6081 Annual Report inside pages 2014 V7:4570 Annual Report mech. 9/16/14 3:34 PM Page 1
Letter to Shareholders
Dear Fellow Shareholder,
It is with great pleasure that I enclose the annual
report for fiscal 2014 for Kearny Financial Corp. and its
subsidiary Kearny Federal Savings Bank.
I am pleased to report that during fiscal 2014, the
company once again made significant progress on a
number of strategic fronts as our business model and
culture continued to evolve. These initiatives included,
converting to a new primary core-processing platform
along with other customer–facing systems. The
establishment of a commercial and industrial business-
banking group to further expand the company’s
growing middle market and small business banking
customer base. On the merger and acquisition front,
the Atlas Bank transaction closed on June 30th,
extending our franchise footprint into both Brooklyn
and Staten Island, New York: two high growth markets.
Additionally, our commercial and residential lending
groups had another exceptional year with $471.8
million in loan originations and overall net loan growth
of $379.1 million (or 22% annualized) as we continued
to execute our
strategic business plan further
diversifying our loan portfolio mix. Finally, we recently
announced our “Second Step” plan of conversion and
reorganization from a mutual holding company
structure to a fully public stock holding company.
During fiscal 2014, the financial services sector
continued to face a confluence of headwinds such as
lackluster economic growth, a flattening yield curve,
monetary policy uncertainty, and intense competition
for both loans and deposits. While these challenges
resulted in some modest spread and margin pressure,
our creative new loan product pricing and disciplined
deposit gathering strategies helped mitigate some of
this pressure. In fact, for fiscal 2014, our net interest
income increased by $7.5 million or 10.8 % to $73.8
million for the fiscal year ended June 30, 2014 from
$66.6 million for fiscal year ended June 30, 2013. This
coupled with a stable interest expense at $22 million
for both fiscal years ended June 30, 2014 and 2013, a
$1.1 million decrease in provision for loan loss to $3.4
million for fiscal 2014 from $4.5 million in fiscal 2013
and, to a lesser extent, an increase in non-interest
income.
This was partially offset by an increase in
non-interest expense of $3.1 million to $63.8 million
for fiscal 2014 from $60.7 million in fiscal 2013. The
increase in non-interest expense primarily reflects
in salary and employee benefits and
increases
equipment and
expenses related to occupancy,
and
insurance
FDIC
advertising,
systems,
miscellaneous items. As a result, the company’s net
income for the fiscal year ended June 30, 2014
increased by $3.7 million or 57% to $10.2 million or
$0.16 per diluted share; as compared $6.5 million or
$0.10 per diluted share for the fiscal year ended June
30, 2013.
Looking towards fiscal 2015, management remains
focused on both the operational and cultural
transformations noted above as we move ever closer to
our goal of becoming a full service community bank.
To help accelerate this process, management expects
to further utilize the company’s new technology
platforms to simplify workflows, accelerate business
processes, and quickly bring new products to market.
To that end, management plans to launch a number of
new products and services this coming fiscal year
including “Mobiliti”, a new mobile banking/payment
services application, and “Popmoney”, a quick secure
way for customers to send and receive money using
the recipient’s email, mobile phone, or account
information and lastly, “OpenNow/FundNow”, an
online accounting origination system. Each of
these
products and services utilize “best of breed” innovative
bank technologies that will ultimately help us attract
new customers as well as deepen existing customer
relationships.
In addition, during this coming fiscal
year, we expect to refresh our current company brand
with a new logo, tag-line, and creative expression.
While our existing brand has certainly served us well
for many decades, the updated brand will have a more
modern look and feel to it that captures much of the
evolutionary process that has occurred within the
Company over the last couple of years.
In closing, I am very much encouraged about the
future growth prospects for the company in the
coming years.
to our culture,
The changes
infrastructure, and management team will help us
expand into new markets, add additional business
lines, enhance current product offerings, and improve
efficiencies in our quest to improve the long-term
value of the company. On behalf of the Board of
Directors and Senior Management team, I would like to
thank our employees, customers, and our shareholders
for their continued support and faith in our vision.
Sincerely,
Craig L. Montanaro, President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2014
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________________ to __________________
Commission File Number: 0-51093
KEARNY FINANCIAL CORP.
(Exact name of Registrant as specified in its Charter)
United States
(State or Other Jurisdiction of
Incorporation or Organization)
120 Passaic Avenue, Fairfield, New Jersey
(Address of Principal Executive Offices)
22-3803741
(I.R.S. Employer
Identification No.)
07004
(Zip Code)
Registrant’s telephone number, including area code: (973) 244-4500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.10 par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). [X ] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] YES [X] NO
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant on December 31, 2013 (the last
business day of the Registrant’s most recently completed second fiscal quarter) was $154.5 million. Solely for purposes of this calculation, shares
held by directors, executive officers and greater than 10% stockholders are treated as shares held by affiliates.
As of August 29, 2014 there were outstanding 67,350,247 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of the definitive Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders. (Part III)
KEARNY FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2014
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
INDEX
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
PART IV
Page
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i
PART I
Item 1. Business
Forward-Looking Statements
This Annual Report contains forward-looking statements, which can be identified by the use of
words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words
of similar meaning. These forward-looking statements include, but are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our
management and are inherently subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond our control. In addition, these forward-looking statements
are subject to assumptions with respect to future business strategies and decisions that are subject to
change.
The following factors, among others, could cause actual results to differ materially from the
anticipated results or other expectations expressed in the forward-looking statements:
general economic conditions, either nationally or in our market areas, that are worse than
expected;
changes in the level and direction of loan delinquencies and write-offs and changes in
estimates of the adequacy of the allowance for loan losses;
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market
conditions;
demand for loans and deposits in our market area;
our ability to implement and changes in our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields,
or reduce the fair value of financial instruments or reduce the origination levels in our
lending business, or increase the level of defaults, losses and prepayments on loans we
have made and make whether held in portfolio or sold in the secondary markets;
adverse changes in the securities markets;
1
changes in laws or government regulations or policies affecting financial institutions,
including changes in regulatory fees and capital requirements;
our ability to manage market risk, credit risk and operational risk in the current economic
conditions;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate any assets, liabilities, customers, systems and
management personnel we have acquired or may acquire into our operations and our
ability to realize related revenue synergies and cost savings within expected time frames
and any goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by bank regulatory
agencies, the Financial Accounting Standards Board, the Securities and Exchange
Commission or the Public Company Accounting Oversight Board;
our ability to retain key employees;
technological changes;
significant increases in our loan losses; and
changes in the financial condition, results of operations or future prospects of issuers of
securities that we own.
Because of these and other uncertainties, our actual future results may be materially different
from the results indicated by these forward-looking statements.
General
Kearny Financial Corp. (the “Company,” “Kearny-Federal” or the “Registrant”) is a federally-
chartered corporation that was organized on March 30, 2001 for the purpose of being a holding company
for Kearny Federal Savings Bank (“Kearny Bank” or the “Bank”), a federally-chartered stock savings
bank. On February 23, 2005, the Company completed a minority stock offering in which it sold
21,821,250 shares, representing 30% of its outstanding common stock upon completion of the offering.
The remaining 70% of the outstanding common stock, totaling 50,916,250 shares, were retained by
Kearny MHC (“Kearny MHC” or the “MHC”). The Company issued an additional 1,044,087 shares of
its common stock to the MHC on June 30, 2014 in conjunction with the Bank’s acquisition of Atlas Bank.
The MHC is a federally-chartered mutual holding company and so long as the MHC is in existence, it will
at all times own a majority of the outstanding common stock of the Company. The stock repurchase
programs conducted by the Company since the offering, net of treasury shares issued in fulfillment of
stock option exercises, have reduced the total number of shares outstanding. The 51,960,337 shares held
by the MHC represented 77.2% of the 67,267,865 total shares outstanding as of the Company’s June 30,
2014 fiscal year end. The MHC and the Company are now regulated as savings and loan holding
companies by the Board of Governors of the Federal Reserve System (“FRB”), as successor to the Office
of Thrift Supervision (“OTS”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”).
2
The Company is a unitary savings and loan holding company and conducts no significant
business or operations of its own. References in this Annual Report on Form 10-K to the Company,
Kearny-Federal or Registrant generally refer to the Company and the Bank, unless the context indicates
otherwise. References to “we”, “us”, or “our” refer to the Bank or Company, or both, as the context
indicates.
The Bank was originally founded in 1884 as a New Jersey mutual building and loan association.
It obtained federal insurance of accounts in 1939 and received a federal charter in 1941. The Bank’s
deposits are federally insured by the Deposit Insurance Fund as administered by the Federal Deposit
Insurance Corporation (“FDIC”) and the Bank is regulated by the Office of the Comptroller of the
Currency (“OCC”), as successor to the OTS under the Dodd-Frank Act, and the FDIC.
The Company’s primary business is the ownership and operation of the Bank. The Bank is
principally engaged in the business of attracting deposits from the general public in New Jersey and New
York and using these deposits, together with other funds, to originate or purchase loans for its portfolio
and invest in securities. Our loan portfolio is primarily comprised of loans collateralized by residential
and commercial real estate augmented by secured and unsecured loans to businesses and consumers. We
also maintain a portfolio of investment securities, primarily comprised of U.S. agency mortgage-backed
securities, U.S. government and agency debentures, bank-qualified municipal obligations, corporate
bonds, asset-backed securities and collateralized loan obligations. The Bank maintains a small balance of
single issuer trust preferred securities and non-agency mortgage-backed securities which were acquired
through the Company’s purchase of other institutions and does not actively purchase such securities.
At June 30, 2014, net loans receivable comprised 49.3% of our total assets while investment
securities, including mortgage-backed and non-mortgage-backed securities, comprised 38.7% of our total
assets. By comparison, at June 30, 2013, net loans receivable comprised 42.9% of our total assets while
securities comprised 44.3% of our total assets. During the latter half of fiscal 2013, we executed a series
of balance sheet restructuring and wholesale growth transactions to enhance our earnings and reduce our
exposure to long term interest rate risk, resulting in both growth and diversification within the securities
portfolio. Notwithstanding the near term effects of these transactions on the composition and allocation
of our earning assets, it remains the long term goal of our business plan to reallocate our balance sheet to
reflect a greater percentage of interest-earning assets to loans while, in turn, reducing the relative size of
the securities portfolio. The composition and volume of loan originations and purchases during fiscal
2014 reflected that strategic focus through which we have increased our commercial loan origination and
support staff and expanded relationships with loan participants and other external loan origination
resources.
We operate from our administrative headquarters in Fairfield, New Jersey and had 42 branch
offices as of June 30, 2014. We also operate an Internet website at www.kearnyfederalsavings.com
through which copies of our periodic reports are available free of charge as soon as reasonably practicable
after they are filed with the Securities and Exchange Commission.
Business Strategy
Our goal is to continue to evolve from a traditional thrift business model toward that of a full
service, community bank, profitably deploying capital and enhancing earnings through a variety of
balance sheet growth and diversification strategies. The key strategic initiatives of our business plan are
presented below accompanied by an overview of our activities and achievements in support of those
initiatives:
3
Continue to Increase Commercial Mortgage Lending: Increase the outstanding
balances of multi-family and nonresidential mortgage loans through all available
channels, including retail/broker originations as well as individual and pooled loan
purchases and participations.
During fiscal 2014, we increased our commercial mortgage loan portfolio by $317.0
million to $983.8 million, or 56.4% of total loans from $666.8 million, or 49.0% of total
loans at June 30, 2013. This increase reflected commercial mortgage loan originations
and purchases totaling $334.4 million and $87.0 million, respectively. We plan to
continue to increase our portfolio of commercial mortgage loans by expanding loan
acquisition volume through all available channels, including retail and broker
originations, as well as individual and pooled loan purchases and participations.
Additionally, we intend to continue to expand our commercial lending infrastructure and
resources, which will be supported by new product and pricing strategies designed to
increase origination volume in a very competitive marketplace.
Continue to Increase Commercial Business Lending: Increase the outstanding
balances of non-real estate secured and unsecured business loans through all
available channels and expand those business relationships.
We plan to continue to focus our efforts on expanding our commercial non-real estate
secured and unsecured business lending activities through all available channels.
Although our commercial business loan originations increased during fiscal 2014, we had
a modest $3.4 million decrease in the aggregate outstanding balance of this loan segment
during fiscal 2014 as loan repayments outpaced new originations during the year. Despite
this modest decline, we anticipate this loan segment to increase in the future. In addition,
we will attempt to expand our relationships with these borrowers to include commercial
deposits and other products, with the goal of increasing our non-interest income.
During the quarter ended March 31, 2014, we hired an experienced senior business
lending officer to oversee our C&I lending function and expect to augment our existing
resources with additional lenders and administrative resources during fiscal 2015. We
expect to hire a senior Small Business Administration (“SBA”) lending officer dedicated
to that function during fiscal 2015 as well as the needed administrative resources to
support an anticipated increase in SBA lending volume during that time.
Through these strategies, we anticipate an increase in the level of non-interest income
through greater gains on sale of SBA loan originations and other business loan-related fee
income. Moreover, the expanded business lending strategies are expected to be
undertaken within a larger set of strategic initiatives designed to promote other business
banking services intended to increase commercial deposit balances and services.
Modestly Increase Residential Mortgage Lending: Modestly increase the
outstanding balance of our one- to four-family first mortgage portfolio while
stabilizing the balance of home equity loans and home equity lines of credit. Allow
segment to continue to decline as a percentage of total loans and earning assets.
We plan to modestly increase our portfolio of one- to four-family first mortgages while
stabilizing the balance of home equity loans and home equity lines of credit and
maintaining our conservative underwriting standards. During the year ended June 30,
4
2014, we originated $78.2 million of one- to four-family first mortgage loans compared
to $65.1 million during the year ended June 30, 2013. We anticipate that this segment of
our loan portfolio will continue to decline as a percentage of total loans and earning
assets as other loan categories grow.
The overall stability in the outstanding balance of the residential mortgage loan portfolio
and, more significantly, its decline as a percentage of total loans continues to reflect our
decreased strategic focus on residential mortgage lending, coupled with the slowed pace
of refinancing and diminished level of demand for “new purchase” mortgage loans.
Continue to Diversify Investment Securities: Continue to diversify composition and
allocation of investment portfolio into new asset sectors to enhance earnings and
reduce exposure to long term interest rate risk. Reduce concentration in agency
one- to four-family residential pass-through mortgage-backed securities.
In order to enhance earnings and reduce our exposure to long term interest rate risk in
fiscal 2013, we initiated a plan to diversify the composition and allocation of our
investment portfolio into new asset sectors., including asset-backed securities, corporate
bonds, municipal obligations, collateralized loan obligations and commercial mortgage-
backed securities (“MBS”) while reducing our concentration in traditional residential
MBS. Several of the added sectors include floating rate securities that reduce the level of
interest rate risk (“IRR”) embedded in our securities portfolio. During fiscal 2014, we
continued to expand our investments into these sectors and expect to continue to do so in
the future.
