financial Condition at June 30, 2003 and June 30, 2002
Our total assets increased by $90.8 million, or 4.8%, to $2.0 billion
at June 30, 2003 from $1.9 billion at June 30, 2002. The increase was reflected
in cash and cash equivalents, partially offset by an overall decrease in our
securities and loan portfolios, and was funded by growth in deposits.
Cash and cash equivalents increased by $228.7 million, or 235.8%, to
$325.7 million at June 30, 2003 from $97.0 million at June 30, 2002, as heavy
prepayments of mortgage-backed securities and loans receivable were experienced
and a significant portion of these funds received were maintained in cash
equivalents pending reinvestment in the securities portfolios.
48
Our securities portfolios, including both available for sale securities
and held to maturity securities, decreased by $140.9 million, or 12.3%, to $1.01
billion at June 30, 2003 from $1.15 billion at June 30, 2002. Mortgage-backed
securities held to maturity decreased $286.9 million, or 29.6%, to $681.6
million from $968.5 million due to higher prepayments in the declining interest
rate environment. Investment securities held to maturity increased $147.9
million, or 106.1%, to $287.3 million from $139.4 million as the funds received
from mortgage-backed security repayments and prepayments were partially
reinvested in this portfolio as part of a strategy to shift assets away from
securities experiencing high prepayments. Securities available for sale
decreased marginally to $37.8 million at June 30, 2003, from $39.7 million at
June 30, 2002.
Loans decreased by $81.9 million, or 13.9%, to $509.2 million at June
30, 2003 from $591.1 million at June 30, 2002. The decrease in loans primarily
resulted from higher than normal loan repayments due to the low market interest
rate environment in 2002 and the first half of 2003. The decrease in the loan
portfolio was largely experienced in the one-to-four family mortgage loan area,
which decreased $92.6 million to $366.4 million at June 30, 2003, from $459.0
million at June 30, 2002, reflecting the high pace of refinancing and prepayment
activity which resulted from the low interest rate environment and which
exceeded origination volume. Other loan types changed as follows: multi-family
and commercial real estate loans increased by $11.7 million to $71.1 million as
part of our strategy to build this part of our loan portfolio, commercial
business loans decreased by $4.4 million to $2.4 million, consumer loans
increased by $1.3 million to $61.4 million and construction loans increased by
$2.2 million to $11.2 million.
At June 30, 2003, we had an outstanding $67.9 million deposit set aside
for the buyout of the minority stockholders of West Essex Bancorp, Inc., which
was utilized when the West Essex merger transaction was consummated on July 1,
2003. No similar asset existed at June 30, 2002.
Total deposits increased by $134.0 million, or 9.1%, to $1.61 billion
at June 30, 2003 from $1.48 billion at June 30, 2002. The majority of this
growth was in certificates of deposit and savings accounts, which increased
$56.0 million, or 5.9%, and $67.5 million, or 17.2%, respectively, during the
fiscal year ended June 30, 2003. The increase was largely a result of the
opening of the Wyckoff branch in May 2002. The increased deposit growth was used
to purchase securities and repay Federal Home Loan Bank advances.
Federal Home Loan Bank advances decreased $36.4 million, or 32.5%, to
$75.7 million at June 30, 2003 from $112.1 million at June 30, 2002, as maturing
advances were repaid and not renewed using a portion of the funds provided by
deposit growth.
Equity decreased $6.8 million, or 2.2%, to $295.7 million at June 30,
2003, from $302.5 million at June 30, 2002, primarily as a result of a $10.3
million reduction related to the purchase, on October 18, 2002, of 100% of the
outstanding minority owned shares of Pulaski Bancorp, Inc. and $1.3 million in
unrealized losses on available for sale securities, partially offset by net
income of $4.1 million.
Comparison of Operating Results for the Years Ended June 30, 2003 and June 30,
2002
General. Net income for the year ended June 30, 2003 was $4.1 million,
a decrease of $12.4 million, or 75.4%, from $16.5 million for the year ended
June 30, 2002. The decrease in net income was due to a $15.3 million increase in
non-interest expense, primarily attributable to approximately $12.9 million of
expenses related to the West Essex merger and approximately $2.0 million of
expenses related to the Pulaski merger, partially offset by a $2.7 million
decrease in income taxes.
49
Net Interest Income. Net interest income increased by $78,000, or 0.2
%, to $51.8 million for the year ended June 30, 2003, from $51.7 million for the
year ended June 30, 2002. The net interest rate spread increased slightly to
2.36% for the year ended June 30, 2003 from 2.35% for the year ended June 30,
2002, while the net interest margin decreased during the period to 2.75% from
2.95%. The net interest rate spread changed little as the 94 basis point
reduction in the cost of interest-bearing liabilities was closely matched by the
93 basis point decline in the average yield on interest-earning assets. The
decrease in the net interest margin is largely reflective of the decrease in the
ratio of interest-earning assets to interest-bearing liabilities to 116.54% for
the year ended June 30, 2003, from 119.58% for the year ended June 30, 2002.
Interest Income. Total interest income decreased by $9.7 million, or
9.1%, to $96.5 million for the year ended June 30, 2003 from $106.2 million for
the year ended June 30, 2002. The primary factor for the decrease in interest
income was a decrease in the average yield of interest-earning assets from 6.06%
for the year ended June 30, 2002 to 5.13% for the year ended June 30, 2003.
Partially offsetting the decreased yield was a $129.0 million, or 7.4%, increase
in the average balance of interest-earning assets. Average yield decreased due
to lower market interest rates prevailing during the period. The increase in
average assets was funded by an overall increase in average deposits.
Interest income on loans receivable decreased $6.6 million, or 15.2%,
to $36.7 million for the year ended June 30, 2003, from $43.3 million for the
year ended June 30, 2002. The primary factors for the decrease in loan interest
income were a decrease of $56.6 million in the average balance of loans
receivable along with a decrease in the average yield on loans receivable to
6.71% from 7.17%. The decrease in average loans was the result of the higher
than normal loan repayments which resulted from the low interest rate
environment and which exceeded origination volume. The decrease in the average
yield on loans receivable reflected decreased market rates of interest on
originations as well as downward interest rate adjustments on floating rate and
adjustable rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, decreased $794,000, or 8.0%, to $9.1 million for the year
ended June 30, 2003, from $9.9 million for the year ended June 30, 2002. The
decrease resulted from a decrease in the average yield on investment securities
to 3.60% during the year ended June 30, 2003, from 5.25% during the year ended
June 30, 2002, which was partially offset by an increase of $64.6 million, or
34.2%, in the average balance of investment securities to $253.7 million during
the year ended June 30, 2003, from $189.1 million during the year ended June 30,
2002. The lower yield reflects $108.7 million of maturities and calls of higher
yielding issues, as well as the generally lower interest rates available on the
securities purchased during the year ended June 30, 2003. The increased average
balance reflects the reinvestment of a portion of the cash flow from repayments
of loans and mortgage-backed securities held to maturity.
Interest income on mortgage-backed securities decreased $2.4 million,
or 4.8%, to $47.8 million for the year ended June 30, 2003 from $50.2 million
for the year ended June 30, 2002. This decrease was a result of a decrease in
the average yield to 5.45% during the year ended June 30, 2003, from 5.93%
during the year ended June 30, 2002, partially offset by an increase of $28.7
million, or 3.4%, in the average balance of mortgage-backed securities to $876.3
million during the year ended June 30, 2003, from $847.6 million during the year
ended June 30, 2002. The decline in yield resulted from principal repayments
received on older higher yielding securities while new purchases were made in a
lower interest rate environment. The change in average balance was not
considered significant.
Interest income on securities purchased under agreements to resell and
other interest-earning assets increased $170,000, or 6.2%, to $2.92 million for
the year ended June 30, 2003, from $2.75 million for
50
the year ended June 30, 2002. This was a result of a $92.3 million, or 81.7%,
increase in the average balance of these assets to $205.3 million during the
year ended June 30, 2003, from $113.0 million during the year ended June 30,
2002, partially offset by a decrease in the average yield to 1.42% during the
year ended June 30, 2003, from 2.44% during the year ended June 30, 2002. The
increase in the average balance was due to the accumulation of assets in these
categories which resulted from heavy repayments on the securities portfolios.
The decline in yield resulted from lower short-term market interest rates.
Interest Expense. Total interest expense decreased $9.7 million, or
17.8%, to $44.7 million for the year ended June 30, 2003 from $54.4 million for
the year ended June 30, 2002, primarily as a result of a decrease in the average
cost of interest-bearing liabilities to 2.77% during the year ended June 30,
2003, from 3.71% during the year ended June 30, 2002, partially offset by a
$149.0, or 10.2%, increase in the average balance of interest-bearing
liabilities to $1.61 billion during the year ended June 30, 2003, as compared to
$1.47 billion during the year ended June 30, 2002. Average cost decreased due to
lower market interest rates prevailing during the period. The growth in average
interest-bearing liabilities is attributed to the growth of the deposit base.
Interest expense on deposits decreased $9.2 million, or 18.7%, to $39.9
million for the year ended June 30, 2003, from $49.1 million for the year ended
June 30, 2002. The decrease in interest expense on deposits primarily resulted
from a decrease in the average cost to 2.63% for the year ended June 30, 2003,
from 3.61% for the year ended June 30, 2002, partially offset by a $160.6
million, or 11.8 %, increase in the average balance of interest-bearing deposits
to $1.52 billion during the year ended June 30, 2003, as compared to $1.36
billion during the year ended June 30, 2002. The decreased average cost was a
result of the decline in market interest rates from 2002 to 2003. The increase
in the average balance of interest-bearing deposits was the result of both
interest credited to accounts and growth of the deposit base. Certificates of
deposit increased to $1.0 billion from $924.0 million, savings and club accounts
increased to $417.8 million from $340.7 million, and interest-bearing demand
accounts increased to $98.9 million from $93.6 million.
Interest expense on Federal Home Loan Bank advances decreased $587,000,
or 10.9%, to $4.8 million for the year ended June 30, 2003, from $5.4 million
for the year ended June 30, 2002, primarily as a result of a decrease in the
average balance of outstanding advances to $95.9 million for the year ended June
30, 2003, from $107.5 million for the year ended June 30, 2002. The average cost
remained relatively unchanged at 4.99% and 5.00%, respectively.
Provision for Loan Losses. Provisions for loan losses are charged to
operations at a level required to reflect credit losses in the loan portfolio
that are both probable and reasonable to estimate. Management, in determining
the allowance for loan losses, considers the losses inherent in the loan
portfolio and changes in the nature and volume of our loan activities, along
with the general economic and real estate market conditions. We utilize a two
tier approach: (1) identification of impaired loans and establishment of
specific loss allowances on such loans; and (2) establishment of general
valuation allowances on the remainder of our loan portfolio. A specific loan
loss allowance is established for an impaired loan based on delinquency status,
size of loan, type of collateral and/or appraisal of the underlying collateral
and financial condition of the borrower. General loan loss allowances are based
upon a combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment.
There was no provision for losses for the year ended June 30, 2003, as
compared to $3,000 for the year ended June 30, 2002. The overall loan portfolio
reflected an $81.8 million, or 13.8%, decrease in total loans. The allowance for
loan losses as a percentage of gross loans outstanding increased to 1.01%
51
at June 30, 2003, from 0.87% at June 30, 2002, reflecting balances of $5.2
million and $5.2 million, respectively. Non-performing loans as a percentage of
gross loans increased only slightly to 0.57% at June 30, 2003, as compared to
0.55% at June 30, 2002.
Non-Interest Income. Non-interest income increased $82,000, or 4.6%, to
$1.85 million for the year ended June 30, 2003, as compared to $1.77 million for
the year ended June 30, 2002. This minimal increase in non-interest income for
2003, as compared to 2002, was consistent with management's expectations.
Non-Interest Expense. Non-interest expense increased $15.3 million, or
52.6%, to $44.4 million for the year ended June 30, 2003, from $29.1 million for
the year ended June 30, 2002. The increase was primarily a result of a $14.3
million increase in merger related expenses, partially offset by a $2.3 million
decrease in goodwill and intangible asset amortization.
Merger related expenses increased $14.3 million to $14.9 million for
the year ended June 30, 2003, from $619,000 for the year ended June 30, 2002.
Included in the amount recorded during the year ended June 30, 2003, are $12.3
million in expenses related to the payout of employment contracts, unexercised
stock options, supplemental benefit plans and incentive stock awards as a result
of both the Pulaski and West Essex mergers. The remaining expenses recorded for
the year ended June 30, 2003, and for the year ended June 30, 2002, consisted
primarily of fees due attorneys and financial advisors for their work related to
the mergers.
Goodwill and intangible asset amortization decreased to $636,000 for
the year ended June 30, 2003, from $2.9 million for the year ended June 30,
2002, due to the adoption, effective July 1, 2003, of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Statement
No. 142 eliminated the amortization of goodwill and, accordingly, no goodwill
related amortization expense was recognized during the year ended June 30, 2003.
Goodwill amortization totaled $2.3 million during the year ended June 30, 2002.
All other elements of non-interest expense totaled $28.8 million for
the year ended June 30, 2003, an increase of $3.3 million, or 12.9%, over the
$25.5 million amount for the year ended June 30, 2002. The increases in these
elements are attributable to the growth of the institution and were reflected in
salary and employee benefits, net occupancy expenses, equipment, advertising,
and miscellaneous expenses.
Provision for Income Taxes. The provision for income taxes decreased
$2.7 million to $5.2 million for the year ended June 30, 2003, from $7.9 million
for the year ended June 30, 2002. The effective income tax rates were 56.4% for
the year ended June 30, 2003, as compared to 32.5% for the year ended June 30,
2002. The income tax expense for the year ended June 30, 2003, was higher than
usual due to the presence of non-deductible merger related costs and excess
compensation expenses, partially offset by a tax benefit related to a former
employee benefit plan. The impact of these items was to increase income tax
expense for the year ended June 30, 2003, by approximately $1.9 million.
Excluding these items, the effective tax rate for the year ended June 30, 2003,
would have been 36.2%. The effective tax rate for the year ended June 30, 2003,
was expected to be higher than in the preceding year due to the effect of a
change in the New Jersey statutory tax rate whereby the statutory tax rate was
increased from 3% to 9% effective January 1, 2002.
52
Average Balance Sheet. The following table sets forth certain
information relating to Kearny Financial Corp. at and for the periods indicated.
The average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily, weekly and monthly balances.
Management does not believe that the use of other than daily balances has caused
any material differences in the information presented in the table.
At September 30, For the Three Months Ended September 30,
------------------------- -----------------------------------------------------------------------------
2004 2004 2003
------------------------- --------------------------------------- -------------------------------------
Actual Actual Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning
assets:
Loans receivable,
net(1).............. $ 515,196 5.63% $ 510,730 $ 7,132 5.59% $ 498,160 $ 7,659 6.15%
Mortgage-backed
securities
held to maturity.... 724,876 4.83 754,994 8,649 4.58 659,658 7,976 4.84
Investment
securities:(2)
Tax-exempt.......... 172,419 3.84 167,206 1,608 3.85 125,304 1,284 4.10
Taxable............. 314,685 3.05 314,754 2,403 3.05 253,147 1,944 3.07
Securities purchased
under agreements
to resell........... - - - - - 200,000 546 1.09
Other interest-earning
assets(3)........... 30,318 1.85 34,585 115 1.33 87,891 247 1.12
---------- ---------- ------- ---------- -------
Total interest-earning
assets............. 1,757,494 4.60 1,782,269 19,907 4.47 1,824,160 19,656 4.31
------- -------
Non-interest-earning
assets............... 146,715 141,747 140,155
---------- ---------- ----------
Total assets......... $1,904,209 $1,924,016 $1,964,315
========== ========== ==========
Interest-bearing
liabilities:
Interest-bearing
demand.............. $ 106,444 0.75 $ 106,638 $ 192 0.72 $ 108,047 $ 193 0.71
Savings and club...... 484,117 1.00 481,667 1,246 1.03 458,645 1,769 1.54
Certificates of
deposit............. 869,184 2.11 884,725 4,674 2.11 984,699 6,130 2.49
Federal Home Loan
Bank advances....... 84,100 4.62 86,103 991 4.60 75,436 1,066 5.65
---------- ---------- ------- ---------- ------
Total interest-
bearing
liabilities........ 1,543,845 1.80 1,559,133 7,103 1.82 1,626,827 9,158 2.25
------ ------
Non-interest-bearing
liabilities.......... 62,562 70,552 57,545
---------- ---------- ----------
Total liabilities..... 1,606,407 1,629,685 1,684,372
Stockholders' equity... 297,802 294,331 279,943
---------- ---------- ----------
Total liabilities
and stockholders'
equity.............. $1,904,209 $1,924,016 $1,964,315
========== ========== ==========
Net interest income.... $12,804 $10,498
======= =======
Interest rate
spread(4)............ 2.80% 2.65% 2.06%
===== ===== ======
Net yield on interest-
earning assets(5)... 2.87% 2.30%
===== =====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities.......... 1.14x 1.14x 1.12x
====== ====== ======
-----------------
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes both available for sale and held to maturity securities.
(3) Includes interest-bearing deposits at other banks, federal funds purchased
and Federal Home Loan Bank of New York capital stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
53
Average Balance Sheet. The following table sets forth certain
information relating to Kearny Financial Corp. at and for the periods indicated.
The average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily, weekly and monthly balances.
Management does not believe that the use of other than daily balances has caused
any material differences in the information presented in the table.
For the Year Ended June 30,
At June 30, ------------------------------------------------------------------------------------------
2004 2004 2003 2002
--------------------- ----------------------------- -------------------------- ------------------------------
Actual Average Average Average
Actual Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ------ ------- -------- --------- ------- -------- ------- ------- -------- ---------
(Dollars in thousands)
Interest-
earning assets:
Loans
receivable,
net(1).......... $505,794 5.60% $ 499,510 $28,919 5.79% $546,521 $36,673 6.71% $ 603,131 $43,258 7.17%
Mortgage-backed
securities
held to
maturity........ 771,353 4.86 713,422 33,980 4.76 876,348 47,764 5.45 847,646 50,225 5.93
Investment
securities:(2)
Tax-exempt...... 161,469 3.89 141,630 5,702 4.03 98,626 4,346 4.41 64,767 3,066 4.73
Taxable......... 315,965 3.03 283,708 8,724 3.07 155,051 4,787 3.09 124,323 6,861 5.52
Securities
purchased under
agreements to
resell.......... -- -- 95,385 982 1.03 118,077 1,577 1.34 36,538 938 2.57
Other interest-
earning
assets(3)....... 29,872 1.13 60,885 347 0.57 87,238 1,345 1.54 76,415 1,814 2.37
----------- ----------- ------- ---------- ------ ---------- --------
Total interest-
earning assets. 1,784,453 4.60 1,794,540 78,654 4.38 1,881,861 96,492 5.13 1,752,820 106,162 6.06
------ ------ -------
Non-interest-
earning assets... 152,065 144,698 83,357 61,711
--------- --------- ---------- ----------
Total assets..... $1,936,518 $1,939,238 $1,965,218 $1,814,531
========= ========= ========= =========
Interest-bearing
liabilities:
Interest-bearing
demand.......... $ 103,648 0.75 $ 109,830 882 0.80 $ 98,926 1,074 1.09 93,638 1,289 1.38
Savings and club.. 481,466 1.00 448,509 5,508 1.23 417,780 6,604 1.58 340,655 7,873 2.31
Certificates of
deposit......... 897,019 1.92 963,089 21,692 2.25 1,002,229 32,230 3.22 924,011 39,907 4.32
Federal Home Loan
Bank advances.... 94,234 4.21 74,340 4,018 5.40 95,853 4,787 4.99 107,459 5,374 5.00
---------- --------- ------ ---------- ------- --------- -------
Total interest-
bearing
liabilities.... 1,576,367 1.70 1,595,768 32,100 2.01 1,614,788 44,695 2.77 1,465,763 54,443 3.71
------ ------ ------
Non-interest-
bearing
liabilities...... 66,646 57,846 56,217 51,560
---------- --------- ---------- ----------
Total liabilities. 1,643,013 1,653,614 1,671,005 1,517,323
Stockholders'
equity........... 293,505 285,624 294,213 297,208
--------- --------- ---------- ---------
Total liabilities
and stockholders'
equity.......... $1,936,518 $1,939,238 $1,965,218 $1,814,531
========= ========= ========= =========
Net interest
income........... $46,554 $51,797 $51,719
====== ====== ======
Interest rate
spread(4)........ 2.90% 2.37% 2.36% 2.35%
==== ==== ==== ====
Net yield on
interest-
earning
assets(5)........ 2.59% 2.75% 2.95%
==== ==== ====
Ratio of average
interest-earning
assets to
average
interest-bearing
liabilities...... 1.13x 1.12x 1.17x 1.20x
====== ====== ===== =====
-----------------
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes both available for sale and held to maturity securities.
(3) Includes interest-bearing deposits at other banks federal funds purchased
and Federal Home Loan Bank of New York capital stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
54
Rate/Volume Analysis. The following table reflects the sensitivity of
Kearny Financial Corp.'s interest income and interest expense to changes in
volume and in prevailing interest rates during the periods indicated. Each
category reflects the: (1) changes in volume (changes in volume multiplied by
old rate); (2) changes in rate (changes in rate multiplied by old volume); and
(3) net change. The net change attributable to the combined impact of volume and
rate has been allocated proportionally to the absolute dollar amounts of change
in each.
Three Months
Ended September 30, Year Ended June 30, Year Ended June 30,
------------------------------- -------------------------------- ------------------------------
2004 vs. 2003 2004 vs. 2003 2003 vs. 2002
------------------------------- -------------------------------- ------------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------------- ------------------------------ --------------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ------ ----- ------ ------ ----- ------ ------ ----
(In thousands)
Interest and dividend income:
Loans receivable ............... $ 188 $ (715) $ (527) $ (2,989) $ (4,765) $ (7,754) $ (3,911) $ (2,674) $ (6,585)
Mortgage-backed securities
held to maturity ............. 1,115 (442) 673 (8,201) (5,583) (13,784) 1,674 (4,135) (2,461)
Investment securities:
Tax-exempt ................... 407 (83) 324 1,758 (402) 1,356 1,500 (220) 1,280
Taxable ...................... 472 (13) 459 3,968 (31) 3,937 1,427 (3,501) (2,074)
Securities purchased under
agreements to resell.......... (273) (273) (546) (270) (325) (595) 1,266 (627) 639
Other interest-earning assets .. (171) 39 (132) (323) (675) (998) 230 (699) (469)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets . $ 1,738 $ (1,487) $ 251 $ (6,057) $(11,781) $(17,838) $ 2,186 $(11,856) $ (9,670)
======== ======== ======== ======== ======== ======== ======== ======== ========
Interest expense:
Interest-bearing demand ........ $ (3) $ 2 $ (1) $ 112 $ (304) $ (192) $ 69 $ (284) $ (215)
Savings and club ............... 85 (608) (523) 456 (1,552) (1,096) 1,546 (2,815) (1,269)
Certificates of deposit ........ (582) (874) (1,456) (1,210) (9,328) (10,538) 3,157 (10,834) (7,677)
Advances from Federal
Home Loan Bank ............... 139 (214) (75) (1,138) 369 (769) (576) (11) (587)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ................ $ (361) $ (1,694) $ (2,055) $ (1,780) $(10,815) $(12,595) $ 4,196 $(13,944) $ (9,748)
======== ======== ======== ======== ======== ======== ======== ======== ========
Change in net interest income ... $ 2,099 $ 207 $ 2,306 $ (4,277) $ (966) $ (5,243) $ (2,010) $ 2,088 $ 78
======== ======== ======== ======== ======== ======== ======== ======== ========
55
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and
liabilities are sensitive to changes in interest rates, a significant form of
market risk for us is interest rate risk, or changes in interest rates.
Notwithstanding the unpredictability of future interest rates, management
expects that changes in interest rates may have a significant, adverse impact on
our net interest income.
Our ability to make a profit largely depends on our net interest
income, which could be negatively affected by changes in interest rates. Net
interest income is the difference between:
o the interest income we earn on our interest-earning assets, such as loans
and securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
The rates we earn on our assets are generally fixed for a contractual
period of time. We, like many savings institutions, have liabilities that
generally have shorter contractual maturities than our assets, such as
certificates of deposit, or have no stated maturity, such as savings and money
market deposits. This imbalance can create significant earnings volatility
because market interest rates change over time. In a period of rising interest
rates, the interest income earned on our assets, which consist primarily of
long-term, fixed-rate securities, may not increase as rapidly as the interest
paid on our liabilities.
We are vulnerable to volatility in our earnings as a result of an
increase in interest rates because the majority of our interest-earning assets
consist of long-term, fixed rate assets. At September 30, 2004, 84.9% of our
loans with contractual maturities of greater than one year had fixed rates of
interest, and 79.1% of our total loans had contractual maturities of ten or more
years. At September 30, 2004, we held $724.9 million of mortgage-backed
securities, representing 38.1% of our assets. We invest generally in fixed-rate
securities and substantially all of our mortgage-backed securities at September
30, 2004 had contractual maturities of ten or more years. In an increasing rate
environment, our cost of funds is expected to increase more rapidly than the
interest earned on our loan portfolio and securities portfolio because our
primary source of funds is deposits with generally shorter maturities than the
maturities on our loans and investment securities. Having interest-bearing
liabilities that reprice more frequently than interest-earning assets will be
detrimental during periods of rising interest rates and could cause our net
interest rate spread to shrink because the increase in the rates we would earn
on our securities and loan portfolios may be less than the increase in the rates
we would pay on deposits and borrowings.
In a period of falling interest rates, prepayments of loans and
mortgage-backed securities generally will increase as borrowers refinance their
debt in order to reduce their borrowing cost. This causes reinvestment risk,
because in a falling rate environment we are generally not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. A falling rate environment would result in a decrease in
rates we pay on deposits and borrowings, but the decrease in the cost of our
funds may not be as great as the decrease in the yields on our mortgage-backed
securities and loan portfolios. This could cause a narrowing of our net interest
rate spread and could cause a decrease in our earnings.
The Board of Directors has established an Interest Rate Risk Management
Committee, comprised of Directors Hopkins, Regan, Aanensen, Mazza and Parow,
which is responsible for monitoring interest rate risk. Our Chief Financial
Officer also participates in this committee as a management liaison. The
committee meets quarterly to address management of our assets and liabilities,
including review of our
56
short term liquidity position; loan and deposit pricing and production volumes
and alternative funding sources; current investments; average lives, durations
and repricing frequencies of loans and securities; and a variety of other asset
and liability management topics. The results of the committee's quarterly review
are reported to the full Board, which makes adjustments to our interest rate
risk policy and strategies as it considers necessary and appropriate.
Quantitative Analysis. The following tables present Kearny Federal
Savings Bank's net portfolio value as of September 30, 2004 and June 30, 2004,
respectively. The net portfolio values shown in these tables were calculated by
the Office of Thrift Supervision, based on information provided by Kearny
Federal Savings Bank.
At September 30, 2004
--------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
------------------- -------------------------------
Changes in Net Portfolio Basis Point
Rates(1) $ Amount $ Change % Change Value Ratio Change
-------- -------- -------- -------- ----------- ------
(Dollars in thousands)
+300 bp 166,167 -136,551 -45% 9.46% -635 bp
+200 bp 212,904 -89,814 -30% 11.76% -405 bp
+100 bp 258,914 -43,804 -14% 13.89% -191 bp
0 bp 302,718 15.81%
-100 bp 330,752 28,034 +9% 16.95% +114 bp
----------------
(1) The -200bp and -300bp scenarios are not shown due to the low prevailing
interest rate environment.
This analysis also indicated that as of September 30, 2004 an immediate
and permanent 2.0% increase in interest rates would cause an approximately 14%
decrease in our net interest income.
At June 30, 2004
------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
------------------------- -------------------------------
Changes in Net Portfolio Basis Point
Rates(1) $ Amount $ Change % Change Value Ratio Change
-------- -------- -------- -------- ----------- ------
(Dollars in thousands)
+300 bp 135,922 -145,263 -52% 7.70% -687 bp
+200 bp 184,947 -96,238 -34% 10.16% -441 bp
+100 bp 232,894 -48,291 -17% 12.42% -215 bp
0 bp 281,185 14.57%
- 100 bp 315,088 33,903 +12% 15.98% +141 bp
-------------
(1) The -200bp and -300bp scenarios are not shown due to the low prevailing
interest rate environment.
This analysis also indicated that as of June 30, 2004 an immediate and
permanent 2.0% increase in interest rates would cause an approximately 15%
decrease in our net interest income.
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous
57
assumptions, including relative levels of market interest rates, prepayments,
and deposit run-offs, and should not be relied upon as indicative of actual
results. Certain shortcomings are inherent in this type of computation. Although
certain assets and liabilities may have similar maturity or periods of
repricing, they may react at different times and in different degrees to changes
in the market interest rates. The interest rate on certain types of assets and
liabilities, such as demand deposits and savings accounts, may fluctuate in
advance of changes in market interest rates, while rates on other types of
assets and liabilities may lag behind changes in market interest rates. Certain
assets, such as adjustable rate mortgages, generally have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making
calculations set forth above. Additionally, an increased credit risk may result
as the ability of many borrowers to service their debt may decrease in the event
of an interest rate increase.
Notwithstanding the discussion above, the quantitative interest rate
analysis presented above indicates that a rapid increase in interest rates would
adversely affect our net interest margin and earnings.
Liquidity and Commitments
We are required to have enough investments that qualify as liquid
assets in order to maintain sufficient liquidity to ensure a safe and sound
operation. Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans.
Historically, we have maintained liquid assets above levels believed to be
adequate to meet the requirements of normal operations, including potential
deposit outflows. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained.
Our liquidity, represented by cash and cash equivalents, is a product
of our operating, investing and financing activities. The largest use of cash by
investing activities during the year ended June 30, 2004 was to fund the
purchase of $425.1 million of mortgage-backed securities. At June 30, 2004, our
cash and cash equivalents totaled $39.5 million, as compared to $325.7 million
at June 30, 2003. Heavy prepayments of mortgage-backed securities and loans
receivable were experienced during the year ended June 30, 2003 and a
significant portion of these funds received were maintained in cash equivalents
pending reinvestment in the securities portfolios. Cash and cash equivalents
increased by 235.8%, to $325.7 million at June 30, 2003 from $97.0 million at
June 30, 2002. The decrease in cash and cash equivalents during 2004 also offset
a decrease in cash provided by financing activities as total deposits declined
during 2004 by $76.2 million compared to an increase in total deposits during
2003 of $134.0 million.
Our primary sources of funds are deposits, amortization, prepayments
and maturities of mortgage-backed securities and outstanding loans, maturities
of investment securities and other short-term investments and funds provided
from operations. 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, deposit flows and loan
and mortgage-backed securities prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, we invest
excess funds in short-term interest-earning assets, which provide liquidity to
meet lending requirements. We also generate cash through borrowings.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. agency securities. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing
58
certificates of deposit and savings withdrawals, to fund loan commitments and to
maintain our portfolio of mortgage-backed securities and investment securities.
At September 30, 2004, the total approved loan origination commitments
outstanding amounted to $11.7 million and commitments to purchase participation
interests in loans totaled $607,000. At the same date, unused lines of credit
were $28.7 million and construction loans in process were $5.6 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
2004, totaled $668.7 million. Although the average cost of deposits decreased
throughout 2004, management's policy is to maintain deposit rates at levels that
are competitive with other local financial institutions. Based on the
competitive rates and on historical experience, management believes that a
significant portion of maturing deposits will remain with Kearny Federal Savings
Bank. At September 30, 2004, the total collateralized borrowing limit was $97.8
million, of which we had $84.1 million outstanding, giving us the ability at
September 30, 2004, to borrow an additional $13.7 million from the Federal Home
Loan Bank of New York as a funding source to meet commitments and for liquidity
purposes.
If the need for additional borrowing arises, we have the option of
pledging additional collateral to significantly increase our collateralized
borrowing limit and enable us to obtain advances up to a total borrowing limit
of 25% of our assets. For example, in the event that we are unable or unwilling
to pay market rates on the significant amount of certificates of deposit
maturing in one year or less, we could obtain replacement funding by pledging
additional collateral, thus securing a greater borrowing limit and generating
the ability to borrow additional funds from the Federal Home Loan Bank. At
September 30, 2004, our total Federal Home Loan Bank borrowing limit was $476.1
million and we had the ability to pledge additional collateral to increase our
collateralized borrowing limit from $97.8 million to the full $476.1 million
limit. At September 30, 2004, we had $1.21 billion of securities we could pledge
as collateral in order to obtain secured borrowings, of which $97.8 million was
pledged.
As noted above, loan prepayments are greatly influenced by general
interest rates. At September 30, 2004, 82.8% of our loan portfolio consisted of
fixed rate loans with maturities of greater than one year. If a rising interest
rate environment were to occur, our liquidity would be affected because we would
expect that the rate of prepayments on fixed rate loans would decrease, thus
decreasing the amount of funds coming from prepayments and reducing our
liquidity.
The following table discloses our contractual obligations and
commitments as of September 30, 2004.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
------- --------- --------- --------- --------
(In thousands)
Federal Home Loan Bank advances........... $84,100 $22,556 $6,217 $45,327 $10,000
------- ------- ------ ------- -------
Total................................. $84,100 $22,556 $6,217 $45,327 $10,000
======= ======= ====== ======= =======
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 Years
--------- -------- --------- --------- --------
(In thousands)
Lines of credit(1)........................ $28,668 $ - $5,118 $ - $23,550
Construction loans in process............. 2,862 2,862 - - -
Other commitments to extend credit(1)..... 9,449 9,449 - - -
------- ------- ------ ------- -------
Total................................. $40,979 $12,311 $5,118 $ - $23,550
======= ======= ====== ======= =======
----------------
(1) Represents amounts committed to customers.
59
Our material capital expenditure plans include the completion of our
new administrative building in Fairfield, New Jersey with anticipated
post-September 30, 2004 expenditures of $3.3 million. The total cost of this
building is expected to be approximately $13.5 million, which cost will be
capitalized and amortized over a forty-year period. Our capital expenditure
plans also include the Lacey, New Jersey de novo branch office, expected to open
in the first quarter of 2005. The total cost of the Lacey office is estimated to
be approximately $2.3 million. Additional capital expenditure plans relate to
renovations and significant improvements to seven branch offices, which includes
the replacement of three office locations with new buildings. We expect to
complete such renovations, improvements and construction by the end of calendar
year 2005, and we anticipate approximately $7.1 million in funds will be
required for the plans related to these seven offices. Furthermore, in December
of 2004, we acquired a 3.7 acre parcel of land in West Caldwell, New Jersey. We
intend to construct a branch office at this location and subdivide and lease to
third parties the portion of land not used for the branch building.
The general business purpose of these expenditures is to maintain and
improve Kearny Federal Savings Bank's facilities. We anticipate that cash flows
from our normal operations will be a sufficient source of funds for these
expenditure plans.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in
the normal course of our business of investing in loans and securities as well
as in the normal course of maintaining and improving Kearny Federal Savings
Bank's facilities. These financial instruments include significant purchase
commitments, such as commitments related to capital expenditure plans and
commitments to purchase investment securities or mortgage-backed securities, and
commitments to extend credit to meet the financing needs of our customers. At
September 30, 2004, we had no significant off-balance sheet commitments to
purchase securities and our significant purchase commitments as of September 30,
2004 related to capital expenditure plans consisted of anticipated
post-September 30, 2004 expenditures of approximately $3.3 million in connection
with the completion of our new administrative building in Fairfield, New Jersey.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance-sheet instruments. At September
30, 2004, the total approved loan origination commitments outstanding amounted
to $11.7 million and commitments to purchase participation interests in loans
totaled $607,000. At the same date, unused lines of credit were $28.7 million
and construction loans in process were $5.6 million. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. For
additional information regarding our outstanding lending commitments at
September 30, 2004, see Note 16 to the consolidated financial statements
beginning on page F-1.
Capital
Consistent with its goals to operate a sound and profitable financial
organization, Kearny Federal Savings Bank actively seeks to maintain a well
capitalized institution in accordance with regulatory standards. As of September
30, 2004, Kearny Federal Savings Bank exceeded all capital requirements of
60
the Office of Thrift Supervision. Kearny Federal Savings Bank's regulatory
capital ratios at September 30, 2004 were as follows: core capital 11.15%; Tier
I risk-based capital 31.27%; and total risk-based capital 33.18%. The regulatory
capital requirements to be considered well capitalized are 5.0%, 6.0% and 10.0%,
respectively.
Impact of Inflation
The financial statements included in this document have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels
of interest rates, is in the area of non-interest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effects of the method used on reported
results.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment." This statement revises the original guidance contained in
SFAS No. 123 and supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees, and its related implementation
guidance. Under SFAS No. 123 (revised 2004), a public entity such as Kearny
Financial Corp. will be required to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions) and recognize such cost over
the period during which an employee is required to provide service in exchange
for the reward (usually the vesting period). For stock options and similar
instruments, grant-date fair value will be estimated using option-pricing models
adjusted for the unique characteristics of instruments (unless observable market
prices for the same or similar instruments are available). For public entities,
such as Kearny Financial Corp., that do not or will not file as small business
issuers, SFAS No. 123 (revised 2004)
61
is effective as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005.
The aforementioned pronouncements related to stock-based payments have
no effect on Kearny Financial Corp.'s historical consolidated financial
statements as we do not currently have any stock-based payment plans. However,
the stock-based payment plans contemplated within this document, consisting of
the stock option and restricted stock award plans, will be subject to the
provisions of SFAS No. 123 (revised 2004). While the actual costs of our
stock-based payment plans will be based on grant-date fair value, which cannot
be determined at this time, additional information on the possible future costs
of these plans can be found in the section of this document entitled Pro Forma
Data, which appears on pages 24 to 30.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after September 30, 2003, and for hedging relationships designated
after September 30, 2003. The guidance should be applied prospectively. The
provisions of this statement that relate to SFAS No. 133, "Implementation
Issues," that have been effective for fiscal quarters that began prior to
September 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist should be applied to existing contracts as well as new contracts entered
into after September 30, 2003. The adoption of this statement did not have a
material effect on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Such
instruments may have been previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after September 15, 2003. The adoption of this statement did not have
a material effect on our reported equity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
This interpretation clarifies that a guarantor is required to disclose: the
nature of the guarantee, including the approximate term of the guarantee, how
the guarantee arose, and the events or circumstances that would require the
guarantor to perform under the guarantee; the maximum potential amount of future
payments under the guarantee; the carrying amount of the liability, if any, for
the guarantor's obligations under the guarantee; and the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the
62
amounts paid under the guarantee. This interpretation also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the obligations it has undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
objective of the initial measurement of that liability is the fair value of the
guarantee at its inception. The initial recognition and initial measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this interpretation did not have a material
effect on our financial position or results of operations.
In December 2003, the FASB issued a revision to Interpretation 46,
"Consolidation of Variable Interest Entities," which established standards for
identifying a variable interest entity ("VIE") and for determining under what
circumstances a VIE should be consolidated with its primary beneficiary.
Application of this Interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers must
apply this Interpretation to all other types of VIEs at the end of the first
reporting period ending after December 15, 2004. The adoption of this
Interpretation has not had and is not expected to have a material effect on our
financial position or results of operations.
BUSINESS OF KEARNY MHC
Kearny MHC is a federal mutual holding company and is subject to
regulation by the Office of Thrift Supervision. Kearny MHC currently owns 100%
of the outstanding common stock of Kearny Financial Corp. So long as Kearny MHC
is in existence, it will at all times own a majority of the outstanding common
stock of Kearny Financial Corp.
The primary business activity of Kearny MHC going forward will continue
to be owning a majority of Kearny Financial Corp.'s common stock. Kearny MHC,
however, is authorized to engage in any other business activities that are
permissible for mutual holding companies under federal law, including investing
in loans and securities. Kearny MHC does not maintain offices separate from
those of Kearny Federal Savings Bank or employ any persons other than certain of
Kearny Federal Savings Bank's officers. Officers of Kearny MHC are not
separately compensated for their service.
BUSINESS OF KEARNY FINANCIAL CORP.
Kearny Financial Corp. is a federal mutual holding company subsidiary
and is subject to regulation by the Office of Thrift Supervision. It was
organized for the purpose of being a holding company for Kearny Federal Savings
Bank.