Maintain Strong Asset Quality: Maintain high asset quality and continue to reduce
the current level of nonperforming assets.
We continue to emphasize and maintain strong asset quality. Nonperforming assets
decreased by $6.1 million to $26.9 million, or 0.77% of total assets, at June 30, 2014
from $33.0 million, or 1.05% of total assets, at June 30, 2013. Through our conservative
underwriting standards and our prompt attention to potential problem loans, we anticipate
maintaining strong asset quality ratios as we continue to grow and diversify our loan
portfolio.
Expand Funding Through Retail Deposits: Expand our funding through retail
deposit growth within existing branch network with greatest emphasis on growth in
non-maturity/non-interest bearing deposits.
Our total deposits increased by $109.4 million for the year ended June 30, 2014 including
$86.1 million of deposits assumed in conjunction with our Atlas Bank acquisition. Non-
interest-bearing deposits increased $33.1 million during fiscal 2014 while interest-bearing
deposits increased $76.3 million. Within interest-bearing deposits, the balance of savings
accounts and certificates of deposit increased by $51.9 million and $55.7 million,
respectively. This growth was partially offset by a $31.3 million decline in the balance of
interest-bearing checking accounts.
With the acquisition of Atlas Bank, we now have a total of 42 branches. We plan to
selectively evaluate branch network expansion opportunities, with a particular focus on
limited branch expansion in Brooklyn and Staten Island, New York, as an outgrowth of
our acquisition of Atlas Bank. We will also continue to carefully seek and evaluate
5
additional de novo branch opportunities to contiguously expand our existing New Jersey
branch network with an emphasis on “fill ins” between our northern and central New
Jersey locations.
Notwithstanding the opportunities presented by de novo branching, we expect to place
greater strategic emphasis on leveraging the opportunities to increase market share and
expand the depth and breadth of customer relationships within the existing branch
system. We continue to develop and deploy strategies to promote the "relationship
banking" business model throughout our branch network with an emphasis on expanding
business customer relationships linked to business lending initiatives.
Mergers and Acquisitions: Actively seeking out franchise expansion opportunities
such as the acquisition of other financial institutions or branches.
As a complement to the “organic” growth strategies, we continue to actively seek out
opportunities to deploy capital, diversify our balance sheet mix, enter new markets and
enhance earnings through mergers and acquisitions with other financial institutions. We
are an experienced acquiror, having acquired five banks in the last 15 years. As
demonstrated through our acquisition of Atlas Bank during fiscal 2014, we expect to
place the greatest emphasis on opportunities to expand within the existing markets we
serve or to enter new markets that are generally contiguous to such markets.
In addition to searching for acquisitions of financial institutions or their branches, we are
currently exploring opportunities for acquisitions or strategic partnerships to broaden our
product and service offerings to include insurance agency and/or insurance related
brokerage services. While we continue to evaluate potential acquisition opportunities,
there are no current agreements or arrangements for any such acquisitions.
Information Technology: Procure and implement various information technologies
designed to support our strategic initiatives while improving operating efficiency
and reducing cost.
In conjunction with our strategic efforts to improve operating efficiency and control
operating expenses, while expanding and enhancing product and service offerings, we
completed the conversion of our primary core processing and related customer-facing
systems to Fiserv, Inc. platforms during fiscal 2014. Additional Fiserv, Inc. technologies
are expected to be deployed during fiscal 2015. We anticipate that such measures will
significantly reduce our recurring technology service provider expenses and enhance our
commercial business lending platform.
We consider the noted enhancements to our information technology infrastructure to be
the first of several strategies to be deployed to control growth in non-interest expenses
and improve our overall operating efficiency. Upon completion of this initiative, we
expect to perform further evaluation and analysis of other significant categories of non-
interest expense with the goal of optimizing the cost level, resource allocation and
utilization of our growing infrastructure to support our strategic goals and objectives.
Acquisition Activity. Since 1999, we have acquired five banking institutions including: 1st Bergen
Bancorp (March 31, 1999), Pulaski Bancorp, Inc. (October 18, 2002), West Essex Bancorp (July 1, 2003),
Central Jersey Bancorp (November 30, 2010) and, most recently, Atlas Bank (June 30, 2014). Atlas
Bank, a federal mutual savings bank, had total assets with a fair value of $120.9 million at June 30, 2014
6
and two branch offices in Brooklyn and Staten Island, New York as of that date. As of June 30, 2014,
Atlas Bank operated its main retail banking office in Brooklyn and a retail branch in Staten Island, New
York, and had assets with a fair value of $120.9 million and deposit balances with fair values totaling
$86.1 million. Atlas Bank had no public stockholders, and therefore no merger consideration was paid to
third parties. We issued 1,044,087 shares of Kearny-Federal common stock to Kearny MHC as
consideration for the transaction. As the merger was completed on June 30, 2014, the transaction is
reflected in the consolidated statements of conditions and consolidated statements of operations at and for
the relevant period presented in this Annual Report.
Upon completion of the transaction, Atlas Bank merged with and into Kearny Bank, and Atlas
Bank’s existing branch offices began operating under the name “Atlas Bank, a division of Kearny Federal
Savings Bank,” for at least a year following the merger.
Market Area. At June 30, 2014, our primary market area consists of the New Jersey counties in
which we currently operate branches including Bergen, Essex, Hudson, Middlesex, Monmouth, Morris,
Ocean, Passaic and Union counties. Our market area was expanded to include Kings and Richmond
counties in New York resulting from our acquisition of Atlas Bank on June 30, 2014. Our lending is
concentrated in these markets 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
within the New York metropolitan area. Service jobs represent the largest employment sector followed
by wholesale/retail trade. Our business of attracting deposits and making loans is generally conducted
within our primary 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 which would adversely affect our
profitability.
According to SNL Financial, the population in our primary market area has increased from 2010
to 2014, with weighted population growth rates of 2.06% and 3.29% for the nine New Jersey counties and
the two New York counties that we operate in, respectively. The weighted average median household
income for 2014 for the nine New Jersey counties that we operate in was $72,840, while the weighted
average median income for 2014 for the two New York counties that we operate in was $49,792. By
contrast, the national level of median household income for 2014 was $51,579. By 2019, the projected
increases in median household income are expected to be 4.12% for the nine New Jersey counties that we
operate in and 6.36% for the two New York counties that we operate in. By 2019, the projected national
level of increase in median household income is expected to be 4.58%.
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. We also face competition
for attracting funds from providers of alternative investment products such as equity and fixed income
investments such as corporate, agency and government securities as well as the mutual funds that invest
in these instruments.
7
There are large retail banking competitors operating throughout our primary market area,
including Bank of America, Citibank, JP Morgan Chase Bank, PNC Bank, TD Bank, and Wells Fargo
Bank and we also face strong competition from other community-based financial institutions.
Restructuring and Wholesale Growth Transactions. The following discussion presents an
overview of certain balance sheet restructuring and wholesale growth transactions we executed during the
prior fiscal year ended June 30, 2013 and will generally serve as a point of reference for subsequent
discussions included in this report.
The Company completed a series of balance sheet restructuring and wholesale growth
transactions during fiscal 2013 that were intended to improve the financial position and operating results
of the Company and the Bank. Through the restructuring transactions, the Company reduced its
concentration in agency mortgage-backed securities (“MBS”) in favor of other investment sectors within
the portfolio. As a result, the Company reduced its exposure to residential mortgage prepayment and
extension risk while enhancing the overall yield of the investment portfolio and providing some
additional protection to earnings against potential movements in market interest rates. The gains
recognized through the sale of MBS enabled the Company to fully offset the costs of prepaying a portion
of its high-rate Federal Home Loan Bank (“FHLB”) advances during the year. The Company also
modified the terms of its remaining high-rate FHLB advances to a lower interest rate while extending the
duration of that modified funding to better protect against potential increases in interest rates in the future.
The key features and characteristics of the restructuring transactions executed during the latter
half of fiscal 2013 were as follows:
the Company sold available for sale agency MBS totaling approximately $330.0 million
with a weighted average book yield of 1.78% resulting in a one-time gain on sale totaling
approximately $9.1 million;
a portion of the proceeds from the noted MBS sales were used to prepay $60.0 million of
fixed-rate FHLB advances at a weighted average rate of 3.99% resulting in a one-time
expense of $8.7 million largely attributable to the prepayment penalties paid to the FHLB
to extinguish the debt;
the Company reinvested the remaining proceeds from the noted MBS sales into a
diversified mix of high-quality securities with an aggregate tax-effective yield modestly
exceeding that of the MBS sold. Such securities primarily included:
o
o
o
o
o
fixed-rate, bank-qualified municipal obligations;
floating-rate corporate bonds issued by financial companies;
floating-rate, asset-backed securities comprising education loans with 97% U.S.
government guarantees;
fixed-rate agency commercial MBS secured by multi-family mortgage loans; and
fixed-rate agency collateralized mortgage obligations (“CMO”); and
the Company modified the terms of its remaining $145.0 million of “putable” FHLB
advances with a weighted average cost of 3.68% and weighted average remaining
maturity of approximately 4.5 years. Such advances were subject to the FHLB’s
quarterly “put” option enabling it to demand repayment in full in the event of an increase
in interest rates. The terms of the modified advances extended their “non-putable” period
8
to five years with a final stated maturity of ten years while reducing their average interest
rate by 0.64% to 3.04% at no immediate cost to the Company.
The Company augmented the restructuring transaction noted above by also executing a limited
wholesale growth strategy during the latter half of fiscal 2013. The strategy enhanced the Company’s net
interest income and operating results without significantly impacting the sensitivity of its Economic
Value of Equity (“EVE”) to movements in interest rates - a key measure of long-term exposure to interest
rate risk.
In conjunction with the wholesale growth strategy, the Company drew an additional $300.0
million of wholesale funding that was utilized to purchase a diverse set of high-quality investment
securities of an equivalent amount. The key features and characteristics of the wholesale growth
transactions were as follows:
wholesale funding sources utilized in the strategy included 90-day FHLB borrowings and
money-market deposits indexed to one-month LIBOR acquired through Promontory
Interfinancial Network’s (“Promontory”) Insured Network Deposits (“IND”) program.
the Company utilized interest rate derivatives in the form of “plain vanilla” swaps and
caps with aggregate notional amounts totaling $300.0 million to serve as cash flow
hedges to manage the interest rate risk exposure of the floating rate funding sources noted
above.
the investment securities acquired with this funding primarily included:
o
o
o
o
o
floating-rate corporate bonds issued by financial companies;
floating-rate, asset-backed securities comprising education loans with 97% U.S.
government guarantees;
floating rate collateralized loan obligations (“CLO”)
fixed-rate agency residential and commercial MBS; and
fixed-rate agency collateralized mortgage obligations (“CMO”).
9
Lending Activities
General. In conjunction with our strategic efforts to evolve from a traditional thrift to a full-
service community bank, our lending strategies have placed increasing emphasis on the origination of
commercial loans while diminishing the emphasis on one- to four-family mortgage lending. The year-to-
year trends in the composition and allocation of our loan portfolio, as reported in the table below,
highlight those changes in business strategy. In particular, the outstanding balance of our commercial
mortgages, including loans secured by multi-family, mixed-use and nonresidential properties, have
significantly increased from both a dollar amount and percentage of portfolio basis over the past several
years. Conversely, absent the effect of acquisitions, the outstanding balance of residential mortgage loans
has declined during recent years, reflecting loan repayments that have outpaced originations.
Our commercial loan offerings also include secured business loans, most of which are secured by
real estate, and unsecured business loans. Commercial loan offerings include programs offered through
the SBA in which Kearny Bank participates as a Preferred Lender. Our consumer loan offerings
primarily include home equity loans and home equity lines of credit as well as account loans, overdraft
lines of credit, vehicle loans and personal loans. We also offer construction loans to builders/developers
as well as individual homeowners. Substantially all of our borrowers are residents of our primary market
area and would be expected to be similarly affected by economic and other conditions in that area. We
have purchased out-of-state one- to four-family first mortgage loans to supplement our in-house
originations. Please see “Lending ActivitiesLoan Originations, Purchases, Sales, Solicitation and
Processing.”
10
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio
in dollar amounts and as a percentage of the total portfolio at the dates indicated.
Real estate mortgage:
One- to four-family ............... $
Commercial ............................
Commercial business ...................
Consumer:
Home equity loans .....................
Home equity lines of credit .......
Passbook or certificate ..............
Other .........................................
Construction .................................
Total loans ...............................
Less:
Allowance for loan losses.........
Unamortized yield adjustments
including net premiums on
purchased loans and net
deferred loans costs and fees ...
2014
2013
At June 30,
2012
2011
2010
Amount
Percent
Amount
Percent Amount
Percent Amount
Percent Amount
Percent
(Dollars in Thousands)
580,612
983,755
67,261
33.31 % $
56.44
3.86
500,647
666,828
70,688
36.77% $
48.97
5.19
562,846
484,934
88,414
43.77% $
37.71
6.88
610,901
383,690
105,001
48.12% $
30.23
8.28
663,850
203,013
14,352
65.52%
20.04
1.42
75,611
24,010
3,965
373
7,281
1,742,868
4.34
1.38
0.23
0.02
0.42
100.00 %
80,813
26,613
3,887
391
11,851
1,361,718
5.93
1.95
0.29
0.03
0.87
100.00%
95,832
29,530
3,638
404
20,292
1,285,890
7.45
2.30
0.28
0.03
1.58
100.00%
111,478
32,925
2,753
1,026
21,598
1,269,372
8.78
2.59
0.22
0.08
1.70
100.00%
101,659
11,320
2,703
1,545
14,707
10.03
1.12
0.27
0.15
1.45
1,013,149 100.00%
12,387
10,896
10,117
11,767
8,561
1,397
13,784
847
11,743
1,654
11,771
1,021
12,788
(564)
7,997
Total loans, net ........................ $ 1,729,084
$ 1,349,975
$ 1,274,119
$ 1,256,584
$ 1,005,152
11
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12
The following table shows the dollar amount of loans as of June 30, 2014 due after June 30, 2015
according to rate type and loan category.
Fixed Rates
Floating or
Adjustable
Rates
(In Thousands)
Real estate mortgage:
One- to four-family ............................. $
551,259
$
Commercial .........................................
Commercial business ....................................
Consumer:
Home equity loans...............................
Home equity lines of credit .................
Passbook or certificate ........................
Other ....................................................
Construction .................................................
415,177
20,027
75,283
1,560
1,432
128
497
29,237
541,264
20,299
—
22,143
361
65
—
$
Total
580,496
956,441
40,326
75,283
23,703
1,793
193
497
Total ........................................... $
1,065,363
$
613,369
$
1,678,732
One- to Four-Family Mortgage Loans. Our lending activities include the origination of one- to
four-family first mortgage loans, of which approximately $548.3 million or 94.5% are secured by
properties located within New Jersey and New York as of June 30, 2014 with the remaining $32.2 million
or 5.5% secured by properties in other states. Our largest outstanding balance at that date was $1.8
million, which was secured by residential property located in Little Silver, New Jersey and was
performing in accordance with its terms.
During the year ended June 30, 2014, Kearny Bank originated $78.2 million of one- to four-
family first mortgage loans compared to $65.1 million in the year ended June 30, 2013. To supplement
loan originations, we also purchased one- to four-family first mortgages totaling $22.4 million during the
year ended June 30, 2014, compared to $16.3 million during the year ended June 30, 2013. In addition to
the loans originated and purchased, we also acquired one- to four-family mortgage loans with fair values
totaling $72.8 million through our acquisition of Atlas Bank on June 30, 2014. The loans acquired from
Atlas Bank included a small portfolio of Non-Income Verification (“NIV”) loans that were granted prior
to 2011. Atlas Bank’ NIV loan program did not require the borrower to provide full financial
documentation upon application. As such, Atlas Bank relied solely on the loan-to-value ratio of the
property and the borrower’s credit when approving an application under this program. The NIV program
was terminated by Atlas Bank in 2011. The NIV loans acquired from Atlas Bank on June 30, 2014 had
outstanding balances of approximately $17.4 million. All of the NIV loans acquired from Atlas Bank on
that date were current and performing as agreed with the exception of one loan with an outstanding
balance of $262,000, for which principal and interest are current but certain real estate taxes are
delinquent.
In total, origination, purchase and acquisition volume of one- to four-family mortgage loans
outpaced loan repayments and sales during fiscal 2014 resulting in a net increase in the outstanding
balance of this segment of the loan portfolio.
We will originate a one- to four-family mortgage loan on an owner-occupied property with a
principal amount of up to 95% of the lesser of the appraised value or the purchase price of the property,
with private mortgage insurance required if the loan-to-value ratio exceeds 80%. At June 30, 2014, one-
13
to four-family owner-occupied properties comprised 99% of our total one- to four-family loan portfolio.
Our loan-to-value limit on a non-owner-occupied property is 75%. Loans in excess of $1.0 million are
handled on a case-by-case basis and are subject to lower loan-to-value limits, generally no more than
50%.
Our fixed-rate and adjustable-rate residential mortgage loans on owner-occupied properties have
terms of ten to 30 years. Residential mortgage loans on non-owner-occupied properties have terms of up
to 15 years for fixed-rate loans and terms of up to 20 years for adjustable-rate loans.
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 30 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 of up to 30 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.
The Dodd-Frank Act prohibits lenders from making residential mortgages unless the lender
makes a reasonable and good faith determination that the borrower has a reasonable ability to repay the
mortgage loan according to its terms. A borrower may recover statutory damages equal to all finance
charges and fees paid within three years of a violation of the ability-to-repay rule and may raise a
violation as a defense to foreclosure at any time. As authorized by the Dodd-Frank Act, the Consumer
Financial Protection Bureau (“CFPB”) has adopted regulations defining “qualified mortgages” that would
be presumed to comply with the Dodd-Frank Act’s ability-to-repay rules. Under the CFPB regulations,
qualified mortgages must satisfy the following criteria: (i) no negative amortization, interest-only
payments, balloon payments or a term greater than 30 years; (ii) no points or fees in excess of 3% of the
loan amount for loans over $100,000; (iii) borrower’s income and assets are verified and documented; and
(iv) the borrower’s debt-to-income ratio generally may not exceed 43%. Qualified mortgages are
conclusively presumed to comply with the ability-to-repay rule unless the mortgage is a “higher cost”
mortgage, in which case the presumption is rebuttable. Kearny Bank will not grant a non-qualified
mortgage loan unless such loan falls under the “temporary qualified mortgage” guidance and there were
additional factors to support the exception (which may include a review of the borrower’s
creditworthiness and whether a deposit relationship exists).
We offer a first-time homebuyer program for persons who have not previously owned real estate
and are purchasing a one- to four-family property in our primary lending area for use as a primary
residence. This program is also available outside these areas, but only to persons who are existing deposit
or loan customers of Kearny Bank and/or members of their immediate families. The financial incentives
offered under this program are a one-eighth of one percentage point rate reduction on all first mortgage
loan types and the refund of the application fee at closing.
The fixed-rate residential mortgage loans that we originate generally meet the secondary
mortgage market standards of the Federal Home Loan Mortgage Corporation (“Freddie Mac”). However,
as our business plan continues to call for increasing total loans on both a dollar and percentage of assets
basis, we generally do not sell such loans in the secondary market and do not currently expect to do so in
any large capacity in the near future.
Substantially all of our residential mortgages include “due on sale” clauses, which give 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 first mortgage
loans are made by state certified or licensed independent appraisers approved by Kearny Bank’s Board of
Directors. Appraisals are performed in accordance with applicable regulations and policies. We require
14
title insurance policies on all first mortgage real estate loans originated. Homeowners, liability and fire
insurance and, if applicable, flood insurance, are also required.
Multi-Family and Nonresidential Real Estate Mortgage Loans. We also originate commercial
mortgage loans on multi-family and nonresidential properties, including loans on apartment buildings,
retail/service properties and land as well as other income-producing properties, such as mixed-use
properties combining residential and commercial space. Our growing strategic emphasis in commercial
lending resulted in the origination of approximately $334.4 million of multi-family and commercial real
estate mortgages during the year ended June 30, 2014, compared to $271.1 million during the year ended
June 30, 2013. Our largest outstanding commercial mortgage loan balance at June 30, 2014 was $19.9
million, which is secured by a multi-family apartment building and performing in accordance with its
terms.
Our commercial mortgage acquisition strategies also included purchases of loan participations
totaling $87.0 million and $1.5 million during the years ended June 30, 2014 and 2013, respectively.
Additionally, we acquired commercial mortgage loans with fair values totaling $5.7 million through our
acquisition of Atlas Bank on June 30, 2014.
In total, commercial mortgage loan acquisition volume significantly outpaced loan repayments
during fiscal 2014 resulting in the reported net increase in the outstanding balance of this segment of the
loan portfolio. Our business plan continues to call for maintaining our strategic emphasis on the
origination of commercial mortgages and increasing this segment of the portfolio on both a dollar and
percentage of assets basis.
We generally require no less than a 25% down payment or equity position for mortgage loans on
multi-family and nonresidential properties. For such loans, we generally require personal guarantees.
Currently, these loans are made with a maturity of up to 25 years. We also offer a five-year balloon loan
with a twenty-five year amortization schedule. Our commercial mortgage loans are generally secured by
properties located in New Jersey and New York.
Commercial mortgage loans are generally considered to entail a greater level of risk than that
which arises from one- to four-family, owner-occupied real estate lending. The repayment of these loans
typically is dependent on a successful operation 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, commercial mortgage loans generally carry larger balances to single borrowers or related groups
of borrowers than one- to four-family mortgage loans. Consequently, such loans typically require
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 including loans
originated through the SBA in which Kearny Bank participates as a Preferred Lender. Kearny Bank
originated approximately $24.1 million of commercial business loans during the year ended June 30,
2014 compared to $21.5 million during the year ended June 30, 2013. Our largest outstanding
commercial business loan balance at June 30, 2014 was $6.7 million, which was secured by a hotel. This
loan was performing in accordance with its original terms at June 30, 2014.
Our commercial business loan acquisition strategies were expanded during fiscal 2014 resulting
in the purchase of C&I loan participations totaling $4.9 million during the year ended June 30, 2014. No
such participations were purchased during fiscal 2013. The outstanding balance of our C&I loan
participations at June 30, 2014 totaled $4.9 million comprising four loans acquired through Kearny
Bank’s membership in BancAlliance, a cooperative network of lending institutions that serves as a
15
conduit for institutional investors to participate in large commercial credits. The BancAlliance network is
supported and managed on a day-to-day basis by Alliance Partners and its wholly-owned subsidiary AP
Commercial LLC which acts as investment advisor and asset manager for loans acquired through the
BancAlliance network while retaining a portion of such loans as an investor.
In total, commercial business loan repayments and sales outpaced loan acquisition volume during
fiscal 2014 resulting in the modest decline in the outstanding balance reported for this segment of the loan
portfolio. As a complement to our commercial mortgage strategies, our business plan calls for expanding
our strategic emphasis on the acquisition of commercial business loans through both retail origination
channels as well as purchases and participations acquired though wholesale sources with the goal of
increasing this portfolio on both a dollar and percentage of assets basis.
Our commercial business loan activity during fiscal 2014 included the sale of $737,000 of SBA
loan participations which resulted in the recognition of related sale gains totaling approximately $80,000
for the year ended June 30, 2014. By comparison, we sold $4.8 million of SBA loan participations during
fiscal 2013 which resulted in the recognition of related sale gains totaling approximately $557,000.
Notwithstanding the recent decline in SBA loan origination and sale activity, our business plan calls for
an increase in SBA lending activity from the levels reported during fiscal 2014. Toward that end, we are
currently evaluating our SBA lending function and expect to restructure that function in the coming year
with a commitment and expectation for an increase in SBA loan origination and sale activity during fiscal
2015.
Approximately $57.8 million or 85.9% of our commercial business loans are “non-SBA” loans.
Of these loans, approximately $54.3 million or 93.9% represent secured loans that are primarily
collateralized by real estate or, to a lesser extent, other forms of collateral. The remaining $3.5 million or
6.1% represent unsecured loans to our business customers. We generally require personal guarantees on
all “non-SBA” commercial business loans. Marketable securities may also be 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 “non-SBA” commercial term loans generally have terms of up to 20 years and are mostly fixed-rate
loans. Our commercial lines of credit have terms of up to two years and are generally adjustable-rate
loans. We also offer a one-year, interest-only commercial line of credit with a balloon payment.
The remaining $9.5 million or 14.1% of commercial business loans represent the retained portion
of SBA loan originations. Such loans are generally secured by various forms of collateral, including real
estate, business equipment and other forms of collateral. Kearny Bank generally sells the guaranteed
portion of eligible SBA loans originated, which ranges from 50% to 90% of the loan’s outstanding
balance while retaining the nonguaranteed portion of such loans in portfolio. Kearny Bank also retains
both the guaranteed and non-guaranteed portion of those SBA originations that are generally ineligible for
sale in the secondary market. At June 30, 2014, approximately $2.2 million of the retained portion of
Kearny Bank’s SBA loans is guaranteed by the Small Business Administration.
Unlike single-family, owner-occupied 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, including those originated under SBA programs, are typically 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, generally have greater credit risk than residential mortgage loans. In addition, commercial
16
business loans may carry larger balances to single borrowers or related groups of borrowers than one- to
four-family first mortgage loans. As such, commercial business lending requires substantially greater
evaluation and oversight efforts compared to residential or commercial real estate lending.
Home Equity Loans and Lines of Credit. Our home equity loans are fixed-rate loans for terms
of generally up to 20 years. We also offer fixed-rate and adjustable-rate home equity lines of credit with
terms of up to 20 years. Kearny Bank originated $29.0 million of home equity loans and home equity
lines of credit compared to $26.1 million in the year ended June 30, 2013. However, repayments of home
equity loans and lines of credit outpaced loan acquisition volume during fiscal 2014 resulting in the
reported net decline in the outstanding balance of this segment of the loan portfolio. Our largest
outstanding home equity loan and line of credit balance at June 30, 2014 was $470,000, which was
secured by a single family residence located in Ocean, New Jersey and performing in accordance with its
terms.
Collateral value is determined through a property value analysis report provided by a state
certified or licensed independent appraiser. In some cases, we determine collateral value 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 and fire insurance and, if
applicable, flood insurance.
Home equity loans and fixed-rate home equity lines of credit are generally originated in our
market area and are generally made in amounts of up to 80% of value on term loans and of 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.
Account Loans and Other Consumer Loans. In addition to home equity loans and lines of
credit, our consumer loan portfolio primarily includes loans secured by savings accounts and certificates
of deposit on deposit with Kearny Bank and overdraft lines of credit as well as vehicle loans and personal
loans. We will generally lend up to 90% of the account balance on a loan secured by a savings account or
certificate of deposit. At June 30, 2014, passbook or certificate loans totaled $4.0 million and other
consumer loans totaled $373,000. Our largest outstanding passbook or certificate loan balance was
$225,000, which was secured by a certificate of deposit and performing in accordance with its terms. At
June 30, 2014, our largest other consumer loan balance at that date was $40,000, which was unsecured
and performing in accordance with its terms.
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 that 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.
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. At June 30, 2014, construction loans totaled $7.3 million. Our largest construction loan balance
at that date was $1.3 million, which was secured by a residential property and performing in accordance
17
with its terms.
During the year ended June 30, 2014, construction loan disbursements were $3.8 million
compared to $3.0 million during the year ended June 30, 2013. However, the repayment of construction
loans more than offset these disbursements during fiscal 2014 resulting in the reported net decline in the
outstanding balance of this segment of the loan portfolio.
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 generally limited to one year with an interest rate tied to the prime rate published in the
Wall Street Journal 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. The Board of Directors reviews Kearny Bank’s business
relationship with a builder or developer prior to accepting a loan application for processing. We generally
do not make construction loans to builders on a speculative basis. There must be a contract for sale in
place. Financing is 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 initial 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 the entire 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.
Loans to One Borrower. Federal law generally limits the amount that a savings institution may
lend to one borrower to the greater of $500,000 or 15% of the institution’s unimpaired capital and surplus.
Accordingly, as of June 30, 2014, our loans-to-one-borrower limit was approximately $54.5 million.
At June 30, 2014, our largest single borrower had an aggregate outstanding loan balance of
approximately $25.4 million comprising eight commercial mortgage loans. Our second largest single
borrower had an aggregate outstanding loan balance of approximately $24.7 million comprising three
commercial mortgage loans. Our third largest borrower had an aggregate outstanding loan balance of
approximately $24.5 million comprising four commercial mortgage loans and two commercial business
lines of credit with an additional $6.0 million available to the borrower through the unused portions of
those lines of credit. At June 30, 2014, all of these lending relationships were current and performing in
accordance with the terms of their loan agreements. By comparison, at June 30, 2013, loans outstanding
to Kearny Bank’s three largest borrowers totaled approximately $20.1 million, $18.2 million and $12.6
million, respectively.
18
Loan Originations, Purchases, Sales, Solicitation and Processing. The following table shows
total loans originated, purchased, acquired and repaid during the periods indicated.
For the Years Ended June 30,
2013
2014
2012
(In Thousands)
Loans originated and purchased:
Loan originations:
Real estate mortgage:
One- to four-family ........................................................................... $
Commercial .......................................................................................