Kearny Financial Corp.'s primary activity is and will continue to be
holding all of the stock of Kearny Federal Savings Bank. Kearny Financial Corp.
intends to invest the proceeds of the offering as discussed under Use of
Proceeds on page 21. Kearny Financial Corp. does not maintain offices separate
from those of Kearny Federal Savings Bank or employ any persons other than
certain of Kearny Federal Savings Bank's officers. Officers of Kearny Financial
Corp. are not separately compensated for their service.
63
BUSINESS OF KEARNY FEDERAL SAVINGS BANK
General
Kearny Federal Savings Bank is a federally-chartered stock savings
bank. We were originally founded in 1884 as a New Jersey mutual building and
loan association under the name "Kearny Building and Loan Association." We
obtained federal insurance of accounts in 1939 and received our federal charter
in 1941. We changed our name from Kearny Federal Savings and Loan Association to
Kearny Federal Savings Bank in 1995. Kearny Federal Savings Bank's deposits are
federally insured by the Savings Association Insurance Fund as administered by
the Federal Deposit Insurance Corporation. Kearny Federal Savings Bank is
regulated by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation.
Our primary business is attracting retail deposits from the general
public and using those deposits, together with funds generated from operations,
principal repayments on securities and loans and borrowed funds, for our
investing and lending activities. We invest in mortgage-backed securities, U.S.
government obligations, obligations of state and political subdivisions and
other securities. Our loan portfolio consists of one- to four-family residential
mortgage loans, multi-family and commercial mortgage loans, construction loans,
commercial business loans, home equity loans and lines of credit, and other
consumer loans. Our interest-earning assets consist primarily of mortgage-backed
securities and investment securities, which comprised 63.6% of our total assets
while our loan portfolio comprised 27.1% of our total assets at September 30,
2004. We intend to increase the balance of our loan portfolio relative to the
size of our securities portfolio, however, such a change will take time and, in
the near future, our assets will continue to consist primarily of securities.
Market Area. We currently operate from our main office in Kearny, New
Jersey, and twenty-four branch offices located in Bergen, Hudson, Passaic,
Morris, Middlesex, Essex, Union and Ocean Counties, New Jersey. We also consider
Monmouth County, New Jersey to be part of our market area.
Our lending is concentrated in the nine New Jersey counties named
above, and our predominant sources of deposits are the communities in which our
offices are located as well as the neighboring communities.
Our primary market area is largely urban and suburban with a broad
economic base as is typical with counties in the New York metropolitan area.
Service jobs represent the largest employment sector followed by
wholesale/retail trade. Unemployment rates in our primary market area counties,
as of June 2004, ranged from a low of 3.4% to a high of 6.8% compared to the New
Jersey statewide average of 4.7%. Essex, Hudson, Passaic and Union counties had
unemployment rates above the statewide measure and Bergen, Middlesex, Morris and
Ocean counties had unemployment rates below the statewide measure. Morris,
Bergen, Middlesex and Union counties had median household incomes of
approximately $87,000, $74,000, $68,000 and $62,000, respectively, compared to
the New Jersey median of $61,000, while Essex, Hudson, Ocean and Passaic
counties had median household incomes ranging from $44,000 to $54,000.
Our business of attracting deposits and making loans is primarily
conducted within our market area. A downturn in the local economy could reduce
the amount of funds available for deposit and the ability of borrowers to repay
their loans. As a result, our profitability could decrease.
64
Competition. We operate in a market area with a high concentration of
banking and financial institutions, and we face substantial competition in
attracting deposits and in originating loans. A number of our competitors are
significantly larger institutions with greater financial and managerial
resources and lending limits. Our ability to compete successfully is a
significant factor affecting our growth potential and profitability.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions, and credit unions located in our primary market area. We
also compete with mortgage banking and finance companies for real estate loans
and with commercial banks and savings institutions for consumer loans, and we
face competition for funds from investment products such as mutual funds,
short-term money funds and corporate and government securities. Based on Federal
Deposit Insurance Corporation data as of June 30, 2004 (the most current
available information), our deposit market share in New Jersey was only 0.7% at
June 30, 2004, a reduction from 0.8% at June 30, 2003, and the largest deposit
share in any county in which we have branches was 2.5% at June 30, 2004 in
Bergen County, down from 2.8% at June 30, 2003. There are large competitors
operating throughout our total market area, including Bank of America, Commerce
Bank, Wachovia Bank and PNC Bank, and we also face strong competition from other
community-based financial institutions.
Lending Activities
General. We have traditionally focused on the origination of one- to
four-family loans, which comprise a significant majority of the total loan
portfolio. We also provide financing on multi-family dwellings, mixed-use
properties and other commercial real estate. Consumer lending is our next
largest category of lending, primarily composed of home equity loans and lines
of credit. We also originate construction loans and commercial business loans,
generally secured by real estate.
65
Loan Portfolio Composition. The following table analyzes the
composition of our loan portfolio by loan category at the dates indicated.
At September 30, At June 30,
----------------- ---------------------------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
----------------- ---------------- ----------------------------------- -------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(In thousands)
Type of Loans:
--------------
Real estate mortgage -
one-to-four family. $370,883 71.37% $358,241 70.22% $366,391 71.50% $458,969 77.24% $468,846 77.42% $464,999 78.07%
Real estate mortgage -
multi-family and
commercial.......... 82,945 15.96 83,426 16.35 71,099 13.88 59,418 10.00 57,013 9.42 50,536 8.48
Commercial business... 3,877 0.75 5,161 1.01 2,353 0.46 6,704 1.13 4,325 0.71 537 0.09
Consumer:
Home equity loans.. 38,494 7.41 37,381 7.33 37,315 7.28 36,750 6.19 39,492 6.52 34,840 5.85
Home equity lines
of credit........ 15,615 3.00 15,677 3.07 19,905 3.89 19,183 3.23 12,641 2.09 10,340 1.74
Passbook or
certificate...... 2,667 0.51 2,746 0.54 2,895 0.56 3,044 0.51 3,539 0.59 3,456 0.58
Other.............. 319 0.06 336 0.07 1,273 0.25 1,111 0.18 1,405 0.23 1,787 0.30
Construction.......... 4,881 0.94 7,212 1.41 11,183 2.18 9,030 1.52 18,299 3.02 29,125 4.89
-------- ------- -------- ------- -------- ------- -------- ------ -------- ------ -------- ------
Total loans...... 519,681 100.00% 510,180 100.00% 512,414 100.00% 594,209 100.00% 605,560 100.00% 595,620 100.00%
-------- ======= -------- ====== -------- ======= -------- ====== -------- ====== -------- ======
Less:
Allowance for loan
losses.......... 5,290 5,144 5,180 5,170 5,167 5,093
Deferred loan (costs)
and fees, net... (805) (758) (1,927) (2,103) (1,789) (1,423)
-------- -------- -------- -------- -------- --------
4,485 4,386 3,253 3,067 3,378 3,670
-------- -------- -------- -------- -------- --------
Total loans, net. $515,196 $505,794 $509,161 $591,142 $602,182 $591,950
======== ======== ======== ======== ======== ========
66
Loan Maturity Schedule. The following tables set forth the maturity of
our loan portfolio at September 30, 2004 and June 30, 2004, respectively. Demand
loans, loans having no stated maturity, and overdrafts are shown as due in one
year or less. Loans are stated in the following tables at contractual maturity
and actual maturities could differ due to prepayments.
At September 30, 2004
-------------------------------------------------------------------------------------------------------------
Real estate Real estate Home
mortgage mortgage - Home equity Passbook
one-to-four multi-family Commercial equity lines of or
family and commercial business loans credit certificate Other Construction Total
--------- -------------- ----------- ------ -------- ------------ ----- ------------- -----
(In thousands)
Amounts Due:
Within 1 Year...... $ 245 $ 1,390 $3,763 $ 111 $ 245 $2,232 $136 $4,881 $ 13,003
-------- ------- ------ ------- ------- ------ ---- ------ --------
After 1 year:
1 to 3 years..... 3,601 755 70 4,586 303 386 72 - 9,773
3 to 5 years..... 6,824 4,706 44 3,034 648 15 14 - 15,285
5 to 10 years.... 46,461 10,762 - 12,339 892 15 - - 70,469
10 to 15 years... 135,101 25,099 - 17,567 6,492 19 - - 184,278
Over 15 years.... 178,651 40,233 - 857 7,035 - 97 - 226,873
-------- ------- ------ ------- ------- ------ ---- ------ --------
Total due after
one year......... 370,638 81,555 114 38,383 15,370 435 183 - 506,678
-------- ------- ------ ------- ------- ------ ---- ------ --------
Total amount due... $370,883 $82,945 $3,877 $38,494 $15,615 $2,667 $319 $4,881 $519,681
======== ======= ====== ======= ======= ====== ==== ====== ========
At June 30, 2004
-------------------------------------------------------------------------------------------------------------
Real estate Real estate Home
mortgage mortgage - Home equity Passbook
one-to-four multi-family Commercial equity lines of or
family and commercial business loans credit certificate Other Construction Total
--------- -------------- ----------- ------ -------- ------------ ----- ------------- -----
(In thousands)
Amounts Due:
Within 1 Year...... $ 256 $ 1,156 $ 5,041 $ 67 $ 358 $2,486 $ 133 $7,212 $16,709
-------- ------- ------ ------- ------- ------ ---- ------ --------
After 1 year:
1 to 3 years..... 1,242 842 75 1,064 158 124 67 - 3,572
3 to 5 years..... 6,280 999 - 5,566 155 94 38 - 13,132
5 to 10 years.... 40,770 11,002 45 10,328 972 - - - 63,117
10 to 15 years... 129,883 24,663 - 16,912 5,708 42 - - 177,208
Over 15 years.... 179,810 44,764 - 3,444 8,326 - 98 - 236,442
-------- ------- ------ ------- ------- ------ ---- ------ --------
Total due after
one year......... 357,985 82,270 120 37,314 15,319 260 203 - 493,471
-------- ------- ------ ------- ------- ------ ---- ------ --------
Total amount due... $358,241 $83,426 $5,161 $37,381 $15,677 $2,746 $336 $7,212 $510,180
======== ======= ====== ======= ======= ====== ==== ====== ========
67
The following table sets forth the dollar amount of all loans at
September 30, 2004 that are due after September 30, 2005.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Real estate mortgage -
one-to-four family............ $336,929 $33,709 $370,638
Real estate mortgage - 53,299 28,256 81,555
multi-family and commercial...
Commercial business............. 100 14 114
Consumer:
Home equity loans............ 38,383 - 38,383
Home equity lines of credit.. 1,305 14,065 15,370
Passbook or certificate...... - 435 435
Other........................ 172 11 183
Construction................. - - -
-------- ------- --------
Total.................... $430,188 $76,490 $506,678
======== ======= ========
The following table sets forth the dollar amount of all loans at June
30, 2004 that are due after June 30, 2005.
Floating or
Fixed Rates Adjustable Rates Total
------------ --------------- -----
(In thousands)
Real estate mortgage -
one-to-four family............ $313,757 $44,228 $357,985
Real estate mortgage -
multi-family and commercial... 45,667 36,603 82,270
Commercial business............. 105 15 120
Consumer:
Home equity loans............ 37,314 - 37,314
Home equity lines of credit.. 1,093 14,226 15,319
Passbook or certificate...... - 260 260
Other........................ 190 13 203
Construction................. - - -
-------- ------- --------
Total.................... $398,126 $95,345 $493,471
======== ======= ========
One- to Four-Family Mortgage Loans. Our primary lending activity
consists of the origination of one- to four-family first mortgage loans, nearly
all of which are secured by property located in New Jersey.
We will originate a one- to four-family mortgage loan on an owner
occupied property with principal amounts up to 95% of the lesser of the
appraised value or the purchase price of the property, with private mortgage
insurance required for loans with a loan to value ratio exceeding 80%. The loan
to value limit on a non-owner occupied property is 75%. Loans in excess of
$750,000 are handled on a case by case basis and are subject to lower loan to
value limits, generally no more than 50%.
68
Our fixed rate and adjustable rate residential mortgage loans on owner
occupied properties have terms of ten to thirty years. Residential mortgage
loans on non-owner occupied properties have terms up to fifteen years for fixed
rate loans and terms up to twenty years for adjustable rate loans. We also offer
ten-year balloon mortgages with a thirty year amortization schedule on owner
occupied properties and a twenty year amortization schedule on non-owner
occupied properties.
Our adjustable rate loan products provide for an interest rate that is
tied to the one-year Constant Maturity U.S. Treasury index and have terms of up
to thirty years with initial fixed rate periods of one, three, five, seven, or
ten years according to the terms of the loan and annual rate adjustment
thereafter. We also offer an adjustable rate loan with a term up to thirty years
with a rate that adjusts every five years to the five-year Constant Maturity
U.S. Treasury index. There is a 200 basis point limit on the rate adjustment in
any adjustment period, and the rate adjustment limit over the life of the loan
is 600 basis points. We emphasize the origination of adjustable rate loans,
however, as a result of the low interest rate environment of the last several
years, customer demand has recently been primarily for fixed rate loans.
We offer a first time home buyer program for persons who have not
previously owned real estate and are purchasing a one- to four-family property
in Bergen, Passaic, Morris, Essex, Hudson, Middlesex, Monmouth, Ocean and Union
Counties, New Jersey for use as a primary residence. This program is also
available outside these areas only to persons who are existing deposit or loan
customers of Kearny Federal Savings Bank and/or members of their immediate
families. The financial incentives offered under this program are a one-quarter
of one percent rate reduction on all first mortgage loan types and the refund of
the application fee at closing.
The fixed rate mortgage loans that we originate generally meet the
secondary mortgage market standards of the Federal Home Loan Mortgage
Corporation. However, as our focus is on growing the size of the loan portfolio,
we generally do not sell loans in the secondary market and do not currently
anticipate that we will commence doing so in any large capacity. There were no
residential mortgage loan sales during the last three fiscal years.
Substantially all of our residential mortgages include "due on sale"
clauses, which are provisions giving us the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party. Property appraisals on real estate securing our one- to
four-family residential loans are made by state certified or licensed
independent appraisers approved by the Board of Directors. Appraisals are
performed in accordance with applicable regulations and policies. We require
title insurance policies on all first mortgage real estate loans originated.
Homeowners, liability, fire and, if applicable, flood insurance policies are
also required.
Multi-family and Commercial Real Estate Mortgage Loans. We also
originate mortgage loans on multi-family and commercial real estate properties,
including loans on apartment buildings, retail/service properties, and other
income-producing properties, including mixed-use properties combining
residential and commercial space. Going forward, we intend to increase the size
of this portfolio.
We generally require no less than a 30% down payment or equity position
for mortgage loans on multi-family and commercial real estate properties, and we
require personal guarantees on all such loans. Currently, these loans are made
with a maturity of up to 15 years. We also offer a five year balloon loan with a
twenty year amortization schedule. All of our multi-family and commercial real
estate mortgage loans are on properties within New Jersey.
69
Multi-family and commercial real estate mortgage loans generally are
considered to entail significantly greater risk than that which is involved with
one- to four-family real estate lending. The repayment of these loans typically
is dependent on the successful operations and income stream of the borrower and
the real estate securing the loan as collateral. These risks can be
significantly affected by economic conditions. In addition, multi-family and
commercial real estate mortgage loans generally carry larger balances to single
borrowers or related groups of borrowers than one- to four-family loans. Multi-
family and commercial real estate lending also generally requires substantially
greater evaluation and oversight efforts compared to residential real estate
lending.
Commercial Business Loans. We also originate commercial term loans and
lines of credit to a variety of professionals, sole proprietorships and small
businesses in our market area. These loans are generally secured by real estate,
and we require personal guarantees on all commercial loans. Marketable
securities are also accepted as collateral on lines of credit, but with a loan
to value limit of 50%. The loan to value limit on secured commercial lines of
credit and term loans is otherwise generally limited to 70%. We also make
unsecured commercial loans in the form of overdraft checking authorization up to
$25,000 and unsecured lines of credit up to $25,000.
Our commercial term loans generally have terms up to fifteen years and
are mostly fixed rate loans. Our commercial lines of credit have terms up to two
years and are mostly adjustable rate loans. We also offer a one-year interest
only commercial line of credit with balloon payment.
Unlike single-family residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income and which are secured by real property whose value
tends to be more easily ascertainable, commercial business loans typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself and the general economic environment. Commercial
business loans, therefore, have greater credit risk than residential mortgage
loans. In addition, commercial loans generally carry larger balances to single
borrowers or related groups of borrowers than one- to four-family loans.
Commercial lending also generally requires substantially greater evaluation and
oversight efforts compared to residential or non-residential real estate
lending.
Home Equity Loans and Lines of Credit. Our home equity loans are fixed
rate loans for terms of generally up to fifteen years. We also offer fixed and
adjustable rate home equity lines of credit with terms up to fifteen years. We
still have in this portfolio a substantial amount of twenty-year home equity
loans originated by Pulaski Savings Bank, which we acquired in 2002. Collateral
value is determined through a property value analysis report (FHLMC Form 704) by
a state certified or licensed independent appraiser, and in some cases, by a
full appraisal performed by a state certified or licensed independent appraiser.
Home equity loans and lines of credit do not require title insurance but do
require homeowner, liability, fire and, if applicable, flood insurance policies.
Home equity loans and fixed rate home equity lines of credit are
primarily originated in our market area and are generally made in amounts of up
to 80% of value on term loans and up to 75% of value on home equity adjustable
rate lines of credit. We originate home equity loans secured by either a first
lien or a second lien on the property.
Other Consumer Loans. In addition to home equity loans and lines of
credit, our consumer loan portfolio at September 30, 2004 also included savings
secured (passbook) loans and unsecured personal overdraft loans. We will
generally lend up to 90% of the account balance on a savings secured loan.
70
Consumer loans entail greater risks than residential mortgage loans,
particularly consumer loans that are unsecured. Consumer loan repayment is
dependent on the borrower's continuing financial stability and is more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy. The
application of various federal laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on consumer loans
in the event of a default.
Our underwriting standards for consumer loans include a determination
of the applicant's credit history and an assessment of the applicant's ability
to meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment and any additional verifiable secondary
income.
We previously made student education loans. We sold this portfolio to
Sallie Mae during the year ended June 30, 2003. Additionally, in our
acquisitions of Pulaski Savings Bank and West Essex Bank, we acquired small
portfolios of automobile loans and personal overdraft accounts. The balance of
automobile loans and unsecured personal loans remaining at September 30, 2004
was $31,000 and $132,000, respectively. Kearny Federal Savings Bank began
offering unsecured personal overdraft loans of up to $2,500 to its customers in
September 2004.
Construction Lending. Our construction lending includes loans to
individuals for construction of one- to four-family residences or for major
renovations or improvements to an existing dwelling. Our construction lending
also includes loans to builders and developers for multi-unit buildings or
multi-house projects. All of our construction lending is in New Jersey.
Construction borrowers must hold title to the land free and clear of
any liens. Financing for construction loans is limited to 80% of the anticipated
appraised value of the completed property. Disbursements are made in accordance
with inspection reports by our approved appraisal firms. Terms of financing are
limited to one year with an interest rate tied to the prime rate and may include
a premium of one or more points. In some cases, we convert a construction loan
to a permanent mortgage loan upon completion of construction.
We have no formal limits as to the number of projects a builder has
under construction or development, and make a case by case determination on
loans to builders and developers who have multiple projects under development.
Loans to builders and developers must be approved by the Board of Directors
before the borrower's application can be accepted. We generally do not make
construction loans to builders on a speculative basis, without a contract in
place. Financing is only provided for up to two houses at a time in a
multi-house project, requiring a contract on one of the two houses before
financing for the next house may be obtained.
Construction lending is generally considered to involve a higher degree
of credit risk than mortgage lending. If the estimate of construction cost
proves to be inaccurate, we may be compelled to advance additional funds to
complete the construction with repayment dependent, in part, on the success of
the ultimate project rather than the ability of a borrower or guarantor to repay
the loan. If we are forced to foreclose on a project prior to completion, there
is no assurance that we will be able to recover all of the unpaid portion of the
loan. In addition, we may be required to fund additional amounts to complete a
project and may have to hold the property for an indeterminate period of time.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the
71
institution's unimpaired capital and surplus. Accordingly, as of September 30,
2004, our loans to one borrower limit was approximately $32.0 million.
At September 30, 2004, our largest single borrower had an aggregate
loan balance of approximately $9.8 million, representing two mortgage loans
secured by commercial real estate, one commercial line of credit secured by real
estate, and one residential mortgage loan. Our second largest single borrower
had an aggregate loan balance of approximately $6.4 million, representing three
loans secured by commercial real estate and one commercial line of credit
secured by real estate. Our third largest borrower had an aggregate loan balance
of approximately $4.0 million, representing two loans secured by commercial real
estate. At September 30, 2004, all of these lending relationships were current
and performing in accordance with the terms of their loan agreements.
Loan Originations, Purchases, Sales, Solicitation and Processing. The
following table shows total loans originated, purchased and repaid during the
periods indicated. During the periods indicated, we did not sell any loans other
than the sale of the student loan portfolio to Sallie Mae during the year ended
June 30, 2003.
For the Three
Months Ended
September 30, For the Year Ended June 30,
------------- ---------------------------
2004 2003 2004 2003 2002
---- ---- ---- ---- ----
(In thousands)
Loan originations and purchases:
Loan originations:
Real estate mortgage - one-to-four family...... $27,778 $19,903 $ 69,550 $ 87,545 $119,373
Real estate mortgage -
multi-family and commercial.................. 924 13,567 26,052 17,227 14,564
Commercial business............................ 145 1,436 5,631 1,714 3,700
Construction................................... 1,040 1,943 6,864 7,662 11,631
Consumer:
Home equity loans and lines of credit.......... 7,122 6,894 31,656 45,328 35,165
Passbook or certificate........................ 437 435 1,830 2,693 3,186
Other.......................................... 68 64 266 101 89
-------- -------- -------- -------- --------
Total loan originations.......................... 37,514 44,242 141,849 162,270 187,708
-------- -------- -------- -------- --------
Loan purchases:
Real estate mortgage - one-to-four family...... - - 14,262 - 5,328
Real estate mortgage -
multi-family and commercial.................. - 407 762 5,687 4,256
-------- -------- -------- -------- --------
Total loan purchases............................. - 407 15,024 5,687 9,584
-------- -------- -------- -------- --------
Loans sold (student loan portfolio).............. - - - (338) -
Loan principal repayments........................ (28,659) (60,363) (157,906) (249,414) (208,643)
-------- -------- -------- -------- --------
Total loans sold and principal repayments........ (28,659) (60,363) (157,906) (249,752) (208,643)
-------- -------- -------- -------- --------
Increase (decrease) due to other items............. 547 (2,589) (2,334) (186) 311
-------- -------- -------- -------- --------
Net (decrease) in loan portfolio................... $ 9,402 $(18,303) $ (3,367) $(81,981) $(11,040)
======== ======== ======== ======== ========
Our customary sources of loan applications include repeat customers,
referrals from realtors and other professionals and "walk-in" customers. Our
residential loan originations are largely advertising driven. On the commercial
lending side, we have recently hired four experienced business development
officers who focus on commercial loan originations and we expect to further
increase staffing in this area.
72
We primarily originate our own loans and retain them in our portfolio.
As part of our loan growth strategy, we generally do not sell loans in the
secondary market and do not currently anticipate that we will commence doing so
in any large capacity. There were no whole loan sales during the three years
ended June 30, 2004 other than the sale of the student loan portfolio. Gross
loan originations totaled $141.8 million for the year ended June 30, 2004.
Principal repayments exceeded loan originations by approximately $16.1 million
for the fiscal year ended June 30, 2004.
During the years ended June 30, 2004, 2003 and 2002, we purchased $14.3
million, $0 and $5.3 million of one- to four-family mortgage loans, consisting
mostly of fifteen and twenty year fixed rate loans with servicing retained by
the seller. These loans were purchased with recourse for a limited period of
time. In accordance with the terms of the loan purchase agreements for loan
purchases in the years ended June 30, 2004 and 2003, any loan purchased that
became delinquent for a period of 60 days within six months from the date of the
purchase of the loan was permitted to be returned to and repurchased by the
selling bank with a refund to Kearny Federal Savings Bank of the unamortized
portion of the premium paid for that loan. As of September 30, 2004, the
recourse period has expired for these loan purchases.
We will continue to actively consider the purchase of loans as
opportunities present themselves. Additionally, we have in the past purchased
first mortgage loans on a forward commitment basis from a New Jersey located
mortgage broker and may in the future enter into such arrangements with such
broker or with other parties on a forward commitment basis.
In addition to purchasing one- to four-family loans, we also
occasionally purchase participations in loans originated by other banks and also
through the Thrift Institutions Community Investment Corporation of New Jersey
("TICIC"). At September 30, 2004, our TICIC participations included multi-
family and commercial real estate properties. The aggregate balance of TICIC
participations at September 30, 2004 was $9.8 million and the average balance on
a single participation was approximately $257,000. At September 30, 2004, we had
a total of five non-TICIC participations with an aggregate balance of $8.8
million, consisting of loans on commercial real estate properties, including a
medical center, a self storage facility, a shopping plaza and commercial
buildings with a combination of retail and office space.
Loan Approval Procedures and Authority. Our lending policies and loan
approval limits are recommended by senior management and approved by the Board
of Directors. Our Senior Vice President/Chief Lending Officer may approve loans
up to $500,000. Assistant vice presidents of Kearny Federal Savings Bank in the
following positions may approve loans as follows: mortgage loan managers,
mortgage loans up to $250,000; consumer loan managers, consumer loans up to
$100,000; and consumer loan underwriters, consumer loans up to $50,000. In
addition to these principal amount limits, there are established limits for the
different levels of approval authority as to minimum credit scores and maximum
loan to value ratios and debt ratios. Members of the Loan Committee, comprised
of four senior officers, our President and Chief Executive Officer, Senior Vice
President/Chief Financial Officer, Senior Vice President/Treasurer and Senior
Vice President/Chief Lending Officer, each have individual authorization to
approve loans up to $500,000. Loans between $500,000 and $750,000 must be
approved by at least two members of the Loan Committee. Non-conforming mortgage
loans and loans over $750,000 require the approval of the Board of Directors.
Asset Quality
Loan Delinquencies and Collection Procedures. The borrower is notified
by both mail and telephone when a loan is thirty days past due. If the
delinquency continues, subsequent efforts are made to contact the delinquent
borrower and additional collection notices and letters are sent. When a loan is
73
ninety days delinquent, it is our general practice to refer it to an attorney
for repossession or foreclosure. All reasonable attempts are made to collect
from borrowers prior to referral to an attorney for collection. In certain
instances, we may modify the loan or grant a limited moratorium on loan payments
to enable the borrower to reorganize his or her financial affairs, and we
attempt to work with the borrower to establish a repayment schedule to cure the
delinquency.
As to mortgage loans, if a foreclosure action is taken and the loan is
not reinstated, paid in full or refinanced, the property is sold at judicial
sale at which we may be the buyer if there are no adequate offers to satisfy the
debt. Any property acquired as the result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until it is sold or otherwise
disposed of. When real estate owned is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value less
estimated selling costs. The initial writedown of the property is charged to the
allowance for loan losses. Adjustments to the carrying value of the properties
that result from subsequent declines in value are charged to operations in the
period in which the declines occur. At September 30, 2004, we held real estate
owned totaling $209,000, consisting of two parcels of vacant land.
Loans are reviewed on a regular basis and are placed on non-accrual
status when they are more than ninety days delinquent, with the exception of a
passbook loan, the outstanding balance of which is collected from the related
passbook account along with accrued interest and a penalty when the loan is 120
days delinquent. Loans may be placed on a non-accrual status at any time if, in
the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. At September 30,
2004, we had approximately $2.5 million of loans that were held on a non-accrual
basis.
Non-Performing Assets. The following table provides information
regarding our non-performing loans and other non-performing assets. As of each
of the dates indicated, we did not have any troubled debt restructurings. At
September 30, 2004, the allowance for loan losses totaled $5.3 million, non-
performing loans totaled $2.5 million, and the ratio of allowance for loan
losses to non-performing loans was 213.65%.
74
At
September 30, At June 30,
------------- -----------------------------------------------------------
2004 2004 2003 2002 2001 2000
---- ------ ------ ------ ------ -----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate mortgage - one-to-four family $1,141 $771 $1,571 $1,152 $1,957 $2,255
Real estate mortgage - multi-family and
commercial.............................. 1,121 1,414 621 897 454 627
Commercial business........................ 33 39 - - - -
Consumer:
Home equity loans....................... - 65 178 91 92 119
Home equity lines of credit............. - - - - 13 158
Other................................... - - - 21 - -
Construction............................... 158 - - - - -
------ ------ ------ ------ ------ ------
Total.................................. 2,453 2,289 2,370 2,161 2,516 3,159
------ ------ ------ ------ ------ ------
Accruing loans which are contractually
past due 90 days or more:
Real estate mortgage - one-to-four family - - 423 427 - -
Real estate mortgage - multi-family and -
commercial.............................. - - 168 381 -
Commercial business........................ - - 23 23 - -
Consumer:
Home equity loans and lines of credit... - - - 1 - 1
Passbook or certificate................. 19 39 98 - 49 68
Other................................... 4 - 2 39 55 46
Construction............................... - - - 469 218 -
------ ------ ------ ------ ------ ------
Total.................................. 23 39 546 1,127 703 115
------ ------ ------ ------ ------ ------
Total non-performing loans................... $2,476 $2,328 $2,916 $3,288 $3,219 $3,274
====== ====== ====== ====== ====== ======
Real estate owned............................ $ 209 $ 209 $ 209 $ 209 $ 361 $ 185
====== ====== ====== ====== ====== ======
Other non-performing assets.................. $ - $ - $ - $ - $ - $ -
====== ====== ====== ====== ====== ======
Total non-performing assets.................. $2,685 $2,537 $3,125 $3,497 $3,580 $3,459
====== ====== ====== ====== ====== ======
Total non-performing loans to total loans.... 0.48% 0.46% 0.57% 0.55% 0.53% 0.55%
====== ====== ====== ====== ====== ======
Total non-performing loans to total assets... 0.13% 0.12% 0.15% 0.17% 0.18% 0.19%
====== ====== ====== ====== ====== ======
Total non-performing assets to total assets.. 0.14% 0.13% 0.16% 0.18% 0.20% 0.21%
====== ====== ====== ====== ====== ======
During the three months ended September 30, 2004, gross interest income
of $44,000 would have been recorded on loans accounted for on a non-accrual
basis if those loans had been current, and $8,000 of interest on such loans was
included in income for the three months ended September 30, 2004. During the
year ended June 30, 2004, gross interest income of $177,000 would have been
recorded on loans accounted for on a non-accrual basis if those loans had been
current, and $118,000 of interest on such loans was included in income for the
year ended June 30, 2004.
Classified Assets. Management, in compliance with Office of Thrift
Supervision guidelines, has instituted an internal loan review program, whereby
non-performing loans are classified as substandard, doubtful or loss. It is our
policy to review the loan portfolio, in accordance with regulatory
classification procedures, on at least a quarterly basis. When a loan is
classified as substandard or doubtful, management is required to evaluate the
loan for impairment. When management classifies a portion of a loan as loss, a
reserve equal to 100% of the loss amount is required to be established or the
loan is to be charged-off.
75
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full highly questionable
and improbable, on the basis of currently existing facts, conditions, and
values. Assets, or portions thereof, classified as "loss" are considered
uncollectible and of so little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Assets which do
not currently expose the insured institution to a sufficient degree of risk to
warrant classification in one of the aforementioned categories but which have
credit deficiencies or potential weaknesses are required to be designated
"special mention" by management.
Management's classification of assets is reviewed by the Board on a
regular basis and by the regulatory agencies as part of their examination
process. An independent loan review firm performs a review of our residential
and commercial loan portfolios, and we downgrade our classifications to match
those of this reviewing firm if there is disagreement between our assessment and
the independent assessment. The following table discloses our classification of
assets and designation of certain loans as special mention as of September 30,
2004. At September 30, 2004, all of the classified assets and special mention
designated assets were loans, and approximately 36.3%, or $3.0 million, of the
classified and special mention loans at such date were loans originated through
the Thrift Institutions Community Investment Corporation of New Jersey
("TICIC").
At
September 30, At June 30,
------------- ------------------------------------
2004 2004 2003 2002
------ ---- ---- ----
(In thousands)
Special Mention..... $ 521 $ 734 $ 1,011 $ 1,688
Substandard......... 5,885 6,264 5,129 6,159
Doubtful............ 1,915 1,149 590 586
Loss................ - - - -
------ ------ ------ ------
Total............. $8,321 $8,147 $6,730 $8,433
====== ====== ====== ======
At September 30, 2004, none of the loans classified as "special
mention" and approximately $1.8 million of loans classified as "substandard" are
included under non-performing assets, as shown in the table on page 75. At
September 30, 2004, $483,000 of the loans classified as "doubtful" are included
under non-performing assets, as shown in the table on page 75.
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses in our loan portfolio to the
extent they are both probable and reasonable to estimate. The allowance is
maintained through provisions for loan losses that are charged to income in the
period they are established. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely.
Recoveries on loans previously charged-off are added back to the allowance.
Management, in determining the allowance for loan losses, considers the
losses inherent in the loan portfolio and changes in the nature and volume of
our loan activities, along with general economic and real estate market
conditions. We utilize a two tier approach: (1) identification of impaired loans
and
76
establishment of specific loss allowances on such loans; and (2) establishment
of general valuation allowances on the remainder of our loan portfolio by type
of loan.
A loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. All
loans identified as impaired are evaluated independently. We do not aggregate
such loans for evaluation purposes. Payments received on impaired loans are
applied first to interest receivable and then to principal.
We maintain a loan review system which allows for a periodic review of
our loan portfolio and the early identification of potential impaired loans.
Such system takes into consideration, among other things, delinquency status,
size of loan, type of collateral and financial condition of the borrower. Large
groups of smaller balance homogeneous loans, such as residential real estate and
home equity and consumer loans, are evaluated in the aggregate using historical
loss factors and current economic conditions. Large balance and/or more complex
loans, such as multi-family and commercial real estate loans, are evaluated
individually for impairment.
Specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of the
loan portfolio, current economic conditions and management's judgment.
The estimation of the allowance for loan losses is inherently
subjective as it requires estimates and assumptions that are susceptible to
significant revisions as more information becomes available or as future events
change. Future additions to the allowance for loan losses may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment. In addition, the Office of Thrift Supervision, as
an integral part of its examination process, periodically reviews our loan and
foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. The Office of Thrift Supervision
may require the allowance for loan losses or the valuation allowance for
foreclosed real estate to be increased based on its review of information
available at the time of the examination, which would negatively affect our
earnings.
77
The following table sets forth information with respect to our
allowance for loan losses at the dates indicated.
For the Three Months
Ended September 30, For the Year Ended June 30,
--------------------- ----------------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
------ ------ ------ ------ ------ ------ -----
(In thousands)
Allowance balance
(at beginning of period).......... $ 5,144 $ 5,180 $ 5,180 $ 5,170 $ 5,167 $ 5,093 $ 5,353
-------- --------- -------- -------- -------- -------- --------
Provision for loan losses............ 151 - - - 3 162 102
-------- --------- -------- -------- -------- -------- --------
Charge-offs:
Real estate mortgage -
one-to-four family.............. - - 12 - - 96 273
Commercial business................ 5 - 24 - - - 89
-------- --------- -------- -------- -------- -------- --------
Total charge-offs.............. 5 - 36 - - 96 362
-------- --------- -------- -------- -------- -------- --------
Recoveries:
Real estate mortgage -
one-to-four family................ - - - 10 - 8 -
-------- --------- -------- -------- -------- -------- --------
Total recoveries............... - - - 10 - 8 -
-------- --------- -------- -------- -------- -------- --------
Net (charge-offs) recoveries......... (5) - (36) 10 - (88) (362)
-------- --------- -------- -------- -------- -------- --------
Allowance balance (at end of period). $ 5,290 $ 5,180 $ 5,144 $ 5,180 $ 5,170 $ 5,167 $ 5,093
======== ======== ======== ======== ======== ======== ========
Total loans outstanding.............. $519,681 $494,261 $510,180 $512,414 $594,209 $605,560 $595,620
======== ======== ======== ======== ======== ======== ========
Average loans outstanding............ $510,730 $498,160 $499,510 $546,521 $603,131 $612,474 $568,212
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding........ 1.02% 1.05% 1.01% 1.01% 0.87% 0.85% 0.86%
======== ======== ======== ======== ======== ======== ========
Net loans charged off as a percent of
average loans outstanding......... 0.00% 0.00% 0.01% 0.00% 0.00% 0.01% 0.06%
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses
to non-performing loans........... 213.65% 198.62% 220.96% 177.64% 157.24% 160.52% 155.56%
======== ======== ======== ======== ======== ======== ========
78
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of our allowance for loan losses by loan category and the percent
of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
At
September 30, At June 30,
------------------ ---------------------------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
------------------ ------------------- ---------------- -------------- ---------------- --------------
Percent Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------
(Dollars in thousands)
At end of period
allocated to:
Real estate mortgage -
one-to-four family... $1,497 71.37% $1,422 70.22% $1,980 71.50% $2,966 77.24% $2,944 77.42% $3,042 78.07%
Real estate mortgage -
multi-family and
commercial........... 3,517 15.96 3,358 16.35 2,198 13.88 1,184 10.00 725 9.42 871 8.48
Commercial business..... 39 0.75 57 1.01 59 0.46 70 1.13 78 0.71 60 0.09
Consumer:
Home equity loans..... 115 7.41 131 7.33 214 7.28 188 6.19 207 6.52 295 5.85
Home equity lines
of credit.......... 45 3.00 52 3.07 218 3.89 261 3.23 169 2.09 142 1.74
Passbook or
certificate........ - 0.51 - 0.54 - 0.56 - 0.51 - 0.59 - 0.58
Other................. 2 0.06 4 0.07 10 0.25 17 0.18 11 0.23 65 0.30
Construction............ 75 0.94 120 1.41 501 2.18 484 1.52 1,033 3.02 618 4.89
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance.... $5,290 100.00% $5,144 100.00% $5,180 100.00% $5,170 100.00% $5,167 100.00% $5,093 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
79
Securities Portfolio
General. Our deposits have traditionally exceeded our loan
originations, and we have invested these deposits primarily in mortgage-backed
securities and investment securities. Our mortgage-backed securities and
investment securities comprised 63.6% of our total assets at September 30, 2004.
We intend to increase the balance of our loan portfolio relative to the size of
our securities portfolio, however, such a change will take time and in the near
future, our assets will continue to be primarily in securities.
Our investment policy, which is approved by the Board of Directors, is
designed to foster earnings and manage cash flows within prudent interest rate
risk and credit risk guidelines. Generally, our investment policy is to invest
funds in various categories of securities and maturities based upon our
liquidity needs, asset/liability management policies, investment quality,
marketability and performance objectives. Our President and Chief Executive
Officer, Senior Vice President and Chief Financial Officer and Senior Vice
President, Treasurer and Chief Accounting Officer are designated by the Board of
Directors as the officers responsible for securities investment transactions and
all transactions require the approval of at least two of these designated
officers. The Interest Rate Risk Management Committee, currently composed of
Directors Hopkins, Regan, Aanensen, Mazza and Parow, with our Senior Vice
President and Chief Financial Officer participating as a management liaison, is
responsible for the administration of the securities portfolio. This committee
meets quarterly to review the securities portfolio. The results of the
committee's quarterly review are reported to the full Board, which makes
adjustments to the investment policy and strategies as it considers necessary
and appropriate.
All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Investments in
securities are made based on certain considerations, which include the interest
rate, tax considerations, volatility, yield, settlement date and maturity of the
security, our liquidity position, and anticipated cash needs and sources. The
effect that the proposed security would have on our credit and interest rate
risk and risk-based capital is also considered.
Federally chartered savings banks have the authority to invest in
various types of liquid assets. The investments authorized under the investment
policy approved by our Board of Directors include U.S. government and government
agency obligations, municipal securities (consisting of bank qualified municipal
bond obligations of state and local governments) and mortgage-backed securities
of various U.S. government agencies or government-sponsored entities. On a
short-term basis, our investment policy authorizes investment in securities
purchased under agreements to resell, federal funds, certificates of deposits of
insured banks and savings institutions and Federal Home Loan Bank term deposits.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that securities be
categorized as "held to maturity," "trading securities" or "available-for-sale,"
based on management's intent as to the ultimate disposition of each security.
Statement No. 115 allows debt securities to be classified as "held to maturity"
and reported in financial statements at amortized cost only if the reporting
entity has the positive intent and ability to hold these securities to maturity.
Securities that might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, or other
similar factors cannot be classified as "held to maturity."