Commercial business .............................................................................
Construction ...........................................................................................
Consumer:
Home equity loans and lines of credit ..............................................
Passbook or certificate ......................................................................
Other..................................................................................................
Total loan originations ............................................................
Loan purchases:
Real estate mortgage:
One- to four-family ........................................................................
Multi-family and commercial ........................................................
Commercial business .....................................................................
Total loans purchased ..............................................................
Loans acquired from Atlas(1) ......................................................................
Loans sold:
One- to four-family .................................................................................
Commercial SBA participations .............................................................
Total loans sold .......................................................................
Loan principal repayments .........................................................................
Increase (decrease) due to other items .......................................................
78,249
334,369
24,062
3,802
29,021
1,330
937
471,770
22,429
87,000
4,914
114,343
78,725
(5,275)
(737)
(6,012)
(281,711)
1,994
$
65,051
271,109
21,546
2,953
$
66,456
95,534
17,968
12,004
26,070
1,492
446
388,667
16,288
1,485
—
17,773
2
—
(4,775)
(4,775)
(322,187)
(3,622)
35,741
2,740
504
230,947
22,185
57,829
—
80,014
—
—
(6,462)
(6,462)
(280,578)
(6,386)
Net increase in loan portfolio..................................................................... $
379,109
$
75,856
$
17,535
(1)
For information on loans acquired in the Atlas Bank acquisition, see Note 2 to the audited consolidated financial statements.
Our customary sources of loan applications include loans originated by our commercial and
residential loan officers, repeat customers, referrals from realtors and other professionals and “walk-in”
customers. These sources are supported in varying degrees by our newspaper and electronic advertising
and marketing strategies.
During prior years, we had purchased loans under the terms of loan purchase and servicing
agreements with three large nationwide lenders, in order to supplement our residential mortgage loan
production pipeline. The original agreements called for the purchase of loan pools that contained
mortgages on residential properties in our lending area. Subsequently, we expanded our loan purchase
and servicing agreements with the same nationwide lenders to include mortgage loans secured by
residential real estate located outside of New Jersey. We have procedures in place for purchasing these
mortgages such that the underwriting guidelines are consistent with those used in our in-house loan
origination process. The evaluation and approval process ensures that the purchased loans generally
conform to our normal underwriting guidelines. Our due diligence process includes full credit reviews
and an examination of the title policy and associated legal instruments. We recalculate debt service and
loan-to-value ratios for accuracy and review appraisals for reasonableness. All loan packages presented
to Kearny Bank must meet our underwriting requirements as outlined in the purchase and servicing
agreements and are subject to the same review process outlined above. Furthermore, there are stricter
19
underwriting guidelines in place for out-of-state mortgages, including higher minimum credit scores. We
did not purchase residential mortgage loans under the noted purchase and servicing agreements during the
year ended June 30, 2014 but may do so in the future.
Once we purchase the loans, we continually monitor the seller’s performance by thoroughly
reviewing portfolio balancing reports, remittance reports, delinquency reports and other data supplied to
us on a monthly basis. We also review the seller’s financial statements and documentation as to their
compliance with the servicing standards established by the Mortgage Bankers Association of America.
As of June 30, 2014, our portfolio of “out-of-state” residential mortgages includes loans located
in 14 states outside of New Jersey and New York that total approximately $32.2 million or 5.5% of one-
to four-family mortgage loans. The states with the three largest concentrations of such loans at June 30,
2014 were Massachusetts, Pennsylvania and Georgia, with outstanding principal balances totaling $10.7
million, $7.1 million and $2.9 million, respectively. The aggregate outstanding balances of loans in each
of the remaining 11 states comprise approximately 35.5% of the total balance of out-of-state residential
mortgage loans with aggregate balances by state ranging from $298,000 to $2.0 million.
We also enter into purchase agreements with a limited number of mortgage originators to
supplement our loan production pipeline. These agreements call for the purchase, on a flow basis, of one-
to four-family first mortgage loans with servicing released to Kearny Bank. During the year ended June
30, 2014, we purchased fixed-rate and adjustable-rate loans with principal balances totaling $22.4 million
from these sellers.
In addition to purchasing one- to four-family loans, we have also purchased participations in
commercial mortgage loans originated by other banks and non-bank originators. Our commercial loan
acquisitions included the purchase of participations totaling $87.0 million during the year ended June 30,
2014. As of that date, the number and aggregate outstanding balance of commercial loan participations
totaled 35 and $131.8 million, respectively, representing loans on a variety of multi-family and
commercial real estate properties.
The participations noted above exclude those acquired through the Thrift Institutions Community
Investment Corporation of New Jersey (“TICIC”), a subsidiary of the New Jersey Bankers Association
that is no longer actively originating loans. At June 30, 2014, our remaining TICIC participations
included a total of 18 loans with an aggregate balance of $3.1 million representing loans on multi-family
and commercial real estate properties.
Loan Approval Procedures and Authority. Senior management recommends and the Board of
Directors approves our lending policies and loan approval limits. Kearny Bank’s Loan Committee
consists of the Chief Lending Officer, Chief Credit Officer, Divisional President and Special Assets
Manager. The Committee may approve loans up to $5.0 million. Our Chief Lending Officer may approve
loans up to $750,000. Loan department personnel of Kearny Bank serving in the following positions may
approve loans as follows: commercial/mortgage loan managers, mortgage loans up to $500,000; mortgage
loan underwriters, mortgage loans up to $250,000; consumer loan managers, consumer loans up to
$250,000; and consumer loan underwriters, consumer loans up to $150,000. In addition to these principal
amount limits, there are established limits for different levels of approval authority as to minimum credit
scores and maximum loan to value ratios and debt to income ratios or debt service coverage. Our Chief
Executive Officer and Chief Operating Officer have authorization to countersign loans for amounts that
exceed $750,000 up to a limit of $1.0 million. Our Chief Lending Officer must approve loans between
$750,000 and $1.0 million along with one of these designated officers. Non-conforming mortgage loans
and loans over $1.0 million up to $2.0 million require the approval of the Loan Committee. Commercial
loans in excess of $5.0 million require approval by the Board of Directors while such approval is also
20
required for residential mortgage loans in excess of $2.0 million and commercial business loans in excess
of $500,000.
Asset Quality
Collection Procedures on Delinquent Loans. We regularly monitor the payment status of all
loans within our portfolio and promptly initiate collection efforts on past due loans in accordance with
applicable policies and procedures. Delinquent borrowers are notified by both mail and telephone when a
loan is 30 days past due. If the delinquency continues, subsequent efforts are made to contact the
delinquent borrower and additional collection notices and letters are sent. All reasonable attempts are
made to collect from borrowers prior to referral to an attorney for collection. However, when a loan is 90
days delinquent, it is our general practice to refer it to an attorney for repossession, foreclosure or other
form of collection action, as appropriate. 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 its fair market value less estimated selling costs. The initial write-
down of the property, if necessary, 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 are identified.
Past Due Loans. A loan’s “past due” status is generally determined based upon its “P&I
delinquency” status in conjunction with its “past maturity” status, where applicable. A loan’s “P&I
delinquency” status is based upon the number of calendar days between the date of the earliest P&I
payment due and the “as of” measurement date. A loan’s “past maturity” status, where applicable, is
based upon the number of calendar days between a loan’s contractual maturity date and the “as of”
measurement date. Based upon the larger of these criteria, loans are categorized into the following “past
due” tiers for financial statement reporting and disclosure purposes: Current (including 1-29 days past
due), 30-59 days, 60-89 days and 90 or more days.
Nonaccrual Loans. Loans are generally placed on nonaccrual status when contractual payments
become 90 days or more past due, and are otherwise placed on nonaccrual when we do not expect to
receive all P&I payments owed substantially in accordance with the terms of the loan agreement. Loans
that become 90 days past maturity, but remain non-delinquent with regard to ongoing P&I payments, may
remain on accrual status if: (1) we expect to receive all P&I payments owed substantially in accordance
with the terms of the loan agreement, past maturity status notwithstanding, and (2) the borrower is
working actively and cooperatively with us to remedy the past maturity status through an expected
refinance, payoff or modification of the loan agreement that is not expected to result in a troubled debt
restructuring (“TDR”) classification. All TDRs are placed on nonaccrual status for a period of no less
than six months after restructuring, irrespective of past due status. The sum of nonaccrual loans plus
accruing loans that are 90 days or more past due are generally defined as “nonperforming loans.”
Payments received in cash on nonaccrual loans, including both the principal and interest portions
of those payments, are generally applied to reduce the carrying value of the loan for financial statement
purposes. When a loan is returned to accrual status, any accumulated interest payments previously
applied to the carrying value of the loan during its nonaccrual period are recognized as interest income as
an adjustment to the loan’s yield over its remaining term.
21
Loans that are not considered to be TDRs are generally returned to accrual status when payments
due are brought current and we expect to receive all remaining P&I payments owed substantially in
accordance with the terms of the loan agreement. Non-TDR loans may also be returned to accrual status
when a loan’s payment status falls below 90 days past due and we: (1) expect receipt of the remaining
past due amounts within a reasonable timeframe, and (2) expect to receive all remaining P&I payments
owed substantially in accordance with the terms of the loan agreement.
Nonperforming Assets. The following table provides information regarding Kearny Bank’s
nonperforming assets which are comprised of nonaccrual loans, accruing loans 90 days or more past due
and real estate owned.
2014
2013
At June 30,
2012
(Dollars in Thousands)
2011
2010
Loans accounted for on a nonaccrual basis:
Real estate mortgage:
One- to four-family(1) ................................................. $
Commercial ................................................................
Commercial business .....................................................
Consumer:
Home equity loans ......................................................
Home equity lines of credit ........................................
Other ...........................................................................
Construction ...................................................................
Total (2)
Accruing loans which are contractually
past due 90 days or more:
Real estate mortgage:
9,944
6,935
4,919
$ 11,675
10,163
4,836
$ 14,917
11,008
3,941
$
949
981
2
1,448
25,178
703
626
28
2,886
30,917
984
193
6
1,758
32,807
One- to four-family ....................................................
Multi-family and commercial ....................................
Commercial business .....................................................
Consumer:
Home equity loans and lines of credit ........................
Passbook or certificate ...............................................
Other ...........................................................................
Construction ...................................................................
Total
—
—
—
—
—
125
—
125
—
—
—
—
—
—
—
—
—
398
293
—
—
—
—
691
$
4,056
7,429
4,866
204
93
22
1,654
18,324
14,923
—
1,718
—
—
—
—
1,867
4,358
2,298
250
—
1
468
9,242
12,321
—
—
—
—
—
—
16,641
12,321
Total nonperforming loans ............................................... $
25,303
$ 30,917
$ 33,498
Real estate owned ............................................................. $
1,624
$
2,061
$
3,811
Total nonperforming assets .............................................. $
26,927
$ 32,978
$ 37,309
$
$
$
34,965
7,497
42,462
$
$
$
21,563
146
21,709
Total nonperforming loans to total loans .........................
Total nonperforming loans to total assets ........................
Total nonperforming assets to total assets .......................
1.45%
0.72%
0.77%
2.27%
0.98%
1.05%
2.61%
1.14%
1.27%
2.76%
1.20%
1.46%
2.13%
0.92%
0.93%
(1)
(2)
At June 30, 2014, included $8.4 million of nonperforming one- to four-family mortgage loans acquired from Countrywide.
TDRs on accrual status not included above totaled $3.3 million, $4.1 million, $2.6 million, $821,000 and $945,000 at June 30, 2014,
2013, 2012, 2011 and 2010, respectively.
Total nonperforming assets decreased by $6.1 million to $26.9 million at June 30, 2014 from
$33.0 million at June 30, 2013. The decrease comprised a net decline in nonperforming loans of $5.6
million plus a net decrease in real estate owned of $437,000. For those same comparative periods, the
number of nonperforming loans increased to 133 loans from 127 loans while the number of real estate
22
owned properties decreased to seven from eight.
At June 30, 2014, nonperforming loans comprised $25.2 million of “nonaccrual” loans and
$125,000 of loans being reported as “accruing loans over 90 days past due.” By comparison, at June 30,
2013, nonperforming loan comprised $30.9 million of “nonaccrual” loans with no loans being reported as
“accruing loans over 90 days past due.”
A significant portion of the non-performing loans reported as “accruing loans over 90 days past
due” prior to fiscal 2012 were originally acquired from Countrywide Home Loans, Inc. (“Countrywide”)
and continue to be serviced by their acquirer, Bank of America (“BOA”) through a subsidiary, BAC
Home Loans Servicing. In accordance with our agreement, BOA advances scheduled principal and
interest payments to Kearny Bank when such payments are not made by the borrower. Prior to fiscal
2012, the timely receipt of principal and interest from the servicer resulted in such loans retaining their
accrual status. However, the delinquency status reported for these nonperforming loans reflected the
borrower’s actual delinquency irrespective of Kearny Bank’s receipt of advances. In recognition that
advances would ultimately be recouped by BOA from Kearny Bank in the event the borrower did not
reinstate the loan, we included our obligation to refund such advances to the servicer, where applicable, in
our impairment analyses of such loans.
Notwithstanding this prior practice, Kearny Bank reclassified the applicable nonperforming BOA
loans from “accruing loans over 90 days past due” to “nonaccrual” during fiscal 2012. Since that time,
interest payments received on the applicable BOA loans have been applied to reduce the carrying value of
the loan for financial statement purposes rather than being recognized as interest income.
Nonperforming one- to four-family mortgage loans at June 30, 2014 include 48 nonaccrual loans
totaling $9.9 million whose net outstanding balances range from $10,000 to $490,000, with an average
balance of approximately $207,000 as of that date. The loans are in various stages of collection, workout
or foreclosure. Of these loans, 44 are secured by New Jersey properties while an additional four loans
acquired from Atlas Bank are secured by properties located in Staten Island, New York. We have
identified approximately $528,000 of specific impairment relating to six of the nonperforming loans for
which valuation allowances are maintained in the allowance for loan losses at June 30, 2014.
The number and balance of nonperforming one- to four-family mortgage loans at June 30, 2014
includes 36 loans totaling $8.4 million that were originally acquired from Countrywide with such loans
comprising 33.2% of total nonperforming loans as of June 30, 2014. As of that same date, Kearny Bank
owned a total of 77 residential mortgage loans with an aggregate outstanding balance of $33.3 million
that were originally acquired from Countrywide. Of these loans, an additional two accruing loans totaling
$866,000 are 30-89 days past due and are in various stages of collection.
Nonperforming commercial real estate loans, including multi-family and nonresidential mortgage
loans, include 19 nonaccrual loans totaling $6.9 million. At June 30, 2014, the outstanding balances of
these loans range from $27,000 to $1.5 million with an average balance of approximately $365,000 as of
that date. The loans are in various stages of collection, workout or foreclosure and are secured by New
Jersey properties. We have identified approximately $569,000 of specific impairment relating to six of
these nonperforming loans for which valuation allowances are maintained in the allowance for loan losses
at June 30, 2014.
Nonperforming commercial business loans at June 30, 2014 include 37 nonaccrual loans totaling
$4.9 million. At June 30, 2014, the outstanding balances of these loans range from $6,000 to $820,000
with an average balance of approximately $133,000 as of that date. The loans are in various stages of
collection, workout or foreclosure and are primarily secured by New Jersey and New York properties and,
23
to a lesser extent, other forms of collateral. We have identified approximately $444,000 of specific
impairment relating to 12 of these nonperforming loans for which valuation allowances are maintained in
the allowance for loan losses at June 30, 2014.
Home equity loans and home equity lines of credit that are reported as nonperforming at June 30,
2014 include 22 nonaccrual loans totaling $1.9 million. At June 30, 2014, the outstanding balances of
these loans range from $8,000 to $459,000 with an average balance of approximately $88,000 as of that
date. The loans are in various stages of collection, workout or foreclosure and are primarily secured by
New Jersey properties. We have identified approximately $132,000 of specific impairment relating to
three of these nonperforming loans for which valuation allowances are maintained in the allowance for
loan losses at June 30, 2014.
Other consumer loans that are reported as nonperforming include two unsecured nonaccrual loans
totaling $2,000 and one accruing loan over 90 days past due totaling $125,000 that is fully secured by
cash on deposit at Kearny Bank.
Nonperforming construction loans include four nonaccrual loans totaling $1.4 million. At June
30, 2014, the outstanding balances of these loans ranged from $355,000 to $596,000 with an average
balance of approximately $362,000 as of that date. The loans are in various stages of collection, workout
or foreclosure and are secured by New Jersey properties in varying stages of development. We have
identified no specific impairment relating to these nonperforming loans at June 30, 2014.
During the years ended June 30, 2014, 2013 and 2012, gross interest income of $1.8 million, $2.1
million and $1.7 million, respectively, would have been recognized on loans accounted for on a
nonaccrual basis if those loans had been current. Interest income recognized on such loans of $52,000,
$46,000 and $134,000 was included in income for the years ended June 30, 2014, 2013 and 2012,
respectively.
At June 30, 2014, 2013, and 2012, Kearny Bank had loans with aggregate outstanding balances
totaling $6.4 million, $9.4 million, and $6.7 million, respectively, reported as troubled debt restructurings.
During the year ended June 30, 2014, gross interest income of $321,000 would have been
recognized on loans reported as troubled debt restructurings under their original terms prior to
restructuring. Actual interest income of $259,000 was recognized on such loans for the year ended June
30, 2014 reflecting the interest received under the revised terms of those restructured loans.
During the year ended June 30, 2013, gross interest income of $303,000 would have been
recognized on loans reported as troubled debt restructurings under their original terms prior to
restructuring. Actual interest income of $250,000 was recognized on such loans for the year ended June
30, 2013 reflecting the interest received under the revised terms of those restructured loans.
Loan Review System. We maintain a loan review system consisting of several related functions
including, but not limited to, classification of assets, calculation of the allowance for loan losses,
independent credit file review as well as internal audit and lending compliance reviews. We utilize both
internal and external resources, where appropriate, to perform the various loan review functions. For
example, we have engaged the services of a third party firm specializing in loan review and analysis to
perform several loan review functions. The firm reviews the loan portfolio in accordance with the scope
and frequency determined by senior management and the Asset Quality Committee of the Board of
Directors. The third party loan review firm assists senior management and the Board of Directors in
identifying potential credit weaknesses; in appropriately grading or adversely classifying loans; in
identifying relevant trends that affect the collectability of the portfolio and identifying segments of the
24
portfolio that are potential problem areas; in verifying the appropriateness of the allowance for loan
losses; in evaluating the activities of lending personnel including compliance with lending policies and
the quality of their loan approval, monitoring and risk assessment; and by providing an objective
assessment of the overall quality of the loan portfolio. Currently, independent loan reviews are being
conducted quarterly and include non-performing loans as well as samples of performing loans of varying
types within our portfolio.
Our loan review system also includes the internal audit and compliance functions, which operate
in accordance with a scope determined by the Audit and Compliance Committee of the Board of
Directors. Internal audit resources assess the adequacy of, and adherence to, internal credit policies and
loan administration procedures. Similarly, our compliance resources monitor adherence to relevant
lending-related and consumer protection-related laws and regulations. The loan review system is
structured in such a way that the internal audit function maintains the ability to independently audit other
risk monitoring functions without impairing its independence with respect to these other functions.
As noted, the loan review system also comprises our policies and procedures relating to the
regulatory classification of assets and the allowance for loan loss functions each of which are described in
greater detail below.
Classification of Assets. In compliance with the regulatory guidelines, our loan review system
includes an evaluation process through which certain loans exhibiting adverse credit quality
characteristics are classified “Special Mention”, “Substandard”, “Doubtful” or “Loss”.
An asset is classified as “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 as
“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 or of so little value that their
continuance as assets is not warranted.
Management evaluates loans classified as substandard or doubtful for impairment in accordance
with applicable accounting requirements. As discussed in greater detail below, a valuation allowance is
established through the provision for loan losses for any impairment identified through such evaluations.
To the extent that impairment identified on a loan is classified as “Loss”, that portion of the loan is
charged off against the allowance for loan losses.
Prior to fiscal 2012, our impaired loans with impairment were characterized by “split
classifications” (e.g. Substandard/Loss) with all loan impairment being ascribed a “Loss” classification by
default and charge-offs being recorded against the allowance for loan loss at the time such losses were
realized. For loans primarily secured by real estate, which have historically comprised a large majority of
our loan portfolio, the recognition of impairments as “charge offs” typically coincided with the
foreclosure of the property securing the impaired loan at which time the property was brought into real
estate owned at its fair value, less estimated selling costs, and any portion of the loan’s carrying value in
excess of that amount was charged off against the allowance for loan losses (“ALLL”).
During fiscal 2012, we modified our loan classification and charge off practices to more closely
align them to those of other institutions regulated by the OCC. The OCC succeeded the OTS as Kearny
Bank’s primary regulator effective July 21, 2011. As a result of those changes, the classification of loan
impairment as “Loss” is now based upon a confirmed expectation for loss, rather than simply equating
25
impairment with a “Loss” classification by default. For loans primarily secured by real estate, the
expectation for loss is generally confirmed when: (a) impairment is identified on a loan individually
evaluated in the manner described below, and (b) the loan is presumed to be collateral-dependent such
that the source of loan repayment is expected to arise solely from sale of the collateral securing the
applicable loan. Impairment identified on non-collateral-dependent loans may or may not be eligible for a
“Loss” classification depending upon the other salient facts and circumstances that affect the manner and
likelihood of loan repayment. As a further result of these changes, loan impairment that is classified as
“Loss” is now charged off against the ALLL concurrent with that classification rather than deferring the
charge off of confirmed expected losses until they are realized as had been Kearny Bank’s practice prior
to fiscal 2012.
The timeframe between when we first identify loan impairment and when such impairment may
ultimately be charged off varies by loan type. For example, unsecured consumer and commercial loans
are generally classified as “Loss” at 120 days past due, resulting in their outstanding balances being
charged off at that time. For our secured loans, the condition of collateral dependency, as noted above,
generally serves as the basis upon which a “Loss” classification is ascribed to a loan’s impairment thereby
confirming an expected loss and triggering charge off of that impairment.
While the facts and circumstances that effect the manner and likelihood of repayment vary from
loan to loan, we generally consider the referral of a loan to foreclosure, coupled with the absence of other
viable sources of loan repayment, to be demonstrable evidence of collateral dependency. Depending
upon the nature of the collections process applicable to a particular loan, an early determination of
collateral dependency could result in a nearly concurrent charge off of a newly identified impairment. By
contrast, a presumption of collateral dependency may only be determined after the completion of lengthy
loan collection and/or workout efforts, including bankruptcy proceedings, which may extend several
months or more after a loan’s impairment is first identified.
The adoption of this change to Kearny-Federal’s charge off practices during fiscal 2012 resulted
in the charge off of approximately $4.2 million of confirmed expected losses during that year for which
valuation allowances had been previously established for identified impairments. Thereafter, the
recognition of charge offs based upon confirmed expected losses rather than realized losses has generally
accelerated the timing of their recognition compared to prior years.
In a limited number of cases, the entire net carrying value of a loan may be determined to be
impaired based upon a collateral-dependent impairment analysis. However, the borrower’s adherence to
contractual repayment terms precludes the recognition of a “Loss” classification and charge off. In these
limited cases, a valuation allowance equal to 100% of the impaired loan’s carrying value may be
maintained against the net carrying value of the asset.
Assets which do not currently expose us to a sufficient degree of risk to warrant an adverse
classification but have some credit deficiencies or other potential weaknesses are designated as “Special
Mention” by management. Adversely classified assets, together with those rated as “Special Mention”,
are generally referred to as “Classified Assets”. Non-classified assets are internally rated within one of
four “Pass” categories or as “Watch” with the latter denoting a potential deficiency or concern that
warrants increased oversight or tracking by management until remediated.
Management performs a classification of assets review, including the regulatory classification of
assets, generally on a monthly basis. The results of the classification of assets review are validated by our
third party loan review firm during their quarterly independent review. In the event of a difference in
rating or classification between those assigned by the internal and external resources, we will generally
utilize the more critical or conservative rating or classification. Final loan ratings and regulatory
26
classifications are presented monthly to the Board of Directors and are reviewed by regulators during the
examination process.
The following table discloses our designation of certain loans as special mention or adversely
classified during each of the five years presented.
2014
2013
At June 30,
2012
(In Thousands)
2011
2010
Special Mention ................................ $
Substandard ......................................
Doubtful ............................................
Loss (1) ...............................................
Total ............................................... $
12,258
41,564
290
—
54,112
$
$
14,050
43,371
391
—
57,812
$
$
20,297
48,131
892
—
69,320
$
$
11,141
39,093
614
—
50,848
$
$
10,353
18,697
—
—
29,050
(1) Net of specific valuation allowances where applicable
At June 30, 2014, 48 loans were classified as Special Mention and 180 loans were classified as
Substandard. As of that same date, four loans were classified as Doubtful. As noted above, all loans, or
portions thereof, classified as Loss during fiscal 2014 were charged off against the allowance for loan
losses.
Allowance for Loan Losses. Our allowance for loan loss calculation methodology utilizes a
“two-tier” loss measurement process that is generally performed monthly. Based upon the results of the
classification of assets and credit file review processes described earlier, we first identify the loans that
must be reviewed individually for impairment. Factors considered in identifying individual loans to be
reviewed include, but may not be limited to, loan type, classification status, contractual payment status,
performance/accrual status and impaired status.
Prior to fiscal 2011, the loans we considered to be eligible for individual impairment review were
generally limited to our larger and/or more complex loans including our commercial mortgage loans,
comprising multi-family and nonresidential real estate loans, as well as our construction loans and
commercial business loans. During fiscal 2011, we expanded the scope of loans that we consider eligible
for individual impairment review to also include one- to four-family mortgage loans, home equity loans
and home equity lines of credit with such loans being reviewed individually for impairment, where
applicable, since that time.
A reviewed loan 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. Once a loan is determined to be impaired, management performs an analysis to determine the
amount of impairment associated with that loan.
In measuring the impairment associated with collateral-dependent loans, the fair value of the
collateral securing the loan is generally used as a measurement proxy for that of the impaired loan itself as
a practical expedient. In the case of real estate collateral, such values are generally determined based
upon a discounted market value obtained through an automated valuation module or prepared by a
qualified, independent real estate appraiser. The value of non-real estate collateral is similarly determined
based upon the independent assessment of fair market value by a qualified resource.
We generally obtain independent appraisals on properties securing mortgage loans when such
loans are initially placed on nonperforming or impaired status with such values updated approximately
27
every six to twelve months thereafter throughout the collections, bankruptcy and/or foreclosure processes.
Appraised values are typically updated at the point of foreclosure, where applicable, and approximately
every six to twelve months thereafter while the repossessed property is held as real estate owned.
As supported by accounting and regulatory guidance, we reduce the fair value of the collateral by
estimated selling costs, such as real estate brokerage commissions, to measure impairment when such
costs are expected to reduce the cash flows available to repay the loan.
We establish valuation allowances in the fiscal period during which the loan impairments are
identified. The results of management’s individual loan impairment evaluations are validated by our third
party loan review firm during their quarterly independent review. Such valuation allowances are adjusted
in subsequent fiscal periods, where appropriate, to reflect any changes in carrying value or fair value
identified during subsequent impairment evaluations which are generally updated monthly by
management.
The second tier of the loss measurement process involves estimating the probable and estimable
losses on loans not otherwise reviewed individually for impairment as well as those individually reviewed
loans that are determined to be non-impaired. Such loans include groups of smaller-balance
homogeneous loans that may generally be excluded from individual impairment analysis, and therefore
collectively evaluated for impairment, as well as the non-impaired loans within categories that are
otherwise eligible for individual impairment review.
Valuation allowances established through the second tier of the loss measurement process utilize
historical and environmental loss factors to collectively estimate the level of probable losses within
defined segments of our loan portfolio. These segments aggregate homogeneous subsets of loans with
similar risk characteristics based upon loan type. For allowance for loan loss calculation and reporting
purposes, we currently stratify our loan portfolio into seven primary segments: residential mortgage loans,
commercial mortgage loans, construction loans, commercial business loans, home equity loans, home
equity lines of credit and other consumer loans.
The risks presented by residential mortgage loans are primarily related to adverse changes in the
borrower’s financial condition that threaten repayment of the loan in accordance with its contractual
terms. Such risk to repayment can arise from job loss, divorce, illness and the personal bankruptcy of the
borrower. For collateral dependent residential mortgage loans, additional risk of loss is presented by
potential declines in the fair value of the collateral securing the loan.
Home equity loans and home equity lines of credit generally share the same risks as those
applicable to residential mortgage loans. However, to the extent that such loans represent junior liens,
they are comparatively more susceptible to such risks given their subordinate position behind senior liens.
In addition to sharing similar risks as those presented by residential mortgage loans, risks relating
to commercial mortgage also arise from comparatively larger loan balances to single borrowers or groups
of related borrowers. Moreover, the repayment of such loans is typically dependent on the successful
operation of an underlying real estate project and may be further threatened by adverse changes to
demand and supply of commercial real estate as well as changes generally impacting overall business or
economic conditions.