We do not currently use or maintain a trading account. Securities not
classified as "held to maturity" are classified as "available-for-sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and reported, net of deferred taxes, as a
separate component of equity.
80
At September 30, 2004, our mortgage-backed securities portfolio
included securities issued by the Government National Mortgage Association, the
Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, and our investment securities portfolio included U.S. government
obligations and obligations of states and political subdivisions.
At September 30, 2004, we also held the following securities: shares of
common stock of the Federal Home Loan Mortgage Corporation with a carrying value
of $16.4 million; mutual fund shares issued by Dryden Government Income Fund,
Inc. and AMF Adjustable Mortgage Rate Fund with an aggregate carrying value of
$14.0 million; and trust preferred securities with an aggregate carrying value
of $10.9 million. Currently, our policy does not permit new investments in
corporate equity securities beyond what we currently hold, and we do not invest
in mortgage-related securities of private corporate issuers that are not issued
by U.S. government agencies or government-sponsored entities.
At September 30, 2004 our securities portfolio contained
mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation
with an aggregate book value in excess of 10% of our equity. The aggregate book
value at September 30, 2004 of mortgage-backed securities in our portfolio
issued by the Federal National Mortgage Association also exceeded 10% of our
equity. The aggregate book value and aggregate market value for mortgage-backed
securities issued by the Federal Home Loan Mortgage Corporation that we held at
September 30, 2004 totaled $294.5 million and $296.8 million, respectively. The
aggregate book value and aggregate market value for mortgage-backed securities
issued by the Federal National Mortgage Association that we held at September
30, 2004 totaled $345.4 million and $350.7 million, respectively. At September
30, 2004, all of the securities we hold issued by the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association were classified as
held to maturity. Other than securities issued by the U.S. government or its
agencies, at September 30, 2004 we did not hold securities of any other issuer
having an aggregate book value in excess of 10% of our equity.
We do not currently participate in hedging programs, interest rate
caps, floors or swaps, or other activities involving the use of off-balance
sheet derivative financial instruments. Further, we do not purchase securities
which are not rated investment grade.
Actual maturities of the securities held by us may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties. At September 30, 2004, we had
$355.6 million of callable securities in our portfolio.
Mortgage-backed Securities. We invest in mortgage-backed securities
issued by U.S. government agencies or government-sponsored entities, such as
Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association. Mortgage- backed
securities are pass-through securities typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a specific range and have varying
maturities. The life of a mortgage-backed security thus approximates the life of
the underlying mortgages. We focus primarily on mortgage-backed securities
secured by one- to four- family mortgages. The mortgage originators use
intermediaries (generally government agencies and government-sponsored
enterprises, but also a variety of private corporate issuers) to pool and
repackage the participation interests in the form of securities, with investors
such as us receiving the principal and interest payments on the mortgages. The
characteristics of the underlying pool of mortgages, i.e., fixed- rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. Mortgage- backed securities are generally referred to as mortgage
participation certificates or pass-through certificates.
81
We do not currently invest in mortgage-backed securities of private
issuers or collateralized mortgage obligations. Securities issued or sponsored
by U.S. government agencies and government- sponsored entities are guaranteed as
to the payment of principal and interest to investors. Mortgage-backed
securities generally yield less than the mortgage loans underlying such
securities as a result of their payment guarantees or credit enhancements which
offer nominal credit risk to the security holder.
The following table sets forth the carrying value of our securities
portfolio at the dates indicated.
At At
September 30, June 30,
------------- ------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
---- ---- ---- ---- ---- ----
(In thousands)
Securities Available for Sale:
-----------------------------
Mutual funds................................. $ 14,025 $ 13,899 $ 14,196 $ 13,682 $ 13,203 $ 12,577
Common stock................................. 16,381 15,894 12,748 15,367 17,576 10,169
U.S. government obligations.................. - - - - 980 2,917
Trust preferred securities due
after ten years.......................... 10,929 11,771 10,896 10,630 10,608 10,503
---------- ---------- ---------- ---------- -------- --------
Total securities available for sale.... 41,335 41,564 37,840 39,679 42,367 36,166
---------- ---------- ---------- ---------- -------- --------
Investment Securities Held to Maturity:
---------------------------------------
U.S. government obligations.................. 273,350 274,401 169,968 60,225 145,080 420,826
Obligations of states and political
subdivisions............................. 172,419 161,469 117,353 79,221 48,875 49,400
---------- ---------- ---------- ---------- -------- --------
Total investment securities
held to maturity.................. 445,769 435,870 287,321 139,446 193,955 470,226
---------- ---------- ---------- ---------- -------- --------
Mortgage-Backed Securities Held to Maturity:
-------------------------------------------
Government National Mortgage Association..... 84,995 94,499 150,699 178,220 198,528 231,389
Federal Home Loan Mortgage Corporation....... 294,451 314,221 197,962 302,246 218,116 101,006
Federal National Mortgage Association........ 345,430 362,633 331,061 454,552 215,330 95,489
Collateralized mortgage obligations
issued by U.S. government agencies....... - - 1,894 33,494 56,999 56,679
Other........................................ - - 3 4 231 408
---------- ---------- ---------- ---------- -------- --------
Total mortgage-backed securities
held to maturity................... 724,876 771,353 681,619 968,516 689,204 484,971
---------- ---------- ---------- ---------- -------- --------
Total....................................... $1,211,980 $1,248,787 $1,006,780 $1,147,641 $925,526 $991,363
========== ========== ========== ========== ======== ========
82
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of our securities
portfolio at September 30, 2004. This table shows contractual maturities and
does not reflect repricing or the effect of prepayments. Actual maturities may
differ.
At September 30, 2004
----------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ------------------ ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------ ------- ------- ------
(Dollars in thousands)
Mutual funds........... $14,025 3.31% $ - -% $ - -% $ - -% $ 14,025 3.31% $ 14,025
Common stock........... 16,381 1.80 - - - - - - 16,381 1.80 16,381
Trust preferred
securities
due after ten years. - - - - - - 10,929 4.14 10,929 4.14 10,929
U.S. government
obligations......... 7,000 1.60 249,262 3.18 494 10.60 16,595 1.85 273,350 3.07 271,418
Obligations of
states and political
subdivisions........ 4,481 4.78 15,822 3.43 75,365 3.76 76,752 3.95 172,419 3.84 176,084
Government National
Mortgage Association 2 7.93 1,100 7.52 736 11.55 83,157 4.45 84,995 4.55 87,376
Federal Home Loan
Mortgage Corporation 1 9.00 3,828 5.51 2,474 5.19 288,148 4.76 294,451 4.77 296,808
Federal National
Mortgage Association 880 5.99 1,909 6.22 18,884 5.57 323,757 4.89 345,430 4.94 350,747
------- -------- ------- ------- ---------- ----------
Total................ $42,770 2.66% $271,921 3.27% $97,953 4.24% $799,338 4.64% $1,211,980 4.23% $1,223,768
======= ======== ======= ======== ========== ==========
83
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of our securities
portfolio at June 30, 2004. This table shows contractual maturities and does not
reflect repricing or the effect of prepayments. Actual maturities may differ.
At June, 2004
-----------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ------------------ ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- ------- ------- ------- ------- ------- ------ ------- ------- ------
(Dollars in thousands)
Mutual funds.............. $13,899 3.18% $ - -% $ - -% $ - -% $ 13,899 3.18% $ 13,899
Common stock.............. 15,894 1.90 - - - - - - 15,894 1.90 15,894
Trust preferred securities
due after ten years.... - - - - - - 11,771 3.94 11,771 3.94 11,771
U.S. government obligations - - 246,259 3.09 10,493 4.62 17,649 1.58 274,401 3.05 269,140
Obligations of states and
political subdivisions. 5,386 4.75 13,606 3.87 65,990 3.73 76,487 3.96 161,469 3.89 159,635
Government National
Mortgage Association... 4 7.52 1,072 7.43 1,006 10.84 92,417 4.51 94,499 4.61 95,519
Federal Home Loan
Mortgage Corporation... 2 9.00 4,451 5.51 2,768 5.37 307,000 4.79 314,221 4.80 313,188
Federal National Mortgage
Association............ 1,299 6.50 2,079 6.24 19,391 5.58 339,864 4.94 362,633 4.98 364,004
------- -------- ------- -------- ---------- ----------
Total................... $36,484 2.97% $267,467 3.21% $99,648 4.30% $845,188 4.66% $1,248,787 4.27% $1,243,050
======= ==== ======== ==== ======= ==== ======== ==== ========== ==== ==========
84
Sources of Funds
General. Deposits are our major source of funds for lending and other
investment purposes. In addition, we derive funds from loan and mortgage-backed
securities principal repayments, and proceeds from the maturity and call of
investment securities. Loan and securities payments are a relatively stable
source of funds, while deposit inflows are significantly influenced by general
interest rates and money market conditions. Borrowings (principally from the
Federal Home Loan Bank) are also used to supplement the amount of funds for
lending and investment.
Deposits. Our current deposit products include checking and savings
accounts, certificates of deposit accounts ranging in terms from thirty days to
five years, and individual retirement accounts. Deposit account terms vary,
primarily as to the required minimum balance amount, the amount of time that the
funds must remain on deposit and the applicable interest rate.
Deposits are obtained primarily from within New Jersey. Traditional
methods of advertising are used to attract new customers and deposits, including
radio, print media, direct mail and inserts included with customer statements.
We do not utilize the services of deposit brokers. Premiums or incentives for
opening accounts are sometimes offered. We periodically select particular
certificate of deposit maturities for promotion. We also offer a twenty-five
basis point premium on certificate accounts with a term of at least one year to
certificate of deposit account holders that have $200,000 or more on deposit
with Kearny Federal Savings Bank. We also offer the opportunity one time during
the term of the certificate to "bump up" the rate paid on all 17-month and
29-month certificates of deposit from the rate set on such certificate to the
current rate being offering by Kearny Federal Savings Bank on certificates of
that particular maturity.
The determination of interest rates is based upon a number of factors,
including: (1) our need for funds based on loan demand, current maturities of
deposits and other cash flow needs; (2) a current survey of a selected group of
competitors' rates for similar products; (3) our current cost of funds, yield on
assets and asset/liability position; and (4) the alternate cost of funds on a
wholesale basis, in particular the cost of advances from the Federal Home Loan
Bank. Interest rates are reviewed by senior management on a weekly basis and
rates are set generally with the intent to be in the top five to ten percent of
the competition.
A large percentage of our deposits are in certificates of deposit,
which totaled 57.5% of total deposits at September 30, 2004. Our liquidity could
be reduced if a significant amount of certificates of deposit maturing within a
short period of time were not renewed. Historically, a significant portion of
the certificates of deposit remain with us after they mature and we believe that
this will continue. At September 30, 2004, $181.7 million, or 20.9%, of our
certificates of deposit were "jumbo" certificates of $100,000 or more. Deposit
inflows are significantly influenced by general interest rates and money market
conditions. The inflow of jumbo certificates of deposit and the retention of
such deposits upon maturity are particularly sensitive to general interest rates
and money market conditions, making jumbo certificates of deposit traditionally
a more volatile source of funding than core deposits. In order to retain jumbo
certificates of deposit, we may have to pay a premium rate, resulting in an
increase in our cost of funds. In a rising rate environment, we may be unwilling
or unable to pay a competitive rate. To the extent that such deposits do not
remain with us, they may need to be replaced with borrowings which could
increase our cost of funds and negatively impact our interest rate spread and
our financial condition.
85
The following tables set forth the distribution of average deposits for
the periods indicated and the weighted average nominal interest rates for each
period on each category of deposits presented.
For the Three Months Ended September 30,
-----------------------------------------------------------------------------------------
2004 2003
---- ----
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ----
(Dollars in thousands)
Non-interest-bearing demand........... $ 53,333 3.49% 0.00% $ 49,242 3.08% 0.00%
Interest-bearing demand............... 106,638 6.99 0.72 108,047 6.75 0.71
Savings and club...................... 481,667 31.56 1.03 458,645 28.65 1.54
Certificates of deposit............... 884,725 57.96 2.11 984,699 61.52 2.49
---------- ------ ---------- ------
Total deposits..................... $1,526,363 100.00% 1.60% $1,600,633 100.00% 2.02%
========== ====== ========== ======
For the Year Ended June 30,
-----------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------------- ------------------------------- -------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
Non-interest-bearing demand.. $ 49,797 3.17% -% $ 45,431 2.90% -% $ 38,972 2.79% -%
Interest-bearing demand...... 109,830 6.99 0.80 98,926 6.32 1.09 93,638 6.70 1.38
Savings and club............. 448,509 28.55 1.23 417,780 26.71 1.58 340,655 24.38 2.31
Certificates of deposit...... 963,089 61.29 2.25 1,002,229 64.07 3.22 924,011 66.13 4.32
---------- ------ ---------- ------ ---------- ------
Total deposits............ $1,571,225 100.00% 1.79% $1,564,366 100.00% 2.55% $1,397,276 100.00% 3.51%
========== ====== ========== ====== ========== ======
86
The following table sets forth certificates of deposit classified by
interest rate as of the dates indicated.
At
September 30, At June 30,
------------- ---------------------------------------
2004 2004 2003 2002
------ ---- ---- ----
(In thousands)
Interest Rate
0.00-1.99%......... $545,134 $582,665 $ 510,306 $177,162
2.00-2.99%......... 200,490 173,505 175,775 286,074
3.00-3.99%......... 85,811 100,138 146,170 169,163
4.00-4.99%......... 25,723 25,956 145,290 200,885
5.00-5.99%......... 10,006 11,957 25,724 60,575
6.00-6.99%......... 1,937 2,716 7,504 60,614
7.00-7.99%......... 83 82 249 806
-------- -------- ---------- --------
Total............ $869,184 $897,019 $1,011,018 $955,279
======== ======== ========== ========
The following table sets forth the amount and maturities of
certificates of deposit at September 30, 2004.
Amount Due
--------------------------------------------------------------------------------------------
Within After
Interest Rate 1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
------------- ------ --------- --------- --------- --------- ------- -----
(In thousands)
0.00-1.99%................ $534,014 $ 11,009 $ - $ - $ - $111 $545,134
2.00-2.99%................ 83,948 100,902 15,388 252 - - 200,490
3.00-3.99%................ 34,806 21,016 10,089 10,076 9,808 16 85,811
4.00-4.99%................ 10,996 856 9,413 1,370 2,993 95 25,723
5.00-5.99%................ 3,497 3,984 2,416 109 - - 10,006
6.00-6.99%................ 1,371 566 - - - - 1,937
7.00-7.99%................ 83 - - - - - 83
-------- -------- ------- ------- ------- ---- --------
Total................... $668,715 $138,333 $37,306 $11,807 $12,801 $222 $869,184
======== ======== ======= ======= ======= ==== ========
The following table sets forth the amount and maturities of
certificates of deposit at June 30, 2004.
Amount Due
--------------------------------------------------------------------------------------------------
Within After
Interest Rate 1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
------------- ------ --------- --------- --------- --------- ------- -----
(In thousands)
0.00-1.99%................ $572,063 $10,483 $ 9 $ - $ - $ 110 $582,665
2.00-2.99%................ 54,767 96,413 22,061 260 4 - 173,505
3.00-3.99%................ 62,690 17,120 1,308 7,585 11,411 24 100,138
4.00-4.99%................ 13,491 908 5,406 6,000 57 94 25,956
5.00-5.99%................ 4,733 3,311 2,840 1,073 - - 11,957
6.00-6.99%................ 2,114 602 - - - - 2,716
7.00-7.99%................ 82 - - - - - 82
-------- -------- ------- ------- ------- -------- --------
Total................... $709,940 $128,837 $31,624 $14,918 $11,472 $ 228 $897,019
======== ======== ======= ======= ======= ======== ========
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The following tables show the amount of certificates of deposit of
$100,000 or more by time remaining until maturity as of the dates indicated.
At September 30, 2004
---------------------
Maturity Period (In thousands)
---------------
Within three months.......................... $51,028
Three through six months..................... 40,047
Six through twelve months.................... 46,326
Over twelve months........................... 44,272
--------
$181,673
========
At June 30, 2004
----------------
Maturity Period (In thousands)
---------------
Within three months.......................... $ 64,956
Three through six months..................... 34,882
Six through twelve months.................... 44,089
Over twelve months........................... 44,082
--------
$188,009
========
Borrowings. To supplement our deposits as a source of funds for lending
or investment, we borrow funds in the form of advances from the Federal Home
Loan Bank. We make use of Federal Home Loan Bank advances as part of our
interest rate risk management, primarily to extend the duration of funding to
match the longer term fixed rate loans held in the loan portfolio as part of our
growth strategy.
Advances from the Federal Home Loan Bank are typically secured by the
Federal Home Loan Bank stock we own and a portion of our residential mortgage
loans and may be secured by other assets, mainly securities which are
obligations of or guaranteed by the U.S. government. Additional information
regarding our Federal Home Loan Bank advances is included under Note 12 to the
consolidated financial statements beginning on page F-1.
Short-term Federal Home Loan Bank advances generally have original
maturities of less than one year. The details of these short-term advances are
presented below for the dates and periods indicated.
At or For the Three Months At or For the
Ended September 30, Year Ended June 30,
--------------------- -------------------
2004 2003 2004 2003 2002
---- ---- ---- ---- ----
(Dollars in thousands)
Federal Home Loan Bank Advances:
Average balance outstanding................ $22,065 $ - $ 1,151 $ 274 $3,364
Maximum amount outstanding
at any month-end during the period...... $20,000 $ - $30,000 $10,000 $8,500
Balance outstanding at end of period....... $20,000 $ - $30,000 $ - $ -
Weighted average interest rate
during the period....................... 1.59% -% 1.43% 1.37% 3.56%
Weighted average interest rate
at end of period........................ 1.78% -% 1.43% -% -%
88
At September 30, 2004, long-term Federal Home Loan Bank advances
totaled $64.1 million. Advances consist of fixed-rate advances that will mature
within one to seven years. The advances are collateralized by Federal Home Loan
Bank stock and certain first mortgage loans and mortgage-backed securities.
These advances had a weighted average interest rate of 5.50% at September 30,
2004. Unused overnight lines of credit at the Federal Home Loan Bank at
September 30, 2004 were $100.0 million.
As of September 30, 2004, long-term advances mature as follows:
Twelve Months Ending September 30, (In thousands)
----------------------------------
2005...................................... $ 2,556
2006...................................... 590
2007...................................... 5,626
2008...................................... 37,328
2009...................................... 8,000
Thereafter................................ 10,000
-------
Total.............................. $64,100
=======
Subsidiary Activity
Kearny Financial Corp. has no subsidiaries other than Kearny Federal
Savings Bank. Kearny Federal Savings Bank has two subsidiaries: KFS Financial
Services, Inc. and Kearny Federal Investment Corp.
KFS Financial Services, Inc. was incorporated as a New Jersey
corporation in 1994 under the name of South Bergen Financial Services, Inc., was
acquired in Kearny's merger with South Bergen Savings Bank in 1999 and was
renamed KFS Financial Services, Inc. in 2000. It is a service corporation
subsidiary organized for the purpose of selling insurance products, including
annuities, to bank customers and the general public through a third party
networking arrangement. KFS Financial Services, Inc. is not a licensed insurance
agency, and it may only offer insurance products through an agreement with a
licensed insurance agency. KFS Financial Services, Inc. has entered into an
agreement with Savings Bank Life Insurance of Massachusetts, a licensed
insurance agency, through which it offers insurance products.
Kearny Federal Investment Corp. was organized in June 2004 under New
Jersey law as a New Jersey investment company primarily to hold investment
securities. At September 30, 2004, it held assets totaling $545.9 million.
At September 30, 2004, West Essex Insurance Agency, which was acquired
in the West Essex Bank merger, also existed as a subsidiary of Kearny Federal
Savings Bank. There was limited activity in this subsidiary following the merger
of West Essex Bank into Kearny, and this subsidiary is expected to be dissolved.
Personnel
As of September 30, 2004, we had 253 full-time employees and 20
part-time employees. The employees are not represented by a collective
bargaining unit. We believe our relationship with our employees is good.
89
Properties and Equipment
At September 30, 2004, our net investment in property and equipment
totaled $28.4 million. We use Financial Services, Inc. ("FSI"), an outside
service company headquartered in Glen Rock, New Jersey, for data processing.
The following table sets forth the location of our main office and
branch offices, the year each office was opened and the net book value of each
office. The following table does not include the Lacey, New Jersey de novo
branch office, which is expected to open in the first quarter of 2005. The total
cost of the Lacey office is estimated to be approximately $2.3 million. We plan
during 2005 to replace three office locations with new buildings at or near
their current locations, at an estimated cost of approximately $1.9 million per
branch. Furthermore, in December of 2004, we acquired a 3.7 acre parcel of land
in West Caldwell, New Jersey for approximately $2.3 million. We intend to
construct a branch office at this location and subdivide and lease to third
parties the portion of land not used for the branch building.
Year Facility Leased or Net Book Value at
Office Location Opened Owned September 30, 2004
--------------- ------ ----- ------------------
Executive Office: 2004(1) Owned $ - (1)
120 Passaic Avenue
Fairfield, New Jersey
Main Office: 1928(2) Owned $570,417
614 Kearny Avenue
Kearny, New Jersey
Branch Offices:
Bayville(3) 1973 Leased $44,100
425 Route 9 & Ocean Gate Drive
Bayville, New Jersey
Caldwell(4) 1968 Owned $161,999
417 Bloomfield Avenue
Caldwell, New Jersey
East Rutherford(5) 1969 Owned $42,419
20 Willow Street
East Rutherford, New Jersey
Franklin Lakes(4) 1978 Leased $5,605
574 Franklin Avenue
Franklin Lakes, New Jersey
Harrison 1995 Owned $317,874
534 Harrison Avenue
Harrison, New Jersey
Irvington(3) 1962 Owned $37,649
860 18th Avenue
Irvington, New Jersey
Lyndhurst 1970 Owned $135,164
307 Stuyvesant Avenue
Lyndhurst, New Jersey
Milltown(3) 1989 Leased $15,221
270 Ryders Lane
Milltown, New Jersey
90
Year Facility Leased or Net Book Value at
Office Location Opened Owned September 30, 2004
--------------- ------ ----- ------------------
Montville(5) 1996 Leased $33,101
339 Main Road
Montville, New Jersey
Northvale(4) 1965 Owned $158,754
119 Paris Avenue
Northvale, New Jersey
North Arlington 1952 Owned $56,063
80 Ridge Road
North Arlington, New Jersey
Old Bridge(3) 2002 Owned $976,282
510 State Highway 34
Old Bridge Township, New Jersey
Old Tappan(4) 1973 Owned $225,730
207 Old Tappan Road
Old Tappan, New Jersey
Pine Brook(4) 1974 Owned $142,336
267 Changebridge Road
Pine Brook, New Jersey
Pleasantdale(4) 1971 Owned $82,636
West Orange (Pleasantdale)
487 Pleasant Valley Way
West Orange, New Jersey
River Vale(4) 1965 Owned $208,501
653 Westwood Avenue
River Vale, New Jersey
Rutherford 1974 Owned $80,243
252 Park Avenue
Rutherford, New Jersey
Spotswood(3) 1979 Owned $223,361
520 Main Street
Spotswood, New Jersey
Springfield(3) 1991 Owned $1,278,711
130 Mountain Avenue
Springfield, New Jersey
Toms River(3) 1996 Owned $649,845
827 Fischer Boulevard
Toms River, New Jersey
Tory Corner(4) 1975 Owned $79,050
West Orange (Tory Corner)
216 Main Street
West Orange, New Jersey
Wanaque(5) 1996 Leased $20,382
4 Union Avenue
Haskell, New Jersey
91
Year Facility Leased or Net Book Value at
Office Location Opened Owned September 30, 2004
--------------- ------ ----- ------------------
Wood-Ridge(5) 1957 Owned $1,659,353
250 Valley Boulevard
Wood-Ridge, New Jersey
Wyckoff 2002 Owned $2,167,536
661 Wyckoff Avenue
Wyckoff, New Jersey
----------------
(1) We began moving management staff and administrative operations into our new
53,000 square feet administrative building in Fairfield, New Jersey in
October 2004 and completed the move-in phase in December 2004. The total
cost of this building is expected to be approximately $13.5 million, which
cost will be capitalized and amortized over a forty-year period.
(2) The main office opened at this site in 1928 and was rebuilt on the same
site in 1968.
(3) This branch was acquired in acquisition of Pulaski Savings Bank in October
2002.
(4) This branch was acquired in acquisition of West Essex Savings Bank in July
2003.
(5) This branch was acquired in acquisition of South Bergen Savings Bank in
April 1999.
Legal Proceedings
Kearny Federal Savings Bank, from time to time, is a party to routine
litigation which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans, and
other issues incident to our business. There were no lawsuits pending or known
to be contemplated against Kearny Financial Corp. or Kearny Federal Savings Bank
at June 30, 2004 that would have a material effect on our operations or income.
REGULATION
Kearny Federal Savings Bank and Kearny Financial Corp. operate in a
highly regulated industry. This regulation establishes a comprehensive framework
of activities in which a savings and loan holding company and federal savings
bank may engage and is intended primarily for the protection of the deposit
insurance fund and depositors. Set forth below is a brief description of certain
laws that relate to the regulation of Kearny Federal Savings Bank and Kearny
Financial Corp. The description does not purport to be complete and is qualified
in its entirety by reference to applicable laws and regulations.
Regulatory authorities have extensive discretion in connection with
their supervisory and enforcement activities, including the imposition of
restrictions on the operation of an institution and its holding company, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, or legislation, including changes
in the regulations governing mutual holding companies, could have a material
adverse impact on Kearny Financial Corp., Kearny Federal Savings Bank, and their
operations. The adoption of regulations or the enactment of laws that restrict
the operations of Kearny Federal Savings Bank and/or Kearny Financial Corp. or
impose burdensome requirements upon one or both of them could reduce their
profitability and could impair the value of Kearny Federal Savings Bank's
franchise, resulting in negative effects on the trading price of Kearny
Financial Corp. common stock.
92
Regulation of Kearny Federal Savings Bank
General. As a federally chartered, Federal Deposit Insurance
Corporation-insured savings bank, Kearny Federal Savings Bank is subject to
extensive regulation by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. This regulatory structure gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies regarding
the classification of assets and the level of the allowance for loan losses. The
activities of federal savings banks are subject to extensive regulation
including restrictions or requirements with respect to loans to one borrower,
the percentage of non-mortgage loans or investments to total assets, capital
distributions, permissible investments and lending activities, liquidity,
transactions with affiliates and community reinvestment. Federal savings banks
are also subject to reserve requirements imposed by the Federal Reserve System.
A federal savings bank's relationship with its depositors and borrowers is
regulated by both state and federal law, especially in such matters as the
ownership of savings accounts and the form and content of the bank's mortgage
documents.
Kearny Federal Savings Bank must file reports with the Office of Thrift
Supervision concerning its activities and financial condition, and must obtain
regulatory approvals prior to entering into certain transactions such as mergers
with or acquisitions of other financial institutions. The Office of Thrift
Supervision regularly examines Kearny Federal Savings Bank and prepares reports
to Kearny Federal Savings Bank's Board of Directors on deficiencies, if any,
found in its operations. The Office of Thrift Supervision has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the Federal Deposit Insurance Corporation has
the authority to recommend to the Director of the Office of Thrift Supervision
that enforcement action be taken with respect to a particular federally
chartered savings bank and, if action is not taken by the Director, the Federal
Deposit Insurance Corporation has authority to take such action under certain
circumstances.
Insurance of Deposit Accounts. The Federal Deposit Insurance
Corporation administers two separate deposit insurance funds. Generally, the
Bank Insurance Fund insures the deposits of commercial banks and the Savings
Association Insurance Fund insures the deposits of savings institutions. Kearny
Federal Savings Bank's deposits are insured by the Savings Association Insurance
Fund. The Federal Deposit Insurance Corporation is authorized to increase
deposit insurance premiums if it determines such increases are appropriate to
maintain the reserves of either the Bank Insurance Fund or the Savings
Association Insurance Fund or to fund the administration of the Federal Deposit
Insurance Corporation. In addition, the Federal Deposit Insurance Corporation is
authorized to levy emergency special assessments on Bank Insurance Fund and
Savings Association Insurance Fund members. The Federal Deposit Insurance
Corporation maintains a risk-based assessment system by which institutions are
assigned to one of three categories based on their capitalization and one of
three subcategories based on examination ratings and other supervisory
information. An institution's assessment rate depends upon the categories to
which it is assigned. Assessment rates are determined semi-annually by the
Federal Deposit Insurance Corporation and currently range from zero basis points
of assessable deposits for the healthiest institutions to 27 basis points of
assessable deposits for the riskiest. The assessment rate for Kearny Federal
Savings Bank is currently 0%.
The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A material increase in Savings Association Insurance Fund
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of Kearny Federal Savings Bank. Management cannot
predict what insurance assessment rates will be in the future.
93
The Federal Deposit Insurance Corporation may terminate an
institution's deposit insurance upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the Federal Deposit Insurance Corporation or the Office of
Thrift Supervision. The management of Kearny Federal Savings Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.
In addition, all Federal Deposit Insurance Corporation-insured
institutions are required to pay assessments to the Federal Deposit Insurance
Corporation to fund interest payments on bonds issued by the Financing
Corporation, an agency of the federal government established to recapitalize the
predecessor to the Savings Association Insurance Fund. These assessments will
continue until the Financing Corporation bonds mature in 2017.
Regulatory Capital Requirements. Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2)
"Tier 1" or "core" capital equal to at least 4% (3% if the institution has
received the highest possible rating on its most recent examination) of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. At September 30, 2004, Kearny Federal Savings Bank was in compliance
with the minimum capital standards and qualified as "well capitalized." For
Kearny Federal Savings Bank's compliance with these regulatory capital
standards, see Historical and Pro Forma Capital Compliance on page 31 as well as
Note 14 to the consolidated financial statements. In assessing an institution's
capital adequacy, the Office of Thrift Supervision takes into consideration not
only these numeric factors but also qualitative factors as well, and has the
authority to establish higher capital requirements for individual institutions
where necessary.
In addition, the Office of Thrift Supervision may require that a
savings institution that has a risk- based capital ratio of less than 8%, a
ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of
Tier 1 capital to total adjusted assets of less than 4% (3% if the institution
has received the highest rating on its most recent examination) take certain
action to increase its capital ratios. If the savings institution's capital is
significantly below the minimum required levels of capital or if it is
unsuccessful in increasing its capital ratios, the Office of Thrift Supervision
may restrict its activities.
For purposes of the Office of Thrift Supervision capital regulations,
tangible capital is defined as core capital less all intangible assets except
for certain mortgage servicing rights. Tier 1 or core capital is defined as
common stockholders' equity, non-cumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of consolidated
subsidiaries, and certain non-withdrawable accounts and pledged deposits of
mutual savings banks. Kearny Federal Savings Bank does not have any
non-withdrawable accounts or pledged deposits. Tier 1 and core capital are
reduced by an institution's intangible assets, with limited exceptions for
certain mortgage and non-mortgage servicing rights and purchased credit card
relationships. Both core and tangible capital are further reduced by an amount
equal to the savings institution's debt and equity investments in
"non-includable" subsidiaries engaged in activities not permissible for national
banks other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The components of supplementary
capital include, among other items, cumulative perpetual preferred stock,
perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock,
94
the portion of the allowance for loan losses not designated for specific loan
losses and up to 45% of unrealized gains on equity securities. The portion of
the allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. For purposes of determining total
capital, a savings institution's assets are reduced by the amount of capital
instruments held by other depository institutions pursuant to reciprocal
arrangements and by the amount of the institution's equity investments (other
than those deducted from core and tangible capital) and its high loan-to-value
ratio land loans and non-residential construction loans.
A savings institution's risk-based capital requirement is measured
against risk-weighted assets, which equal the sum of each on-balance-sheet asset
and the credit-equivalent amount of each off-balance- sheet item after being
multiplied by an assigned risk weight. These risk weights range from 0% for cash
to 100% for delinquent loans, property acquired through foreclosure, commercial
loans, and certain other assets.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA,
requires that the Office of Thrift Supervision and other federal banking
agencies revise their risk-based capital standards, with appropriate transition
rules, to ensure that they take into account interest rate risk, or IRR,
concentration of risk and the risks of non-traditional activities. The Office of
Thrift Supervision adopted regulations, effective January 1, 1994, that set
forth the methodology for calculating an IRR component to be incorporated into
the Office of Thrift Supervision risk-based capital regulations. On May 10,
2002, the Office of Thrift Supervision adopted an amendment to its capital
regulations which eliminated the IRR component of the risk-based capital
requirement. Pursuant to the amendment, the Office of Thrift Supervision will
continue to monitor the IRR of individual institutions through the Office of
Thrift Supervision requirements for IRR management, the ability of the Office of
Thrift Supervision to impose individual minimum capital requirements on
institutions that exhibit a high degree of IRR, and the requirements of Thrift
Bulletin 13a, which provides guidance on the management of IRR and the
responsibility of boards of directors in that area.
The Office of Thrift Supervision continues to monitor the IRR of
individual institutions through analysis of the change in net portfolio value,
or NPV. NPV is defined as the net present value of the expected future cash
flows of an entity's assets and liabilities and, therefore, hypothetically
represents the value of an institution's net worth. The Office of Thrift
Supervision has also used this NPV analysis as part of its evaluation of certain
applications or notices submitted by thrift institutions. The Office of Thrift
Supervision, through its general oversight of the safety and soundness of
savings associations, retains the right to impose minimum capital requirements
on individual institutions to the extent the institution is not in compliance
with certain written guidelines established by the Office of Thrift Supervision
regarding NPV analysis. The Office of Thrift Supervision has not imposed any
such requirements on Kearny Federal Savings Bank.
Prompt Corrective Regulatory Action. Under the Office of Thrift
Supervision Prompt Corrective Action regulations, the Office of Thrift
Supervision is required to take supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's level of
capital. Generally, a savings institution that has a ratio of total capital to
risk-weighted assets of less than 8.0%, a ratio of Tier 1 (core) capital to risk
weighted assets of less than 4.0% or a ratio of Tier 1 capital to total assets
that is less than 4.0% (3.0% or less for institutions with the highest
examination rating) is considered to be undercapitalized. A savings institution
that has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is
considered to be "significantly undercapitalized." A savings institution that
has a tangible capital to assets ratio equal
95
to or less than 2.0% is deemed to be "critically undercapitalized." Generally,
the Office of Thrift Supervision is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulations also provide that a capital restoration plan must be filed with the
Office of Thrift Supervision within forty-five days of the date an institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized," and compliance with the plan must be
guaranteed by any parent holding company. In addition, numerous mandatory
supervisory actions become immediately applicable to the institution, including,
but not limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The Office of Thrift Supervision may
also take any one of a number of discretionary supervisory actions against
undercapitalized institutions, including the issuance of a capital directive and
the replacement of senior executive officers and directors. At September 30,
2004, Kearny Federal Savings Bank's ratio of total capital to risk-weighted
assets was 33.18%, its ratio of Tier 1 (core) capital to risk weighted assets
was 31.27% and its ratio of Tier 1 capital to adjusted total assets was 11.15%,
and it qualified as "well capitalized."
Dividend and Other Capital Distribution Limitations. The Office of
Thrift Supervision imposes various restrictions or requirements on the ability
of savings institutions to make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan
holding company, such as Kearny Federal Savings Bank, must file an application
or a notice with the Office of Thrift Supervision at least thirty days before
making a capital distribution, such as paying a dividend to Kearny Financial
Corp. A savings institution must file an application for prior approval of a
capital distribution if: (i) it is not eligible for expedited treatment under
the applications processing rules of the Office of Thrift Supervision; (ii) the
total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings institution's net income for that year to date plus the
institution's retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the Office of Thrift Supervision or
applicable regulations.
The Office of Thrift Supervision may disapprove a notice or deny an
application for a capital distribution if: (i) the savings institution would be
undercapitalized following the capital distribution; (ii) the proposed capital
distribution raises safety and soundness concerns; or (iii) the capital
distribution would violate a prohibition contained in any statute, regulation or
agreement. Kearny Federal Savings Bank made a capital distribution to Kearny
Financial Corp. to provide the cash paid in connection with the acquisition of
West Essex Bank, and as a result it is likely that Kearny Federal Savings Bank
will be required to file an application, rather than a notice, for any capital
distributions for a period of time following the offering.
Capital distributions by Kearny Financial Corp., as a savings and loan
holding company, will not be subject to the Office of Thrift Supervision capital
distribution rules. Because Kearny Financial Corp. will retain 50% of the net
proceeds of the stock offering, the likelihood that Kearny Federal Savings Bank
must file an application rather than a notice for capital distributions is not
expected to affect the payment of cash dividends by Kearny Financial Corp. to
its stockholders or the amount of such dividends.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA,
as amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the Office of Thrift Supervision,
has adopted guidelines establishing general standards relating to internal
controls, information and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings and
compensation, fees and benefits. In
96
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director, or principal stockholder.
In addition, the Office of Thrift Supervision adopted regulations to
require a savings bank that is given notice by the Office of Thrift Supervision
that it is not satisfying any of such safety and soundness standards to submit a
compliance plan to the Office of Thrift Supervision. If, after being so
notified, a savings bank fails to submit an acceptable compliance plan or fails
in any material respect to implement an accepted compliance plan, the Office of
Thrift Supervision may issue an order directing corrective and other actions of
the types to which a significantly undercapitalized institution is subject under
the "prompt corrective action" provisions of FDICIA. If a savings bank fails to
comply with such an order, the Office of Thrift Supervision may seek to enforce
such an order in judicial proceedings and to impose civil monetary penalties.
Kearny Federal Savings Bank has not received any notice from the Office of
Thrift Supervision that it has failed to meet any standard prescribed by the
guidelines.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender test or they become subject to the business activity
restrictions and branching rules applicable to national banks.
To qualify as a qualified thrift lender, a savings institution must either (i)
be deemed a "domestic building and loan association" under the Internal Revenue
Code by maintaining at least 60% of its total assets in specified types of
assets, including cash, certain government securities, loans secured by and
other assets related to residential real property, educational loans and
investments in premises of the institution or (ii) satisfy the statutory
qualified thrift lender test set forth in the Home Owners' Loan Act by
maintaining at least 65% of its portfolio assets in qualified thrift investments
(defined to include residential mortgages and related equity investments,
certain mortgage-related securities, small business loans, student loans and
credit card loans). For purposes of the statutory qualified thrift lender test,
portfolio assets are defined as total assets minus goodwill and other intangible
assets, the value of property used by the institution in conducting its
business, and specified liquid assets up to 20% of total assets. A savings
institution must maintain its status as a qualified thrift lender on a monthly
basis in at least nine out of every twelve months. Kearny Federal Savings Bank
met the qualified thrift lender test as of September 30, 2004 and in each of the
last twelve months and, therefore, qualifies as a qualified thrift lender.
A savings bank that fails the qualified thrift lender test and does not
convert to a bank charter generally will be prohibited from: (1) engaging in any
new activity not permissible for a national bank, (2) paying dividends not
permissible under national bank regulations, and (3) establishing any new branch
office in a location not permissible for a national bank in the institution's
home state. In addition, if the institution does not requalify under the
qualified thrift lender test within three years after failing the test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from the
Federal Home Loan Bank as promptly as possible.
Transactions with Related Parties. Federal law limits Kearny Federal
Savings Bank's authority to lend to, and engage in certain other transactions
with (collectively, "covered transactions"), "affiliates" (e.g., any company
that controls or is under common control with an institution, including Kearny
Financial Corp., Kearny MHC and their non-savings institution subsidiaries). The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution's capital and surplus. Loans and other specified
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in federal law. The purchase of low
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quality assets from affiliates is generally prohibited. Transactions with
affiliates must be on terms and under circumstances that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits a company from
making loans to its executive officers and directors. However, that act contains
a specific exception for loans by a depository institution to its executive
officers and directors in compliance with federal banking laws. Under such laws,
Kearny Federal Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders ("insiders"), as well as entities such persons
control, is limited. The law restricts both the individual and aggregate amount
of loans Kearny Federal Savings Bank may make to insiders based, in part, on
Kearny Federal Savings Bank's capital position and requires certain board
approval procedures to be followed. Such loans must be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees.
Kearny Federal Savings Bank makes loans to its officers, directors and
employees in the ordinary course of business. Such loans are on substantially
the same terms and conditions, including interest rates and collateral, as those
of comparable transactions prevailing at the time with other persons. Such loans
also do not include more than the normal risk of collectibility or present other
unfavorable features.
As of September 30, 2004, June 30, 2004 and June 30, 2003, loans made
by Kearny Federal Savings Bank to senior officers, directors and their
associates totaled approximately $1.6 million, $1.6 million and $2.5 million,
respectively. During the year ended June 30, 2004, new loans to senior officers,
directors and their associates totaled $0, repayments totaled approximately
$100,000 and loans to individuals no longer associated with the Kearny Federal
Savings Bank totaled approximately $774,000. During the three months ended
September 30, 2004, new loans to senior officers, directors and their associates
totaled $0 and repayments totaled approximately $25,000.
Other than through loans with Kearny Federal Savings Bank made in the
ordinary course of business on substantially the same terms and conditions as
those of comparable transactions prevailing at the time with other persons, no
directors, officers or their immediate family members were engaged, directly or
indirectly, in transactions with Kearny Financial Corp. or any subsidiary
exceeding $60,000 during the three years ended June 30, 2004 or the three months
ended September 30, 2004.
Community Reinvestment Act. Under the Community Reinvestment Act, every
insured depository institution, including Kearny Federal Savings Bank, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community. The
Community Reinvestment Act requires the Office of Thrift Supervision to assess
the depository institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution, such as a merger or the establishment of a branch office by
Kearny Federal Savings Bank. An unsatisfactory Community Reinvestment Act
examination rating may be used by the Office of Thrift Supervision as the basis
for the denial of an application. Kearny Federal
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Savings Bank received a satisfactory Community Reinvestment Act rating in its
most recent Community Reinvestment Act examination by the Office of Thrift
Supervision.
Federal Home Loan Bank System. Kearny Federal Savings Bank is a member
of the Federal Home Loan Bank of New York, which is one of twelve regional
Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by financial institutions and proceeds derived from the
sale of consolidated obligations of the Federal Home Loan Bank System. It makes
loans to members pursuant to policies and procedures established by the board of
directors of the Federal Home Loan Bank.
As a member, Kearny Federal Savings Bank is required to purchase and
maintain stock in the Federal Home Loan Bank of New York in an amount equal to
the greater of 1% of our aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of each year or 5% of
our outstanding Federal Home Loan Bank advances. We are in compliance with this
requirement with an investment in Federal Home Loan Bank of New York stock at
September 30, 2004 of $11.4 million. The Federal Home Loan Bank imposes various
limitations on advances such as limiting the amount of certain types of real
estate related collateral to 30% of a member's capital and limiting total
advances to a member.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid and could continue to do so in the future. In addition, these
requirements could result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their checking accounts and non-personal certificate accounts. At
September 30, 2004, Kearny Federal Savings Bank was in compliance with such
requirements.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
The USA Patriot Act. Kearny Federal Savings Bank is subject to Office
of Thrift Supervision regulations implementing the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA Patriot Act. The USA Patriot Act gives the
federal government powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA Patriot Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act. As of September 30, 2004, management of Kearny Federal
Savings Bank believes all required actions to be taken by Kearny Federal Savings
Bank under the USA Patriot Act have been completed.
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Among other requirements, Title III of the USA Patriot Act and the
related regulations of the Office of Thrift Supervision impose the following
requirements with respect to financial institutions:
o Establishment of anti-money laundering programs that include, at minimum:
(i) internal policies, procedures, and controls; (ii) specific designation
of an anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Establishment of a program specifying procedures for obtaining identifying
information from customers seeking to open new accounts, including
verifying the identity of customers within a reasonable period of time.
o Establishment of appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect and report
money laundering.
o Prohibitions on establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do not
have a physical presence in any country), and compliance with certain
record keeping obligations with respect to correspondent accounts of
foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Regulation of Kearny Financial Corp.
General. Kearny Financial Corp. is a savings and loan holding company
within the meaning of Section 10 of the Home Owners' Loan Act. It is required to
file reports with the Office of Thrift Supervision and is subject to regulation
and examination by the Office of Thrift Supervision. Kearny Financial Corp. must
also obtain regulatory approval from the Office of Thrift Supervision before
engaging in certain transactions, such as mergers with or acquisitions of other
financial institutions. In addition, the Office of Thrift Supervision has
enforcement authority over Kearny Financial Corp. and any non-savings
institution subsidiaries. This permits the Office of Thrift Supervision to
restrict or prohibit activities that it determines to be a serious risk to
Kearny Federal Savings Bank. This regulation is intended primarily for the
protection of the depositors and not for the benefit of stockholders of Kearny
Financial Corp.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into
law the Sarbanes-Oxley Act of 2002, or the Act, which implemented legislative
reforms intended to address corporate and accounting fraud. In addition to the
establishment of a new accounting oversight board that will enforce auditing,
quality control and independence standards and will be funded by fees from all
publicly traded companies, the Act places certain restrictions on the scope of
services that may be provided by accounting firms to their public company audit
clients. Any non-audit services being provided to a public company audit client
will require preapproval by the company's audit committee. In addition, the Act
makes certain changes to the requirements for partner rotation after a period of
time. The Act requires chief executive officers and chief financial officers, or
their equivalent, to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission, subject to civil and criminal penalties if
they knowingly or willingly violate this certification requirement. In addition,
under the Act, counsel will be required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
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Under the Act, longer prison terms will apply to corporate executives
who violate federal securities laws; the period during which certain types of
suits can be brought against a company or its officers is extended; and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives (other than
loans by financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision of the Act directs that civil penalties
levied by the Securities and Exchange Commission as a result of any judicial or
administrative action under the Act be deposited to a fund for the benefit of
harmed investors. The Federal Accounts for Investor Restitution provision also
requires the Securities and Exchange Commission to develop methods of improving
collection rates. The legislation accelerates the time frame for disclosures by
public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in ownership in a company's securities
within two business days of the change.
The Act also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under the Act, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements
materially misleading. The Act also requires the Securities and Exchange
Commission to prescribe rules requiring inclusion of any internal control report
and assessment by management in the annual report to stockholders. The Act
requires the company's registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls.
Activities Restrictions. As a savings and loan holding company and as a
subsidiary holding company of a mutual holding company, Kearny Financial Corp.
is subject to statutory and regulatory restrictions on its business activities.
The non-banking activities of Kearny Financial Corp. and its non- savings
institution subsidiaries are restricted to certain activities specified by
Office of Thrift Supervision regulation, which include performing services and
holding properties used by a savings institution subsidiary, activities
authorized for savings and loan holding companies as of March 5, 1987, and non-
banking activities permissible for bank holding companies pursuant to the Bank
Holding Company Act of 1956 or authorized for financial holding companies
pursuant to the Gramm-Leach-Bliley Act. Before engaging in any non-banking
activity or acquiring a company engaged in any such activities, Kearny Financial
Corp. must file with the Office of Thrift Supervision either a prior notice or
(in the case of non- banking activities permissible for bank holding companies)
an application regarding its planned activity or acquisition.
Mergers and Acquisitions. Kearny Financial Corp. must obtain approval
from the Office of Thrift Supervision before acquiring, directly or indirectly,
more than 5% of the voting stock of another savings institution or savings and
loan holding company or acquiring such an institution or holding
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company by merger, consolidation or purchase of its assets. Federal law also
prohibits a savings and loan holding company from acquiring more than 5% of a
company engaged in activities other than those authorized for savings and loan
holding companies by federal law; or acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating an application for Kearny Financial Corp. to acquire
control of a savings institution, the Office of Thrift Supervision would
consider the financial and managerial resources and future prospects of Kearny
Financial Corp. and the target institution, the effect of the acquisition on the
risk to the insurance funds, the convenience and the needs of the community and
competitive factors.
Stock Holding Company Subsidiary Regulation. The Office of Thrift
Supervision has adopted regulations governing the two-tier mutual holding
company form of organization and subsidiary stock holding companies that are
controlled by mutual holding companies. We have adopted this form of
organization and it will continue in place after the proposed offering. Kearny
Financial Corp. is the stock holding company subsidiary of Kearny MHC. Kearny
Financial Corp. is permitted to engage in activities that are permitted for
Kearny MHC subject to the same restrictions and conditions.
Waivers of Dividends by Kearny MHC. Office of Thrift Supervision
regulations require Kearny MHC to notify the Office of Thrift Supervision of any
proposed waiver of its receipt of dividends from Kearny Financial Corp. The
Office of Thrift Supervision reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is consistent
with such directors' fiduciary duties to the mutual holding company's members;
(ii) for as long as the savings association subsidiary is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company is considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with Statement of Financial Accounting Standards No.
5, where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under Office of Thrift Supervision capital distribution regulations. We
anticipate that Kearny MHC will waive dividends paid by Kearny Financial Corp.,
if any.
Conversion of Kearny MHC to Stock Form. Office of Thrift Supervision
regulations permit Kearny MHC to convert from the mutual form of organization to
the capital stock form of organization, commonly referred to as a second step
conversion. In a second step conversion a new holding company would be formed as
the successor to Kearny Financial Corp., Kearny MHC's corporate existence would
end, and certain depositors of Kearny Federal Savings Bank would receive the
right to subscribe for shares of the new holding company. In a second step
conversion, each share of common stock held by stockholders other than Kearny
MHC would be automatically converted into a number of shares of common stock of
the new holding company determined pursuant to an exchange ratio that ensures
that Kearny Financial Corp. stockholders own the same percentage of common stock
in the new holding company as they owned in Kearny Financial Corp. immediately
prior to the second step conversion. Under Office of Thrift Supervision
regulations, Kearny Financial Corp. stockholders would not be diluted because of
any dividends waived by Kearny MHC (and waived dividends would not be considered
in determining an appropriate exchange ratio), in the event Kearny MHC converts
to stock form. The total number of shares held by Kearny Financial Corp.
stockholders after a second step conversion also would be increased by any
purchases by Kearny Financial Corp. stockholders in the stock offering of the
new holding company conducted as part of the second step conversion.
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Acquisition of Control. Under the federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire "control" of
a savings and loan holding company or savings association. An acquisition of
"control" can occur upon the acquisition of 10% or more of the voting stock of a
savings and loan holding company or savings institution or as otherwise defined
by the Office of Thrift Supervision. Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice to
act, taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
Federal Securities Laws
Kearny Financial Corp. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 for the
registration of the common stock to be issued pursuant to the offering. Upon
completion of the offering, Kearny Financial Corp. common stock will continue to
be registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. Kearny Financial Corp. will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934.
TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations.
All thrift institutions are now subject to the same provisions as banks
with respect to deductions for bad debts. Thrift institutions that are treated
as "small banks" (the average adjusted bases for all assets of such institution
equals $500 million or less) under the Internal Revenue Code may account for bad
debts by using the experience method for determining additions to their bad debt
reserve. Thrift institutions that are not treated as small banks must now use
the specific charge-off method.
Kearny Financial Corp. may exclude from its income 100% of dividends
received from Kearny Federal Savings Bank as a member of the same affiliated
group of corporations. A 70% dividends received deduction generally applies with
respect to dividends received from corporations that are not members of such
affiliated group.
Kearny Financial Corp. and Kearny Federal Savings Bank have previously
filed a consolidated federal tax return with Kearny MHC. Kearny MHC's
consolidated federal income tax returns have not been audited by the IRS during
the past five years. Following the stock offering, Kearny Financial Corp. and
Kearny Federal Savings Bank will file a consolidated return and Kearny MHC will
file a separate return.
State Taxation
Kearny Financial Corp. and its subsidiaries file New Jersey income tax
returns and are subject to a state income tax that is calculated based on
federal taxable income, subject to certain adjustments. In July 2002, New Jersey
eliminated the 3% tax rate formerly applicable to thrift institutions located in
New
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Jersey, and such institutions are now subject to the 9% tax rate applicable to
New Jersey corporations. Such change was retroactive to January 1, 2002.
The state income tax returns of Kearny Federal Savings Bank have not
been audited during the past five years. For additional information, see Note 15
to the consolidated financial statements beginning on page F-1.
MANAGEMENT
Directors and Executive Officers of Kearny Financial Corp. and Kearny Federal
Savings Bank
Kearny Financial Corp.'s and Kearny Federal Savings Bank's Boards of
Directors are both composed of nine members, with each director serving for a
term of three years. Kearny Financial Corp.'s and Kearny Federal Savings Bank's
bylaws require that directors be divided into three classes, as nearly equal in
number as possible, with approximately one-third of the directors elected each
year.
Kearny Financial Corp.'s and Kearny Federal Savings Bank's executive
officers are appointed annually by the respective Boards of Directors and serve
at the Board's discretion. However, several of Kearny Federal Savings Bank's
officers do have employment agreements, as further described on page 109.
The following table sets forth information with respect to the
directors and executive officers of Kearny Financial Corp. and Kearny Federal
Savings Bank.
Age at Current
June 30, Director Term
Name 2004 Position Since(1) Expires
---- ------ -------- -------- -------
Directors
John J. Mazur, Jr. 50 Chairman 1996 2004
John N. Hopkins 57 Director, President and Chief 2001 2006
Executive Officer
Theodore J. Aanensen 59 Director 1986 2005
Matthew T. McClane 67 Director 1994 2004
John F. McGovern 43 Director 1999 2004
Joseph P. Mazza 60 Director 1993 2005
Leopold W. Montanaro(2) 64 Director 2003 2006
Henry S. Parow 81 Director 1976 2006
John F. Regan 59 Director 1999 2005
Edward T. Rushforth(3) 87 Director 1975 2006
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Age at Current
June 30, Director Term
Name 2004 Position Since(1) Expires
---- ------ -------- -------- -------
Executive Officers(4)
Albert E. Gossweiler 56 Senior Vice President and N/A N/A
Chief Financial Officer
William C. Ledgerwood 51 Senior Vice President, Treasurer and N/A N/A
Chief Accounting Officer
Sharon Jones 50 Senior Vice President and Corporate N/A N/A
Secretary
Patrick M. Joyce 39 Senior Vice President and Chief N/A N/A
Lending Officer
Allan Beardslee 52 Senior Vice President of Information N/A N/A
Technology
Erika Sacher 39 Senior Vice President and Branch N/A N/A
Administrator
----------------------
(1) Indicates the year the individual first became a director of Kearny Federal
Savings Bank. Upon the formation of Kearny Financial Corp. in March 2001,
each person serving as a director at that time of Kearny Federal Savings
Bank became a director of Kearny Financial Corp.
(2) Mr. Montanaro serves as a director of Kearny Federal Savings Bank only.
(3) Mr. Rushforth serves as a director of Kearny Financial Corp. and Kearny MHC
only.
(4) Mr. Hopkins, Mr. Gossweiler, Mr. Ledgerwood and Ms. Jones also serve as
officers of Kearny Financial Corp. The other officers listed herein are
officers of Kearny Federal Savings Bank only.
The business experience of each of Kearny Financial Corp.'s and Kearny
Federal Savings Bank's directors and executive officers is set forth below. Each
has held his present position for at least the past five years, except as
otherwise indicated.
Directors
John J. Mazur, Jr. is the sole owner and president/chief executive
officer of Elegant Desserts, a wholesale bakery located in Lyndhurst, New
Jersey, that sells gourmet cakes nationally and on QVC. He opened this business
in 1994. From 1976 to 2003, he was also a partner and general manager of Mazur's
Bakery, a retail bakery in Lyndhurst, New Jersey, that operated from 1936 until
it was sold in 2003. He became chairman of the Board of Directors of Kearny in
January 2004.
John N. Hopkins became president and chief executive officer of Kearny
MHC, Kearny Financial Corp. and Kearny Federal Savings Bank in 2002 and served
the Bank previously as executive vice president from 1994 to 2002 and as chief
financial officer from 1994 to 1999. He has been employed by Kearny Federal
Savings Bank since 1975. He is a graduate of Fairleigh Dickinson University.
Active in professional and charitable organizations, he serves on several
committees of the New Jersey League of Community Bankers; the board of directors
of the Thrift Institutions Community Investment Corp. of NJ (TICIC), the board
of trustees of Clara Maass Medical Center, the board of trustees of the Saint
Barnabas Health Care System and the Rutherford Senior Citizens Center (55 Kip
Center).
Theodore J. Aanensen is an owner and president of Aanensen's, a luxury
home remodeling and custom cabinetry company established in Kearny in 1951. A
graduate of Upsala College in 1966, he has been president of Aanensen's since
1982.
105
Joseph P. Mazza is a graduate of Seton Hall University and The
University of Pennsylvania. He is a self-employed dentist practicing in
Rutherford, New Jersey, since 1971. He also serves on the Board of the
Rutherford Senior Citizens Center.
Matthew T. McClane retired in 2002. He was appointed to president and
chief executive officer of Kearny Federal Savings Bank in 1994 and president and
chief executive officer of Kearny MHC and Kearny Financial Corp. in 2001. He was
employed by Kearny Federal Savings Bank from 1967 to 2002.
John F. McGovern is the owner of McGovern Monuments, a monument sales
and lettering company located in North Arlington, New Jersey that has been in
business since 1924. He has also worked as a self-employed certified public
accountant and certified financial planner since 1984 and as a registered
investment advisor since 2001.
Leopold W. Montanaro is retired and was the chairman, president and
chief executive officer of West Essex Bancorp, Inc. and West Essex Bank, located
in Caldwell, New Jersey, until such bank was acquired by Kearny Financial Corp.
on July 1, 2003. He was employed by West Essex Bank from 1972 until the
completion of the merger with Kearny Federal Savings Bank. He serves as a
director of Kearny Federal Savings Bank but not as a director of Kearny
Financial Corp. or Kearny MHC.
Henry S. Parow is a graduate of Seton Hall College. He is a licensed
funeral director in the state of New Jersey since 1950. He is the original
owner, director and manager of the Parow Funeral Home, North Arlington, New
Jersey, since 1957. He currently is on the Board of Directors of Kearny Federal
Savings Bank, Kearny MHC and Kearny Financial Corp.
John F. Regan has been the majority stockholder and president of two
automobile sales and service companies, DeMassi Pontiac, Buick and GMC, located
in Riverdale, New Jersey and Regan Pontiac, Buick and GMC, located in Long
Island City, New York since 1995.
Edward T. Rushforth is retired. He was a florist and the owner of a
retail floral business that he sold in 1977. He served as a director of Kearny
Federal Savings Bank until 2003 and now serves only as a director of Kearny
Financial Corp. and Kearny MHC.
Executive Officers
Albert E. Gossweiler became senior vice president and chief financial
officer of Kearny Federal Savings Bank in 1999 and of Kearny Financial Corp.
upon its formation in 2001. He was previously employed by South Bergen Savings
Bank and joined Kearny when such bank was acquired by Kearny Federal Savings
Bank in 1999. He was employed by South Bergen Savings Bank from 1981 until the
completion of the merger with Kearny Federal Savings Bank.
William C. Ledgerwood became the senior vice president, treasurer and
chief accounting officer of Kearny Federal Savings Bank and Kearny Financial
Corp. in 2002 and has been employed by Kearny Federal Savings Bank since 1998.
He was previously the chief financial officer for The Jersey Bank for Savings,
which opened as a de novo stock bank in 1989 and was acquired by Interchange
Bank in 1998.
Sharon Jones is the corporate secretary of Kearny MHC, Kearny Financial
Corp. and Kearny Federal Savings Bank. She was appointed to the office of
corporate secretary in 1997 and became a senior vice president in 2002. She has
been employed by Kearny Federal Savings Bank since 1972.
106
Patrick M. Joyce became the senior vice president and chief lending
officer of Kearny Federal Savings Bank in 2002 and was previously vice president
of loan originations from 1999 to 2002. He was formerly employed by South Bergen
Savings Bank as an assistant corporate secretary and as a loan originator
starting in 1989. He joined Kearny when South Bergen Savings Bank was acquired
by Kearny Federal Savings Bank in 1999 and was employed by such bank from 1985
until the completion of the merger with Kearny Federal Savings Bank.
Allan Beardslee became senior vice president of information technology
for Kearny Federal Savings Bank in 2002 and prior to that was senior vice
president of operations beginning in 1982. He has been employed by Kearny
Federal Savings Bank since 1975.
Erika Sacher has been the senior vice president and branch
administrator of Kearny Federal Savings Bank since 2002 and was previously a
vice president and branch administrator from 1999 to 2002. She was formerly
employed by South Bergen Savings Bank as a vice president and branch
administrator and joined Kearny when such bank was acquired by Kearny Federal
Savings Bank in 1999. She was employed by South Bergen Savings Bank from 1991
until the completion of the merger with Kearny Federal Savings Bank.
Meetings and Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the
Board and through activities of its committees. During the fiscal year ended
June 30, 2004, the Board of Directors met twelve times. No director attended
fewer than 75% of the total meetings of the Board of Directors and committees on
which he served during the year ended June 30, 2004. The Board maintains an
Audit & Compliance Committee, a Budget Committee, an Executive Committee, an
Interest Rate Risk Management Committee, an Asset Quality Committee, a
Nominating Committee and a Compensation Committee, as well as a Building &
Grounds Committee, a Governance Committee, a Planning & Marketing Committee, an
Electronic Data Processing Committee and a Benefits Equalization Plan
Administrative Committee.
The Audit & Compliance Committee consists of Directors McGovern
(Chair), Mazur, Mazza and Regan. Each member of the Audit Committee is
independent in accordance with the listing standards of the Nasdaq Stock Market.
The Board of Directors has designated John F. McGovern as an audit committee
financial expert under the rules of the Securities and Exchange Commission. This
committee meets monthly and also periodically with the internal auditor, the
compliance officer and the external auditors. This committee's responsibilities
include oversight of the internal audit and regulatory compliance activities and
monitoring management and employee compliance with the Board's audit policies
and applicable laws and regulations. This committee is directly responsible for
the appointment, compensation, retention and oversight of the work of the
external auditors. This committees operates under a written charter, which
governs its composition, responsibilities and operations.
The Compensation Committee consists of Directors Aanensen (Chair),
Mazur, Mazza and Parow. This committee meets as needed. The responsibilities of
this committee include appraisal of the performance of officers, administration
of management incentive compensation plans and review of directors'
compensation. This committee reviews industry compensation surveys and reviews
the recommendations of management on employee compensation matters. This
committees operates under a written charter, which governs its composition,
responsibilities and operations.
The Nominating Committee, consisting of Directors Mazza (Chair),
Aanensen, Parow, Regan and Rushforth, is responsible for the annual selection of
management's nominees for election as directors.
107
Each member of the Nominating Committee is independent in accordance with the
listing standards of the Nasdaq Stock Market. This committees operates under a
written charter, which governs its composition, responsibilities and operations.
Kearny Financial Corp. and Kearny Federal Savings Bank have adopted a
code of ethics, which applies to all employees and directors and addresses
compliance with applicable laws, rules and regulations. The code of ethics is
designed to deter wrongdoing and to promote honest and ethical conduct, full and
accurate disclosure and compliance with all applicable laws, rules and
regulations.
Director Compensation
Board Fees. Directors are currently paid a fee of $1,250 per Kearny
Federal Savings Bank board meeting attended, $600 per Kearny Financial Corp.
meeting attended and $600 per Kearny MHC meeting attended. The chairman of the
board receives a higher fee of $1,500, $720 and $720, for bank, holding company
and mutual holding company meetings, respectively.
Members of the Kearny Federal Savings Bank Executive Committee are
currently paid $1,200 per committee meeting attended; the chairman of the board
receives a higher fee of $1,440 for Executive Committee meetings. Each member of
the Kearny Federal Savings Bank Board of Directors is also a member of the
Executive Committee. Members of the Audit & Compliance Committee and the
chairman of this committee are paid $250 and $350, respectively, for each
meeting attended. Members of the Compensation Committee and the chairman of this
committee are paid $250 and $300, respectively, for each meeting attended. The
Administrative Building Construction Committee and the Branch Renovation &
Construction Committee are ad hoc committees, and members of these committees
are paid $250 per meeting attended.
Directors also receive an annual retainer as follows: $30,000 for
service on Kearny Federal Savings Bank's board, $6,000 for service on Kearny
Financial Corp.'s board and $6,000 for service on Kearny MHC's board. The
aggregate fees paid to the directors for the year ended June 30, 2004 were
$594,850. Directors who also serve as employees do not receive compensation as
directors. Effective January 1, 2005, the annual retainers will be increased to
$32,000 for service on Kearny Federal Savings Bank's board, $9,000 for service
on Kearny Financial Corp.'s board and $9,000 for service on Kearny MHC's board.
Directors Consultation and Retirement Plan. Kearny Federal Savings Bank
maintains a Directors Consultation and Retirement Plan (the "DCRP"). The DCRP
provides retirement benefits to the directors of the Bank based upon the number
of years of service to the Bank's board. To be eligible to receive benefits
under the DCRP, a director generally must have completed at least 5 years of
service and must not retire from the board prior to reaching 60 years of age. If
a director agrees to become a consulting director to the Bank's board upon
retirement, he will receive a monthly payment equal to 2.5% of the Bank's Board
fee in effect during the 12-month period prior to the date of retirement
multiplied by the number of years of service as a director, not to exceed 80% of
Board fee compensation. Benefits under the DCRP begin upon a director's
retirement and are paid for life; provided, however, that in the event of a
director's death prior to the receipt of 120 monthly payments, payments shall
continue to the director's surviving spouse or estate until 120 payments have
been made. In the event there is a change in control (as defined in the DCRP),
all directors will be presumed to be eligible to receive benefits under the DCRP
and each director will receive a lump sum payment equal to the present value of
future benefits payable. Benefits under the DCRP are unvested and forfeitable
until retirement at or after age 60 with at least 5 years of service,
termination of service following a change in control, disability following at
least 5 years
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of service or death. For the year ended June 30, 2004, payments made by the Bank
under the DCRP totaled $89,314.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by Kearny Financial Corp.'s Chief
Executive Officer and certain other officers of Kearny Financial Corp. or Kearny
Federal Savings Bank for the year ended December 31, 2003. All compensation was
paid by Kearny Federal Savings Bank.
Annual Compensation(1)
----------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ------ ------ ----- ------------
John N. Hopkins, President and 2003 $335,000 $103,450 $6,381(2)
Chief Executive Officer
Allan Beardslee, Senior Vice President 2003 173,000 61,610 6,007(3)
and EDP Officer
Albert E. Gossweiler, Senior Vice 2003 173,000 57,110 6,042(4)
President and Chief Financial Officer
Sharon Jones, Senior Vice President 2003 147,500 55,825 4,785(5)
and Corporate Secretary
William C. Ledgerwood, Senior Vice 2003 135,000 59,950 4,247(6)
President, Treasurer and Chief
Accounting Officer
--------------
(1) Compensation information for the years ended December 31, 2002 and 2001 is
omitted because Kearny Financial Corp. was not a reporting company under
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 during those
periods. Kearny provides certain of its executive officers with non-cash
benefits and perquisites, such as the use of company- owned or leased
vehicles. The aggregate value of such non-cash benefits for the year ended
December 31, 2003 did not exceed the lesser of $50,000 or 10% of the
aggregate salary and bonus for any officer.
(2) Consists of an employer contribution to the 401(k) Plan for Mr. Hopkins of
$4,059 and $2,322 for payment of life insurance premium.
(3) Consists of an employer contribution to the 401(k) Plan for Mr. Beardslee
of $5,190 and $817 for payment of life insurance premium.
(4) Consists of an employer contribution to the 401(k) Plan for Mr. Gossweiler
of $4,515 and $1,527 for payment of life insurance premium.
(5) Consists of an employer contribution to the 401(k) Plan for Ms. Jones of
$4,342 and $443 for payment of life insurance premium.
(6) Consists of an employer contribution to the 401(k) Plan for Mr. Ledgerwood
of $3,640 and $607 for payment of life insurance premium.
Employment Agreements. Kearny Federal Savings Bank has entered into an
employment agreement with Mr. Hopkins, pursuant to which his minimum base salary
is $450,000. Mr. Hopkins' employment agreement has a term of three years, which
commenced on July 1, 2004, and may be extended on or before each anniversary of
the effective date upon determination of the Board of Directors of Kearny
Federal Savings Bank that his performance has met the requirements and standards
of the Board. Pursuant to the terms of Mr. Hopkins' employment agreement, he is
generally entitled to participate in all discretionary bonuses, pension and
other retirement benefit plans, welfare benefit plans and other equity,
incentive and benefit plans and privileges applicable to senior management of
Kearny Federal Savings
109
Bank. Upon his termination of employment at any time on or after attainment of
age 62 and until he becomes eligible for Medicare coverage, Mr. Hopkins is
permitted to continue to participate, at Kearny Federal Savings Bank's expense,
in the group medical plan sponsored by the Bank.
If Kearny Federal Savings Bank terminates Mr. Hopkins without "cause"
as defined in the agreement, he will be entitled to (i) a continuation of his
salary from the date of termination through the remaining term of the agreement,
and (ii) during the same period, the cost of obtaining health, life, disability
and other benefits at levels substantially equal to those provided on the date
of termination of employment. If Mr. Hopkins' employment is terminated
involuntarily during the term of the agreement following a "change in control,"
as defined in the agreement, of Kearny Federal Savings Bank or Kearny Financial
Corp. or without cause within twenty-four months following a change in control,
he will be paid an amount equal to 2.999 times his five-year average annual
taxable cash compensation in a lump sum and be entitled to continued medical and
dental coverage for the remainder of the term. Mr. Hopkins will also be entitled
to the foregoing change in control severance payment and benefits if he
voluntarily terminates his employment within 120 days following certain events
during the term of the agreement following a change in control of Kearny Federal
Savings Bank or Kearny Financial Corp. or within twenty-four months following a
change in control. All amounts payable as severance in respect of a change in
control will be reduced to the extent necessary such that neither the payments
under the employment agreement, nor any other payments, constitute "excess
parachute payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. If a change in control payment had been made under Mr. Hopkins
agreement as of September 30, 2004, the payment would have equaled approximately
$818,240.
Kearny Federal Savings Bank has also entered into employment agreements
with Senior Vice Presidents Beardslee, Gossweiler, Jones, Joyce, Ledgerwood and
Sacher providing for a minimum base salary of $183,000, $183,000, $156,500,
$165,000, $170,000 and $170,000, respectively. These agreements each have a term
of two years, which commenced on July 1, 2004, and each provides for extension
of the term on or before each anniversary of the effective date upon
determination of the Board of Directors of Kearny Federal Savings Bank that the
officer's performance has met its requirements and standards. Pursuant to the
terms of the employment agreements, each officer is generally entitled to
participate in all discretionary bonuses, pension and other retirement benefit
plans, welfare benefit plans and other equity, incentive and benefit plans and
privileges applicable to senior management of Kearny Federal Savings Bank. Upon
termination of employment at any time on or after attainment of age 62 and until
eligibility for Medicare coverage, each of the officers is also permitted to
continue to participate, at Kearny Federal Savings Bank's expense, in the group
medical plan sponsored by the Bank.
If terminated without cause, each of these officers will be entitled to
(i) a continuation of his or her salary through the remaining term of the
agreement, and (ii) during the same period, the cost of obtaining health, life,
disability and other benefits at levels substantially equal to those provided on
the date of termination of employment. If terminated involuntarily during the
term of the agreement following a "change in control," as defined in the
agreement, of Kearny Federal Savings Bank or Kearny Financial Corp. or without
cause within twenty-four months following a change in control, each of these
officers will be paid an amount equal to 2.0 times his or her most recent total
annual compensation (including the value of deferred compensation and retirement
plans) in a lump sum and be entitled to continued medical and dental coverage
for the remainder of the term. Each of the officers will also be entitled to the
foregoing change in control severance payment and benefits upon a voluntary
termination of employment within 120 days following certain events during the
term of the agreement following a change in control of Kearny Federal Savings
Bank or Kearny Financial Corp. or within twenty-four months following a change
in control. All amounts payable to any of the officers as severance in respect
of a change in control will be reduced to the extent necessary such that neither
the payments under the employment agreement, nor any
110
other payments, constitute "excess parachute payments" under Section 280G of the
Internal Revenue Code of 1986, as amended. If change in control payments had
been made under these agreements as of September 30, 2004, the payments would
have equaled approximately $481,000, $472,000, $416,000, $374,000, $398,000 and
$328,000 for Senior Vice Presidents Beardslee, Gossweiler, Jones, Joyce,
Ledgerwood and Sacher, respectively.
Additionally, at September 30, 2004, Kearny Federal Savings Bank had
change in control severance arrangements with forty-one other officers of the
Bank providing for payment of one times their most recent total annual
compensation (including the value of deferred compensation and retirement plans)
if terminated within twenty-four months following a change in control. Such
agreements are currently effective through May 2006.
As of September 30, 2004, Kearny Federal Savings Bank also sponsored a
change in control severance pay plan, which provides for payments in the event
of involuntary termination without cause within 12 months of consummation of a
merger or change of control. The amount of such payments is equal to two and
one-half weeks salary for every year or partial year of service with Kearny
Federal Savings Bank, with a minimum benefit equal to two and one-half weeks of
salary and a maximum benefit equal to 100 weeks of salary. If the other party to
the transaction sponsors a more generous severance pay plan, the employee is
entitled to receive the amount of payments payable under such party's plan.
Employees who are subject to employment, change in control or severance
agreements are not entitled to benefits under his plan.
Benefit Plans
401(k) Savings and Profit Sharing Plan. Kearny Federal Savings Bank
sponsors a tax-qualified defined contribution savings plan for the benefit of
its employees. Employees become eligible to participate under the 401(k) Plan on
the first day of the month coincident with or immediately following the
completion of twelve months of service and the attainment of age 21. Under the
401(k) Plan, employees may voluntarily elect to defer between 1% and 75% of
compensation, not to exceed applicable limits under the Internal Revenue Code.
Employees age 50 and over may make catch-up contributions, which for calendar
year 2003 were limited to $2,000. In addition, the 401(k) Plan provides for
dollar-for- dollar employer matching contributions up to a maximum of 3% of such
person's salary for each participant under the 401(k) Plan. Employee and
employer matching contributions are immediately 100% vested. The 401(k) Plan
will be amended for participants under the 401(k) Plan to be able to direct
401(k) Plan assets to be invested in the stock of Kearny Financial Corp. in the
offering. Such directed investment of 401(k) Plan assets will be determined
based upon each individual's subscription rights as eligible depositors of
Kearny Federal Savings Bank at the eligibility record date and supplemental
eligibility record date set for the offering.
It is intended that the 401(k) Plan will operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and the requirements of Section 401(a) of the Internal Revenue Code.
Contributions to the 401(k) Plan for employees may be reduced in the future or
eliminated as a result of contributions made to the Employee Stock Ownership
Plan. See Management - Potential Stock Benefit Plans - Employee Stock Ownership
Plan on page 113.
Pension Plan. Kearny Federal Savings Bank is a participating employer
in a multiple-employer pension plan sponsored by the Financial Institutions
Retirement Fund (the "Pension Plan"). All full-time employees of the Bank are
eligible to participate after one year of service and attainment of age 21. A
qualifying employee becomes fully vested in the Pension Plan upon the earlier of
completion of five years
111
service or attainment of normal retirement age of 65. The Pension Plan is
intended to comply with the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age. A participant who is vested in the Pension
Plan may take an early retirement and elect to receive a reduced monthly benefit
beginning as early as age 45. The Pension Plan also provides for payments in the
event of disability or death.
The annual benefit amount upon retirement at age 65 equals 2% times
years of service times a participant's highest five year average salary.
Benefits are payable in the form of a monthly retirement benefit and a death
benefit or an alternative form that is actuarially equivalent. At September 30,
2004, Officers Hopkins, Gossweiler, Ledgerwood, Sacher, Joyce, Beardslee and
Jones had 28 years, 21 years, 5 years, 12 years, 18 years, 28 years and 31
years, respectively, of credited service under the Pension Plan and had a
current highest five year average salary of $283,000, $159,000, $121,000,
$115,000, $104,000, $166,000 and $140,000, respectively.
We anticipate higher benefits costs during the remainder of fiscal
2005, as we expect to contribute significantly more to fund the employee pension
plan.
Benefit Equalization Plan. Kearny Federal Savings Bank has adopted a
Benefit Equalization Plan (the "BEP"). The purpose of the BEP is to provide a
pension benefit based upon the actual earnings of senior officers of the Bank
(President, Executive Vice Presidents, Vice Presidents and Corporate
Secretaries) in the event that their average annual earnings exceeds the
permissible pensionable earnings level under the Pension Plan as required by the
limitations of Sections 401(a)(17) and 415 of the Internal Revenue Code. The
supplemental pension for President and Chief Executive Officer John N. Hopkins
and other senior officers whose highest five year annual earnings prior to
retirement will include years in which such earnings exceed the limits of
Sections 401(a)(17) and 415 of the Internal Revenue Code will receive a
supplemental benefit based upon the difference between their average earnings
taking into effect this maximum pensionable earnings limitation and their
average earnings without regard to such limitation, multiplied by 2% times their
years of service at retirement. The benefits payment under the BEP will be in
the form of an annual benefit payable for life and a death benefit, unless the
committee administering the BEP authorizes an alternative form of benefit.
During the year ended June 30, 2004, there was approximately $59,000 of benefits
paid to retired participants under the BEP. For the year ended June 30, 2004,
financial reporting expense accrued under the BEP totaled $207,000.
The following table sets forth the estimated annual benefits payable
under the Pension Plan and the Benefit Equalization Plan described above, upon
retirement at age 65 as of June 30, 2004, expressed in the form of a life
annuity, for the average annual earnings described above and years of service
specified. Such amounts are in addition to any benefits payable under Social
Security.
Creditable Years of Service at Age 65
Average
Annual Wages 15 20 25 30 35
------------ ---------- ----------- ---------- --------- -------
$ 25,000 $ 7,500 $ 10,000 $ 12,500 $ 15,000 $ 17,500
50,000 15,000 20,000 25,000 30,000 35,000
75,000 22,500 30,000 37,500 45,000 52,500
100,000 30,000 40,000 50,000 60,000 70,000
150,000 50,000 60,000 75,000 90,000 105,000
200,000 60,000 80,000 100,000 120,000 140,000
300,000 90,000 120,000 150,000 180,000 210,000
400,000 120,000 160,000 200,000 240,000 280,000
550,000 165,000 220,000 275,000 330,000 385,000
112
Group Term Life Insurance Plan. Kearny Federal Savings Bank has a
post-retirement group term life insurance plan covering all eligible employees.
Benefits are based on age and years of service. During the year ended June 30,
2004, there was approximately $6,000 contributed to and benefit paid under this
plan.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee during the year ended June 30, 2004, consisted of
Directors Aanensen (Chair), Mazur, Mazza and Parow. During the year ended June
30, 2004, Kearny Financial Corp. had no "interlocking" relationships in which
(i) an executive officer of Kearny Financial Corp. served as a member of the
compensation committee of another entity, one of whose executive officers served
on the compensation committee of Kearny Financial Corp.; (ii) an executive
officer of Kearny Financial Corp. served as a director of another entity, one of
whose executive officers served on the compensation committee of Kearny
Financial Corp.; and (iii) an executive officer of Kearny Financial Corp. served
as a member of the compensation committee of another entity, one of whose
executive officers served as a director of Kearny Financial Corp.
Potential Stock Benefit Plans
Employee Stock Ownership Plan. We intend to establish an employee stock
ownership plan for the exclusive benefit of participating employees of Kearny
Federal Savings Bank, to be implemented prior to the completion of the offering.
Participating employees are employees who have completed at least one year of
service and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the employee stock ownership
plan will be submitted to the IRS. Although no assurances can be given, we
expect that the employee stock ownership plan will receive a favorable letter of
determination from the IRS.
The employee stock ownership plan is to be funded by contributions made
by Kearny Federal Savings Bank in cash or common stock. Benefits may be paid
either in shares of the common stock or in cash. The plan will borrow funds with
which to acquire up to 8% of the shares sold in the offering. The employee stock
ownership plan may elect, in whole or in part, to fill its order through open
market purchases subsequent to the closing of the offering, subject to any
required regulatory approval. The employee stock ownership plan intends to
borrow funds from Kearny Financial Corp. The loan is expected to be for a term
of ten years at an annual interest rate equal to the prime rate as published in
The Wall Street Journal. Presently it is anticipated that the employee stock
ownership plan will purchase up to 8% of the shares sold in the offering. The
loan will be secured by the shares purchased and earnings of employee stock
ownership plan assets. Shares purchased with loan proceeds will be held in a
suspense account for allocation among participants as the loan is repaid. It is
anticipated that all contributions will be tax-deductible.