The risks presented by construction loans are generally considered to be greater than those
attributable to residential and commercial mortgage loans. Risks from construction lending arise, in part,
from the concentration of principal in a limited number of loans and borrowers and the effects of general
economic conditions on developers and builders. Moreover, a construction loan can involve additional
28
risks because of the inherent difficulty in estimating both a property's value at completion of the project
and the estimated cost, including interest, of the project. The nature of these loans is such that they are
comparatively more difficult to evaluate and monitor than permanent mortgage loans.
Commercial business loans are also considered to present a comparatively greater risk of loss due
to the concentration of principal in a limited number of loans and/or borrowers and the effects of general
economic conditions on the business. Commercial business loans may be secured by varying forms of
collateral including, but not limited to, business equipment, receivables, inventory and other business
assets which may not provide an adequate source of repayment of the outstanding loan balance in the
event of borrower default. Moreover, the repayment of commercial business loans is primarily dependent
on the successful operation of the underlying business which may be threatened by adverse changes to the
demand for the business’ products and/or services as well as the overall efficiency and effectiveness of
the business’ operations and infrastructure.
Finally, our unsecured consumer loans generally have shorter terms and higher interest rates than
other forms of lending but generally involve more credit risk due to the lack of collateral to secure the
loan in the event of borrower default. Consumer loan repayment is dependent on the borrower's
continuing financial stability, and therefore is more likely to be adversely affected by job loss, divorce,
illness and personal bankruptcy. By contrast, our consumer loans also include account loans that are fully
secured by the borrower’s deposit accounts and generally present nominal risk to Kearny Bank.
Each primary segment is further stratified to distinguish between loans originated and purchased
through third parties from loans acquired through business combinations. Commercial business loans
include secured and unsecured loans as well as loans originated through SBA programs. Additional
criteria may be used to further group loans with common risk characteristics. For example, such criteria
may distinguish between loans secured by different collateral types or separately identify loans supported
by government guarantees such as those issued by the SBA.
In regard to historical loss factors, our allowance for loan loss calculation calls for an analysis of
historical charge-offs and recoveries for each of the defined segments within the loan portfolio. We
currently utilize a two-year moving average of annual net charge-off rates (charge-offs net of recoveries)
by loan segment, where available, to calculate our actual, historical loss experience. The outstanding
principal balance of the non-impaired portion of each loan segment is multiplied by the applicable
historical loss factor to estimate the level of probable losses based upon our historical loss experience.
As noted, the second tier of our allowance for loan loss calculation also utilizes environmental
loss factors to estimate the probable losses within the loan portfolio. Environmental loss factors are based
upon specific qualitative criteria representing key sources of risk within the loan portfolio. Such risk
criteria have traditionally considered the level of and trends in nonperforming loans; the effects of
changes in credit policy; the experience, ability and depth of the lending function’s management and staff;
national and local economic trends and conditions; credit risk concentrations and changes in local and
regional real estate values. During fiscal 2014, the environmental factors we utilized in our allowance for
loan loss calculation were expanded to include changes in the nature, volume and terms of loans, changes
in the quality of loan review systems and resources and the effects of regulatory, legal and other external
factors.
For each category of the loan portfolio, a level of risk, developed from a number of internal and
external resources, is assigned to each of the qualitative criteria utilizing a scale ranging from zero
(negligible risk) to 15 (high risk) , with higher values potentially ascribed to exceptional levels of risk that
exceed the standard range, as appropriate. The sum of the risk values, expressed as a whole number, is
multiplied by 0.01% to arrive at an overall environmental loss factor, expressed in basis points, for each
29
loan category.
Prior to fiscal 2012, the aggregate outstanding principal balance of the non-impaired loans within
each loan category was simply multiplied by the applicable environmental loss factor, as described above,
to estimate the level of probable losses based upon the qualitative risk criteria. To more closely align our
ALLL calculation methodology to that of other institutions regulated by the OCC, we modified our ALLL
calculation methodology during fiscal 2012 to explicitly incorporate our existing credit-rating
classification system into the calculation of environmental loss factors by loan type.
To do so, we implemented the use of risk-rating classification “weights” into our calculation of
environmental loss factors during 2012. Our existing risk-rating classification system ascribes a numerical
rating of “1” through “9” to each loan within the portfolio. The ratings “5” through “9” represent the
numerical equivalents of the traditional loan classifications “Watch”, “Special Mention”, “Substandard”,
“Doubtful” and “Loss”, respectively, while lower ratings, “1” through “4”, represent risk-ratings within
the least risky “Pass” category. The environmental loss factor applicable to each non-impaired loan
within a category, as described above, is “weighted” by a multiplier based upon the loan’s risk-rating
classification. Within any single loan category, a “higher” environmental loss factor is now ascribed to
those loans with comparatively higher risk-rating classifications resulting in a proportionately greater
ALLL requirement attributable to such loans compared to the comparatively lower risk-rated loans within
that category.
In evaluating the impact of the level and trends in nonperforming loans on environmental loss
factors, we first broadly consider the occurrence and overall magnitude of prior losses recognized on such
loans over an extended period of time. For this purpose, losses are considered to include both charge offs
as well as loan impairments for which valuation allowances have been recognized through provisions to
the allowance for loan losses, but have not yet been charged off. To the extent that prior losses have
generally been recognized on nonperforming loans within a category, a basis is established to recognize
existing losses on loans collectively evaluated for impairment based upon the current levels of
nonperforming loans within that category. Conversely, the absence of material prior losses attributable to
delinquent or nonperforming loans within a category may significantly diminish, or even preclude, the
consideration of the level of nonperforming loans in the calculation of the environmental loss factors
attributable to that category of loans.
Once the basis for considering the level of nonperforming loans on environmental loss factors is
established, we then consider the current dollar amount of nonperforming loans by loan type in relation to
the total outstanding balance of loans within the category. A greater portion of nonperforming loans
within a category in relation to the total suggests a comparatively greater level of risk and expected loss
within that loan category and vice-versa.
In addition to considering the current level of nonperforming loans in relation to the total
outstanding balance for each category, we also consider the degree to which those levels have changed
from period to period. A significant and sustained increase in nonperforming loans over a 12-24 month
period suggests a growing level of expected loss within that loan category and vice-versa.
As noted above, we consider these factors in a qualitative, rather than quantitative fashion when
ascribing the risk value, as described above, to the level and trends of nonperforming loans that is
applicable to a particular loan category. As with all environmental loss factors, the risk value assigned
ultimately reflects our best judgment as to the level of expected losses on loans collectively evaluated for
impairment.
The sum of the probable and estimable loan losses calculated through the first and second tiers of
30
the loss measurement processes as described above, represents the total targeted balance for our
allowance for loan losses at the end of a fiscal period. As noted earlier, we established all additional
valuation allowances in the fiscal period during which additional individually identified loan impairments
and additional estimated losses on loans collectively evaluated for impairment are identified. We adjust
our balance of valuation allowances through the provision for loan losses as required to ensure that the
balance of the allowance for loan losses reflects all probable and estimable loans losses at the close of the
fiscal period. Notwithstanding calculation methodology and the noted distinction between valuation
allowances established on loans collectively versus individually evaluated for impairment, our entire
allowance for loan losses is available to cover all charge-offs that arise from the loan portfolio.
Although we believe that our allowance for loans losses is 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.
31
The following table sets forth information with respect to activity in the allowance for loan losses
for the periods indicated.
Allowance balance (at beginning of period) ............................... $
Provision for loan losses .............................................................
Charge-offs:
One- to four-family mortgage ..................................................
Home equity loan .....................................................................
Commercial mortgage ..............................................................
Commercial business ................................................................
Construction ..............................................................................
Other ..........................................................................................
Total charge-offs ..................................................................
Recoveries:
One- to four-family mortgage ..................................................
Home equity loan .....................................................................
Commercial mortgage ..............................................................
Commercial business ................................................................
Construction .............................................................................
Other .........................................................................................
2014
2013
2012
2011
2010
For the Years Ended June 30,
(Dollars in Thousands)
$
10,896
3,381
$
10,117
4,464
$
11,767
5,750
8,561 $
4,628
6,434
2,616
1,202
47
44
1,170
—
30
2,493
67
2
525
9
—
—
2,272
221
1,042
182
9
2
3,728
15
10
—
18
—
—
6,398
135
483
349
106
9
7,480
6
2
37
—
33
2
931
7
—
5
492
7
1,442
6
—
2
11
—
1
202
16
322
—
—
1
541
10
—
42
—
—
—
Total recoveries ....................................................................
Net (charge-offs) recoveries .......................................................
Allowance balance (at end of period) ......................................... $
603
(1,890)
12,387
Total loans outstanding ............................................................... $
1,742,868
Average loans outstanding .......................................................... $
1,548,746
$
$
$
43
(3,685)
10,896
$
80
(7,400)
10,117
$
20
(1,422)
11,767 $
52
(489)
8,561
1,361,718
$
1,285,890
$
1,269,372 $
1,013,149
1,309,085
$
1,250,307
$
1,172,576 $
1,030,287
Allowance for loan losses as a percent
of total loans outstanding ...............................................
0.71%
0.80%
0.79%
0.93%
0.84%
Net loan charge-offs as a percent
of average loans outstanding ..........................................
Allowance for loan losses to non-performing loans ...................
0.12%
48.96%
0.28%
35.24%
0.59%
30.20%
0.12%
33.65%
0.05%
39.70%
32
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T
The following table sets forth the allocation of the allowance for loan losses by loan category and
segment within each valuation allowance category at the dates indicated. The valuation allowance
categories presented reflect the allowance for loan loss calculation methodology in effect at the time.
At June 30,
2014
2013
2012
2011
2010
(Dollars in Thousands)
Valuation allowance for loans individually evaluated for
impairment:
Real estate mortgage:
One- to four-family .................................................. $
Commercial .............................................................
Commercial business .....................................................
Consumer:
Home equity loans ..................................................
Home equity lines of credit ....................................
Other .......................................................................
Construction ...................................................................
Total valuation allowance ......................................
$
528
569
444
132
—
—
—
1,673
697
514
757
110
—
—
—
2,078
$
1,240 $
667
776
127
—
—
—
2,810
$
4,061
1,503
692
—
—
—
105
6,361
2,433
1,771
5
—
—
—
106
4,315
Valuation allowance for loans collectively evaluated for
impairment:
Historical loss factors ......................................................
Environmental loss factors:
Real estate mortgage:
One- to four-family ................................................
Multi-family and commercial ...............................
Commercial business .....................................................
Consumer:
Home equity loans ..................................................
Home equity lines of credit ....................................
Other .......................................................................
Construction ...................................................................
Total environmental loss factors ............................
2,058
2,439
2,288
738
199
1,175
6,717
374
229
88
8
65
8,656
1,278
4,292
407
239
76
6
81
6,379
1,502
2,776
316
258
54
8
105
5,019
2,160
1,658
186
312
49
8
62
4,435
1,784
1,443
103
305
34
8
139
3,816
Total (Factors based) ...............................................
10,714
8,818
7,307
5,173
4,015
Unallocated general valuation allowance ..........................
—
—
—
233
231
Total allowance for loan losses ......................................... $ 12,387
$ 10,896
$
10,117 $ 11,767
$
8,561
During the year ended June 30, 2014, the balance of the allowance for loan losses increased by
approximately $1.5 million to $12.4 million or 0.71% of total loans at June 30, 2014 from $10.9 million
or 0.80% of total loans at June 30, 2013. The increase resulted from provisions of $3.4 million during the
year ended June 30, 2014 that were partially offset by charge-offs, net of recoveries, totaling $1.9 million.
With regard to loans individually evaluated for impairment, the balance of our allowance for loan
losses attributable to such loans decreased by $405,000 to $1.7 million at June 30, 2014 from $2.1 million
at June 30, 2013. The balance at June 30, 2014 reflected the allowance for impairment identified on $4.6
million of impaired loans while an additional $32.6 million of impaired loans had no allowance for
impairment as of that date. By comparison, the balance of the allowance at June 30, 2013 reflected the
impairment identified on $4.7 million of impaired loans while an additional $34.9 million of impaired
loans had no impairment as of that date. The outstanding balances of impaired loans reflect the
cumulative effects of various adjustments including, but not limited to, purchase accounting valuations
and prior charge-offs, where applicable, which are considered in the evaluation of impairment.
34
With regard to loans evaluated collectively for impairment, the balance of our allowance for loan
losses attributable to such loans increased by $1.9 million to $10.7 million at June 30, 2014 from $8.8
million at June 30, 2013. The increase in valuation was partly attributable to a $383.5 million increase in
the aggregate outstanding balance of loans collectively evaluated for impairment to $1.71 billion at June
30, 2014 from $1.32 billion at June 30, 2013 as well as the ongoing reallocation of loans within the
portfolio in favor of commercial loans against which we generally assign comparatively higher historical
and environmental loss factors in our ALLL calculation. The increase in the allowance also reflected
changes to certain environmental loss factors that were partially offset by decreases in historical loss
factors.
Specifically, our loan portfolio experienced a net annualized average charge-off rate of 12 basis
points during the year ended June 30, 2014 representing a decrease of 16 basis points from the 28 basis
points of charge-offs reported for fiscal 2013. The historical loss factors used in our allowance for loan
loss calculation methodology were updated to reflect the effect of these charge offs on the average
annualized historical charge off rates by loan segment over the two year look-back period used by that
methodology. The effect of the decline in the aggregate charge-off rate during the current year more than
offset the effect of the concurrent increase in the overall balance of the unimpaired portion of the loan
portfolio noted above. Together, these factors resulted in a net decrease of $381,000 in the applicable
portion of the allowance to $2.1 million as of June 30, 2014 compared to $2.4 million at June 30, 2013.
As noted earlier, the loans acquired from Atlas Bank on June 30, 2014 were recorded at their fair
value on the date of acquisition. Such valuations reflected any estimated impairment for potential credit
losses at that time. Consequently, the historical loss factors applied to such loans were initially set to zero
at June 30, 2014. The level of historical loss factors attributable to all acquired loans, including those
acquired from Atlas Bank, will be updated periodically to reflect any “post-acquisition” charge off
activity in accordance with our allowance for loan loss calculation methodology.
Changes to environmental loss factors during the year ended June 30, 2014 generally reflected
changes to estimated impairment attributable to three primary factors. First, we updated the loss factors
applicable to loans originally acquired through our acquisition of Central Jersey Bank during fiscal 2011.
All such loans were initially recorded at fair value at acquisition reflecting any impairment identified on
such loans at that time. In general, the aggregate level of realized losses on the acquired impaired loans
has not exceeded the level of impairment originally ascribed to the loans at the time of acquisition.