Contributions to the employee stock ownership plan and shares released
from the suspense account will be allocated among participants on the basis of
base compensation. All participants must be employed at least 1,000 hours in a
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Participant benefits become fully
vested in plan allocations following five years of service. Employment service
before the adoption of the employee stock ownership plan shall be credited for
the purposes of vesting. Contributions to the employee stock ownership plan by
Kearny Federal Savings Bank are discretionary and as a result benefits payable
under this plan cannot be estimated.
113
The Board of Directors has appointed the non-employee directors to a
committee that will administer the plan and serve as the plan's trustees. The
trustees must vote all allocated shares held in the plan as directed by plan
participants. Unallocated shares and allocated shares for which no timely
direction is received will be voted as directed by the Board of Directors or the
plan's committee, subject to the trustees' fiduciary duties.
Benefits Equalization Plan for Employee Stock Ownership Plan. Along
with the implementation of the employee stock ownership plan, Kearny Federal
Savings Bank will implement a benefits equalization plan related to this plan
for its senior officers. The participants under this plan will be the same as
the participants under the benefits equalization plan related to the Kearny
Federal Savings Bank's Pension Plan. This plan will provide participating
executives with benefits otherwise limited under the employee stock ownership
plan by Sections 401(a)(17) and 415 of the Internal Revenue Code. Specifically,
the plan will provide benefits to officers that cannot be provided under the
employee stock ownership plan as a result of limitations imposed by Sections
401(a)(17) and 415 of the Internal Revenue Code, but that would have been
provided under the employee stock ownership plan, but for these Internal Revenue
Code limitations. For example, this plan will provide participants with a
benefit for any compensation that they may earn in excess of $205,000 (as
indexed) comparable to the benefits earned by all participants under the
employee stock ownership plan for compensation earned below that level. Kearny
Federal Savings Bank may utilize a grantor trust in connection with this plan in
order to set aside funds that ultimately may be used to pay benefits under the
plan. The assets of the grantor trust will remain subject to the claims of
Kearny Federal Savings Bank's general creditors in the event of insolvency,
until paid to a participant following termination of employment according to the
terms of the plan. Benefits under the plan will be paid in a lump sum in the
form of common stock of Kearny Financial Corp. to the extent permissible under
applicable regulations, or in the alternative, benefits will be paid in cash
based upon the value of such common stock at the time that such benefit payments
are made. The actual value of benefits under this plan and the annual financial
reporting expense associated with this plan will be calculated annually based
upon a variety of factors, including the actual value of benefits for
participants determined under the employee stock ownership plan each year, the
applicable limitations under the Internal Revenue Code that are subject to
adjustment annually and the salary of each participant at such time. Generally,
benefits under the plan will be taxable to each participant at the time of
receipt of such payment, and Kearny Federal Savings Bank will recognize a
tax-deductible compensation expense at such time.
Stock Option Plan. We intend to adopt a stock option plan for the
benefit of directors and officers after the passage of at least six months
following the completion of the offering. Under the current regulations of the
Office of Thrift Supervision, the stock option plan must be approved by a
majority of the total votes eligible to be cast by our stockholders, other than
Kearny MHC, unless we obtain a waiver from the Office of Thrift Supervision
allowing approval by a majority of votes cast, other than by Kearny MHC. The
plan and the approval of the plan will comply with all of the then applicable
Office of Thrift Supervision regulations. Up to 4.9% of the total number of
shares of common stock to be issued in the offering to public stockholders and
Kearny MHC will be reserved for issuance under the stock option plan. No
determinations have been made as to any specific grants to be made under the
stock option plan or the terms thereof. In accordance with the requirements of
our charter, any stock option plan adopted will be subject to approval of the
holders of a majority of the shares eligible to be voted at a stockholder
meeting.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers and directors with a
proprietary interest in Kearny Financial Corp. as an incentive to contribute to
our success and reward directors and officers for outstanding performance.
Although the terms of the stock option plan have not yet been determined, it is
expected that the stock option plan will provide for the grant of: (1) options
to purchase the common stock intended to qualify
114
as incentive stock options under the Internal Revenue Code (incentive stock
options); and (2) options that do not so qualify (non-incentive stock options).
The exercise price of any options will be not less than the fair market value of
the common stock on the date of grant. Any stock option plan would be in effect
for up to 10 years following the earlier of adoption by the Board of Directors
or approval by the stockholders. Options would expire no later than 10 years
following the date granted and would expire earlier if the option committee so
determines or in the event of termination of employment. Options would be
granted based upon several factors, including seniority, job duties and
responsibilities and job performance.
The Financial Accounting Standards Board has announced a change in the
required accounting methods applicable to stock options effective after June 15,
2005. Under such accounting requirements, we will be required to recognize
compensation expense related to stock options outstanding based upon the fair
value of such awards at the date of grant over the period that such awards are
earned. In preparing the pro forma information presented on pages 24 to 30, we
assumed that compensation expense would be recognized on a straight-line basis
over the 5-year vesting period. The new accounting guidance does not, however,
require that we use a straight-line basis to recognize the expense and we may
use a different method. Additionally, our pro forma information assumes that the
options would vest at a rate of 20% per year, and the options may vest at a rate
other than 20% per year.
Restricted Stock Plan. We also intend to establish a restricted stock
plan to provide our officers and directors with a proprietary interest in Kearny
Financial Corp. after the passage of at least six months following the
completion of the offering. The restricted stock plan is expected to provide for
the award of common stock, subject to vesting restrictions, to eligible officers
and directors. Under the current regulations of the Office of Thrift
Supervision, the stock option plan must be approved by a majority of the total
votes eligible to be cast by our stockholders, other than Kearny MHC, unless we
obtain a waiver from the Office of Thrift Supervision allowing approval by a
majority of votes cast, other than by Kearny MHC. The plan and the approval of
the plan will comply with all of the then applicable Office of Thrift
Supervision regulations.
We expect to contribute funds to the restricted stock plan to acquire,
in the aggregate, up to 1.96% of the total number of shares of common stock
issued in the offering to public stockholders and Kearny MHC. Shares used to
fund the restricted stock plan may be acquired through open market purchases or
provided from authorized but unissued shares. No determinations have been made
as to the specific terms of the restricted stock plan.
Dilution. While our intention is to fund the stock option plan and
restricted stock plan through open market purchases, stockholders will
experience a reduction or dilution in ownership interest if the plans are
instead funded with newly-issued shares.
The issuance of authorized but unissued shares of stock to the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.92%.
The issuance of authorized but unissued shares of stock to the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.67%.
Transactions with Management and Others
Other than through loans with Kearny Federal Savings Bank, no
directors, executive officers or their immediate family members were engaged,
directly or indirectly, in transactions with Kearny Financial
115
Corp. or any subsidiary exceeding $60,000 during the three years ended June 30,
2004 or the three months ended September 30, 2004.
Kearny Federal Savings Bank makes loans to its officers, directors and
employees in the ordinary course of business. Such loans are on substantially
the same terms and conditions as those of comparable transactions prevailing at
the time with other persons. Such loans also do not include more than the normal
risk of collectibility or present other unfavorable features.
Proposed Stock Purchases by Management
While no formal decisions have been made, preliminary indications are
that Kearny Financial Corp.'s directors and executive officers and their
associates will purchase approximately 573,000 shares of common stock in the
offering, which represents 1.2%, 1.0% and 0.9% of the total shares to be
outstanding after the offering at the minimum, midpoint and maximum of the
offering range, respectively.
The following table sets forth for each of the directors and executive
officers of Kearny Financial Corp. (including in each case all "associates" of
the directors and executive officers) the number of shares of common stock which
each director and officer have preliminarily indicated they intend to purchase.
The table does not include purchases by the employee stock ownership plan and
does not take into account any stock benefit plans to be adopted following the
stock offering. See Management - Potential Stock Benefit Plans on page 113.
Total Percentage of Percentage of Percentage of
Number of Total Dollar Total Outstanding Total Outstanding Total Outstanding
Shares Amount of Shares at Shares at Shares at
to be Shares to be Minimum of the Midpoint of the Maximum of the
Name Purchased Purchased Offering Range(1) Offering Range(2) Offering Range(3)
---- --------- --------- -------------- -------------- --------------
John J. Mazur, Jr. 75,000 $ 750,000 0.160% 0.136% 0.119%
John N. Hopkins 50,000 500,000 0.107% 0.091% 0.079%
Theodore J. Aanensen 32,500 325,000 0.070% 0.059% 0.051%
Matthew T. McClane 20,000 200,000 0.043% 0.036% 0.032%
John F. McGovern 50,000 500,000 0.107% 0.091% 0.079%
Joseph P. Mazza 50,000 500,000 0.107% 0.091% 0.079%
Leopold Montanaro 75,000 750,000 0.160% 0.136% 0.119%
Henry S. Parow 75,000 750,000 0.160% 0.136% 0.119%
John F. Regan 55,000 550,000 0.118% 0.100% 0.087%
Edward T. Rushforth 5,000 50,000 0.011% 0.009% 0.008%
Albert E. Gossweiler 42,500 425,000 0.091% 0.077% 0.067%
William C. Ledgerwood 20,000 200,000 0.043% 0.036% 0.032%
Sharon Jones 10,000 100,000 0.021% 0.018% 0.016%
Patrick M. Joyce 4,000 40,000 0.009% 0.007% 0.006%
Allan Beardslee 4,000 40,000 0.009% 0.007% 0.006%
Erika Sacher 5,000 50,000 0.011% 0.009% 0.008%
------- ---------- ----- ----- -----
Total 573,000 $5,730,000 1.226% 1.042% 0.906%
======= ========== ===== ===== =====
-----------------
(1) Assumes the issuance of 46,750,000 shares in the offering, including shares
to be issued to Kearny MHC.
(2) Assumes the issuance of 55,000,000 shares in the offering, including shares
to be issued to Kearny MHC.
(3) Assumes the issuance of 63,250,000 shares in the offering, including shares
to be issued to Kearny MHC.
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If the stockholders of Kearny Financial Corp. approve the stock benefit
plans as discussed in this prospectus (including 1.96% of the total number of
shares of common stock issued in the offering to public stockholders and Kearny
MHC for the restricted stock plan and 4.9% of the total number of shares of
common stock issued in the offering to public stockholders and Kearny MHC for
the stock option plan), and assuming that the plans are funded with newly issued
shares instead of shares acquired in open market purchases, the aggregate
ownership of directors and executive officers would increase. See Management -
Potential Stock Benefit Plans on page 113.
Purchases of common stock in the offering by directors and executive
officers will be counted toward the minimum of 14,025,000 shares required to be
sold to public stockholders to complete the offering. Management may, but is not
required to, purchase additional shares in the offering to satisfy the
14,025,000 share minimum, subject to the limitation on the individual maximum
share purchase limitations and the requirement that directors, executive
officers and their associates may not purchase, in the aggregate, more than 25%
of the shares sold in the offering.
Shares of common stock purchased by directors and executive officers
cannot be sold for a period of one year following the offering, and stock
certificates issued to directors and executive officers will bear a legend
restricting their sale. See The Stock Offering - Restrictions on Transferability
by Directors and Executive Officers on page 135.
Security Ownership of Certain Beneficial Owners and Management
Currently, all of the outstanding common stock of Kearny Financial
Corp. is held by Kearny MHC, the federal mutual holding company parent of Kearny
Financial Corp. After the stock offering, Kearny MHC will hold 70% of the
outstanding common stock of Kearny Financial Corp. Information regarding the
planned purchases of common stock in the stock offering by directors and
executive officers of Kearny Financial Corp. (including in each case all
"associates" of the directors and executive officers) is set forth above under
Proposed Stock Purchases by Management.
The following table sets forth information regarding Kearny MHC's
ownership of Kearny Financial Corp. common stock.
Number of Shares
Name and Address of Common Stock Percent of Shares of
of Beneficial Owner Beneficially Owned Common Stock Outstanding
------------------- ------------------ ------------------------
Kearny MHC
614 Kearny Avenue, Kearny, NJ 07032 10,000 100%
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THE STOCK OFFERING
The Board of Directors adopted the plan authorizing the stock offering
on June 7, 2004, subject to the approval of the Office of Thrift Supervision. We
received authorization from the Office of Thrift Supervision to conduct the
stock offering on December 28, 2004. Office of Thrift Supervision authorization
does not constitute a recommendation or endorsement of an investment in our
stock by the Office of Thrift Supervision.
General
On June 7, 2004, the Board of Directors adopted the plan of stock
issuance, pursuant to which Kearny Financial Corp. will sell its common stock to
eligible depositors of Kearny Federal Savings Bank in a subscription offering
and, if shares are available, to the general public in a community offering
and/or a syndicated community offering. The Board of Directors unanimously
adopted the plan after consideration of the advantages and the disadvantages of
the stock offering. The stock offering will be accomplished in accordance with
the procedures set forth in the plan, the requirements of applicable laws and
regulations, and the policies of the Office of Thrift Supervision.
We are offering for sale between a minimum of 14,025,000 shares and an
anticipated maximum of 18,975,000 shares of common stock in the offering
(subject to adjustment to up to 21,821,250 shares). The minimum purchase is 25
shares of common stock (minimum investment of $250). Our common stock is being
offered at a fixed price of $10.00 per share in the offering. Interest will be
paid on subscription funds from the date the payment is received until the
offering is either completed or terminated.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
pending completion or termination of the offering, subscription funds received
by us will be invested only in investments permissible under Rule 15c2-4.
Purposes of the Stock Offering
Kearny Financial Corp. has grown significantly in recent years. The
proceeds from the sale of common stock of Kearny Financial Corp. will provide
Kearny Federal Savings Bank with new equity capital, which will support
additional future deposit growth and expanded operations. While Kearny Federal
Savings Bank currently exceeds all regulatory capital requirements to be
considered well capitalized, the sale of stock, coupled with the accumulation of
earnings, less dividends or other reductions in capital, from year to year,
provides a means for the orderly preservation and expansion of Kearny Federal
Savings Bank's capital base. If we expand our business as we currently plan, we
will need the additional capital to remain well capitalized under regulatory
capital requirements.
The offering will afford our directors, officers and employees the
opportunity to become stockholders, which we believe to be an effective
performance incentive and an effective means of attracting and retaining
qualified personnel. The offering also will provide our customers and local
community members with an opportunity to acquire our stock.
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Conduct of the Offering
Subject to the limitations of the plan of stock issuance adopted by our
Board of Directors, shares of common stock are being offered in descending order
of priority in the subscription offering to:
o Eligible Account Holders (depositors at the close of business on March 31,
2003 with deposits of at least $50.00);
o the tax qualified employee stock benefit plans of Kearny Federal Savings
Bank;
o Supplemental Eligible Account Holders (depositors at the close of business
on September 30, 2004 with deposits of at least $50.00);
o Other Members (depositors at the close of business on November 30, 2004 who
are not Eligible Account Holders or Supplemental Eligible Account Holders).
Former depositors of West Essex Bank, which was acquired by Kearny
Federal Savings Bank in July 2003, will be treated as Eligible Account Holders
if they had deposits with West Essex at the close of business on March 31, 2003
of at least $50.00.
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering. The
community offering, if any, may commence at any time during or subsequent to the
completion of the subscription offering. A syndicated community offering, if we
conduct one, would commence just prior to, or as soon as practicable after, the
termination of the subscription offering. In any community offering or
syndicated community offering, we will fill orders for our common stock in an
equitable manner as determined by the Board of Directors in order to achieve a
wide distribution of the stock.
Any shares sold above the maximum of the offering range may be sold to
the employee stock ownership plan before satisfying remaining unfilled orders of
Eligible Account Holders to fill the plan's subscription, or the plan may
purchase some or all of the shares covered by its subscription after the
offering in the open market, subject to any required regulatory approval.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of stock
issuance to the following persons in the following order of priority:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase, subject to the overall limitations
described under The Stock Offering - Limitations on Purchases of Common Stock,
up to the greater of (i) the maximum purchase limitation in the community
offering (i.e., 50,000 shares), (ii) one-tenth of 1% of the total shares of
common stock offered in the subscription and community offering, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock offered in the
subscription and community offering by a fraction, of which the numerator is the
total amount of the qualifying deposits of the Eligible Account Holder and the
denominator is the total amount of all qualifying deposits of all Eligible
Account Holders. If there are insufficient shares available to satisfy all
subscriptions of Eligible
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Account Holders, shares will be allocated to Eligible Account Holders so as to
permit each subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares ordered. Thereafter, unallocated shares will be allocated to
remaining subscribing Eligible Account Holders whose subscriptions remain
unfilled in the same proportion that each subscriber's qualifying deposit bears
to the total amount of qualifying deposits of all subscribing Eligible Account
Holders, in each case measured as of March 31, 2003, whose subscriptions remain
unfilled. Subscription rights received by officers and directors of Kearny
Financial Corp. or Kearny Federal Savings Bank, and such persons' associates,
based on their increased deposits in Kearny Federal Savings Bank in the one year
preceding March 31, 2003 will be subordinated to the subscription rights of all
other Eligible Account Holders. To ensure proper allocation of stock, each
Eligible Account Holder must list on his order form all accounts in which he had
an ownership interest as of the Eligibility Record Date. Failure to list an
account, or providing incorrect information, could result in the loss of all or
a part of the subscriber's allocation. The total amount of qualifying deposits
of all Eligible Account Holders as of March 31, 2003 was $1,593.3 million.
Priority 2: The Employee Plans. If there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
tax qualified employee stock benefit plans may be given the opportunity to
purchase in the aggregate up to but less than 5% of the total number of shares
of common stock issued in the offering to public stockholders and to Kearny MHC.
It is expected that Kearny Federal Savings Bank's employee stock ownership plan
will purchase up to 8% of the shares issued in the offering to persons other
than Kearny MHC. To the extent the employee stock ownership plan does not
purchase shares in the offering, the employee stock ownership plan intends to
purchase shares in the open market purchases subsequent to the closing of the
offering, subject to any required regulatory approval.
Priority 3: Supplemental Eligible Account Holders. If there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the tax qualified employee stock benefit plans, each
Supplemental Eligible Account Holder shall be given the opportunity to purchase,
subject to the overall limitations described under The Stock Offering -
Limitations on Purchases of Common Stock, up to the greater of (i) the maximum
purchase limitation in the community offering (i.e., 50,000 shares), (ii)
one-tenth of 1% of the total shares of common stock offered in the subscription
and community offering, and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of common stock
offered in the subscription and community offering by a fraction, of which the
numerator is the amount of the qualifying deposits of the Supplemental Eligible
Account Holder and the denominator is the total amount of all qualifying
deposits of all Supplemental Eligible Account Holders. If Supplemental Eligible
Account Holders subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders and the employee stock ownership plan
and other tax-qualified employee stock benefit plans, if any, is in excess of
the total number of shares offered in the offering, the shares of common stock
will be allocated among subscribing Supplemental Eligible Account Holders first
so as to permit each subscribing Supplemental Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of 100 shares or the number of shares ordered. Thereafter, unallocated
shares will be allocated to each subscribing Supplemental Eligible Account
Holder whose subscription remains unfilled in the same proportion that each
subscriber's qualifying deposit bear to the total amount of qualifying deposits
of all subscribing Supplemental Eligible Account Holders, in each case measured
as of September 30, 2004, whose subscriptions remain unfilled. To ensure proper
allocation of stock, each Supplemental Eligible Account Holder must list on his
order form all accounts in which he had an ownership interest as of the
Supplemental Eligibility Record Date. Failure to list an account, or providing
incorrect information, could
120
result in the loss of all or a part of the subscriber's allocation. The total
amount of qualifying deposits of all Supplemental Eligible Account Holders as of
September 30, 2004 was $1,511.1 million.
Priority 4: Other Members. If there are sufficient shares remaining
after satisfaction of all subscriptions by the Eligible Account Holders, the
tax-qualified employee stock benefit plans and the Supplemental Eligible Account
Holders, each Other Member (depositors as of November 30, 2004) who is not an
Eligible Account Holder or a Supplemental Eligible Account Holder shall have the
opportunity to purchase up to the greater of 50,000 shares of common stock or
one-tenth of 1% of the total offering of shares of common stock offered in the
subscription offering, subject to the overall purchase limitations described
under The Stock Offering - Limitations on Purchases of Common Stock. If Other
Members subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, the tax-qualified employee stock
benefit plans and Supplemental Eligible Account Holders, is in excess of the
total number of shares offered in the offering, the subscriptions of Other
Members will be allocated among subscribing Other Members to permit each
subscribing Other Member to purchase a number of shares sufficient to make his
total allocation of common stock equal to the lesser of 100 shares or the number
of shares subscribed for by Other Members. Any shares remaining will be
allocated among the subscribing Other Members whose subscriptions remain
unsatisfied on a 100 shares (or whatever lesser amount is available) per order
basis until all orders have been filled or the remaining shares have been
allocated.
Restrictions on Transfer of Subscription Rights and Shares. Applicable
regulations and the plan of stock issuance prohibits any person with
subscription rights, including Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members, from transferring or entering into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights or the shares of common stock to be issued when subscription
rights are exercised. Subscription rights may be exercised only by the person to
whom they are granted and only for his account. With the exception of IRA stock
purchases, the subscription rights of a qualifying account may not be
transferred to an account that is in a different form of ownership. Adding or
deleting a name or otherwise altering the form of beneficial ownership of a
qualifying account will result in the loss of your subscription rights. Each
person subscribing for shares will be required to certify that such person is
purchasing shares solely for his own account and that he has no agreement or
understanding regarding the sale or transfer of the shares. The regulations also
prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase subscription rights or shares of common
stock before the completion of the offering.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
which we determine involve the transfer of subscription rights.
Deadlines for Purchasing Stock
The subscription offering will terminate at 12:00 noon, Eastern time,
on January 28, 2005. We may extend this expiration date without notice to you
for up to 45 days, until March 14, 2005. Once submitted, your order is
irrevocable unless the offering is extended beyond March 14, 2005. We may
request permission from the Office of Thrift Supervision to extend the offering
beyond March 14, 2005, and the Office of Thrift Supervision may grant one or
more extensions of the offering of up to 90 days per extension, but in no event
may the offering be extended beyond June 7, 2006. If the offering is extended
beyond March 14, 2005, we will notify each subscriber and subscribers will have
the right to confirm, modify or rescind their subscriptions. If an affirmative
response is not received prior to the expiration of
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the resolicitation period, a subscriber's subscription will be canceled and
funds will be returned with interest.
A community offering and a syndicated community offering, if such
offerings are conducted, may terminate at any time without notice but no later
than March 14, 2005.
Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering then,
depending on market conditions at or near the completion of the subscription
offering, shares remaining unsubscribed may be made available for purchase in
the community offering to certain members of the general public. The maximum
amount of common stock that any person may purchase in the community offering is
50,000 shares, or $500,000. In the community offering, if any, shares will be
available for purchase by the general public, and preference shall be given
first to natural persons residing in Bergen, Hudson, Passaic, Morris, Monmouth,
Middlesex, Essex, Union and Ocean Counties, New Jersey and second to other
natural persons residing in New Jersey. We intend to issue the shares in a
manner that would promote a wide distribution of common stock.
We will consider persons residing in one of the specified counties if
they occupy a dwelling in the county and establish an ongoing physical presence
in the county that is not merely transitory in nature. We may utilize depositor
or loan records or other evidence provided to us to make a determination as to
whether a person is a resident in one of the specified counties. In all cases,
the determination of residence status will be made by us in our sole discretion.
If purchasers in the community offering, whose orders would otherwise
be accepted, subscribe for more shares than are available for purchase, the
shares available to them will be allocated among persons submitting orders in
the community offering in an equitable manner we determine.
As stated above, preference in the community shall be given first to
natural persons residing in Bergen, Hudson, Passaic, Morris, Monmouth,
Middlesex, Essex, Union and Ocean Counties, New Jersey and second to other
natural persons residing in New Jersey. If shares are available for these
"preferred purchasers" in the community offering but there are insufficient
shares to satisfy all orders, the available shares will be allocated first to
each preferred purchasers whose order we accept in an amount equal to the lesser
of 100 shares or the number of shares ordered by each such subscriber, if
possible. After that, unallocated shares will be allocated among the remaining
preferred purchasers whose orders remain unsatisfied in the same proportion that
the unfilled order of each such subscriber bears to the total unfilled orders of
all such subscribers. If, after filling the orders of the first group of
preferred purchasers (natural persons residing in Bergen, Hudson, Passaic,
Morris, Monmouth, Middlesex, Essex, Union and Ocean Counties, New Jersey) and
then the orders of the second group of preferred purchasers (natural persons
residing in New Jersey), shares are available for other subscribers in the
community offering but there are insufficient shares to satisfy all orders,
shares will be allocated in the same manner as for preferred purchasers.
The community offering, if any, may commence at any time during or
subsequent to the completion of the subscription offering. The community
offering, if any, must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the Office of Thrift
Supervision.
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If we receive regulatory approval for an extension, all subscribers
will be notified of the extension and of the duration of any extension that has
been granted, and will have the right to confirm, increase, decrease or rescind
their orders. If we do not receive an affirmative response from a subscriber to
any resolicitation, the subscriber's order will be rescinded and all funds
received will be promptly returned with interest.
The opportunity to subscribe for shares of common stock in the
community offering is subject to our right to reject orders, in whole or part,
either at the time of receipt of an order or as soon as practicable following
the expiration date of the offering. If your order is rejected in part, you will
not have the right to cancel the remainder of your order.
Syndicated Community Offering
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Sandler O'Neill, acting as our agent. In such capacity, Sandler
O'Neill may form a syndicate of other broker-dealers. Alternatively, we may sell
any remaining shares in an underwritten public offering. Neither Sandler O'Neill
nor any registered broker-dealer will have any obligation to take or purchase
any shares of the common stock in the syndicated community offering; however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in any
syndicated community offering. The syndicated community offering would terminate
no later than 45 days after the expiration of the subscription offering, unless
extended by us, with approval of the Office of Thrift Supervision. See -
Community Offering above for a discussion of rights of subscribers in the event
an extension is granted.
The opportunity to subscribe for shares of common stock in the
syndicated community offering is subject to our right to reject orders, in whole
or part, either at the time of receipt of an order or as soon as practicable
following the expiration date of the offering. If your order is rejected in
part, you will not have the right to cancel the remainder of your order.
Purchasers in the syndicated community offering are eligible to
purchase up to $500,000 of common stock (which equals 50,000 shares). We may
begin the syndicated community offering or underwritten public offering at any
time following the commencement of the subscription offering.
If we are unable to find purchasers from the general public for all
unsubscribed shares, we will make other purchase arrangements, if feasible.
Other purchase arrangements must be approved by the Office of Thrift Supervision
and may provide for purchases by directors, officers, their associates and other
persons in excess of the limitations provided in the plan of stock issuance and
in excess of the proposed director purchases discussed earlier, although no
purchases are currently intended. If other purchase arrangements cannot be made,
we may do any of the following: terminate the stock offering and promptly return
all funds; set a new offering range, notify all subscribers and give them the
opportunity to confirm, cancel or change their orders; or take such other
actions as may be permitted by the Office of Thrift Supervision.
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Limitations on Purchases of Common Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum number of shares which may be purchased in the
offering by any individual (or individuals through a single
account) shall not exceed 50,000 shares, or $500,000. This limit
applies to stock purchases in total in the subscription,
community and syndicated community offerings.
2. The maximum number of shares that may be purchased by any
individual together with any associate or group of persons acting
in concert is 75,000 shares, or $750,000. Any persons or entities
having the same address on an account or stock order form are
considered to be acting in concert. This limit applies to stock
purchases in total in the subscription, community and syndicated
community offerings. This limit does not apply to our
tax-qualified employee stock benefit plans, which in the
aggregate may subscribe for up to but less than 5% of the total
number of shares of common stock issued in the offering to public
stockholders and to Kearny MHC.
3. The maximum number of shares which may be purchased in all
categories in the offering by our officers and directors and
their associates in the aggregate shall not exceed 25% of the
total number of shares sold in the offering.
4. The minimum order is 25 shares, or $250.
5. If the number of shares otherwise allocable to any person or that
person's associates would be in excess of the maximum number of
shares permitted as set forth above, the number of shares
allocated to that person shall be reduced to the lowest
limitation applicable to that person, and then the number of
shares allocated to each group consisting of a person and that
person's associates shall be reduced so that the aggregate
allocation to that person and his associates complies with the
above maximums, and the maximum number of shares shall be
reallocated among that person and his associates in proportion to
the shares subscribed by each (after first applying the maximums
applicable to each person, separately).
6. Depending on market or financial conditions, we may decrease or
increase the purchase limitations, provided that the maximum
purchase limitations may not be increased to a percentage in
excess of 5% of the offering. If we increase the maximum purchase
limitations, we are only required to resolicit persons who
subscribed for the maximum purchase amount and may, in our sole
discretion, resolicit certain other large subscribers.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range of up to 15% (the adjusted maximum) the additional shares
will generally be issued in the following order of priority: (a)
to fill the employee stock ownership plan's subscription; (b) if
there is an oversubscription at the Eligible Account Holder
level, to fill unfilled subscriptions of Eligible Account
Holders; (c) if there is an oversubscription at the Supplemental
Eligible Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders; (d) if there is an
oversubscription at the Other Member level, to fill unfilled
subscriptions of Other Members; (e) to fill orders received in a
community offering; with preference given to
124
persons who live in the local community; and (f) to fill orders
received in the syndicated community offering. The employee stock
ownership plan may, however, elect to fill part or all of its
stock order in the open market, after completion of the stock
offering.
8. No person will be allowed to purchase any stock if that purchase
would be illegal under any federal or state law or regulation or
would violate regulations or policies of the National Association
of Securities Dealers. We and/or our representatives may ask for
an acceptable legal opinion from any purchaser regarding the
legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
9. We have the right to reject any order submitted by a person whose
representations we believe are untrue or who we believe is
violating, circumventing or intends to violate, evade or
circumvent the terms and conditions of the plan of stock
issuance, either alone or acting in concert with others.
10. The above restrictions also apply to purchases by persons acting
in concert under applicable regulations of the Office of Thrift
Supervision. Under regulations of the Office of Thrift
Supervision, our directors are not considered to be affiliates or
a group acting in concert with other directors solely as a result
of membership on our Board of Directors.
11. In addition, in any community offering or syndicated community
offering, we must first fill orders for our common stock up to a
maximum of 2% of the total shares issued in the offering in a
manner that will achieve a wide distribution of the stock, and
thereafter any remaining shares will be allocated on an equal
number of shares per order basis, until all orders have been
filled or the shares have been exhausted.
The term "associate" of a person is defined in the plan of stock
issuance to mean:
(1) any corporation or organization of which a person is a senior
officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities;
(2) any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or
in a similar fiduciary capacity; or
(3) any relative or spouse of a person or any relative of a spouse,
who has the same home as that person.
For example, a corporation for which a person serves as an officer
would be an associate of that person and all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
125
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that any tax-qualified employee stock benefit plan will not be deemed to be
acting in concert with its trustee or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the trustee and
stock held by the plan will be aggregated. We will presume that certain persons
are acting in concert based upon various facts, including the fact that persons
have joint account relationships or the fact that such persons have filed joint
Schedules 13D with the Securities and Exchange Commission with respect to other
companies. We reserve the right to make an independent investigation of any
facts or circumstances brought to our attention that indicate that one or more
persons acting independently or as a group acting in concert may be attempting
to violate or circumvent the regulatory prohibition on the transferability of
subscription rights.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." These
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant, including joint account relationships or shared
addresses on the records of Kearny Federal Savings Bank.
Each person purchasing shares of the common stock in the offering will
be considered to have confirmed that his purchase does not conflict with the
maximum purchase limitation. If the purchase limitation is violated by any
person or any associate or group of persons affiliated or otherwise acting in
concert with that person, we will have the right to purchase from that person at
the $10.00 purchase price per share all shares acquired by that person in excess
of that purchase limitation or, if the excess shares have been sold by that
person, to receive the difference between the purchase price per share paid for
the excess shares and the price at which the excess shares were sold by that
person. Our right to purchase the excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by our directors and executive
officers. For certain restrictions on the common stock purchased by our
directors and executive officers, see The Stock Offering - Restrictions on
Transferability by Directors and Executive Officers on page 135. In addition,
under guidelines of the National Association of Securities Dealers, members of
the National Association of Securities Dealers and their associates are subject
to certain restrictions on the transfer of securities purchased in accordance
with subscription rights and to certain reporting requirements after the
purchase.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering by mail or in person a properly executed and
completed order form, together with full payment of the purchase price for all
shares for which subscription is made or include appropriate authorization in
the space provided on the order form for withdrawal of full payment from a
deposit account at Kearny Federal Savings Bank; provided, however, that if the
employee plans subscribe for shares during the subscription offering, the
employee plans will not be required to pay for the shares at the time they
subscribe but rather may pay for the shares upon completion of the offering. All
subscription rights will expire on the expiration date, whether or not we have
been able to locate each
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person entitled to subscription rights. To place an order in the community
offering, an investor must complete an order form and return it prior to the
applicable expiration date. Once submitted, subscription orders cannot be
revoked without our consent.
We may, in our sole discretion, permit institutional investors to
submit irrevocable orders together with the legally binding commitment for
payment and to thereafter pay for such shares of common stock for which they
subscribe in the community offering at any time before the 48 hours prior to the
completion of the offering. This payment may be made by wire transfer. Our
interpretation of the terms and conditions of the plan of stock issuance and of
the acceptability of the order forms will be final.
To ensure that your stock purchase eligibility and priority are
properly identified, you must list all accounts on the order form, giving all
names in each account, the account number and the approximate account balance as
of the appropriate eligibility date. We will strive to identify your ownership
in all accounts, but cannot guarantee we will identify all accounts in which you
have an ownership interest.
If a stock order form:
o is not delivered to a subscriber and is returned to us by the United States
Postal Service or we are unable to locate the addressee;
o is not received by us or is received after the applicable expiration date;
o is not completed correctly or executed; or
o is not accompanied by the full required payment for the shares subscribed
for, including instances where a savings account or certificate balance
from which withdrawal is authorized is unavailable, uncollected or
insufficient to fund the required payment, but excluding subscriptions by
the employee plans;
then the subscription rights for that person will lapse as though that
person failed to return the completed order form within the time period
specified.
However, we may, but will not be required to, waive any irregularity on
any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by a date that we may specify.
The waiver of an irregularity on an order form in no way obligates us to waive
any other irregularity on any other order form. Waivers will be considered on a
case by case basis. We will not accept orders received on photocopies or
facsimile order forms, or for which payment is to be made by wire transfer or
payment from private third parties. Our interpretation of the terms and
conditions of the plan of stock issuance and of the acceptability of the order
forms will be final, subject to the authority of the Office of Thrift
Supervision.
The reverse side of the order form contains a certification form
mandated by regulation. We will not accept order forms where the certification
form is not executed. By executing and returning the certification form, you
will be certifying that you received this prospectus and acknowledging that the
common stock is not a deposit account and is not insured or guaranteed by the
federal government. You also will be acknowledging that you received disclosure
concerning the risks involved in this offering. The certification form could be
used as support to show that you understand the nature of this investment.
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To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to the expiration date or hand delivered any later than two days
prior to the expiration date. Execution of the order form will confirm receipt
or delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Employee plans subscribing for shares during the subscription
offering may pay for those shares upon completion of the offering. Payment for
shares of common stock may be made:
o in cash, if delivered in person;
o by check or money order made payable to Kearny Financial Corp.; or
o for shares subscribed for in the subscription offering, by authorization of
withdrawal from deposit accounts maintained with Kearny Federal Savings
Bank.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
subscribers' checks must be made payable to Kearny Financial Corp., and checks
received by the stock information center will be transmitted by noon of the
following business day directly to the segregated deposit account at Kearny
Federal Savings Bank established to hold funds received as payment for shares.
We may, at our discretion, determine during the offering period that it is in
the best interest of Kearny Federal Savings Bank to hold subscription funds in
an escrow account at another insured financial institution instead of at Kearny
Federal Savings Bank.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for upon the completion of the offering; provided
that there is in force from the time of its subscription until the completion of
the offering a loan commitment from an unrelated financial institution or from
us to lend to the employee stock ownership plan, at that time, the aggregate
purchase price of the shares for which it subscribed.
Appropriate means by which account withdrawals may be authorized are
provided on the order form. If a subscriber authorizes us to withdraw the amount
of the purchase price from his or her deposit account, we will do so as of the
completion of the offering, though the account must contain the full amount
necessary for payment at the time the subscription is received. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase the common stock for
which a subscription has been made until the offering has been completed or
terminated. In the case of payments authorized to be made through withdrawal
from savings accounts, all sums authorized for withdrawal will continue to earn
interest at the contract rate until the offering has been completed or
terminated. Interest penalties for early withdrawal applicable to certificate
accounts will not apply to withdrawals authorized for the purchase of shares.
However, if a partial withdrawal results in a certificate account with a balance
less than the applicable minimum balance requirement, the certificate shall be
canceled at the time of withdrawal, without penalty, and the remaining balance
will be converted into a savings account and will earn interest at the regular
passbook savings rate subsequent to the withdrawal. In the case of payments made
in cash or by check or money order, funds will be placed in a segregated account
and interest will be paid by Kearny Federal Savings Bank at the regular passbook
savings rate from the date payment is received until the offering is completed
or
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terminated. An executed order form, once we receive it, may not be modified,
amended, or rescinded without our consent, unless the offering is not completed
within 45 days after the conclusion of the subscription offering, in which event
subscribers may be given the opportunity to increase, decrease, or rescind their
subscription for a specified period of time. If the offering is not completed
for any reason, all funds submitted pursuant to the offerings will be promptly
refunded with interest as described above.
Kearny Federal Savings Bank's individual retirement accounts (IRAs) and
Keogh accounts do not permit investment in our common stock. A depositor
interested in using his or her IRA or Keogh funds to purchase common stock must
do so through a self-directed IRA or Keogh account. Since we do not offer those
accounts, we will allow a depositor to make a trustee-to-trustee transfer of the
IRA or Keogh funds to a trustee offering a self-directed IRA or Keogh program
with the agreement that the funds will be used to purchase our common stock in
the offering. There will be no early withdrawal or Internal Revenue Service
interest penalties for transfers. The new trustee would hold the common stock in
a self-directed account in the same manner as we now hold the depositor's IRA of
Keogh funds. An annual administrative fee may be payable to the new trustee.
Depositors interested in using funds in an IRA or Keogh with us to purchase
common stock should contact the stock information center as soon as possible so
that the necessary forms may be forwarded for execution and returned before the
subscription offering ends. In addition, federal laws and regulations require
that officers, directors and 10% stockholders who use self-directed IRA or Keogh
funds to purchase shares of common stock in the subscription offering, make
purchases for the exclusive benefit of IRA or Keogh accounts.
Federal regulations prohibit Kearny Federal Savings Bank from lending
funds or extending credit to any person to purchase the common stock in the
offering.
Stock Information Center. Our stock information center is located at
120 Passaic Avenue, Fairfield, New Jersey 07004. The phone number is (866)
424-2161. The stock information center's hours of operation are generally 10:00
a.m. to 4:00 p.m., Eastern time, Monday through Friday.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed by our transfer agent to the persons
entitled thereto at the address noted on the order form, as soon as practicable
following completion of the offering. Any certificates returned as undeliverable
will be held until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for the common
stock are available and delivered to subscribers, subscribers may not be able to
sell the shares of stock for which they subscribed, even though trading of our
common stock may have commenced.
Restrictions on Repurchase of Shares
Under Office of Thrift Supervision regulations, we may not, for a
period of one year from the date of the completion of the offering, repurchase
any of our common stock from any person, except (1) in an offer made to all
stockholders to repurchase the common stock on a pro rata basis, approved by the
Office of Thrift Supervision, (2) the repurchase of qualifying shares of a
director, or (3) repurchases to fund restricted stock plans or tax-qualified
employee stock benefit plans. Where extraordinary circumstances exist, the
Office of Thrift Supervision may approve the open market repurchase of up to 5%
of our common stock during the first year following the offering. To receive
such approval, we must establish compelling and valid business purposes for the
repurchase to the satisfaction of the Office of Thrift Supervision. Furthermore,
repurchases of any common stock are prohibited if they would cause Kearny
Federal Savings Bank's regulatory capital to be reduced below the amount
required under the regulatory
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capital requirements imposed by the Office of Thrift Supervision. If, in the
future, the rules and regulations regarding the repurchase of stock are
liberalized, we may utilize the rules and regulations then in effect.
How We Determined the $10.00 Per Share Price and the Number of Shares to Be
Issued in the Stock Offering
The plan of stock issuance requires that the purchase price of the
common stock must be based on the appraised pro forma market value of Kearny
Financial Corp. and Kearny Federal Savings Bank, as determined on the basis of
an independent valuation. RP Financial, LC, a financial services industry
consulting firm whose members collectively have over 100 years of experience in
valuing financial institutions for mutual holding company reorganizations and
stock offerings, has been retained to make this valuation. Kearny selected RP
Financial based upon its experience and reputation in valuing stock offerings by
issuers such as Kearny Financial Corp. Kearny has no prior relationship with RP
Financial. For its services in making this appraisal, RP Financial's fees and
out-of-pocket expenses are estimated to be $75,000. Kearny has agreed to
indemnify RP Financial and any employees of RP Financial who act for or on
behalf of RP Financial in connection with the appraisal against any and all
loss, cost, damage, claim, liability or expense of any kind, including claims
under federal and state securities laws, arising out of any misstatement, untrue
statement of a material fact or omission to state a material fact in the
information supplied by Kearny to RP Financial, unless RP Financial is
determined to be negligent or otherwise at fault.
RP Financial made its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
o the present and projected operating results and financial condition of
Kearny Financial Corp. and Kearny Federal Savings Bank, which were prepared
by Kearny Federal Savings Bank and then adjusted by RP Financial to reflect
the net proceeds of this offering and the economic and demographic
conditions in Kearny Federal Savings Bank's existing marketing area as
prepared by RP Financial;
o certain historical, financial and other information relating to Kearny
Federal Savings Bank prepared by Kearny Federal Savings Bank; and
o the impact of the stock offering on Kearny's net worth and earnings
potential as calculated by RP Financial.
The appraisal also incorporated an analysis of a peer group of
publicly-traded mutual holding companies that RP Financial considered to be
comparable to Kearny. The peer group analysis conducted by RP Financial included
a total of ten publicly-traded mutual holding companies with total assets of
more than $250 million and less than $10 billion. RP Financial excluded three
mutual holding companies which otherwise met the foregoing criteria due to the
lack of seasoned trading history and reported financial statements as a
publicly-traded company. The analysis of comparable publicly-traded institutions
included an evaluation of the average and median price-to-earnings and
price-to-book value ratios indicated by the market prices of the peer companies.
RP Financial applied the peer group's pricing ratios as adjusted for certain
qualitative valuation factors to account for differences between Kearny and the
peer group, to Kearny's pro forma earnings and book value to derive the
estimated pro forma market value of Kearny.
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The Board of Directors reviewed the methodologies and the
appropriateness of the assumptions used by RP Financial in addition to the
factors listed above, and the Board of Directors believes that these assumptions
were reasonable. On the basis of the foregoing, RP Financial has advised Kearny
Financial Corp. and Kearny in its opinion, dated November 26, 2004, that the
estimated pro forma market value of Kearny Financial Corp. on a fully-converted
basis ranged from a minimum of $467.5 million to a maximum of $632.5 million
with a midpoint of $550.0 million. The Board of Directors of Kearny determined
that the common stock should be sold at $10.00 per share. Based on the estimated
valuation and the $10.00 per share price, the number of shares of common stock
that Kearny Financial Corp. will issue will range from a minimum of 46,750,000
shares to a maximum of 63,250,000 shares, with a midpoint of 55,000,000 shares.
The Board determined to offer for sale 30% of these shares, or between
14,025,000 shares and 18,975,000 shares, with a midpoint of 16,500,000 shares,
to depositors of Kearny, to the Kearny Federal Savings Bank Employee Stock
Ownership Plan and, if a community offering is held, to the public. The 70% of
the shares of Kearny Financial Corp. stock that are not offered for sale in the
offering will be issued to Kearny MHC.
The estimated valuation range may be amended with the approval of the
Office of Thrift Supervision or if necessitated by subsequent developments in
the financial condition of Kearny Financial Corp. and Kearny or market
conditions generally. In the event the estimated valuation range is updated to
amend the value of Kearny Financial Corp. on a fully-converted basis below
$467.5 million, which is the minimum of the estimated valuation range, or above
$727.4 million, which is the maximum of the estimated valuation range, as
adjusted by 15%, a new appraisal will be filed with the Office of Thrift
Supervision.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, if Kearny Financial Corp.
receives orders for common stock in excess of $189.8 million (the maximum of the
estimated valuation range of shares to be sold to the public) and up to $218.2
million (the maximum of the estimated valuation range of shares to be sold to
the public, as adjusted by 15%), the Office of Thrift Supervision may require it
to accept all such orders. We cannot guarantee, however, that Kearny Financial
Corp. will receive orders for common stock in excess of the maximum of the
estimated valuation range of shares to be sold to the public or that, if such
orders are received, that all such orders will be accepted because Kearny
Financial Corp.'s final valuation and the number of shares to be issued are
subject to the receipt of an updated appraisal from RP Financial which reflects
such an increase in the valuation and the approval of an increase by the Office
of Thrift Supervision. In addition, an increase in the number of shares to be
sold to the public above 18,975,000 shares will first be used, if necessary, to
fill the order of the employee stock ownership plan. There is no obligation or
understanding on the part of management to take and/or pay for any shares in
order to complete the stock offering.
The following table presents a summary of selected pricing ratios for
the peer group companies on a fully-converted basis and the resulting
fully-converted pricing ratios for Kearny Financial Corp. reflecting the pro
forma impact of the stock offering. Compared to the median pricing ratios of the
peer group, Kearny Financial Corp.'s pro forma pricing ratios at the midpoint of
the offering range indicated a premium of 50.2% on a price-to-earnings basis, a
discount of 24.7% on a price-to-tangible book value basis. The estimated
appraised value and the resulting premiums or discounts took into consideration
the potential financial impact of the stock offering.
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Pro Forma Price
---------------------------------------
Reported Tangible
Earnings Book Value Book Value
Multiple(1) Ratio Ratio
----------- ----- -----
Kearny Financial Corp. (pro forma, on a fully-
converted basis):
Minimum....................................... 31.1x 67.9% 77.3%
Midpoint...................................... 35.9x 71.3% 80.1%
Maximum....................................... 41.0x 75.1% 83.4%
Maximum, as adjusted.......................... 47.4x 80.3% 88.6%
All fully-converted publicly-traded thrifts
as of November 26, 2004:
Average....................................... 18.5x 164.8% 180.0%
Median........................................ 17.5x 155.5% 170.4%
Valuation of peer group as of November 26, 2004
(on a fully-converted basis):
Average....................................... 26.1x 100.8% 106.1%
Median........................................ 23.9x 100.8% 106.4%
------------------
(1) The price-to-earnings multiples set forth in the above table do not reflect
the recognition of compensation expense in connection with stock options.
New accounting guidance issued by the Financial Accounting Standards Board
in December 2004 requires the recognition of compensation expense related
to stock options outstanding based upon the fair value of such awards at
the date of grant over the period that such awards are earned. The
implementation of this accounting guidance will have a significant impact
on pricing ratios of Kearny Financial Corp. and will likely have a
significant impact on the peer group companies as well. The pro forma
information presented on pages 24 to 30 reflects an estimated expense for
the stock option plan that may be adopted by Kearny Financial Corp. and the
resulting effect on the pro forma price-to-earnings multiples for Kearny
Financial Corp.
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing Kearny
Financial Corp.'s shares. RP Financial did not independently verify the
consolidated financial statements and other information provided by Kearny, nor
did RP Financial value independently the assets or liabilities of Kearny. The
valuation considers Kearny as a going concern and should not be considered as an
indication of the liquidation value of Kearny. Moreover, because this valuation
is necessarily based upon estimates and projections of a number of matters, all
of which are subject to change from time to time, no assurance can be given that
persons purchasing common stock in the offerings will thereafter be able to sell
such shares at prices at or above the purchase price or in the range of the
valuation described above.
No sale of shares of common stock in the stock offering may be
completed unless RP Financial confirms that nothing of a material nature has
occurred which would cause it to conclude that the aggregate value of the common
stock to be issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of Kearny Financial Corp. and Kearny. If
this confirmation is not received, we may cancel the stock offering, extend the
offering period and establish a new estimated valuation and offering range
and/or estimated price range, extend, reopen or hold a new offering or take any
other action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock to be
issued may be increased or decreased without a resolicitation
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of subscribers, provided that the product of the total number of shares issued
times the purchase price is not below the minimum or more than 15% above the
maximum of the estimated valuation range. If market or financial conditions
change so as to cause the aggregate value of the common stock to be issued to be
below the minimum of the estimated valuation range or more than 15% above the
maximum of this range, purchasers will be resolicited and be permitted to
continue their orders, in which case they will need to reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest, or be permitted to
modify or rescind their subscriptions. Any change in the estimated valuation
range must be approved by the Office of Thrift Supervision.
An increase in the number of shares of common stock to be issued as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and Kearny Financial Corp.'s pro forma
net income and stockholders' equity on a per share basis while increasing pro
forma net income and stockholders' equity on an aggregate basis. A decrease in
the number of shares of common stock to be issued would increase both a
subscriber's ownership interest and Kearny Financial Corp.'s pro forma net
income and stockholders' equity on a per share basis while decreasing pro forma
net income and stockholders' equity on an aggregate basis.
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the main
office of Kearny and the other locations specified under Where You Can Find More
Information. In addition, the appraisal report is an exhibit to the registration
statement of which this prospectus is a part. The registration statement is
available on the SEC's website (http://www.sec.gov).
Plan of Distribution/Marketing Arrangements
Offering materials have been initially distributed to certain persons
by mail, with additional copies made available through the stock information
center and Sandler O'Neill. All prospective purchasers are to send payment to
the stock information center and such funds will be deposited with Kearny
Federal Savings Bank and held in a separate account earning interest and not
released until the offering is completed or terminated. We may, at our
discretion, determine during the offering period that it is in the best interest
of Kearny Federal Savings Bank to hold subscription funds in an escrow account
at another insured financial institution instead of at Kearny Federal Savings
Bank.
We have engaged Sandler O'Neill, a broker-dealer registered with the
National Association of Securities Dealers, as a financial and marketing advisor
in connection with the offering of our common stock. In its role as financial
and marketing advisor, Sandler O'Neill will assist us in the offering as
follows:
o consulting as to the securities marketing implications of any aspect of the
plan of stock issuance;
o reviewing with our Board of Directors the securities marketing implications
of the independent appraiser's appraisal of the common stock;
o reviewing all offering documents, including the prospectus, stock order
forms and related offering materials (we are responsible for the
preparation and filing of such documents);
o assisting in the design and implementation of a marketing strategy for the
offering;
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o assisting us in scheduling and preparing for meetings with potential
investors and broker-dealers; and
o providing such other general advice and assistance we may request to
promote the successful completion of the offering.
For these services, Sandler O'Neill will receive a fee of 1.0% of the
aggregate dollar amount of the common stock sold in the subscription and
community offerings if the stock issuance is consummated, excluding in each case
shares purchased by our tax qualified employee benefit plans and shares
purchased by our directors, officers and employees and their immediate families.
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Sandler O'Neill. In such capacity, Sandler O'Neill may form a
syndicate of other broker-dealers. Neither Sandler O'Neill nor any registered
broker-dealer will have any obligation to take or purchase any shares of the
common stock in the syndicated community offering; however, Sandler O'Neill has
agreed to use its best efforts in the sale of shares in any syndicated community
offering. If there is a syndicated community offering, Sandler O'Neill will
receive a management fee of 1.0% of the aggregate dollar amount of the common
stock sold in the syndicated community offering. The total fees payable to
Sandler O'Neill and other National Association of Securities Dealers member
firms in the syndicated community offering shall not exceed 5.5% of the
aggregate dollar amount of the common stock sold in the syndicated community
offering.
We also will reimburse Sandler O'Neill for its reasonable out-of-pocket
expenses (including legal fees and expenses) associated with its marketing
effort, up to a maximum of $80,000 for which we have made an advance payment of
$25,000 to Sandler O'Neill. If the plan of stock issuance is terminated or if
Sandler O'Neill terminates its agreement with us in accordance with the
provisions of the agreement, Sandler O'Neill will only receive reimbursement of
its reasonable out-of-pocket expenses. We will indemnify Sandler O'Neill against
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the common stock, including
liabilities under the Securities Act of 1933.
In addition, we have engaged Sandler O'Neill to act as stock offering
agent in connection with the offering. In its role as stock offering agent,
Sandler O'Neill will assist us in the offering as follows: (i) consolidation of
accounts and development of a central file; (ii) preparation of order and/or
request forms; (iii) organization and supervision of the stock information
center; and (iv) subscription services. For these services, Sandler O'Neill will
receive a fee of $60,000 and reimbursement for its reasonable out-of-pocket
expenses up to a maximum of $20,000. For these services, we have made an advance
payment of $10,000 to Sandler O'Neill.
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock. Other trained employees may
participate in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or answering questions of a ministerial nature.
Other questions of prospective purchasers will be directed to executive officers
or registered representatives of Sandler O'Neill. We will rely on Rule 3a4-1 of
the Securities Exchange Act of 1934 so as to permit officers, directors and
employees to participate in the sale of our common stock. No officer, director
or employee will be compensated for his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
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The offering will comply with the requirements of Rule 10b-9
promulgated under the Securities Exchange Act of 1934.
Restrictions on Transferability by Directors and Executive Officers
Shares of the common stock purchased by our directors or executive
officers cannot be sold for a period of one year following completion of the
offering, except for a disposition of shares after death. To ensure this
restriction is upheld, shares of the common stock issued to directors and
executive officers will bear a legend restricting their sale. Appropriate
instructions will be issued to the transfer agent with respect to applicable
restrictions on transfer of such stock. Any shares issued to directors and
executive officers as a stock dividend, stock split or otherwise with respect to
restricted stock will be subject to the same restriction.
For a period of three years following the offering, our directors and
executive officers and their associates may not, without the prior approval of
the Office of Thrift Supervision, purchase our common stock except from a broker
or dealer registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made by tax
qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual directors or executive officers.
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in the offering. This registration does not cover
the resale of the shares. Shares of common stock purchased by persons who are
not affiliates of us may be resold without registration. Shares purchased by an
affiliate of us will have resale restrictions under Rule 144 of the Securities
Act. If we meet the current public information requirements of Rule 144, each
affiliate of ours who complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of certain
other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of 1%
of our outstanding shares or the average weekly volume of trading in the shares
during the preceding four calendar weeks. We may make future provisions to
permit affiliates to have their shares registered for sale under the Securities
Act under certain circumstances.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the offering, no depositor may transfer or
enter into an agreement or understanding to transfer any subscription rights or
the legal or beneficial ownership of the shares of common stock to be purchased
in the offering. Depositors who submit an order form will be required to certify
that their purchase of common stock is solely for their own account and there is
no agreement or understanding regarding the sale or transfer of their shares. We
intend to pursue any and all legal and equitable remedies after we become aware
of any agreement or understanding, and will not honor orders we reasonably
believe to involve an agreement or understanding regarding the sale or transfer
of shares.
Effects of the Stock Offering
General. The stock offering will not have any effect on Kearny Federal
Savings Bank's present business of accepting deposits and investing its funds in
loans and other investments permitted by law. The stock offering will not result
in any change in the existing services provided to depositors and borrowers, or
in existing offices, management, and staff. After the stock offering, Kearny
Federal Savings Bank will
135
continue to be subject to regulation, supervision, and examination by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation.
Deposits and Loans. Each holder of a deposit account in Kearny Federal
Savings Bank at the time of the stock offering will continue as an account
holder in Kearny Federal Savings Bank after the stock offering, and the stock
offering will not affect the deposit balance, interest rate or other terms. Each
deposit account will be insured by the Federal Deposit Insurance Corporation to
the same extent as before the stock offering. Depositors will continue to hold
their existing certificates, savings records, checkbooks and other evidence of
their accounts. The stock offering will not affect the loans of any borrower
from Kearny Federal Savings Bank. The amount, interest rate, maturity, security
for, and obligations under each loan will remain contractually fixed as they
existed prior to the stock offering.
Voting Rights. As a federally chartered stock savings bank, all voting
rights of Kearny Federal Savings Bank are held solely by its sole stockholder,
Kearny Financial Corp. All voting rights of Kearny Financial Corp. are held
solely by its sole stockholder, Kearny MHC. All voting rights of Kearny MHC are
held by the depositors and certain borrowers of Kearny Federal Savings Bank at
the applicable record date. After the stock offering, the voting rights of
Kearny Financial Corp. will be held by its stockholders. Kearny MHC will own a
majority of the outstanding common stock of Kearny Financial Corp., and thus the
Board of Directors of Kearny MHC, which is comprised of the same individuals who
are directors of Kearny Financial Corp., will control the affairs of Kearny
Financial Corp., including the election of directors of Kearny Financial Corp.
Material Federal and State Tax Consequences. We have received an
opinion from Malizia Spidi & Fisch, PC on the material federal tax consequences
of the stock offering to Kearny Financial Corp., the purchasers of its common
stock and the recipients of subscription rights to purchase such common stock.
The opinion has been filed as an exhibit to the registration statement of which
this prospectus is a part and covers those federal tax matters that are material
to the transaction. Such opinion is made in reliance upon various statements,
representations and declarations as to matters of fact made by us, as detailed
in the opinion. The opinion provides that:
o we will recognize no gain or loss upon the receipt of money in
exchange for shares of common stock; and
o no gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members upon the
distribution to them of the nontransferable subscription rights
to purchase shares of common stock.
The opinion in the second bullet above is predicated on representations
from Kearny Federal Savings Bank, Kearny Financial Corp. and Kearny MHC that no
person shall receive any payment, whether in money or property, in lieu of the
issuance of subscription rights. The opinion in the second bullet above is also
based on the position that the subscription rights to purchase shares of common
stock received by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members have a fair market value of zero. In reaching their
opinion stated in the second bullet above, Malizia Spidi & Fisch, PC has noted
that the subscription rights will be granted at no cost to the recipients, will
be legally non-transferable and of short duration, and will provide the
recipients with the right only to purchase shares of common stock at the same
price to be paid by members of the general public in any community offering.
Malizia Spidi & Fisch, PC believes that it is more likely than not that the fair
market value of the subscription rights to purchase common stock is zero.
Malizia Spidi & Fisch, PC has noted in its opinion that they are not aware of
the Internal Revenue Service claiming in any similar transaction that
136
subscription rights have any market value. In that there are no judicial
opinions or official Internal Revenue Service positions on this issue, however,
such position related to subscription rights comes to a reasoned conclusion
instead of an absolute conclusion on these issues. Such conclusion of counsel is
supported by a letter from RP Financial furnished to us which states that the
subscription rights do not have any value when they are distributed or
exercised. If the Internal Revenue Service disagrees with this valuation of
subscription rights and determines that such subscription rights have value,
income may be recognized by recipients of these rights, in certain cases whether
or not the rights are exercised. This income may be capital gain or ordinary
income, and Kearny Financial Corp. could recognize gain on the distribution of
these rights. Based on the foregoing, Malizia Spidi & Fisch, PC believes that it
is more likely than not that the nontransferable subscription rights to purchase
our common stock have no value.
We are also subject to New Jersey income taxes and have received an
opinion from Radics & Co., LLC that the stock offering will be treated for New
Jersey state tax purposes similar to the treatment of the stock offering for
federal tax purposes.
Unlike a private letter ruling from the IRS, the federal and state tax
opinions have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the New Jersey tax authorities. Eligible
Account Holders and Supplemental Eligible Account Holders are encouraged to
consult with their own tax advisers as to the tax consequences in the event the
subscription rights are determined to have any market value.
Interpretation, Amendment or Termination of the Plan of Stock Offering
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. To the extent permitted by law,
all interpretations by us of the plan of stock issuance will be final; however,
such interpretations have no binding effect on the Office of Thrift Supervision.
The plan of stock issuance provides that, if deemed necessary or desirable, we
may substantively amend the plan of stock issuance as a result of comments from
regulatory authorities or otherwise.
Completion of the offering requires the sale of all shares of the
common stock within ninety days following approval of the plan of stock issuance
by the Office of Thrift Supervision, unless an extension is granted by the
Office of Thrift Supervision. If this condition is not satisfied, the plan of
stock issuance will be terminated and we will continue our business. We may
terminate the plan of stock issuance at any time.
Conditions to the Offering
Completion of the offering is subject to several factors, including:
1. the receipt of all the required approvals of the Office of Thrift
Supervision for the issuance of common stock in the offering, and
2. the sale of a minimum of 14,025,000 shares of common stock.
If such conditions are not met before we complete the offering, all
funds received will be promptly returned with interest and all withdrawal
authorizations will be canceled. The stock purchases of our officers and
directors will be counted for purposes of meeting the minimum number of shares.
137
RESTRICTIONS ON ACQUISITION OF KEARNY FINANCIAL CORP.
General
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Kearny Financial Corp., Kearny Federal
Savings Bank or their respective capital stock are described below. Also
discussed are certain provisions in Kearny Financial Corp.'s charter and bylaws
which may be deemed to affect the ability of a person, firm or entity to acquire
Kearny Financial Corp.
Statutory and Regulatory Restrictions on Acquisition
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or of the public to
permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Kearny Financial Corp. or Kearny Federal Savings Bank without
Office of Thrift Supervision approval.
Charter and Bylaws of Kearny Financial Corp.
The following discussion is a summary of certain provisions of the
charter and bylaws of Kearny Financial Corp. that relate to corporate
governance. The description is necessarily general and qualified by reference to
the charter and bylaws.
138
Classified Board of Directors. The Board of Directors of Kearny
Financial Corp. is required by the bylaws to be divided into three staggered
classes as equal in size as is possible, with one class elected annually by
stockholders for three-year terms. A classified board promotes continuity and
stability of management of Kearny Financial Corp., but makes it more difficult
for stockholders to change a majority of the directors because it generally
takes at least two annual elections of directors for this to occur. Directors
are elected by a plurality of votes cast, and because Kearny MHC will own a
majority of the common stock, it will control the election of directors.
Authorized but Unissued Shares of Capital Stock. Following the stock
offering, Kearny Financial Corp. will have authorized but unissued shares of
preferred stock and common stock. See Description of Capital Stock on page 140.
Although these shares could be used by the Board of Directors of Kearny
Financial Corp. to make it more difficult or to discourage an attempt to obtain
control of Kearny Financial Corp. through a merger, tender offer, proxy contest
or otherwise, it is unlikely that we would use or need to use shares for these
purposes because Kearny MHC will own a majority of the common stock.
Special Meetings of Stockholders. Kearny Financial Corp.'s bylaws
provide that special meetings of stockholders may be called only by the chairman
of the board, the president, or a majority of the Board of Directors, or upon
the written request of the holders of not less than one-tenth of all of the
outstanding stock of Kearny Financial Corp.
How Shares are Voted. Kearny Financial Corp.'s bylaws provide that
there will not be cumulative voting by stockholders for the election of Kearny
Financial Corp.'s directors. No cumulative voting rights means that Kearny MHC,
as the holder of a majority of the shares eligible to be voted at a meeting of
stockholders, may elect all directors of Kearny Financial Corp. to be elected at
that meeting. This could prevent minority stockholder representation on Kearny
Financial Corp.'s Board of Directors.
Procedures for Stockholder Nominations. Kearny Financial Corp.'s bylaws
provide that any stockholder wanting to make a nomination for the election of
directors or a proposal for new business at a meeting of stockholders must send
written notice to the Secretary of Kearny Financial Corp. at least five days
before the date of the annual meeting. The bylaws further provide that if a
stockholder wanting to make a nomination or a proposal for new business does not
follow the prescribed procedures, the proposal will not be considered until an
adjourned, special, or annual meeting of the stockholders taking place thirty
days or more thereafter. Management believes that it is in the best interests of
Kearny Financial Corp. and its stockholders to provide enough time for
management to disclose to stockholders information about a dissident slate of
nominations for directors. This advance notice requirement may also give
management time to solicit its own proxies in an attempt to defeat any dissident
slate of nominations if management thinks it is in the best interest of
stockholders generally. Similarly, adequate advance notice of stockholder
proposals will give management time to study such proposals and to determine
whether to recommend to the stockholders that such proposals be adopted.
Indemnification. Kearny Financial Corp.'s bylaws provide for
indemnification of its officers, directors and employees to the fullest extent
authorized by the regulations of the Office of Thrift Supervision.
139
DESCRIPTION OF CAPITAL STOCK
General
Kearny Financial Corp. is authorized to issue 75,000,000 shares of
common stock, par value $0.10 per share and 25,000,000 shares of serial
preferred stock, par value $0.10 per share. We currently expect to have between
46,750,000 and 63,250,000 shares of common stock, subject to an increase to
72,737,500 shares, outstanding after the stock offering, including shares that
will be held by Kearny MHC. Upon payment of the purchase price shares of common
stock issued in the offering will be fully paid and non- assessable. Each share
of common stock will have the same relative rights as, and will be identical in
all respects with, each other share of common stock. The common stock will
represent non-withdrawable capital, will not be an account of insurable type and
will not be insured by the Federal Deposit Insurance Corporation or any other
governmental agency. The Board of Directors can, without stockholder approval,
issue additional shares of common stock, although Kearny MHC, so long as it is
in existence, must own a majority of Kearny Financial Corp.'s outstanding shares
of common stock.
Common Stock
Distributions. Kearny Financial Corp. can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations which
are imposed by law. See Our Policy Regarding Dividends on page 22. The holders
of common stock of Kearny Financial Corp. will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of Kearny
Financial Corp. out of funds legally available therefor. If Kearny Financial
Corp. issues preferred stock, the holders thereof may have a priority over the
holders of the common stock with respect to dividends.
Voting Rights. The holders of common stock will possess exclusive
voting rights in Kearny Financial Corp. The holder of shares of common stock
will be entitled to one vote for each share held on all matters subject to
stockholder vote and will not have any right to cumulate votes in the election
of directors.
Liquidation Rights. In the event of any liquidation, dissolution, or
winding-up of Kearny Financial Corp., the holders of the common stock generally
would be entitled to receive, after payment of all debts and liabilities of
Kearny Financial Corp. (including all debts and liabilities of Kearny Federal
Savings Bank), all assets of Kearny Financial Corp. available for distribution.
If preferred stock is issued, the holders thereof may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Because the holders of the common stock
do not have any preemptive rights with respect to any shares Kearny Financial
Corp. may issue, the Board of Directors may sell shares of capital stock of
Kearny Financial Corp. without first offering such shares to existing
stockholders. The common stock will not be subject to any redemption provisions.
Preferred Stock
We are authorized to issue up to 25,000,000 shares of serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of preferred stock and the qualifications, limitations and
restrictions of those shares as the Board of Directors may determine in its
discretion. Preferred stock may be issued in distinctly designated series, may
be convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have
140
full or limited voting rights. The issuance of preferred stock could adversely
affect the voting and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the stock offering and federal taxation will be
passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. Matters
relating to state taxation will be passed upon for us by Radics & Co., LLC, Pine
Brook, New Jersey. Certain legal matters will be passed upon for Sandler O'Neill
& Partners, L.P. by Thacher Proffitt & Wood LLP, New York.
EXPERTS
The consolidated financial statements of Kearny Financial Corp. at June
30, 2004 and 2003 and for each of the years in the three year period ended June
30, 2004 have been included in this prospectus in reliance upon the report of
Radics & Co., LLC, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
RP Financial, LC has consented to the publication in this document of a
summary of its letter to Kearny Financial Corp. setting forth its conclusion as
to the estimated pro forma market value of the common stock and has also
consented to the use of its name and statements with respect to it appearing in
this document.
REGISTRATION REQUIREMENTS
Prior to completion of the offering, we will register our common stock
with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. We will be subject to the information, proxy solicitation, insider
trading restrictions, tender offer rules, periodic reporting and other
requirements of the SEC under the Securities Exchange Act of 1934. We will not
deregister the common stock under the Securities Exchange Act of 1934 for a
period of at least three years following the stock offering.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. The statements contained in this document as to the contents of any
contract or other document filed as an exhibit to the Form S-1 are, of
necessity, brief descriptions. The registration statement and exhibits can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of the registration
materials can be obtained from the SEC at prescribed rates. You may obtain
information on the operation of the Public Reference Room by calling
1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy
and information
141
statements and other information regarding registrants, including Kearny
Financial Corp., that file electronically with the SEC. The address for this web
site is http://www.sec.gov.
We have filed an application for approval of the stock issuance with
the Office of Thrift Supervision. This prospectus omits certain information
contained in that application. That information can be examined without charge
at the public reference facilities of the Office of Thrift Supervision located
at 1700 G Street, N.W., Washington, D.C. 20552.
A copy of our charter and bylaws, filed as exhibits to the registration
statement as well as those of Kearny Federal Savings Bank and Kearny MHC, are
available without charge from Kearny Financial Corp. Copies of the plan of stock
issuance are also available without charge.
142
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm...........................................F-1
Consolidated Statements of Financial Condition
as of September 30, 2004 (unaudited) and June 30, 2004 and 2003 (audited) .............. F-2
Consolidated Statements of Income
for the Three Months Ended September 30, 2004 and 2003 (unaudited) and
the Years Ended June 30, 2004, 2003 and 2002 (audited)...................................F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
June 30, 2004, 2003 and 2002 (audited) and
for the Three Months Ended September 30, 2004 (unaudited)................................F-4
Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 2004 and 2003 (unaudited) and
the Years Ended June 30, 2004, 2003 and 2002 (audited)............................ F-5 - F-6
Notes to Consolidated Financial Statements................................................ F-7 - F-49
All schedules are omitted as the required information either is not
applicable or is included in the consolidated financial statements or related
notes.
143
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To The Board of Directors
Kearny Financial Corp. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Kearny Financial Corp. (the "Company") and Subsidiaries as of June 30, 2004
and 2003, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 2004. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of the Company and Subsidiaries as of June 30, 2004 and 2003,
and the consolidated results of their operations and cash flows for each of the
years in the three- year period ended June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/Radics & Co., LLC
Pine Brook, New Jersey
August 9, 2004
F-1
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands, Except Share and Per Share Data)
June 30,
September 30, --------------------------
Notes 2004 2004 2003
---------------- --------------- ------------ ------------
(Unaudited)
Assets
Cash and amounts due from depository institutions $ 17,937 $ 21,008 $ 25,291
Interest-bearing deposits in other banks 18,926 18,480 89,366
Federal funds sold - - 11,000
Securities purchased under agreements to resell - - 200,000
----------- ----------- -----------
Cash and cash equivalents 1, 3 and 17 36,863 39,488 325,657
Securities available for sale 1, 4 and 17 41,335 41,564 37,840
Investment securities held to maturity 1, 5, 12 and 17 445,769 435,870 287,321
Loans receivable, including net deferred loan costs of $805, $758
and $1,927 1, 6 and 17 520,486 510,938 514,341
Less: Allowance for loan losses 1 and 6 (5,290) (5,144) (5,180)
----------- ----------- -----------
Net loans receivable 515,196 505,794 509,161
----------- ----------- -----------
Mortgage-backed securities held to maturity 1, 7 and 17 724,876 771,353 681,619
Premises and equipment 1 and 8 28,384 26,649 19,884
Federal Home Loan Bank of New York stock ("FHLB") 12 11,392 11,392 13,787
Interest receivable 1, 9 and 17 8,861 9,861 8,479
Goodwill 1, 2 and 10 82,263 82,263 31,746
Deposit for acquisition of West Essex Bancorp, Inc. 2 - - 67,853
Other assets 10, 15 and 19 9,270 12,284 13,135
----------- ----------- -----------
Total assets $ 1,904,209 $ 1,936,518 $ 1,996,482
=========== =========== ===========
Liabilities and stockholders' equity
Liabilities
Deposits: 1, 11 and 17
Non-interest bearing 51,065 55,377 48,229
Interest bearing 1,459,745 1,482,133 1,565,455
----------- ----------- -----------
Total deposits 1,510,810 1,537,510 1,613,684
Advances from FHLB 12 and 17 84,100 94,234 75,749
Advance payments by borrowers for taxes 4,088 4,224 4,213
Other liabilities 1, 13 and 15 7,409 7,045 7,167
----------- ----------- -----------
Total liabilities 1,606,407 1,643,013 1,700,813
----------- ----------- -----------
Commitments and contingencies 1, 16 and 17
Stockholders' equity 1, 2, 14, 15 and 18
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;
10,000, 10,000 and 11,737 shares issued and outstanding, respectively 1 1 1
Paid in capital 499 499 19,066
Retained earnings - substantially restricted 286,755 282,959 273,970
Unearned Employee Stock Ownership Plan ("ESOP") shares - - (663)
Unearned Incentive Plan shares - - (193)
Treasury stock, at cost; 126 shares at June 30, 2003 - - (4,283)
Accumulated other comprehensive income 10,547 10,046 7,771
----------- ----------- -----------
Total stockholders' equity 297,802 293,505 295,669
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,904,209 $ 1,936,518 $ 1,996,482
=========== =========== ===========
See notes to consolidated financial statements.
F-2
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------
(In Thousands, Except Share and Per Share Data)
Three Months Ended
September 30, Year Ended June 30,
--------------------- -----------------------------------
Notes 2004 2003 2004 2003 2002
----------- -------- ---------- -------- -------- ----------
(Unaudited)
Interest income:
Loans 1 and 5 $ 7,132 $ 7,659 $ 28,919 $ 36,673 $ 43,258
Mortgage-backed securities 1 8,649 7,976 33,980 47,764 50,225
Investment and available for sale securities 1 4,011 3,228 14,426 9,133 9,927
Other interest earning assets 115 793 1,329 2,922 2,752
-------- -------- ---------- -------- ----------
Total interest income 19,907 19,656 78,654 96,492 106,162
-------- -------- ---------- -------- ----------
Interest expense:
Deposits 11 6,112 8,092 28,082 39,908 49,069
Borrowings 991 1,066 4,018 4,787 5,374
-------- -------- ---------- -------- ----------
Total interest expense 7,103 9,158 32,100 44,695 54,443
-------- -------- ---------- -------- ----------
Net interest income 12,804 10,498 46,554 51,797 51,719
Provision for loan losses 1 and 5 151 - - - 3
-------- -------- ---------- -------- ----------
Net interest income after provision for loan losses 12,653 10,498 46,554 51,797 51,716
-------- -------- ---------- -------- ----------
Non-interest income:
Fees and service charges 177 388 681 1,002 1,057
Trading account income - - - - 62
Miscellaneous 317 50 879 845 646
-------- -------- ---------- -------- ----------
Total non-interest income 494 438 1,560 1,847 1,765
-------- -------- ---------- -------- ----------
Non-interest expenses:
Salaries and employee benefits 1 and 13 4,652 4,194 16,522 16,962 15,468
Net occupancy expense of premises 1 and 8 647 577 2,523 2,376 1,968
Equipment 1 874 764 3,453 3,142 2,945
Advertising 281 262 861 861 642
Federal insurance premium 140 154 587 620 542
Amortization of goodwill and intangible assets 1, 2 and 10 159 159 636 636 2,947
Directors' fees 217 198 827 818 383
Merger related expenses 2 - 592 592 14,921 619
Miscellaneous 819 843 3,471 4,016 3,551
-------- -------- ---------- -------- ----------
Total non-interest expenses 7,789 7,743 29,472 44,352 29,065
-------- -------- ---------- -------- ----------
Income before income taxes 5,358 3,193 18,642 9,292 24,416
Income taxes 1 and 15 1,562 958 5,745 5,237 7,926
-------- -------- ---------- -------- ----------
Net income $ 3,796 $ 2,235 $ 12,897 $ 4,055 $ 16,490
======== ======== ========== ======== ==========
Net income per common share:
Basic $ 379.60 $ 223.50 $ 1,289.70 $ 337.52 $ 1,294.02
Diluted 379.60 223.50 1,289.70 336.06 1,287.13
======== ======== ========== ======== ==========
Weighted average number of common shares outstanding:
Basic 10,000 10,000 10,000 12,014 12,743
Diluted 10,000 10,000 10,000 12,066 12,811
======== ======== ========== ======== ==========
See notes to consolidated financial statements.
F-3
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
----------------------------------------------------------
(In Thousands)
Retained Accumulated
Common Stock Earnings - Unearned Other
---------------- Paid in Substantially Unearned Incentive Treasury Comprehensive
Shares Amount Capital Restricted ESOP Shares Plan Shares Stock Income Total
------ ------ -------- ----------- ----------- ----------- -------- ------------- -------
Balance - June 30, 2001 13 $ 1 $27,739 $257,752 $(971) $(668) $(4,047) $10,304 $290,110
--------
Net income for the year
ended June 30, 2002 - - - 16,490 - - - - 16,490
Unrealized loss on
securities
available for sale,
net of deferred income
tax benefit of $693 - - - - - - - (1,261) (1,261)
--------
Comprehensive income - - - - - - - - 15,229
--------
ESOP shares committed
to be released - - 173 - 160 - - - 333
Incentive Plan shares
earned - - - - - 249 - - 249
Treasury stock purchases - - - - - - (2,530) - (2,530)
Treasury stock reissued - - (6) - - - 328 - 322
Cash dividends - - - (1,259) - - - - (1,259)
---- --- -------- -------- ----- ----- ------- ------- --------
Balance - June 30, 2002 13 1 27,906 272,983 (811) (419) (6,249) 9,043 302,454
--------
Net income for the year
ended June 30, 2003 - - - 4,055 - - - - 4,055
Unrealized loss on
securities
available for sale,
net of deferred income
tax benefit of $743 - - - - - - - (1,272) (1,272)
--------
Comprehensive income - - - - - - - - 2,783
--------
ESOP shares committed
to be released - - 459 - 148 - - - 607
Incentive Plan shares
earned - - - - - 182 - - 182
Treasury stock reissued - - (20) - - - 365 - 345
Cash dividends declared - - - (986) - - - - (986)
Acquisition of
Pulaski Bancorp, Inc. (1) - (9,850) (2,082) - 44 1,601 - (10,287)
Permanent tax benefit
related to stock options - - 571 - - - - - 571
---- --- -------- -------- ----- ----- ------- ------- --------
Balance - June 30, 2003 12 1 19,066 273,970 (663) (193) (4,283) 7,771 295,669
--------
Net income for the year
ended June 30, 2004 - - - 12,897 - - - - 12,897
Unrealized gain on
securities available
for sale, net of
deferred income
tax of $1,296 - - - - - - - 2,275 2,275
--------
Comprehensive income - - - - - - - - 15,172
--------
Acquisition of
West Essex Bancorp, Inc. (2) - (18,567) (3,908) 663 193 4,283 - (17,336)
---- --- -------- -------- ----- ----- ------- ------- --------
Balance - June 30, 2004 10 1 499 282,959 - - - 10,046 293,505
Net income for the
three months ended
September 30, 2004
(unaudited) - - - 3,796 - - - - 3,796
Unrealized gain on
securities available
for sale, net of
deferred income tax
expense of $269
(unaudited) - - - - - - - 501 501
---- --- -------- -------- ----- ----- ------- ------- --------
Balance - September 30, 2004
(unaudited) 10 $ 1 $ 499 $286,755 - - - $10,547 $297,802
==== === ======== ======== ===== ===== ======= ======= ========
See notes to consolidated financial statements.