However, during fiscal 2014 we have identified and recognized additional “post-acquisition” impairment
and charge-offs attributable to acquired loans that were performing at the time of acquisition. We
consider such losses in developing the environmental loss factors used to calculate the required allowance
applicable to the non-impaired portion of our acquired loan portfolio. As such, during the year ended
June 30, 2014, we modified the following environmental loss factors applicable to loans acquired during
fiscal 2011:
(cid:127) National and local economic trends and conditions: Increased the loss factors within the
following loan segments to reflect the continued weakness in national and local economic conditions and
the increase in related impairment that continues to be recognized over time since the loan segments were
originally acquired at fair value:
All acquired loan segments: Increased (+3 bp) from “6” to “9”
(cid:127) Changes in the value of underlying collateral: Increased the loss factors within the following
loan segments to reflect the continued weakness in applicable real estate values coupled with the adverse
effects of Hurricane Sandy on collateral values and the increase in related impairment that continues to be
35
recognized over time since the loan segments were originally acquired at fair value:
All acquired loan segments: Increased (+3 bp) from “6” to “9”
(cid:127) Level of and trends in nonperforming loans: Increased the loss factors within the following
loan segments to reflect increases in the level of nonperforming loans and realized losses and the increase
in related impairment that continues to be recognized over time since the loan segments were originally
acquired at fair value.
Acquired SBA loan segments: Increased (+3 bp) from “12” to “15”
Given their original acquisition at fair value and limited portfolio seasoning through June 30,
2014, the environmental loss factors established for loans acquired through business combinations
generally reflect a comparatively lower level of risk than those applicable to the remaining portfolio. As
noted earlier, the loans acquired from Atlas Bank on June 30, 2014 were recorded at their fair value on
the date of acquisition. Such valuations reflected any estimated impairment for potential credit losses at
that time. Consequently, the environmental loss factors applied to such loans were initially set to zero at
June 30, 2014. The level of environmental loss factors attributable to all acquired loans, including those
acquired from Atlas Bank, will continue to be monitored and adjusted to reflect our best judgment as to
the level of incurred “post- acquisition” impairment.
The second set of environmental loss factor changes during fiscal 2014 were primarily
attributable to the significant growth in commercial mortgage loans reported during the year that
necessitated changes to the applicable environmental loss factors including, but not limited to, the
utilization of a new loss factor added during fiscal 2014:
(cid:127) National and local economic trends and conditions: Reallocated a portion of the risk factor
value attributable to accelerated growth in commercial mortgage loan segments to a new loss factor added
to our framework of environmental loss factors during fiscal 2014 (see below).
Multi-family mortgage loans: Reallocated (-6 bp) from “15” to “9”
Nonresidential mortgage loans: Reallocated (-3 bp) from “15” to “12”
(cid:127) Concentration of credit: Reallocated a portion of the risk factor value attributable to
accelerated growth in commercial mortgage loan segments to a new loss factor added to our framework of
environmental loss factors during fiscal 2014 (see below).
Multi-family mortgage loans: Reallocated (-3 bp) from “12” to “9”
Nonresidential mortgage loans: Reallocated (-3 bp) from “12” to “9”
(cid:127) Changes in the nature, volume and terms of loans: Added new environmental loss factor
during fiscal 2014 with factor values initially reallocated from existing risk factors (see above).
Additional increases were also made to the risk factor values to reflect further accelerated growth in
commercial mortgage loan segments.
Multi-family mortgage loans: Reallocated (+9 bp) from “0” to “9”
Nonresidential mortgage loans: Reallocated (+6 bp) from “0” to “6”
Multi-family mortgage loans: Increased (+6 bp) from “9” to “15”
Nonresidential mortgage loans: Increased (+3 bp) from “6” to “9”
36
The third set of environmental loss factor changes during fiscal 2014 generally reflected the
modest improvement in national and local economic conditions as well as improvements in certain real
estate collateral values and the resulting impact on the estimated impairment within the applicable “non-
acquired” segments our loan portfolio:
(cid:127) National and local economic trends and conditions: Decreased the loss factors within the
following loan segments to reflect modest improvement in certain economic indicators. The
improvement in such indicators generally suggests growing stability and/or improvement in national and
location economic conditions that - while remaining weak – have recovered from their worst levels
brought about by the global financial crisis of 2007-2008.
Residential mortgage loans: Decreased (-3 bp) from “9” to “6”
Home equity loans & lines of credit: Decreased (-3 bp) from “9” to “6”
Construction loans: Decreased (-3 bp) from “15” to “12”
Multi-family mortgage loans: Decreased (-3 bp) from “9” to “6”
Nonresidential mortgage loans: Decreased (-3 bp) from “12” to “9”
Commercial business loans: Decreased (-3 bp) from “15” to “12”
(cid:127) Changes in collateral values: Decreased the loss factor within the following loan segment to
reflect the improvement in real estate collateral values securing loans within the applicable segment.
Multi-family mortgage loans: Decreased (-3 bp) from “15” to “12”
In conjunction with the net changes to the outstanding balance of the applicable loans, the
increase in the environmental loss factors during the year ended June 30, 2014 resulted in a net increase
of $2.3 million in the applicable valuation allowances to $8.7 million at June 30, 2014 from $6.4 million
at June 30, 2013.
The tables on the following pages present the historical and environmental loss factors, reported
as a percentage of outstanding loan principal, that were the basis for computing the portion of the
allowance for loan losses attributable to loans collectively evaluated for impairment at June 30, 2014, and
June 30, 2013. Given their acquisition at fair value on June 30, 2014, loans acquired in conjunction with
the Atlas Bank acquisition on June 30, 2014 were excluded from the ALLL calculation as of that date.
Therefore, the historical and environmental loss factors applicable to the categories of loans denoted as
“acquired in merger” below were applicable at June 30, 2014 to loans previously acquired in conjunction
with our acquisition of Central Jersey during fiscal 2011.
37
Total
0.30%
3.31
3.55
0.44
0.66
0.33
0.30
0.78
0.30
0.69
0.30
0.69
0.30
0.72
0.30
0.82
0.30
0.69
0.30
1.19
1.55
0.36
0.54
0.21
Allowance for Loan Losses
Allocation of Loss Factors on Loans Collectively Evaluated for Impairment
at June 30, 2014
Historical
Loss Factors
Environmental
Loss Factors (2)
Loan Category
Residential mortgage loans
Originated ............................................
Purchased.............................................
Acquired in merger .............................
Home equity loans
Originated ............................................
Acquired in merger .............................
Home equity lines of credit
Originated ............................................
Acquired in merger .............................
Construction loans
One- to four-family
Originated .........................................
Acquired in merger ..........................
Multi-family
Originated .........................................
Acquired in merger ..........................
Nonresidential
Originated .........................................
Acquired in merger ..........................
Commercial mortgage loans
Multi-family
Originated .........................................
Acquired in merger ..........................
Nonresidential
Originated .........................................
Acquired in merger ..........................
Commercial business loans
Secured (One- to four-family)
Originated .........................................
Acquired in merger ..........................
Secured (Other)
Originated .........................................
Purchased .........................................
Acquired in merger ..........................
Unsecured
Originated .........................................
Acquired in merger ..........................
0.03%
2.56
3.25
0.27%
0.75
0.30
0.33
0.30
0.33
0.30
0.69
0.30
0.69
0.30
0.69
0.30
0.72
0.30
0.72
0.30
0.69
0.30
0.69
0.36
0.30
0.54
0.21
0.11
0.36
0.00
0.00
0.09
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.10
0.00
0.00
0.00
0.50
1.19
0.06
0.00
0.00
38
Allowance for Loan Losses
Allocation of Loss Factors on Loans Collectively Evaluated for Impairment
at June 30, 2014 (continued)
Loan Category
SBA 7A
Historical
Loss Factors
Environmental
Loss Factors (2)
Originated .........................................
Acquired in merger ..........................
0.00%
18.91
SBA Express
Originated .........................................
Acquired in merger ..........................
SBA Line of Credit
Originated .........................................
Acquired in merger ..........................
0.00
0.00
0.00
0.53
0.69%
0.33
0.69
0.33
0.69
0.33
Total
0.69%
19.24
0.69
0.33
0.69
0.86
—
Other consumer loans (1) .........................
________________________________________________
(1) We generally maintain an environmental loss factor of 0.21% on other consumer loans while historical loss factors
range from 0.00% to 12.34% based on loan type. Resulting balances in the allowance for loan losses are immaterial and
therefore excluded from the presentation.
(2) ”Base” environmental factors reported excluding the effect of “weights” attributable to internal credit-rating
classification as follows: “Pass-1”: 70%, “Pass-2”: 80%, “Pass-3”: 90%, “Pass-4”: 100%, “Watch”: 200%, “Special
Mention”: 400%, “Substandard”: 600%, “Doubtful”: 800%. (e.g. Environmental loss factor applicable to originated
residential mortgage loan rated as “Substandard”: 0.27% X 600% = 1.62%).
—
—
39
Total
0.39%
3.53
1.86
0.51
0.54
0.36
0.24
0.72
0.24
0.72
0.24
0.72
0.24
0.72
0.24
0.85
0.35
0.72
0.24
0.80
0.31
0.57
0.18
Allowance for Loan Losses
Allocation of Loss Factors on Loans Collectively Evaluated for Impairment
at June 30, 2013
Historical
Loss Factors
Environmental
Loss Factors (2)
Loan Category
Residential mortgage loans
Originated ............................................
Purchased.............................................
Acquired in merger .............................
Home equity loans
Originated ............................................
Acquired in merger .............................
Home equity lines of credit
Originated ............................................
Acquired in merger .............................
Construction loans
One- to four-family
Originated .........................................
Acquired in merger ..........................
Multi-family
Originated .........................................
Acquired in merger ..........................
Nonresidential
Originated .........................................
Acquired in merger ..........................
Commercial mortgage loans
Multi-family
Originated .........................................
Acquired in merger ..........................
Nonresidential
Originated .........................................
Acquired in merger ..........................
Commercial business loans
Secured (One- to four-family)
Originated .........................................
Acquired in merger ..........................
Secured (Other)
Originated .........................................
Acquired in merger ..........................
Unsecured
Originated .........................................
Acquired in merger ..........................
0.09%
2.78
1.62
0.30%
0.75
0.24
0.36
0.24
0.36
0.24
0.72
0.24
0.72
0.24
0.72
0.24
0.72
0.24
0.72
0.24
0.72
0.24
0.72
0.24
0.57
0.18
0.15
0.30
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.13
0.11
0.00
0.00
0.08
0.07
0.00
0.00
40
Allowance for Loan Losses
Allocation of Loss Factors on Loans Collectively Evaluated for Impairment
at June 30, 2013 (continued)
Historical
Loss Factors
Environmental
Loss Factors (2)
Loan Category
SBA 7A
Originated .........................................
Acquired in merger ..........................
0.00%
1.58
SBA Express
Originated .........................................
Acquired in merger ..........................
SBA Line of Credit
Originated .........................................
Acquired in merger ..........................
SBA Other
Originated .........................................
Acquired in merger ..........................
0.00
0.00
0.00
0.00
0.00
0.00
0.72%
0.24
0.72
0.24
0.72
0.24
0.72
0.24
Total
0.72%
1.82
0.72
0.24
0.72
0.24
0.72
0.24
—
Other consumer loans (1) .........................
________________________________________________
(1) We generally maintain an environmental loss factor of 0.27% on other consumer loans while historical loss
factors range from 0.00% to 100.00% based on loan type. Resulting balances in the allowance for loan losses are
immaterial and therefore excluded from the presentation.
(2) ”Base” environmental factors reported excluding the effect of “weights” attributable to internal credit-rating
classification as follows: “Pass-1”: 70%, “Pass-2”: 80%, “Pass-3”: 90%, “Pass-4”: 100%, “Watch”: 200%,
“Special Mention”: 400%, “Substandard”: 600%, “Doubtful”: 800%. (e.g. Environmental loss factor applicable to
originated residential mortgage loan rated as “Substandard”: 0.30% X 600% = 1.8%).
—
—
An overview of the balances and activity within the allowance for loan loss during prior fiscal
years reflects the lagging detrimental effects on economic and market conditions that resulted from the
2008-2009 financial crisis which have continued to adversely impact credit quality within our loan
portfolio since that time.
During the fiscal year ended June 30, 2013, the balance of the allowance for loan losses increased
by approximately $779,000 to $10.9 million at June 30, 2013 from $10.1 million at June 30, 2012. The
increase resulted from additional provisions of $4.5 million that were partially offset by net charge offs of
$3.7 million during fiscal 2013. Valuation allowances attributable to impairment identified on
individually evaluated loans decreased by $732,000 to $2.1 million at June 30, 2013 from $2.8 million at
June 30, 2012. For those same comparative periods, valuation allowances on loans evaluated collectively
for impairment increased by approximately $1.5 million to $8.8 million from $7.3 million reflecting the
overall growth in the balance of non-impaired loans in the portfolio in conjunction with changes to the
historical and environmental loss factors used in the allowance for loan loss calculation during the year.
During the fiscal year ended June 30, 2012, the balance of the allowance for loan losses decreased
by approximately $1.7 million to $10.1 million at June 30, 2012 from $11.8 million at June 30, 2011.
The decrease resulted from net charge-offs totaling $7.4 million that were partially offset by additional
provisions of $5.8 million. As noted earlier, the net charge-offs reported during fiscal 2012 reflected
changes to our loan classification and charge off practices that resulted in the accelerated charge off of
approximately $4.2 million of confirmed expected losses for which valuation allowances had been
previously established for identified impairments. Due partly to this change, valuation allowances
attributable to impairment identified on individually evaluated loans decreased by $3.6 million to $2.8
million at June 30, 2012 from $6.4 million at June 30, 2011. For those same comparative periods,
valuation allowances on loans evaluated collectively for impairment increased by approximately $2.1
million to $7.3 million from $5.2 million reflecting the overall growth in the balance of non-impaired
loans in the portfolio in conjunction with changes to the historical and environmental loss factors used in
the allowance for loan loss calculation during the year. As noted earlier, changes to environmental loss
factors during fiscal 2012 included those arising from incorporating our credit-rating classification system
41
into the calculation of environmental loss factors by loan type. Finally, the balance of the unallocated
allowance was reduced to zero at June 30, 2012 from our prior balance of $233,000 at June 30, 2011.
The calculation of probable losses within a loan portfolio and the resulting allowance for loan
losses is subject to estimates and assumptions that are susceptible to significant revisions as more
information becomes available and as events or conditions effecting individual borrowers and the
marketplace as a whole change over time. Future additions to the allowance for loan losses will likely be
necessary if economic and market conditions do not improve in the future from those currently prevalent
in the marketplace. In addition, the federal banking regulators, as an integral part of their examination
process, periodically review our loan and foreclosed real estate portfolios and the related allowance for
loan losses and valuation allowance for foreclosed real estate. The regulators may require the allowance
for loan losses to be increased based on their review of information available at the time of the
examination, which may negatively affect our earnings.