F-4
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------
(In Thousands)
Three Months Ended
September 30, Year Ended June 30,
---------------------- -------------------------------------
2004 2003 2004 2003 2002
--------- --------- --------- --------- ---------
(Unaudited)
Cash flows from operating activities:
Net income $ 3,796 $ 2,235 $ 12,897 $ 4,055 $ 16,490
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and
equipment 316 329 1,314 1,279 1,172
Net amortization of premiums, discounts and
loan fees and costs 307 794 2,679 2,260 512
Deferred income taxes (582) 92 556 (734) (28)
Amortization of goodwill and intangible assets 159 159 636 636 2,947
Provision for loan losses 151 - - - 3
Purchase of trading securities - - - - (23,906)
Proceeds from sale of trading securities - - - - 24,733
Realized gains on trading securities - - - - (31)
Unrealized gain on trading securities - - - - (31)
Realized gain on sale of securities
available for sale (71) - - - -
Decrease (increase) in interest receivable 1,000 88 (1,381) 977 648
Decrease (increase) in other assets 2,854 (1,329) (17) (1,461) (1,406)
Increase (decrease) in interest payable 37 (277) (376) (375) (718)
Increase (decrease) in other liabilities 649 44 (1,705) 1,944 191
ESOP and Incentive Plan expenses - - - 789 582
--------- --------- --------- --------- ---------
Net cash provided by operating activities 8,616 2,135 14,603 9,370 21,158
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of term deposit - - - - 399
Purchases of securities available for sale (43) (36) (152) (180) (254)
Proceeds from calls of securities
available for sale - - - - 1,000
Proceeds from sale of securities
available for sale 1,115 - - - -
Purchases of investment securities
held to maturity (14,051) (114,515) (263,187) (261,813) (56,013)
Proceeds from calls and maturities
of investment securities held to maturity 3,109 23,159 111,189 108,705 107,082
Proceeds from repayments of investment securities
held to maturity 1,048 872 3,612 73,154 4,776
Purchase of loans - - (15,024) (5,687) (9,584)
Proceeds on sale of student loans - - - 338 -
Net (increase) decrease in loans receivable (9,592) 18,205 16,922 86,934 20,718
Purchases of mortgage-backed securities
held to maturity (1,308) (126,652) (425,124) (154,799) (571,751)
Principal repayments on mortgage-backed securities
held to maturity 47,511 139,052 334,016 371,915 290,490
Additions to premises and equipment (2,051) (347) (8,079) (3,714) (4,426)
Redemption (purchase) of FHLB Stock - 2,987 2,395 1,954 (1,021)
Cash paid for acquisition of minority interest
in Pulaski Bancorp, Inc. - - - (26,433) -
Cash paid for acquisition of minority interest
in West Essex Bancorp, Inc. - - - (67,853) -
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities 25,738 (57,275) (243,432) 122,521 (218,584)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits (26,709) (39,083) (75,836) 134,221 138,328
FHLB advances - - - - 34,000
Repayment of FHLB advances (134) (1,126) (11,515) (36,331) (9,529)
Net change in short-term borrowings from FHLB (10,000) - 30,000 - (24,500)
Increase (decrease) in advance payments by
borrowers for taxes (36) (485) 11 (445) (320)
Proceeds from issuance of common stock of
West Essex Bancorp, Inc. - - - 345 277
Purchase of treasury stock of
West Essex Bancorp, Inc. - - - - (2,530)
Dividends paid to minority stockholders of
West Essex Bancorp, Inc. and
Pulaski Bancorp, Inc. - - - (1,054) (1,171)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities (36,979) (40,694) (57,340) 96,736 134,555
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents (2,625) (95,834) (286,169) 228,627 (62,871)
Cash and cash equivalents - beginning 39,488 325,657 325,657 97,030 159,901
--------- --------- --------- --------- ---------
Cash and cash equivalents - ending $ 36,863 $ 229,823 $ 39,488 $ 325,657 $ 97,030
========= ========= ========= ========= =========
See notes to consolidated financial statements.
F-5
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------
(In Thousands)
Three Months Ended
September 30, Year Ended June 30,
------------------ --------------------------------
2004 2003 2004 2003 2002
-------- -------- -------- -------- --------
(Unaudited)
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes, net of refunds $ 1,981 $ 1,255 $ 5,956 $ 6,931 $ 8,154
======== ======== ======== ======== ========
Interest $ 7,066 $ 9,435 $ 32,476 $ 45,061 $ 55,160
======== ======== ======== ======== ========
Supplemental disclosure of non-cash transactions
Purchase of minority shares of West Essex $ - $ 17,336 $ 17,336 $ - $ -
======== ======== ======== ======== ========
Goodwill - West Essex acquisition $ - $ 50,517 $ 50,517 $ - $ -
======== ======== ======== ======== ========
Deposit for acquisition of West Essex Bancorp, Inc. $ - $(67,853) $(67,853) $ - $ -
======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-6
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------
Basis of financial statement presentation
-----------------------------------------
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Kearny Federal Savings Bank (the
"Bank"), and the Bank's wholly owned subsidiaries, KFS Financial
Services, Inc. and West Essex Insurance Agency, and have been prepared
in conformity with accounting principles generally accepted in the
United States of America. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the dates of the consolidated
statements of financial condition and revenues and expenses for the
periods then ended. Actual results could differ significantly from
those estimates. A material estimate that is particularly susceptible
to significant change relates to the determination of the allowance for
loan losses. Management believes that the allowance for loan losses
represents its best estimate of losses known and inherent in the loan
portfolio that are both probable and reasonable to estimate. While
management uses available information to recognize losses on loans,
future additions to the allowance for loan losses may be necessary
based on changes in economic conditions in the market area.
The Company's unaudited interim consolidated financial statements are
subject to possible adjustment in connection with the annual audit of
the consolidated financial statements as of and for the year ending
June 30, 2005. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of financial position and results of operations for the
periods presented. Operations for the three months ended September 30,
2004, are not necessary indicative of the results to be expected for
the full year.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the recognition of additions to the
allowance based on their judgments about information available to them
at the time of their examination.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from depository
institution, interest-bearing deposits in other banks, securities
purchased under agreements to resell, and federal funds sold, all with
original maturities of three months or less.
Securities purchased under agreements to resell
-----------------------------------------------
Securities purchased under agreements to resell are accounted for as
collateralized financial transactions and are carried at the amounts at
which the securities will be subsequently reacquired. Securities
purchased under agreements to resell are required to be held by a third
party custodian. The market values of securities to be resold are
monitored on a daily basis and additional collateral may be obtained
where considered necessary to protect against credit exposure.
F - 7
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-------------------------------------------------------
Securities
----------
Investments in debt securities that the Company/Bank has the positive
intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized holding gains and losses
included in earnings. Debt and equity securities not classified as
trading securities nor as held-to-maturity securities are classified as
available for sale securities and reported at fair value, with
unrealized holding gains or losses, net of deferred income taxes,
reported in the accumulated other comprehensive income component of
stockholder's equity.
The Company adopted Emerging Issues Tax Force ("EITF") Issuance No.
03-1, The Meaning of Other than Temporary Impairment and Its
Application to Certain Investments, as of June 30, 2004. EITF 03-1
includes certain disclosures regarding quantitative and qualitative
disclosures for securities accounted for under the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, that are impaired at the balance sheet date, but for which
other-than-temporary impairment has not been recognized. The
disclosures under EITF 03-1 are required for consolidated financial
statements for years ending after December 15, 2003 and are included in
these consolidated financial statements.
Under EITF 03-1, individual securities are considered impaired when
fair value is less than amortized cost. Management evaluates on a
monthly basis whether any securities are other-than-temporarily
impaired. In making this determination, we consider the extent and
duration for the impairment, the nature and financial health of the
issuer, other factors relevant to specific securities, and the
Company's ability and intent to hold securities for a period of time
sufficient to allow for any anticipated recovery in market value. If a
security is determined to be other-than-temporarily impaired, an
impairment loss is charged to operations.
Premiums and discounts on all securities are amortized/accreted to
maturity by use of the level-yield method. Gain or loss on sales of
securities is based on the specific identification method.
Concentration of risk
---------------------
The Bank's lending activity is concentrated in loans secured by real
estate located primarily in the State of New Jersey.
Loans receivable
----------------
Loans receivable are stated at unpaid principal balances plus net
deferred loan origination costs and discounts less the allowance for
loan losses. Loan origination fees and certain direct loan origination
costs are deferred and amortized, using the level-yield method, as an
adjustment of yield over the contractual lives of the related loans.
Unearned discounts are accreted by use of the level-yield method over
the contractual lives of the related loans.
F - 8
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-------------------------------------------------------
Loans receivable (Cont'd.)
--------------------------
Recognition of interest by the accrual method is generally discontinued
when interest or principal payments are ninety days or more in arrears
on a contractual basis, or when other factors indicate that the
collection of such amounts is doubtful. At the time a loan is placed on
nonaccrual status, an allowance for uncollected interest is recorded in
the current period for previously accrued and uncollected interest.
Interest on such loans, if appropriate, is recognized as income when
payments are received. A loan is returned to accrual status when
interest or principal payments are no longer ninety days or more in
arrears on a contractual basis and factors indicating doubtful
collectibilty no longer exist.
Allowance for loan losses
-------------------------
An allowance for loan losses is maintained at a level that represents
management's best estimate of losses known and inherent in the loan
portfolio that are both probable and reasonable to estimate. The
allowance is decreased by loan charge-offs, increased by subsequent
recoveries of loans previously charged off, and then adjusted, via
either a charge or credit to operations, to an amount determined by
management to be necessary. Loans or portions thereof, are charged off
when, after collection efforts are exhausted, they are determined to be
uncollectible. Management of the Bank, in determining the allowance for
loan losses, considers the losses inherent in its loan portfolio and
changes in the nature and volume inherent in its loan activities, along
with the general economic and real estate market conditions. The Bank
utilizes a two tier approach: (1) identification of impaired loans and
establishment of specific loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of its
loan portfolio. The Bank maintains a loan review system which allows
for a periodic review of its loan portfolio and the early
identification of potential impaired loans. Such system takes into
consideration, among other things, delinquency status, size of loans,
type of collateral and financial condition of the borrowers. Specific
loan loss allowances are established for identified loans based on a
review of such information and/or appraisals of the underlying
collateral. General loan losses are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition
of the loan portfolio, current economic conditions and management's
judgment. Although management believes that specific and general loan
losses are established in accordance with management's best estimate,
actual losses are dependent upon future events and, as such, further
additions to the level of loan loss allowances may be necessary.
A loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. All loans identified as impaired are evaluated
independently. The Bank does not aggregate such loans for evaluation
purposes. Payments received on impaired loans are applied first to
interest receivable and then to principal.
F - 9
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-------------------------------------------------------
Premises and equipment
----------------------
Land is carried at cost. Buildings and improvements, furnishings and
equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed on the straight-line
method over the following estimated useful lives:
Buildings and improvements 10 to 50 years
Furnishings and equipment 4 to 20 years
Leasehold improvements Shorter of useful lives or 10 years
Construction in progress primarily represents facilities under
construction for future use in the Company's business and includes all
costs to acquire land and construct buildings, as well as capitalized
interest during the construction period. Interest is capitalized at the
Bank's average cost of interest-bearing liabilities.
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to operations in
the year incurred. Rental income is netted against occupancy costs in
the consolidated statements of income.
Goodwill and other intangible assets
------------------------------------
Goodwill and other intangible assets principally represent the excess
cost over the fair value of the net assets of the institutions acquired
in purchase transactions. Through June 30, 2002, goodwill was amortized
using the straight line method over 15 years. The Company adopted,
effective July 1, 2002, SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets", under which goodwill
is no longer amortized, but subject to an impairment test. Goodwill is
evaluated annually by reporting unit and an impairment loss recorded if
indicated. The impairment test is performed in two phases. The first
step of the goodwill impairment test compares the fair value of the
reporting unit with its carrying amount, including goodwill. If the
fair value of the reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not impaired; however, if the
carrying amount of the reporting unit exceeds its fair value, an
additional procedure must be performed. That additional procedure
compares the implied fair value of the reporting unit's goodwill (as
defined in SFAS No. 142), with the carrying amount of that goodwill. An
impairment loss is recorded to the extent that the carrying amount of
goodwill exceeds its implied fair value. Fair value is determined by a
combination of the Comparable Transaction and Discounted Cash Flow
approaches. No impairment charges were required to be recorded in the
years ended June 30, 2004, 2003 or 2002. If an impairment loss is
determined to exist in the future, such loss will be reflected as an
expense in the consolidated statements of income in the period in which
the impairment loss is determined. Separate intangible assets,
including core deposit intangibles that are not deemed to have
indefinite lives, continue to be amortized over their useful lives,
which is estimated to be ten years.
F - 10
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-- ------------------------------------------ ---------
Income taxes
------------
The Company and its subsidiaries file consolidated federal income tax
returns. Income taxes are allocated based on the contribution of income
to the consolidated income tax returns. Separate state income tax
returns are filed.
Federal and state income taxes have been provided on the basis of the
reported income. The amounts reflected on the Company's tax returns
differ from these provisions due principally to temporary differences
in the reporting of certain items for financial reporting and income
tax reporting purposes. Deferred income taxes are recorded to recognize
such temporary differences.
Stock-based compensation plans
------------------------------
Entities acquired by Company had granted stock options to employees and
outside directors. See note 13 for additional information as to option
grants. The options granted were accounted for using the intrinsic
value method, in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. No compensation expense has been reflected in net
income for the options granted as all such grants had an exercise price
equal to the market price of the underlying stock at the date of grant.
The following table provides information as to net income and earnings
per share as if the fair value recognition provisions of Statement of
Financial Accounting Standards No 123, "Accounting for Stock-Based
Compensation", as amended, had been applied to all option grants.
Year Ended June 30,
---------------------------------------
2004 2003 2002
---- ---- ----
(In Thousands, Except for Per Share Amounts)
Net income as reported $ 12,897 $ 4,055 $ 16,490
Remove: Total stock-based compensation expense,
net of income taxes, included in reported
net income - - -
Include:
Total stock-based compensation expense,
net of income taxes, that would have been
included in the determination of net income
if the fair value method had been applied to
all grants - (155) (139)
---------- --------- ----------
Pro forma net income $ 12,897 $ 3,900 $ 16,351
========== ========= ==========
Basic net income per common share:
As reported $ 1,289.70 $ 337.52 $ 1,294.02
Pro forma 1,289.70 324.62 1,283.14
========== ========= ==========
Diluted net income per common share:
As reported $ 1,289.70 $ 336.06 $ 1,287.13
Pro forma 1,289.70 323.22 1,276.33
========== ========= ==========
During the three months ended September 30, 2004 and 2003 (unaudited), there was
no stock-based compensation included in reported net income nor would there have
been under the fair value method.
F - 11
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-------------------------------------------------------
Interest rate risk
------------------
The Bank is principally engaged in the business of attracting deposits
from the general public and using these deposits, together with other
funds, to purchase securities and to make loans secured by real estate.
The potential for interest-rate risk exists as a result of the
generally shorter duration of interest-sensitive liabilities compared
to the generally longer duration of interest-sensitive assets. In a
rising rate environment, liabilities will reprice faster than assets,
thereby reducing net interest income. For this reason, management
regularly monitors the maturity structure of the Bank's assets and
liabilities in order to measure its level of interest-rate risk and to
plan for future volatility.
Net income per common share
---------------------------
Basic net income per common share is computed by dividing net income by
the weighted average number of shares of common stock outstanding.
Diluted net income per common share is computed by dividing net income
by the weighted average number of shares of common stock outstanding,
as adjusted to include the effects of outstanding stock options, if
dilutive, using the treasury stock method.
Net income per common share computations include the outstanding shares
of common stock related to acquired entities (see Note 2). Such shares
have been converted to equivalent Kearny shares, based upon the
relative book values of each entity at the applicable acquisition
dates.
Reclassification
----------------
Certain amounts as of and for the years ended June 30, 2003 and 2002,
have been reclassified to conform to the current year's presentation.
2. BUSINESS COMBINATIONS
--------------------------
On January 10, 2002, Kearny MHC, the Company and the Bank entered into a merger
agreement with Pulaski MHC, Pulaski Bancorp, Inc. ("Pulaski") and Pulaski's
subsidiary, Pulaski Savings Bank ("PSB"). On October 18, 2002, pursuant to this
merger agreement, (i) Pulaski MHC merged with Kearny MHC, with Kearny MHC as the
surviving entity; (ii) Pulaski merged with the Company, with the Company as the
surviving entity; (iii) PSB merged with and into the Bank, with the Bank as the
surviving institution, the Bank remaining a subsidiary of the Company; (iv)
concurrently with steps (i) through (iii), 100% of the outstanding shares of
Pulaski common stock were canceled, with shares previously held by stockholders
other than Pulaski MHC exchanged for a payment of $32.90 per share cash; and (v)
as a result of the foregoing, the interests of Pulaski MHC members ceased to
exist and were converted into interests of the same nature in Kearny MHC. The
amount paid to minority shareholders of Pulaski in excess of their combined
interest in Pulaski amounted to $16,146,000, which was recorded as goodwill.
F - 12
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. BUSINESS COMBINATIONS (Cont'd.)
----------------------------------
On September 11, 2002, Kearny MHC, the Company and the Bank entered into a
merger agreement with West Essex Bancorp, M.H.C., West Essex Bancorp, Inc.
("West Essex") and West Essex's subsidiary, West Essex Savings Bank ("WESB"). On
July 1, 2003, pursuant to this merger agreement, (i) West Essex MHC merged with
Kearny MHC, with Kearny MHC as the surviving entity; (ii) West Essex merged with
the Company, with the Company as the surviving entity; (iii) WESB merged with
and into the Bank, with the Bank as the surviving institution, the Bank
remaining a subsidiary of the Company; (iv) concurrently with steps (i) through
(iii), 100% of the outstanding shares of West Essex common stock were canceled,
with shares previously held by stockholders other than West Essex Bancorp,
M.H.C. exchanged for a payment of $35.10 per share cash; and (v) as a result of
the foregoing, the interests of West Essex Bancorp, M.H.C. members ceased to
exist and were converted into interests of the same nature in Kearny MHC. The
amount paid to minority shareholders of West Essex in excess of their combined
interest in West Essex amounted to $50,517,000, which was recorded as goodwill.
Both of the above noted transactions were accounted for as follows: (i) the
merger of the mutual holding companies utilized the pooling-of-interests method
accounting, (ii) the acquisition of the mid-tier stock holding company's
minority shareholder interests was accounted for as the acquisition of
non-controlling minority interests, and (iii) the merger of the mid-tier holding
companies was accounted for as a combination of entities under common control.
In addition, Emerging Issues Task Force Topic No. D-97, "Push-Down Accounting",
was applied to the applicable entities.
For the purpose of comparability, in presenting share and per share information
for periods preceding the merger dates, issued and outstanding shares of Pulaski
and West Essex were converted to Company shares on the basis of relative book
value per share. Accordingly, Pulaski shares were converted at a rate of 1 share
of Company common stock for every 1,797 shares of Pulaski common stock and West
Essex shares were converted at a rate of 1 share of Company common stock for
every 2,816 shares of West Essex common stock.
Merger related expenses include the following (in thousands):
Three Months Ended
September 30, Year Ended June 30,
---------------------------- -----------------------------------
2004 2003 2004 2003 2002
---- ---- ---- ---- ----
(Unaudited)
Legal, professional, filing fees and other expenses $ - $ 592 $ 592 $ 2,670 $ 619
Payments for terminated employment contracts and
stock based compensation plans for officers - - - 10,657 -
Stock option payout to directors - - - 1,594 -
------- ----- ----- -------- -----
$ - $ 592 $ 592 $ 14,921 $ 619
======= ===== ===== ======= =====
F - 13
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
----------------------------------------------------
June 30,
Interest September 30, ------------------
Purchased From Maturity Rate 2004 (Unaudited) 2004 2003
------------------ ------------- ------- ---------------- -------- --------
(In Thousands)
Paine Webber, Inc. July 2, 2003 1.375% $ - $ - $200,000
======== ======== ========
At June 30, 2003, the Bank purchased Federal National Mortgage Association
mortgage-backed securities, under agreements to resell, having a market value of
approximately $204,000,000.
4. SECURITIES AVAILABLE FOR SALE
----------------------------------
September 30, 2004 (Unaudited)
------------------------------------------------
Gross Unrealized
Amortized ----------------------- Carrying
Cost Gains Losses Value
--------- --------- ----------- ---------
(In Thousands)
Common stock $ 246 $16,135 $ - $16,381
Mutual funds 13,976 146 97 14,025
Trust preferred securities
due after ten years 10,887 231 189 10,929
------- ------- ------- -------
$25,109 $16,512 $ 286 $41,335
======= ======= ======= =======
June 30, 2004
------------------------------------------------
Gross Unrealized
Amortized ----------------------- Carrying
Cost Gains Losses Value
--------- --------- ----------- ---------
(In Thousands)
Common stock $ 246 $15,648 $ - $15,894
Mutual funds 13,933 63 97 13,899
Trust preferred securities
due after ten years 11,929 69 227 11,771
------- ------- ------- -------
$26,108 $15,780 $ 324 $41,564
======= ======= ======= =======
F - 14
4. SECURITIES AVAILABLE FOR SALE (Cont'd.)
-- ---------------------------------------
June 30, 2003
------------------------------------------------
Gross Unrealized
Amortized ----------------------- Carrying
Cost Gains Losses Value
--------- --------- ----------- ---------
(In Thousands)
Common stock $ 246 $12,502 $ - $12,748
Mutual funds 13,781 427 12 14,196
Trust preferred securities
due after ten years 11,927 245 1,276 10,896
------- ------- ------- -------
$25,954 $13,174 $ 1,288 $37,840
======= ======= ======= =======
The age of unrealized losses and fair value of related securities available for
sale were as follows (in thousands):
Less Than 12 Months 12 Months or More Total
----------------------------- -------------------------- ----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------ --------------- ------------ ------------ ----------- ----------
September 30, 2004 (Unaudited)
Common stock $ - $ - $ - $ - $ - $ -
Mutual funds - - 7,197 97 7,197 97
Trust preferred stock - - 7,617 189 7,617 189
-------- -------- -------- ------- -------- -------
Total $ $ 14,814 286 14,814 286
======== ======== ======== ======= ======== =======
June 30, 2004
Common stock $ - $ - $ - $ - $ - $ -
Mutual funds - - 7,057 97 7,057 97
Trust preferred stock - - 7,577 227 7,577 227
-------- -------- -------- ------- -------- -------
Total $ - $ - $ 14,634 $ 324 $ 14,634 $ 324
======== ======== ======== ======= ======== =======
As of September 30, 2004 (unaudited) and June 30, 2004, management has concluded
that the unrealized losses are temporary in nature since they are primarily
related to market interest rates and not related to the underlying credit
quality of the issuer of the securities. Additionally, the Company has the
intent and ability to hold these investments for a time necessary to recover the
amortized cost.
During the three months ended September 30, 2004 (unaudited), proceeds from
sales of securities available for sale totalled $1,115,000 and resulted in gross
gains of $71,000. There were no sales of securities available for sale during
the three months ended September 30, 2003 (unaudited) and the years ended June
30, 2004, 2003 and 2002.
F - 15
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. INVESTMENT SECURITIES HELD TO MATURITY
-------------------------------------------
September 30, 2004 (Unaudited)
-------------------------------------------
Gross Unrealized
Carrying -------------------- Estimated
Value Gains Losses Fair Value
--------- --------- ----------- ----------
(In Thousands)
Government agencies:
After one year but within five years $256,262 $ 73 $ 2,008 $254,327
After five years but within ten years 494 115 - 609
After ten years 16,594 3 115 16,482
-------- -------- -------- --------
273,350 191 2,123 271,418
-------- -------- -------- --------
Obligations of states and political subdivisions:
Within one year 4,481 62 - 4,543
After one year but within five years 15,822 413 - 16,235
After five years but within ten years 75,364 2,249 174 77,439
After ten years 76,752 1,481 366 77,867
-------- -------- -------- --------
172,419 4,205 540 176,084
-------- -------- -------- --------
$445,769 $ 4,396 $ 2,663 $447,502
======== ======== ======== ========
June 30, 2004
-------------------------------------------
Gross Unrealized
Carrying -------------------- Estimated
Value Gains Losses Fair Value
--------- --------- ----------- ----------
(In Thousands)
Government agencies:
After one year but within five years $246,259 $ - $ 5,223 $241,036
After five years but within ten years 10,493 117 62 10,548
After ten years 17,649 11 104 17,556
-------- -------- -------- --------
274,401 128 5,389 269,140
-------- -------- -------- --------
Obligations of states and political subdivisions:
Within one year 5,386 33 - 5,419
After one year but within five years 13,606 369 54 13,921
After five years but within ten years 65,990 922 991 65,921
After ten years 76,487 394 2,507 74,374
-------- -------- -------- --------
161,469 1,718 3,552 159,635
-------- -------- -------- --------
$435,870 $ 1,846 $ 8,941 $428,775
======== ======== ======== ========
F-16
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. INVESTMENT SECURITIES HELD TO MATURITY (Cont'd.)
---------------------------------------------------
June 30, 2004
-------------------------------------------
Gross Unrealized
Carrying -------------------- Estimated
Value Gains Losses Fair Value
--------- --------- ----------- ----------
(In Thousands)
Government agencies:
After one year but within five years $120,369 $ 1,276 $ - $121,645
After five years but within ten years 25,493 257 - 25,750
After ten years 24,106 142 130 24,118
-------- -------- -------- --------
169,968 1,675 130 171,513
-------- -------- -------- --------
Obligations of states and political subdivisions:
Within one year 8,217 109 - 8,326
After one year but within five years 21,807 834 - 22,641
After five years but within ten years 24,074 1,271 - 25,345
After ten years 63,255 2,639 141 65,753
-------- -------- -------- --------
117,353 4,853 141 122,065
-------- -------- -------- --------
$287,321 $ 6,528 $ 271 $293,578
======== ======== ======== ========
There were no sales of investment securities held to maturity during the three
months ended September 30, 2004 and 2003 (unaudited) and the years ended June
30, 2004, 2003 and 2002. During the three months ended September 30, 2004 and
2003 (unaudited) and the years ended June 30, 2004, 2003 and 2002, proceeds from
calls of securities totalled $ -0-, $18,159,000, $103,810,000, $108,705,000 and
$107,082,000, respectively, resulting in no gains or losses. At June 30, 2004,
investment securities held to maturity with a carrying value of $256,752,000 are
callable within one year.
At September 30, 2004 (unaudited) and June 30, 2004, all obligations of states
and political subdivisions were guaranteed by insurance policies issued by
various insurance companies.
The age of unrealized losses and fair value of related investment securities
held to maturity were as follows (in thousands):
Less Than 12 Months 12 Months or More Total
------------------------- ------------------------ -----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ------ ---------- ------ ---------- ------
September 30, 2004 (Unaudited)
Government agencies: $140,828 $ 1,150 $ 92,480 $ 973 $233,308 $ 2,123
Obligations of states and
political subdivisions: 21,270 186 13,839 354 35,109 540
-------- -------- -------- -------- -------- --------
Total $162,098 $ 1,336 $106,319 $ 1,327 $268,417 $ 2,663
======== ======== ======== ======== ======== ========
June 30, 2004
Government agencies: $250,973 $ 5,285 $ 16,386 $ 104 $267,359 $ 5,389
Obligations of states and
political subdivisions: 85,620 3,026 7,365 526 92,985 3,552
-------- -------- -------- -------- -------- --------
Total $336,593 $ 8,311 $ 23,751 $ 630 $360,344 $ 8,941
======== ======== ======== ======== ======== ========
F-17
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. INVESTMENT SECURITIES HELD TO MATURITY (Cont'd.)
-- -------------------------------------- ---------
As of September 30, 2004 (unaudited) and June 30, 2004, management has concluded
that the unrealized losses are temporary in nature since they are primarily
related to market interest rates and not related to the underlying credit
quality of the issuers of the securities. Additionally, the Company has the
intent and ability to hold these investments for the time necessary to recover
the amortized cost.
6. LOANS RECEIVABLE
---------------------
June 30,
September 30, --------------------
2004 (Unaudited) 2004 2003
--------------- -------- --------
(In Thousands)
Real estate mortgage $453,828 $441,667 $437,490
-------- -------- --------
Commercial business 3,877 5,161 2,353
-------- -------- --------
Consumer:
Home equity loans 38,494 37,381 37,315
Home equity lines of credit 15,615 15,677 19,905
Passbook or certificate 2,667 2,746 2,895
Other 319 336 1,273
-------- -------- --------
57,095 56,140 61,388
-------- -------- --------
Construction 4,881 7,212 11,183
-------- -------- --------
Total loans 519,681 510,180 512,414
Deferred loan costs and fees, net 805 758 1,927
-------- -------- --------
$520,486 $510,938 $514,341
======== ======== ========
At September 30, 2004 (unaudited) and June 30, 2004 and 2003, real estate
mortgage loans included $370,883,000, $358,241,000 and $366,391,000,
respectively, of loans secured by one-to-four-family residential properties.
The Bank has granted loans to its officers and directors and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. As of September 30, 2004 (unaudited) and June 30,
2004 and 2003, such loans totalled approximately $1,608,000, $1,633,000 and
$2,507,000, respectively. During the three months ended September 30, 2004
(unaudited), new loans to related parties totalled $ -0- and repayments totalled
$25,000. During the year ended June 30, 2004, new loans to related parties
totalled $-0-, repayments totalled approximately $100,000 and loans to
individuals no longer associated with the Bank totalled approximately $774,000.
F - 18
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE (Cont'd.)
-----------------------------
The activity in the allowance for loan losses is as follows (in thousands):
Three Months Ended
September 30, Year Ended June 30,
------------------ -----------------------------
2004 2003 2004 2003 2002
------- ------- ------- ------- -------
(Unaudited)
Balance - beginning $ 5,144 $ 5,180 $ 5,180 $ 5,170 $ 5,167
Provisions charged to operations 151 - - - 3
Loans charged off (5) - (36) - -
Loans recovered - - - 10 -
------- ------- ------- ------- -------
Balance - ending $ 5,290 $ 5,180 $ 5,144 $ 5,180 $ 5,170
======= ======= ======= ======= =======
At September 30, 2004 (unaudited) and June 30, 2004 and 2003, nonaccrual loans
for which the accrual of interest had been discontinued totalled approximately
$2,453,000, $2,289,000 and $2,370,000, respectively. Had these loans been
performing in accordance with their original terms, the interest income
recognized for the three months ended September 30, 2004 and 2003 (unaudited)
and the years ended June 30, 2004, 2003 and 2002, would have been $ 44,000,
$50,000 , $177,000, $178,000 and $197,000, respectively. Interest income
recognized on such loans was $8,000, $30,000, $118,000, $102,000 and $170,000,
respectively.
Impaired loans and related amounts recorded in allowance for loan losses are
summarized as follows (in thousands):
June 30,
September 30, -------------------
2004 2004 2003
---- ---- ----
(Unaudited)
Recorded investment in impaired loans
with recorded allowance $ 255 $ 256 $ 229
Without recorded allowance - - -
----- ----- -----
Total impaired loans 255 256 229
Related allowance for loan losses 115 115 115
----- ----- -----
Net impaired loans $ 140 $ 141 $ 114
===== ===== =====
The interest income received and recognized for these loans during the three
months ended September 30, 2004 (unaudited) was $5,000. No interest income was
received and recognized for these loans during the three months ended September
30, 2003 (unaudited) and the years ended June 30, 2004, 2003 and 2002. The
average balance of impaired loans during the three months ended September 30,
2004 and 2003 (unaudited) and the years ended June 30, 2004, 2003 and 2002
approximated $256,000, $229,000, $243,000, $229,000 and $115,000, respectively.
F - 19
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
------------------------------------------------
September 30, 2004 (Unaudited)
-------------------------------------------
Gross Unrealized Estimated
Carrying ------------------ ----------
Value Gains Losses Fair Value
-------- -------- ------- ----------
(In Thousands)
Government National Mortgage Association $ 84,995 $ 2,612 $ 231 $ 87,376
Federal Home Loan Mortgage Corporation 294,451 3,829 1,472 296,808
Federal National Mortgage Association 345,430 6,208 891 350,747
-------- -------- -------- --------
$724,876 $ 12,649 $ 2,594 $734,931
======== ======== ======== ========
June 30, 2004
-------------------------------------------
Gross Unrealized Estimated
Carrying ------------------ ----------
Value Gains Losses Fair Value
-------- -------- ------- ----------
(In Thousands)
Government National Mortgage Association $ 94,499 $ 2,507 $ 1,487 $ 95,519
Federal Home Loan Mortgage Corporation 314,221 2,472 3,505 313,188
Federal National Mortgage Association 362,633 4,670 3,300 364,003
-------- -------- -------- --------
$771,353 $ 9,649 $ 8,292 $772,710
======== ======== ======== ========
June 30, 2003
-------------------------------------------
Gross Unrealized Estimated
Carrying ------------------ ----------
Value Gains Losses Fair Value
-------- -------- ------- ----------
(In Thousands)
Government National Mortgage Association $150,699 $ 6,433 $ 62 $157,070
Federal Home Loan Mortgage Corporation 197,962 6,337 125 204,174
Federal National Mortgage Association 331,061 10,828 195 341,694
Collateral mortgage obligations - corporations 1,894 39 - 1,933
Other - mortgage-backed security 3 - - 3
-------- -------- -------- --------
$681,619 $ 23,637 $ 382 $704,874
======== ======== ======== ========
Net premiums of approximately $3,302,000 (unaudited), $3,565,000 and $3,705,000
at September 30, 2004, and June 30, 2004 and 2003, respectively, are included in
the carrying amounts of mortgage-backed securities held to maturity.
There were no sales of mortgage-backed securities held to maturity during the
three months ended September 30, 2004 and 2003 (unaudited) and the years ended
June 30, 2004, 2003 and 2002. At September 30, 2004 (unaudited) and at June 30,
2004 and 2003, securities with carrying value of approximately $822,000,
$906,000 and $430,000, respectively, were pledged to secure public funds on
deposit.
F - 20
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. MORTGAGE-BACKED SECURITIES HELD TO MATURITY (Cont'd.)
--------------------------------------------------------
The age of unrealized losses and fair value of related mortgage-backed
securities held to maturity were as follows (in thousands):
Less Than 12 Months 12 Months or More Total
------------------------ ------------------------ ------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ------ ---------- ------ ---------- ------
September 30, 2004 (Unaudited)
Mortgage-backed
Securities $207,984 $ 1,870 $55,566 $ 724 $263,550 $ 2,594
======== ======= ======= ===== ======== =======
June 30, 2004
Mortgage-backed
Securities $376,245 $ 7,977 $ 4,126 $ 315 $380,371 $ 8,292
======== ======= ======= ===== ======== =======
As of September 30, 2004 (unaudited) and June 30, 2004, management has concluded
that the unrealized losses are temporary in nature since they are primarily
related to market interest rates and not related to the underlying credit
quality of the issuers of the securities. Additionally, the Company has the
intent and ability to hold these investments for the time necessary to recover
the amortized cost.
8. PREMISES AND EQUIPMENT
---------------------------
June 30,
September 30, ------------------
2004 (Unaudited) 2004 2003
--------------- ------- -------
(In Thousands)
Land $ 5,689 $ 5,689 $ 5,127
Buildings and improvements 15,839 15,800 15,672
Leasehold improvements 422 422 399
Furnishings and equipment 7,807 7,203 5,788
Construction in progress 9,292 7,902 1,999
------- ------- -------
39,049 37,016 28,985
Less accumulated depreciation and amortization 10,665 10,367 9,101
------- ------- -------
$28,384 $26,649 $19,884
======= ======= =======
F - 21
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. INTEREST RECEIVABLE
------------------------
June 30,
September 30, -------------------
2004 (Unaudited) 2004 2003
--------------- ------ ------
(In Thousands)
Loans $2,226 $2,116 $2,396
Mortgage-backed securities 3,265 3,514 3,507
Investments 3,370 4,231 2,569
Other interest-earning assets - - 7
------ ------ ------
$8,861 $9,861 $8,479
====== ====== ======
10. GOODWILL AND OTHER INTANGIBLE ASSETS
-----------------------------------------
Net assets of an institution acquired in a purchase transaction prior to July 1,
2001, were recorded at fair value at the date of acquisition. The Bank also has
finite-lived intangible assets, which are included in other assets, in the form
of core deposit intangibles. These intangibles are being amortized on the
straight line basis over their estimated useful lives of ten years.
Core Deposit
Goodwill Intangibles
-------- ------------
(In Thousands)
Balance at July 1, 2001 $ 17,911 $ 4,108
Amortization (2,311) (636)
-------- --------
Balance at June 30, 2002 15,600 3,472
Pulaski Savings Bank acquisition (see note 2) 16,146 -
Amortization - (636)
-------- --------
Balance at June 30, 2003 31,746 2,836
Amortization - (636)
West Essex Savings Bank acquisition (see note 2) 50,517 -
-------- --------
Balance at June 30, 2004 82,263 2,200
Amortization (unaudited) -- (159)
-------- --------
Balance at September 30, 2004 (unaudited) $ 82,263 $ 2,041
======== ========
The gross carrying amount of core deposit intangibles was $5,987,000 at
September 30, 2004 (unaudited) and at both June 30, 2004 and 2003, while
accumulated amortization totalled $3,310,000 (unaudited), $3,151,000 and
$3,787,000 at September 30, 2004 and at June 30, 2004 and 2003, respectively.
Amortization is expected to total $636,000 in each of the years ending June 30,
2005, 2006 and 2007, and $292,000 in the year ending June 30, 2008.
F - 22
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. DEPOSITS
--------------
June 30,
September 30, ------------------------------------------------
2004 (Unaudited) 2004 2003
-------------------------------- ------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------------ ----------- ------------- ----------- ------------- ------------
(In Thousands)
Non-interest-bearing demand $ 51,065 0.00% $ 55,377 0.00% $ 48,229 0.00%
Interest-bearing demand 106,444 0.75% 103,648 0.75% 93,698 0.92%
Savings and club 484,117 1.00% 481,466 1.00% 460,739 1.29%
Certificates of deposit 869,184 2.11% 897,019 1.92% 1,011,018 2.72%
----------- ----------- -----------
Total deposits $ 1,510,810 1.59% $ 1,537,510 1.48% $ 1,613,684 2.13%
=========== =========== ===========
Certificates of deposit with balances of $100,000 or more at September 30, 2004
(unaudited) and at June 30, 2004 and 2003, totalled approximately $181,673,000,
$188,009,000 and $203,822,000, respectively. Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation.
A summary of certificates of deposit by maturity follows (in thousands):
June 30,
September 30, ------------------------
2004 2004 2003
------------- ---------- -----------
(Unaudited)
One year or less $ 668,715 $ 709,940 $ 814,875
After one to two years 138,333 128,837 125,671
After two to three years 37,306 31,624 46,376
After three years 24,830 26,618 24,096
--------- --------- -----------
$ 869,184 $ 897,019 $ 1,011,018
========= ========= ===========
Interest expense on deposits consists of the following (in thousands):
Three Months Ended
September 30, Year Ended June 30,
------------------ --------------------------
2004 2003 2004 2003 2002
---- ---- ---- ---- ----
(Unaudited)
Demand $ 192 $ 193 $ 882 $ 1,074 $ 1,289
Savings and clubs 1,246 1,769 5,508 6,604 7,873
Certificates of deposits 4,674 6,130 21,692 32,230 39,907
------- ------- ------- ------- -------
$ 6,112 $ 8,092 $28,082 $39,908 $49,069
======= ======= ======= ======= =======
F - 23
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. ADVANCES FROM FHLB
-----------------------
June 30,
September 30, --------------------------------------------
2004 (Unaudited) 2004 2003
---------------------- ------------------ ----------------------
Weighted Weighted Weighted
Average Average Average
Rate Amount Rate Amount Rate Amount
----------- ------- --------- ------ ----------- ---------
(In Thousands)
Due in less than one year 2.21% $22,000 1.75% $32,000 6.55% $11,000
After one to five years 5.46% 50,000 5.46% 50,000 5.51% 44,000
After five to ten years 5.40% 10,000 5.40% 10,000 5.43% 18,000
Other borrowings, payable in
monthly installments through
February 25, 2008 6.03% 2,100 6.03% 2,234 6.03% 2,749
------- ------- -------
4.62% $84,100 4.21% $94,234 5.66% $75,749
======= ======= =======
At June 30, 2004, of the $60,000,000 in advances due after one through ten
years, $57,000,000 are callable, including $47,000,000 which are callable within
one year.
FHLB advances at September 30, 2004 (unaudited) and at June 30, 2004 and 2003,
are collateralized by the FHLB capital stock owned by the Bank and investment
securities held to maturity with fair values totalling approximately
$107,520,000, $126,810,000 and $90,779,000, respectively.
13. BENEFIT PLANS
------------------
Thrift Plan
-----------
The Bank sponsors the Financial Institutions Thrift Plan (the "Plan"),
pursuant to Section 401(k) of the Internal Revenue Code, for all
eligible employees. Employees may elect to save up to 20% of their
compensation. The Bank will contribute a matching contribution up to 3%
of the employee annual compensation. The Plan expense amounted to
approximately $66,000 (unaudited), $60,000 (unaudited), $264,000,
$183,000 and $163,000 for the three months ended September 30, 2004 and
2003, and the years ended June 30, 2004, 2003 and 2002, respectively.
Retirement Plan
---------------
The Bank has a non-contributory multiple-employer pension plan covering
all eligible employees. Significant actuarial assumptions include the
projected unit credit cost valuation method and an annual investment
rate of 8.25%, 8.25% and 8.00% for the years ended June 30, 2004, 2003
and 2002, respectively. At the date of latest plan review, the net
assets available for plan benefits exceeded the actuarial present value
of accumulated plan benefits. Data for the actuarial present value of
accumulated vested and non-vested benefits is not determinable for this
multiple-employer retirement plan. During the years ended June 30,
2004, 2003 and 2002, total pension plan expense and contributions to
the plan were approximately $1,193,000, $685,000 and $573,000,
respectively. During the three months ended September 30, 2004 and 2003
(unaudited), total pension plan expense totalled $306,000 and $298,000,
respectively, and contributions to the plan totalled $ -0- and
$178,000, respectively.
F - 24
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
--------------------------
Retirement Plan (Cont'd.)
PSB, a subsidiary of Pulaski, had a non-contributory employer pension
plan covering all eligible employees. The plan assets, in the amount of
$3,010,355, were transferred to the multi-employer pension plan
covering employees of the PSB on the date of merger. During the year
ended June 30, 2002, PSB contributed $398,000 to the plan and recorded
expenses of $180,000. No contributions were made to this plan and
expenses of $63,000 were recorded during the year ended June 30, 2003.
WESB, a subsidiary of West Essex had a non-contributory employer
pension plan ("the Plan") covering all eligible employees. The Plan was
terminated effective as of the last business day prior to the
acquisition of WESB by the Company.
F - 25
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
The following table sets forth the Plan's funded status and components of net
periodic cost (in thousands):
June 30,
-----------------------
2004 2003
------- -------
Change in benefit obligation
Benefit obligation - beginning $ 5,294 $ 4,805
Service cost - 152
Interest cost 284 241
Actuarial loss - 640
Annuity payments (100) (75)
Curtailments - (469)
------- -------
Benefit obligation - ending $ 5,478 $ 5,294
======= =======
Change in plan assets
Fair value of assets - beginning $ 4,122 $ 3,310
Actual return on plan assets 411 260
Employer contribution 80 627
Annuity payments (100) (75)
------- -------
Fair value of assets - ending $ 4,513 $ 4,122
======= =======
Reconciliation of funded status
Accumulation benefit obligation $ 5,478 $ 5,294
======= =======
Projected benefit obligation (5,478) (5,294)
Fair value of assets 4,513 4,122
Unrecognized gain/loss (96) -
------- -------
Accrued pension cost included in
other liabilities $(1,061) $(1,172)
======= =======
F - 26
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
Year Ended June 30,
----------------------
2004 2003
------- -------
Net periodic pension expenses
Service cost $ - $ 152
Interest cost 284 241
Expected return on plan assets (315) (216)
Amortization of transition obligation - 24
Unrecognized (gain)/loss - 12
Unrecognized past service liability - 40
Curtailment and purchase credit - 1,211
------- -------
Total pension expense $ (31) $ 1,464
======= =======
For the three months ended September 30, 2004 and 2003 (unaudited),
pension expense totalled $ -0-.
Valuation assumptions
Amortization period 10.49 10.82
Discount rate 5.42% 6.75%
Long-term rate 8.50% 8.50%
Salary increases N/A 4.00%
The Plan assets are invested in six diversified investment funds of the
RSI Retirement Trust (the "Trust"), a no-load series of open-ended
mutual fund. The Trust has been given discretion by the West Essex
Bank, F.S.B., to determine the appropriate strategic asset allocation
versus plan liabilities. The percentage of total fair value by asset
category follows:
June 30,
-----------------------
2004 2003
----------- ---------
Equity securities 53% 51%
Debt securities (Bond Mutual Funds) 47% 49%
--- ---
100% 100%
=== ===
The expected long-term rate of return on assets was based on historical
returns earned by equities and fixed income securities, adjusted to
reflect expectations of future returns as applied to the Plan's target
allocation of asset classes. The target allocation of asset classes was
65% in equity securities and 35% in debt securities.
During the fiscal year ending June 30, 2005, the Bank is expected to
contribute in cash approximately $1,061,000. The total benefit payments
expected to be paid are $5,478,000.
F - 27
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
Benefit Equalization Plan ("BEP")
---------------------------------
The Bank has an unfunded non-qualified plan to compensate senior
officers of the Bank who participate in the Bank's qualified benefit
plans for certain benefits lost under such plans by reason of benefit
limitations imposed by Sections 415 and 401 of the Internal Revenue
Code. There were approximately $59,000 contributions made to and
benefits paid under the BEP during both the year ended June 30, 2004
and 2003. There were no contributions made or benefits paid during the
year ended June 30, 2002.
The following table sets forth the BEP's funded status and components
of net periodic pension cost (in thousands):
June 30,
-------------------
2004 2003
------- -------
Change in benefit obligation
Benefit obligation - beginning $ 1,328 $ 993
Service cost 24 12
Interest cost 98 72
Actuarial loss - 310
Benefit payments (59) (59)
------- -------
Benefit obligation - ending $ 1,391 $ 1,328
======= =======
Change in plan assets
Fair value of assets - beginning $ - $ -
Actual return on plan assets - -
Settlements 59 59
Contributions (59) (59)
------- -------
Fair value of assets - ending $ - $ -
======= =======
Reconciliation of funded status
Accumulated benefit obligation $ (954) $ (841)
------- -------
Projected benefit obligation (1,391) (1,328)
Fair value of assets - -
------- -------
Funded status (1,391) (1,328)
Unrecognized prior service cost (50) (42)
Unrecognized net actuarial loss 595 672
------- -------
Accrued pension cost included in other liabilities $ (846) $ (698)
======= =======
F - 28
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
June 30,
------------------------
2004 2003
---- ----
Value assumptions
Discount rate 7.50% 7.50%
Salary increase rate 5.50% 5.50%
Year Ended June 30,
------------------------------
2004 2003 2002
---- ---- ----
Net periodic pension expense
Service cost $ 24 $ 12 $ 30
Interest cost 98 72 68
Amortization of unrecognized past service cost 8 8 20
Amortization of unrecognized net actuarial loss 77 38 42
----- ----- -----
$ 207 $ 130 $ 160
===== ===== =====
During the three months ended September 30, 2004 and 2003 (unaudited),
net periodic pension expense totalled $52,000 and $52,000,
respectively.
Valuation Assumptions
Discount rate 7.50% 7.50% 7.50%
Salary increase rate 5.50% 5.50% 5.50%
It is estimated that contributions of approximately $59,000 will be
made during the year ending June 30, 2005.
Stock based compensation plans
------------------------------
Pulaski Savings Bank and West Essex Savings Bank each had both an
Employee Stock Ownership Plan and a Stock Incentive Plan. These plans
were fully funded and expenses were recorded through the date of
merger. Expenses related to these plans aggregated $789,000 and
$585,000 for the years ended June 30, 2003 and 2002, respectively.
Small amounts representing unallotted shares on the dates of the
mergers were cancelled.
F - 29
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
Stock based compensation plans (Cont'd.)
------------------------------ ---------
The Stock Incentive Plan included both stock awards and stock options.
Stock awards were expensed over the vesting period based upon the fair
value of awards at the grant dates. Stock options were accounted for
using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees"; accordingly, no expense was recognized as the exercise
prices of all option grants were equal to the market value of the
underlying stock on the grant dates. The weighted average grant date
fair value of options granted during the years ended June 30, 2003 and
2002 (none were granted thereafter), estimated using the Black-Scholes
option-pricing model, and assumptions used in such valuations, were as
follows:
Year Ended June 30,
-----------------------------
2003 2002
------------- -------------
Options granted (A) 1,000 10,829
Weighted average grant-date fair value per option (A) $ 8.84 $ 4.72
Expected common stock dividend yield 2.93% 3.29%
Expected volatility 58.17% 38.08%
Expected option life 6.5 Years 6.5 Years
Risk-free interest rate 4.18% 4.66%
(A) Represents actual options granted and has not been
converted to equivalent Kearny Financial Corp. amounts
(see Note 2).
F-30
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
Postretirement Welfare Plan
---------------------------
The Bank has a postretirement group term life insurance plan covering
all eligible employees. The benefits are based on age and years of
service. The plan is unfunded. The following table sets forth the
accrued accumulated postretirement benefit obligation and the net
periodic postretirement benefit cost (in thousands):
June 30,
-----------------
2004 2003
----- -----
Change in benefit obligation
Benefit obligation - beginning $ 378 $ 248
Service cost 18 12
Interest cost 22 19
Actuarial loss (3) 17
Premiums/claims paid (6) (5)
Plan amendment - 87
----- -----
Benefit obligation - ending $ 409 $ 378
===== =====
Change in plan assets
Fair value of assets - beginning $ - $ -
Actual return on plan assets - -
Premiums/claims paid 6 5
Contributions (6) (5)
----- -----
Fair value of assets - ending $ - $ -
===== =====
Reconciliation of funded status
Accumulation benefit obligation (409) (378)
Fair value of assets - -
----- -----
Funded status (409) (378)
Unrecognized net actuarial loss (9) (6)
Unrecognized prior service cost 74 83
----- -----
Accrued postretirement benefit cost included in
other liabilities $(344) $(301)
===== =====
F - 31
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
Year Ended June 30,
----------------------------
2004 2003 2002
---- ---- ----
Net periodic postretirement benefit cost:
Service cost $ 18 $ 12 $ 11
Interest cost 22 19 16
Amortization of unrecognized net actuarial gain - - (1)
Amortization of unrecognized past service liability 9 4 -
---- ---- ----
$ 49 $ 35 $ 26
==== ==== ====
During the three months ended September 30, 2004 and 2003 (unaudited),
net postretirement benefit cost totalled $14,000 and $12,000,
respectively.
The discount rate and projected salary increase rate used in computing
the accumulated postretirement benefit obligation were 6.63% and 4.00%,
respectively, at June 30, 2004 and 5.75% and 3.25%, respectively, at
June 30, 2003; and 7.00% and 4.25%, respectively, at June 30, 2002.
On December 8, 2003, the President signed the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act) into law. The
Act introduces a voluntary prescription drug benefit under Medicare as
well as a federal subsidy to sponsors of retiree health care plans that
provide at least an actuarially equivalent benefit. FASB Staff Position
(FSP) No. FAS 106-1 "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization act of
2003" (FSP 106-1), permits deferring the recognizing of the effects of
the Act on its Postretirement Health and Life Plans.
Since the Bank does not provide medical coverage for retirees, the
health care cost trend has no impact on the Bank's liability and FSB
No. FAS 106-1 is not applicable.
It is estimated that contributions of approximately $6,000 will be
made during the year ending June 30, 2005.
Directors' Consultation and Retirement Plan ("DCRP")
----------------------------------------------------
The Bank has an unfunded retirement plan for non-employee directors.
The benefits are payable based on term of service as a director. The
discount rate used in computing the actuarial present value of the
projected benefit obligation was 6.63% (2004), 5.75% (2003) and 7.00%
(2002). The increase in future compensation levels used was 4.00%
(2004), 3.25% (2003) and 4.25% (2002).
F - 32
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
The following table sets forth the DCRP's funded status and components
of net periodic cost (in thousands):
June 30,
--------------------
2004 2003
------- -------
Change in benefit obligation
Projected benefit obligation - beginning $ 1,487 $ 1,019
Service cost 78 56
Interest cost 83 78
Actuarial loss 2 143
Annuity payments (89) (51)
Plan amendments - 242
------- -------
Projected benefit obligation - ending $ 1,561 $ 1,487
======= =======
Change in plan assets
Fair value of assets - beginning $ - $ -
Actual return on plan assets - -
Settlements 89 51
Contributions (89) (51)
------- -------
Fair value of assets - ending $ - $ -
======= =======
Reconciliation of funded status
Accumulated benefit obligation $(1,361) $(1,335)
------- -------
Projected benefit obligation (1,561) (1,487)
Fair value of assets - -
------- -------
Funded status (1,561) (1,487)
Unrecognized transition obligation 219 263
Unrecognized net actuarial loss (7) (10)
Unrecognized prior service cost 341 375
------- -------
Accrued cost included in other liabilities $(1,008) $ (859)
======= =======
F - 33
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. BENEFIT PLANS (Cont'd.)
--------------------------
Year Ended June 30,
----------------------
2004 2003 2002
----- ----- -----
Net periodic plan cost
Service cost $ 78 $ 56 $ 39
Interest cost 83 78 52
Amortization of unrecognized transition obligation 44 44 44
Amortization of unrecognized net actuarial gain - (2) (28)
Amortization of unrecognized past service liability 33 24 15
----- ----- -----
$ 238 $ 200 $ 122
===== ===== =====
During the three months ended September 30, 2004 and 2003 (unaudited),
net periodic plan cost totalled $66,000 and $60,000, respectively.
Effective January 1, 2003, the plan was amended to reflect that, upon a
change of control, all benefits payable shall be immediately paid to
the participants in the form of a lump sum payment. It is estimated
that contributions of approximately $129,000 will be made during the
year ended June 30, 2005.
During the years ended June 30, 2004, 2003 and 2002, contributions and
benefits paid totalling $89,000, $51,000 and $32,000, respectively,
were made to the Plan.
Pulaski Savings Bank had an unfunded retirement plan for its
non-employee directors with benefits payable based on term of service
as a director. As a result of the merger, all directors became fully
vested. The amount vested is to be paid, either in ten annual
installments, or lump sum if elected by the director or in full to the
surviving beneficiary in case of deceased director. During the year
ended June 30, 2004 two deceased directors surviving beneficiaries were
paid $284,000 and during the year ended June 30, 2003 one director, who
elected for lump sum was paid $120,000. The two remaining director's
elected annual payments in the aggregate amount of approximately
$32,000. The present value of future remaining annual payments, in the
amount of $254,000 and $594,000, is included in other liabilities at
June 30, 2004 and 2003, respectively. The Bank recorded expenses with
respect to this plan during the three months ended September 30, 2004
and 2003 (unaudited) and the years ended June 30, 2004, 2003 and 2002
of $ -0-, $ -0- , $ -0-, $81,000 and $141,000, respectively.
14. STOCKHOLDER'S EQUITY AND REGULATORY CAPITAL
------------------------------------------------
The Office of Thrift Supervision (the "OTS") imposes various restrictions or
requirements on the ability of savings institutions to make capital
distributions, including cash dividends. A savings institution that is a
subsidiary of a savings and loan holding company, such as the Bank, must file an
application or a notice with the OTS at least thirty days before making a
capital distribution. A savings institution must file an application for prior
approval of a capital distribution if: (i) it is not eligible for expedited
treatment under the applications processing rules of the OTS; (ii) the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings institution's net income for that year to date plus the
institution's retained
F - 34
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. STOCKHOLDER'S EQUITY AND REGULATORY CAPITAL (Cont'd.)
--------------------------------------------------------
net income for the preceding two years; (iii) it would not adequately be
capitalized after the capital distribution; or (iv) the distribution would
violate an agreement with the OTS or applicable regulations. As a result of the
dividend paid by the Bank to the Company in connection with the acquisition of
West Essex and its subsidiaries, it is likely that the Bank will be required to
file an application, rather than a notice, for any planned capital
distributions.
The Bank is subject to various regulatory capital requirements administered by
Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain of-balance-sheet items as accumulated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting, and other factors.
The OTS may disapprove a notice or deny an application for a capital
distribution if: (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement. The capital
distributions by Kearny Financial Corp., as a savings and loan holding company,
will not be subject to the OTS capital distribution rules.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to adjusted total assets (as defined). The following
tables present a reconciliation of capital per accepted principles generally
accepted in the United States of America ("GAAP") and regulatory capital and
information as to the Bank's capital levels at the dates presented:
June 30,
September 30, -----------------------
2004 (Unaudited) 2004 2003
--------------- ---------- ----------
(In Thousands)
GAAP capital:
Consolidated capital $ 297,802 $ 293,505 $ 295,669
Less: Unconsolidated capital of the Company (1,531) (1,520) (52,543)
--------- --------- ---------
Bank capital 296,271 291,985 243,126
Less: Unrealized gain on securities (10,547) (10,008) (7,771)
Goodwill (82,263) (82,263) (31,746)
Intangible assets (2,041) (2,200) (2,836)
--------- --------- ---------
Core and tangible capital 201,420 197,514 200,773
Add: General valuation allowance 5,290 5,029 5,065
Unrealized gain on equity securities 6,957 7,026 5,486
--------- --------- ---------
Total regulatory capital $ 213,667 $ 209,569 $ 211,324
========= ========= =========
F-35
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. STOCKHOLDER'S EQUITY AND REGULATORY CAPITAL (Cont'd.)
--------------------------------------------------------
September 30, 2004 (Unaudited)
-----------------------------------------------------------------------------------
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
----------------------- ---------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- --------------- ------------ ---------- ------------
(Dollars in Thousands)
Total Capital (to risk-weighted assets) $ 213,667 33.18 % $ 51,522 8.00 % $ 64,403 10.00 %
Tier 1 Capital (to risk-weighted assets) 201,420 31.27 - - 38,642 6.00
Core (Tier 1) Capital (to adjusted total assets) 201,420 11.15 54,170 3.00 90,284 5.00
Tangible Capital (to adjusted total assets) 201,420 11.15 27,085 1.50 - -
June 30, 2004
------------------------------------------------------------------------------------
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
------------------------ ---------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- --------------- ------------ ------------ ------------
(Dollars in Thousands)
Total Capital (to risk-weighted assets) $ 209,569 32.56 % $ 51,490 8.00 % $ 64,362 10.00 %
Tier 1 Capital (to risk-weighted assets) 197,514 30.69 - - 38,617 6.00
Core (Tier 1) Capital (to adjusted total assets) 197,514 10.76 55,068 3.00 91,780 5.00
Tangible Capital (to adjusted total assets) 197,514 10.76 27,534 1.50 - -
June 30, 2003
------------------------------------------------------------------------------------
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
------------------------ ---------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- --------------- ------------ ----------- ------------
(Dollars in Thousands)
Total Capital (to risk-weighted assets) $ 211,324 33.60 % $ 50,317 8.00 % $ 62,896 10.00 %
Tier 1 Capital (to risk-weighted assets) 200,773 31.92 - - 37,738 6.00
Core (Tier 1) Capital (to adjusted total assets) 200,773 10.62 56,712 3.00 94,519 5.00
Tangible Capital (to adjusted total assets) 200,773 10.62 28,356 1.50 - -
On November 3, 2003, the most recent notification from the OTS, the Bank was
categorized as well capitalized as of September 30, 2003, under the regulatory
framework for prompt corrective action. There are no conditions existing or
events which have occurred since notification that management believes have
changed the Bank's category.
F - 36
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. INCOME TAXES
------------
The Bank qualifies as a savings institution under the provisions of the Internal
Revenue Code (the "IRC"). Retained earnings at September 30, 2004 (unaudited)
and at June 30, 2004, includes approximately $30.5 million of bad debt
allowance, pursuant to the IRC, for which income taxes have not been provided.
If such amount is used for purposes other than or to absorb bad debts, including
distributions in liquidation, it will be subject to income tax at the then
current rate.
The components of income taxes are as follows (in thousands):
Three Months Ended
September 30, Year Ended June 30,
------------------ ------------------------------
2004 2003 2004 2003 2002
------- ------- ------- ------- -------
(Unaudited)
Current tax expense:
Federal income $ 1,865 $ 601 $ 3,600 $ 3,319 $ 7,240
State income 279 265 1,589 2,652 714
------- ------- ------- ------- -------
2,144 866 5,189 5,971 7,954
------- ------- ------- ------- -------
Deferred tax (benefit):
Federal income (498) 78 470 (72) (25)
State income (84) 14 86 (662) (3)
------- ------- ------- ------- -------
(582) 92 556 (734) (28)
------- ------- ------- ------- -------
$ 1,562 $ 958 $ 5,745 $ 5,237 $ 7,926
======= ======= ======= ======= =======
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 35% to income before income taxes (in thousands):
Three Months Ended
September 30, Year Ended June 30,
--------------------- ---------------------------------
2004 2003 2004 2003 2002
------- ------- ------- ------- -------
(Unaudited)
Federal income tax expense $ 1,875 $ 1,118 $ 6,525 $ 3,252 $ 8,545
Increases (reductions) in income taxes resulting from:
Tax exempt interest (448) (445) (1,780) (1,301) (894)
New Jersey state tax,
net of federal income tax effect 127 184 1,106 1,314 469
Compensation in excess of limit - - - 1,548 -
Non deductible merger expenses - 207 207 934 210
Tax benefit on disqualified distribution - - - (610) -
Other items, net 8 (106) (313) 100 (404)
------- ------- ------- ------- -------
Total income tax expense $ 1,562 $ 958 $ 5,745 $ 5,237 $ 7,926
======= ======= ======= ======= =======
Effective income tax rate 29.15% 30.00% 30.82% 56.36% 32.46%
======= ======= ======= ======= =======
The effective income tax rate represents total income tax expense divided by
income before income taxes.
F - 37
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. INCOME TAXES (Cont'd.)
-------------------------
The tax effects of existing temporary differences that give rise to deferred
income tax assets and liabilities are as follows (in thousands):
June 30,
September 30, --------------------
2004 2004 2003
----------------- ---------- --------
(Unaudited)
Deferred income tax assets
Allowance for loan losses $ 2,177 $ 2,108 $ 2,031
Goodwill 1,018 998 1,503
Deferred directors' fees - - 16
Benefit plans 1,554 1,069 1,048
Compensation - - 168
Other 77 71 89
-------- -------- ------
4,826 4,246 4,855
-------- -------- ------
Deferred income tax liabilities
Unrealized gain on available for sale securities 5,679 5,410 4,114
Depreciation 380 377 337
Other 74 79 172
-------- -------- ------
6,133 5,866 4,623
-------- -------- ------
Net deferred income tax (liabilities) assets $ (1,307) $ (1,620) $ 232
======== ======== ======
16. COMMITMENTS
------------------
The Bank has non-cancellable operating leases for branch offices. Rental
expenses paid during the three months ended September 30, 2004 and 2003
(unaudited) and the years ended June 30, 2004, 2003 and 2002, were approximately
$82,000, $90,000, $343,000, $352,000 and $362,000, respectively. Future minimum
rental commitments are as follows:
Year Ended June 30, Amount
------------------- ------
2005 $ 272,000
2006 282,000
2007 257,000
2008 252,000
2009 214,000
Thereafter 402,000
-----------
$ 1,684,000
===========
F - 38
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. COMMITMENTS (Cont'd.)
------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. The Bank's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The outstanding loan commitments are as follows (in thousands):
June 30,
September 30, --------------------
2004 2004 2003
--------------- -------- --------
(Unaudited)
Mortgage loans $ 6,872 $ 23,678 $ 26,511
Home equity loans and lines 2,635 4,027 3,351
Commercial lines of credit 2,240 265 175
Construction loans 2,862 4,483 1,992
Purchase of participations 607 607 1,100
Construction loans in process 5,613 5,278 5,666
Undisbursed funds from approved
lines of credit 25,763 23,817 20,474
-------- -------- --------
$ 46,592 $ 62,155 $ 59,269
======== ======== ========
At September 30, 2004 (unaudited), the outstanding mortgage loan commitments
include $4,389,000 for fixed rate loans with interest rates ranging from 4.63%
to 6.50% and $2,483,000 for adjustable rate loans with an initial rate ranging
from 4.50% to 6.50%. Home equity loan commitments include $2,570,000 for fixed
rate loans with interest rates ranging from 4.75% to 6.50% and $65,000 for
adjustable rate loans with an initial rate of 4.50%. Commercial lines of credit
commitments are for loans with interest rates ranging from 0.50% to 1.00% above
the prime rate published in the Wall Street Journal. Construction loan
commitments are for loans with interest rates ranging from 1.00% to 1.50% above
the prime rate published in the Wall Street Journal. Commitments to purchase
participations are for loans at a fixed rate, set at the funding date, ranging
from 1.35% to 1.36% above the Federal Home Loan Bank of New York CIP advance
rate for ten year or 15 year advances. Undisbursed funds from approved lines of
credit are adjustable rate loans with interest rates ranging from 1.00% below to
2.00% above the prime rate published in the Wall Street Journal.
F - 39
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. COMMITMENTS (Cont'd.)
------------------------
At June 30, 2004, the outstanding mortgage loan commitments include $22,980,000
for fixed rate loans with interest rates ranging from 4.38% to 6.50% and
$1,698,000 for adjustable rate loans with an initial rate ranging from 3.88% to
6.38%. Home equity loan commitments include $3,019,000 for fixed rate loans with
interest rates ranging from 4.63% to 6.25% and $949,000 for adjustable rate
loans with an initial rate of 4.00%. Commercial lines of credit commitments are
for loans with interest rates ranging from 0.50% to 1.00% above the prime rate
published in the Wall Street Journal. Construction loan commitments are for
loans with interest rates ranging from 1.00% to 1.50% above the prime rate
published in the Wall Street Journal. Commitments to purchase participations are
for loans at a fixed rate, set at the funding date, ranging from 1.35% to 1.36%
above the Federal Home Loan Bank of New York CIP advance rate for ten year or 15
year advances. Undisbursed funds from approved lines of credit are adjustable
rate loans with interest rates ranging from 1.00% below to 2.00% above the prime
rate published in the Wall Street Journal.
At June 30, 2003, the outstanding mortgage loan commitments include $20,334,000
for fixed rate loans with interest rates ranging from 4.50% to 6.75% and
$6,177,000 for adjustable rate loans with an initial rate ranging from 4.25% to
7.00%. Home equity loan commitments include $2,664,000 for fixed rate loans with
interest rates ranging from 4.25% to 6.50% and $687,000 for adjustable rate
loans with an initial rate of 4.25%. Commercial lines of credit commitments are
for loans with interest rates ranging from 1.00% to 1.50% above the prime rate
published in the Wall Street Journal. Construction loan commitments are for
loans with interest rates ranging from 1.00% to 1.50% above the prime rate
published in the Wall Street Journal. Commitments to purchase participations are
for loans at a fixed rate, set at the funding date, ranging from 1.35% to 1.60%
above the Federal Home Loan Bank of New York CIP advance rate for ten year
advances, or the prime rate published in the Wall Street Journal on the
fifteenth day of the month. Undisbursed funds from approved lines of credit are
adjustable rate loans with interest rates ranging from 1.00% to 1.50% above the
prime rate published in the Wall Street Journal.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counterparty.
The Bank has established an overnight line of credit and companion (DRA)
commitment, each in the amount of $50,000,000, with the Federal Home Loan Bank
of New York, which expire on December 15, 2004. As of September 30, 2004
(unaudited) and June 30, 2004, no funds were drawn against these credit lines.
At September 30, 2004 (unaudited) and June 30, 2004, the Bank has commitments
for building improvements in the amount of $2,582,000 and $1,477,000,
respectively. In addition, the Bank also has, in the normal course of business,
commitments for servicers and supplies. Management does not anticipate losses on
any of these transactions.
The Company and subsidiaries are also party to litigation which arises primarily
in the ordinary course of business. In the opinion of management, the ultimate
disposition of such litigation should not have a material adverse effect on the
consolidated financial position of the Company.
F - 40
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
----------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents and interest receivable
-------------------------------------------------
The carrying amounts for cash and cash equivalents and interest
receivable approximate fair value because they mature in three
months or less.
Securities available for sale, investment securities held to
------------------------------------------------------------------
maturity and mortgage-backed securities held to maturity
--------------------------------------------------------
The fair values for securities available for sale, investment
securities held to maturity and mortgage-backed securities held to
maturity are based on quoted market prices when available. If
quoted market prices are not available, fair value is estimated
using quoted market prices for similar securities.
Loans receivable
----------------
The fair value of loans receivable is estimated by discounting the
future cash flows, using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities, of such loans.
Deposits
--------
The fair value of demand, savings and club accounts is equal to
the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated using rates currently
offered for deposits of similar remaining maturities. The fair
value estimates do not include the benefit that results from the
low-cost funding provided by deposit liabilities compared to the
cost of borrowing funds in the market.
Advances from FHLB
------------------
Fair value is estimated using rates currently offered for advances
of similar remaining maturities.
Commitments
-----------
The fair value of commitments to fund credit lines and originate
or participate in loans is estimated using fees currently charged
to enter into similar agreements taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loans commitments, fair value also
considers the difference between current levels of interest and
the committed rates.
F - 41
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
------------------------------------------------
The carrying amounts and estimated fair value of financial instruments are as
follows (in thousands):
June 30,
September 30, --------------------------------------------------
2004 2004 2003
------------------------------ ------------------------ ------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
--------------- ------------ ----------- ----------- ----------- ------------
(Unaudited)
Cash and cash equivalents $ 36,863 $ 36,863 $ 39,488 $ 39,488 $ 325,657 $ 325,657
Securities available for sale 41,335 41,335 41,564 41,564 37,840 37,840
Investment securities held to maturity 445,769 447,502 435,870 428,775 287,321 293,578
Loans receivable 515,196 521,275 505,794 510,437 509,161 522,115
Mortgage-backed securities held to maturity 724,876 734,931 771,353 772,710 681,619 704,874
Interest receivable 8,861 8,861 9,861 9,861 8,479 8,479
Financial liabilities
Deposits 1,510,810 1,511,876 1,537,510 1,540,029 1,613,684 1,621,335
Advances from FHLB 84,100 87,432 94,234 95,217 75,749 81,932
Stated Stated Stated
Contract Estimated Contract Estimated Contract Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
--------------- ------------ ----------- ----------- ----------- ------------
Commitments
To originate loans $ 14,609 $ 14,609 $ 32,453 $ 32,453 $ 32,029 $ 32,029
To participate in loans 607 607 607 607 1,100 1,100
Unused lines of credit 25,763 25,763 23,817 23,817 20,474 20,474
Loans in process 5,613 5,613 5,278 5,278 5,666 5,666
Limitations
-----------
Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value
exists for a significant portion of the financial instrument, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instrument and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
F - 42
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
------------------------------------------------
The fair value estimates are based on existing on-and-of balance sheet
financial instruments without attempting the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Other significant assets and
liabilities that are not considered financial assets and liabilities
include premises and equipment, and advances from borrowers for taxes
and insurance. In addition, the ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of
the estimates.
Finally, reasonable comparability between financial institutions may
not be likely due to the wide range of permitted valuation techniques
and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of
uniform valuation methodologies introduces a greater degree of
subjectivity to these estimated fair values.
F - 43
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION
--------------------------------------
Kearny Financial Corp. operates its wholly owned subsidiary, Kearny Federal
Savings Bank and its wholly owned subsidiaries. The consolidated earnings of the
subsidiaries are recognized by the Company using equity method of accounting.
Accordingly, the consolidated earnings of the subsidiaries are recorded as
increase in the Company's investment in the subsidiaries. The following are the
condensed financial statements for Kearny Financial Corp. (Parent Company only)
as of September 30, 2004, and June 30, 2004 and 2003, and for the three months
ended September 30, 2004 and 2003, and each of the years in the three-year
period ended June 30, 2004 (in thousands):
CONDENSED STATEMENTS OF FINANCIAL CONDITION
-------------------------------------------
June 30,
September 30, -------------------
2004 2004 2003
-------- -------- --------
(Unaudited)
Assets
------
Cash and amounts due from depository
institutions $ 951 $ 1,234 $ 1,367
Securities available for sale - 1,104 1,046
Accrued interest receivable - 3 3
Investment in subsidiaries 296,272 291,985 225,790
Deposit for acquisition of West Essex Bancorp, Inc. - - 67,853
Other assets 671 283 677
-------- -------- --------
$297,894 $294,609 $296,736
======== ======== ========
Liabilities
-----------
Due to subsidiaries $ 92 $ 1,104 $ 953
Other liabilities - - 114
Stockholders' equity (A) 297,802 293,505 295,669
-------- -------- --------
$297,894 $294,609 $296,736
======== ======== ========
(A) At September 30, 2004 (unaudited) and June 30, 2004, the Company was
wholly owned by Kearny MHC, a Mutual Holding Company. At June 30,
2003, the Company was 85% owned by Kearny MHC.
F - 44
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
----------------------------------------------
CONDENSED STATEMENTS OF INCOME
------------------------------
Three Months Ended
September 30, Year Ended June 30,
------------------- -------------------------------
2004 2003 2004 2003 2002
-------- -------- -------- -------- --------
(Unaudited)
Interest income $ 17 $ 21 $ 110 $ 86 $ 103
Gain on sale of securities available
for sale 71 - - - -
Equity in undistributed earnings of
the subsidiaries 3,747 2,829 13,442 5,256 16,804
-------- -------- -------- -------- --------
3,835 2,850 13,552 5,342 16,907
-------- -------- -------- -------- --------
Directors' fees 33 12 67 32 -
Merger expenses - 592 592 1,176 179
Other expenses 2 8 - 74 288
-------- -------- -------- -------- --------
35 612 659 1,282 467
-------- -------- -------- -------- --------
Income before income taxes 3,800 2,238 12,893 4,060 16,440
Income taxes (benefit) expense 4 3 (4) 5 (50)
-------- -------- -------- -------- --------
Net income $ 3,796 $ 2,235 $ 12,897 $ 4,055 $ 16,490
======== ======== ======== ======== ========
F - 45
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
----------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
Three Months Ended
September 30, Years Ended June 30,
-------------------- --------------------------------
2004 2003 2004 2003 2002
-------- -------- -------- -------- --------
(Unaudited)
Cash flows from operating activities:
Net income $ 3,796 $ 2,235 $ 12,897 $ 4,055 $ 16,490
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Equity in undistributed earnings
of the subsidiaries (3,747) (2,829) (13,442) 89,030 (16,804)
Amortization of premiums - 1 2 4 5
Realized gain on sale of securities available for sale (71) - - - -
Decrease in accrued interest receivable 3 (20) - 40 5
Decrease in loan receivable - - - 961 2,224
Other assets (388) 399 394 (79) 152
Other liabilities (991) 132 16 953 114
Minority interest in consolidated subsidiaries - - - 789 582
-------- -------- -------- -------- --------
Net cash (used in) provided by operating activities (1,398) (82) (133) 95,753 2,768
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of Pulaski minority interest - - - (26,433) -
Deposit for acquisition of West Essex minority interest - - (67,853) -
Proceeds from sale of securities available for sale 1,115 - - - -
-------- -------- -------- -------- --------
Net cash used in investment activities 1,115 - - (94,286) -
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock of West
Essex Bancorp, Inc. - - - 345 277
Purchase of treasury stock of West Essex Bancorp, Inc. - - - - (2,530)
Dividends paid to minority stockholders of West Essex
Bancorp, Inc. and Pulaski Bancorp, Inc. - - - (1,054) (1,171)
-------- -------- -------- -------- --------
Net cash used in financing activities - - - (709) (3,424)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents (283) (82) (133) 758 (656)
Cash and cash equivalents - beginning 1,234 1,367 1,367 609 1,265
-------- -------- -------- -------- --------
Cash and cash equivalents - ending $ 951 $ 1,285 $ 1,234 $ 1,367 $ 609
======== ======== ======== ======== ========
Supplemental disclosure:
Purchase of minority shares of West Essex $ - $ 17,336 $ 17,336 $ - $ -
======== ======== ======== ======== ========
Goodwill - West Essex acquisition $ - $ 50,517 $ 50,517 $ - $ -
======== ======== ======== ======== ========
Deposit for acquisition of West Essex $ - $(67,853) $(67,853) $ - $ -
======== ======== ======== ======== ========
F - 46
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. STOCK OFFERING
-------------------
On June 7, 2004, the Board of Directors of the Company and the Bank adopted a
plan of stock issuance pursuant to which the Company will sell common stock
representing a minority ownership of the estimated pro forma market value of the
Company which will be determined by an independent appraisal, to eligible
depositors of the Bank in a subscription offering and, if necessary, to the
general public of the community and/or in a syndicated offering. The majority of
the common stock will be owned by Kearny MHC, (a mutual holding company). The
plan is subject to approval of the Office of Thrift Supervision.
Following the sale of commons tock, all depositors who had membership or
liquidation rights with respect to the Bank as of the effective date of the
transaction will continue to have such rights solely with respect to the Mutual
Holding Company as along as they continue to hold deposit accounts with the
Bank. In addition, all persons who become depositors of the Bank subsequent to
the date of the transaction will have such membership and liquidation rights
with respect to the holding company. Borrowers of the Bank as of the date of the
transaction will have the same membership rights in the holding company that
they had in the Bank immediately prior to the date of the transaction as long as
their existing borrowings remain outstanding.
Cost incurred in connection with the offering will be recorded as reduction of
the proceeds from offering. If the transaction is not consummated, all cost
incurred in connection with the transaction will be expensed. At September 30,
2004 (unaudited) and June 30, 2004, approximately $454,000 and $88,000 in
conversion costs have been incurred and are included in other assets.
20. RECENT ACCOUNTING PRONOUNCEMENTS
-------------------------------------
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effects of the method used on reported
results.
On March 31, 2004, the FASB published an Exposure Draft, "Share-Based Payment",
an Amendment of FASB Statements No. 123 and 95 (the "Exposure Draft"). The FASB
is proposing, among other things, amendments to SFAS No. 123 and thus, the
manner in which share-based compensation, such as stock options, will be
accounted for by both public and non-public companies. For public companies, the
cost of employee services received in exchange for equity instruments including
options and restricted stock awards generally would be measured at fair value at
the grant date. The grant-date fair value would be estimated using
option-pricing models adjusted for the unique characteristics of those options
and instruments, unless observable market prices for the same or similar options
are available. The cost would be recognized over the requisite service period,
often the vesting period. The cost of employee services received in exchange for
liabilities would be measured initially at the fair value, rather than the
previously allowed intrinsic value under APB Opinion No. 25, Accounting for
Stock Issued to Employees, of the liabilities and would be remeasured
subsequently at each reporting date through settlement date.
F - 47
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
20. RECENT ACCOUNTING PRONOUNCEMENTS (Cont'd.)
---------------------------------------------
The proposed changes in accounting would replace existing requirements under
SFAS No. 123, "Accounting for Stock-Based Compensation", and would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25, which did not require companies to expense options. Under the terms of
the Exposure Draft, the accounting for similar transactions involving parties
other than employees or the accounting for employee stock ownership plans that
are subject to American Institute of Certified Public Accountants ("AICPA")
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans", would remain unchanged.
The Exposure Draft provides that the proposed statement would be applied to
public entities prospectively for fiscal years beginning after December 15,
2004, as if all share-based compensation awards vesting, granted, modified, or
settled after December 15, 1994 had been accounted for using the fair
value-based method of accounting. The FASB is soliciting comments on the
Exposure Draft and is expected to issue the final statement in the fourth
quarter of 2004.
The aforementioned pronouncements related to stock-based compensation have no
effect on the Company's historical financial statements as the Company has not
issued any stock-based compensation. The management has not completed an
analysis of the potential effects of this statement on our future financial
statements. However, the Company intends to account for future stock-based
compensation using the intrinsic value method under APB Opinion No. 25,
providing such method is permitted at the time stock-based compensation is
granted.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after September 30, 2003, and for hedging relationships designated
after September 30, 2003. The guidance should be applied prospectively. The
provisions of this statement that relate to SFAS No. 133, "Implementation
Issues," that have been effective for fiscal quarters that began prior to
September 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist should be applied to existing contracts as well as new contracts entered
into after September 30, 2003. The adoption of this statement did not have a
material effect on the Company's financial position or results of operations.
F - 48
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
20. RECENT ACCOUNTING PRONOUNCEMENTS (Cont'd.)
---------------------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Such instruments may have
been previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after September
15, 2003. The adoption of this statement did not have a material effect on the
Company's financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose: the nature of the guarantee,
including the approximate term of the guarantee, how the guarantee arose, and
the events or circumstances that would require the guarantor to perform under
the guarantee; the maximum potential amount of future payments under the
guarantee; the carrying amount of the liability, if any, for the guarantor's
obligations under the guarantee; and the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to recover
the amounts paid under the guarantee. This interpretation also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the obligations it has undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
objective of the initial measurement of that liability is the fair value of the
guarantee at its inception. The initial recognition and initial measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this interpretation did not have a material
effect on Company's financial position or results of operations.
In December 2003, the FASB issued a revision to Interpretation 46,
"Consolidation of Variable Interest Entities," which established standards for
identifying a variable interest entity ("VIE") and for determining under what
circumstances a VIE should be consolidated with its primary beneficiary.
Application of this Interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers must
apply this Interpretation to all other types of VIEs at the end of the first
reporting period ending after December 15, 2004. The adoption of this
Interpretation has not and is not expected to have a material effect on
Company's financial position or results of operations.
F - 49
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which the offer or solicitation would be unlawful. The affairs of Kearny
Financial Corp. and its subsidiaries may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
KEARNY FINANCIAL CORP.
Holding Company for Kearny Federal Savings Bank
Up to 18,975,000 Shares of Common Stock
(subject to increase to up to 21,821,250 shares)
--------------------------------
PROSPECTUS
--------------------------------
Sandler O'Neill & Partners, L.P.
December 28, 2004
Until the later of February 1, 2005, or 25 days after commencement of the
offering, all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.