Securities Portfolio
Our deposits and borrowings have traditionally exceeded our outstanding balance of loans
receivable. We have generally invested excess funds into investment securities with a historical emphasis
on U.S. agency mortgage-backed securities and U.S. agency debentures. Such assets are a significant
component of our investment portfolio at June 30, 2014 and are expected to remain so in the future.
However, recent enhancements to our investment policies, strategies and infrastructure have enabled us to
diversify the composition and allocation of our securities portfolio as described below.
At June 30, 2014, our securities portfolio totaled $1.36 billion and comprised 38.7% of our total
assets. By comparison, at June 30, 2013, our securities portfolio totaled $1.39 billion and comprised
44.3% of our total assets.
The year-over-year net decrease in the securities portfolio totaled approximately $34.7 million
which largely reflected security repayments and sales that were partially offset by security purchases
during the year as well as the addition of securities with fair values totaling $26.9 million acquired in
conjunction with the acquisition of Atlas Bank on June 30, 2014. The securities acquired from Atlas
Bank included mortgage-backed securities, including pass-through securities and collateralized mortgage
obligations, with fair values totaling $23.9 million as well as one corporate bond with a fair value of $3.0
million at June 30, 2014. All securities acquired from Atlas Bank were determined to be high-quality,
investment grade securities with no “other-than-temporary” impairment.
The net decrease in the portfolio was partially offset by an increase in the fair value of the
available for sale securities portfolio to an unrealized gain of $1.1 million at June 30, 2014 from an
unrealized loss of $7.4 million at June 30, 2013.
The decrease in the dollar amount of the securities portfolio and its decline as a percentage of
total assets from June 30, 2013 to June 30, 2014 reflects the stated goals and objectives of our business
plan which continues to call for shifting the mix of our earning assets toward greater balances of loans
and lesser balances of investment 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, and marketability and
performance objectives. Our Chief Executive Officer, Chief Operating Officer, Chief Risk/Investment
Officer and Chief Financial Officer are the executive management members of our Capital Markets
42
Committee (“CMC”) that are generally designated by the Board of Directors as the officers primarily
responsible for securities portfolio management and all transactions require the approval of at least two of
these designated officers. The Board of Directors is responsible for the oversight of the securities
portfolio and the CMC’s activities relating thereto.
Federally-chartered savings banks have the authority to invest in various types of liquid assets.
The investments authorized for purchase under the investment policy approved by our Board of Directors
include U.S. government and agency mortgage-backed securities (including U.S. agency commercial
MBS), U.S. government and government agency debentures, municipal obligations (consisting of bank-
qualified municipal bond obligations of state and local governments), corporate bonds, asset-backed
securities and collateralized loan obligations. We also hold small balances of single-issuer trust preferred
securities and non-agency mortgage-backed securities that were acquired through bank acquisitions, but
generally do not purchase such securities for the portfolio. 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.
The carrying value of our mortgage-backed securities totaled $732.9 million at June 30, 2014 and
comprised 54.0% of total investments and 20.9% of total assets as of that date. Mortgage-backed
securities generally include mortgage pass-through securities and collateralized mortgage obligations
which are typically issued with stated principal amounts and backed by pools of mortgage loans.
Mortgage originators use intermediaries (generally government agencies and government-sponsored
enterprises, but also a variety of non-agency corporate issuers) to pool and package mortgage loans into
mortgage-backed securities. The cash flow and re-pricing characteristics of a mortgage pass-through
security generally approximate those of the underlying mortgages. By comparison, the cash flow and re-
pricing characteristics of collateralized mortgage obligations are determined by those assigned to an
individual security, or “tranche”, within the terms of a larger investment vehicle which allocates cash
flows to its component tranches based upon a predetermined structure as payments are received from the
underlying mortgagors.
We generally invest in mortgage-backed securities issued by U.S. government agencies or
government-sponsored entities, such as the Government National Mortgage Association (“Ginnie Mae”),
Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage
Association (“Fannie Mae”). Mortgage-backed 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 because of the costs of servicing and of their payment guarantees or credit enhancements which
minimize the level of credit risk to the security holder.
In addition to our investments in agency mortgage-backed securities, we formerly had an
investment in the AMF Ultra Short Mortgage Fund (“AMF Fund”), a mutual fund acquired during 2002
as the result of a merger, which invested primarily in agency and non-agency mortgage-backed securities
of short duration. The housing and credit crises negatively impacted the market value of certain securities
in the fund’s portfolio resulting in a continuing decline in the net asset value of this fund. Due to a
continuing decline in the net asset value of the AMF Fund, we elected to withdraw our investment in the
fund by invoking a redemption-in-kind option during fiscal 2009 in lieu of cash. The shares redeemed for
cash and the shares redeemed for the underlying securities were initially written down to fair value as of
the trade date. However, additional losses in the form of other-than-temporary impairments (“OTTI”)
were recognized through earnings during fiscal 2009 and 2010 due to further declines in the value of the
applicable non-agency securities.
43
During the year ended June 30, 2014, non-agency CMOs totaling $34,000 fell below our
investment grade threshold triggering their sale resulting in sale losses totaling $6,000. Similar sales were
executed during fiscal 2013 and fiscal 2012 for CMOs totaling $24,000 and $38,000, respectively,
resulting in losses on sale of $6,000 and $6,000, respectively.
We acquired one additional non-agency CMO with a fair value of $210,000 in conjunction with
the acquisition of Atlas Bank on June 30, 2014. The acquisition increased the aggregate number and
carrying value of our non-agency CMOs to five and $264,000, respectively. Of these securities, three
non-agency CMOs with carrying values of $31,200 were impaired at June 30, 2014, but maintained their
credit-ratings at levels supporting our investment grade assessment with such ratings equaling “A” by
Standard & Poor’s Financial Services (“S&P”) and/or “Baa2” by Moody’s Investor Service (“Moody’s”),
where rated by those agencies.
The carrying value of our U.S. agency debt securities totaled $148.6 million at June 30, 2014 and
comprised 10.9% of total investments and 4.2% of total assets as of that date. Such securities included
$144.3 million of fixed-rate U.S. agency debentures as well as $4.2 million of securitized pools of loans
issued and fully guaranteed by the SBA.
The carrying value of our securities representing obligations of state and political subdivisions
totaled $98.8 million at June 30, 2014 and comprised 7.3% of total investments and 2.8% of total assets
as of that date. Such securities include approximately $95.7 million of highly-rated, fixed-rate bank-
qualified securities representing general obligations of municipalities located within the U.S. or the
obligations of their related entities such as boards of education or school districts. The portfolio also
includes a nominal balance of non-rated municipal obligations totaling approximately $3.1 million
comprising seven short-term, bond anticipation notes (“BANs”) issued by a total of four New Jersey
municipalities with whom we also maintain or seek to maintain deposit relationships. At June 30, 2014,
the fair value of each of our BANs equaled or exceeded their respective carrying values resulting in no
reported impairment on those securities as of that date. Each of our impaired municipal obligations were
consistently rated by Moody’s and S&P well above the thresholds that generally support our investment
grade assessment with such ratings equaling or exceeding “A” or higher by S&P and/or “A1” or higher by
Moody’s, where rated by those agencies. In the absence of such ratings, we rely upon our own internal
analysis of the issuer’s financial condition to validate its investment grade assessment.
The carrying value of our asset-backed securities totaled $87.3 million at June 30, 2014 and
comprised 6.4% of total investments and 2.5% of total assets as of that date. This category of securities is
comprised entirely of structured, floating-rate securities representing securitized federal education loans
with 97% U.S. government guarantees. The securities represent tranches of a larger investment vehicle
designed to reallocate credit risk among the individual tranches comprised within that vehicle. Through
this process, investors in different tranches are subject to varying degrees of risk that the cash flows of
their tranche will be adversely impacted by borrowers defaulting on the underlying loans. Our securities
represent the highest credit-quality tranches within the overall structures with each being rated “AA+” by
S&P at June 30, 2014.
The outstanding balance of our collateralized loan obligations totaled $119.6 million at June 30,
2014 and comprised 8.8% of total investments and 3.4% of total assets as of that date. This category of
securities is comprised entirely of structured, floating-rate securities comprised of securitized commercial
loans to large, U.S. corporations. Our securities represent tranches of a larger investment vehicle
designed to reallocate cash flows and credit risk among the individual tranches comprised within that
vehicle. Through this process, investors in different tranches are subject to varying degrees of risk that
the cash flows of their tranche will be adversely impacted by borrowers defaulting on the underlying
loans. At June 30, 2014, each of our collateralized loan obligations were consistently rated by Moody’s
44
and S&P well above the thresholds that generally support our investment grade assessment with such
ratings equaling or exceeding “AA” or higher by S&P and/or “Aa2” or higher by Moody’s, where rated
by those agencies.
The carrying value of our corporate bonds totaled $162.2 million at June 30, 2014 and comprised
12.0% of total investments and 4.6% of total assets as of that date. This category of securities is
comprised entirely of floating-rate corporate debt obligations of large financial institutions. At June 30,
2014, each of our corporate bonds were consistently rated by Moody’s and S&P well above the thresholds
that generally support our investment grade assessment with such ratings equaling or exceeding “A-” or
higher by S&P and/or “Baa1” or higher by Moody’s, where rated by those agencies.
The carrying value of our trust preferred securities totaled $7.8 million at June 30, 2014 and
comprised less than 1.0% of total investments and total assets as of that date. The category comprises a
total of five “single-issuer” (i.e. non-pooled) trust preferred securities that were originally issued by four
separate financial institutions. As a result of bank mergers involving the issuers of these securities, our
five trust preferred securities currently represent the de-facto obligations of three separate financial
institutions. At June 30, 2014, two of the securities at an amortized cost of $3.0 million were consistently
rated by Moody’s and S&P above the thresholds that generally support our investment grade assessment,
with such ratings equaling “BBB” by S&P and “Baa2” by Moody’s. The securities were originally issued
through Chase Capital II and currently represent de-facto obligations of JP Morgan Chase & Co. We also
owned two trust preferred securities at an amortized cost of $4.9 million whose external credit ratings by
both S&P and Moody’s fell below the thresholds that we normally associate with investment grade
securities, with such ratings equaling “BB+” by S&P and “Ba1” by Moody’s. The securities were
originally issued through BankBoston Capital Trust IV and MBNA Capital B and currently represent de-
facto obligations of Bank of America Corporation. We hold one non-rated trust preferred security with a
par value of $1.0 million representing a de-facto obligation of Mercantil Commercebank Florida Bancorp,
Inc.
Current accounting standards require 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. These standards allow 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
adjustments to accumulated other comprehensive income, a separate component of equity. As of June 30,
2014, our held to maturity securities portfolio had a carrying value of $512.1 million or 37.7 % of our
total securities with the remaining $845.1 million or 62.3% of securities classified as available for sale.
Other than mortgage-backed or debt securities issued or guaranteed by the U.S. government or its
agencies, we did not hold securities of any one issuer having an aggregate book value in excess of 10% of
our equity at June 30, 2014. All of our securities carry market risk insofar as increases in market rates of
interest may cause a decrease in their market value. We have determined that none of our securities with
unrealized losses at June 30, 2014 are other than temporarily impaired as of that date.
Purchases of 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
45
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. We do not purchase securities that are
determined to be below investment grade.
During the years ended June 30, 2014, 2013 and 2012, proceeds from sales of securities available
for sale totaled $170.9 million, $442.8 million and $51.3 million, which resulted in gross gains of $3.6
million, $10.6 million and $53,000 and gross losses of $2.1 million, $135,000, and $0, respectively.
Proceeds from sale of securities held to maturity during the years ended June 30, 2014, 2013 and 2012
totaled $28,000, $18,000 and $32,000, with gross losses of $6,000, $6,000 and $6,000, respectively.
46
The following table sets forth the carrying value of our securities portfolio at the dates indicated.
Mortgage-backed securities include mortgage pass-through securities and collateralized mortgage
obligations.
Debt Securities Available for Sale:
U.S. agency obligations .................................................... $
Obligations of states and political subdivisions ...............
Asset-backed securities ....................................................
Collateralized loan obligations .........................................
Corporate bonds ...............................................................
Trust preferred securities ..................................................
Total debt securities available for sale .....................
Debt Securities Held to Maturity:
U.S. agency obligations ...................................................
Obligations of states and political subdivisions ..............
Total debt securities held to maturity .......................
Mortgage-Backed Securities Available for Sale:
Government National Mortgage Association ..................
Federal Home Loan Mortgage Corporation ....................
Federal National Mortgage Association ..........................
Non-agency.......................................................................
Total mortgage-backed securities
At June 30,
2014
2013
2012
2011
2010
(In Thousands)
4,205 $
5,015 $
26,773
87,316
119,572
162,234
7,798
407,898
144,349
72,065
216,414
3,276
231,910
201,827
210
25,307
24,798
78,486
159,192
7,324
300,122
144,747
65,268
210,015
6,333
299,833
474,486
—
5,889 $
—
—
—
—
6,713
12,602
32,426
2,236
34,662
11,690
460.509
757,905
—
6,591 $
30,635
—
—
—
7,447
44,673
103,458
3,009
106,467
13,581
390,448
656,218
—
3,942
18,955
—
—
—
6,600
29,497
255,000
—
255,000
15,628
273,704
414,123
—
available for sale .........................................
437,223
780,652
1,230,104
1,060,247
703,455
Mortgage-Backed Securities Held to Maturity:
Government National Mortgage Association ..................
Federal Home Loan Mortgage Corporation ....................
Federal National Mortgage Association ..........................
Non-agency.......................................................................
Total mortgage-backed securities
9
303
295,292
54
—
120
100,889
105
—
158
786
146
—
212
930
203
held to maturity ..........................................
295,658
101,114
1,090
1,345
—
267
1,123
310
1,700
Total ................................................................................ $
1,357,193 $
1,391,903 $
1,278,458 $
1,212,732 $
989,652
47
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T
Sources of Funds
General. Retail deposits are our primary 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 maturities and calls of non-mortgage-backed 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. Wholesale funding sources including, but not limited
to, borrowings from the FHLB of New York, wholesale deposits and other short term-borrowings are also
used to supplement the funding for loans and investments.
Deposits. Our current deposit products include interest-bearing and non-interest-bearing
checking accounts, money market deposit accounts, savings accounts and certificates of deposit accounts
ranging in terms from 30 days to five years. Certificates of deposit with terms ranging from one year to
five years are available for individual retirement account plans. Deposit account terms, such as interest
rate earned, applicability of certain fees and service charges and funds accessibility, will vary based upon
several factors including, but not limited to, minimum balance, term to maturity, and transaction
frequency and form requirements.
Deposits are obtained primarily from within New Jersey and New York through Kearny Bank’s
network of retail branches. Traditional methods of advertising are used to attract new customers and
deposits, including radio, print media, outdoor advertising, direct mail and inserts included with customer
statements. Premiums or incentives for opening accounts are sometimes offered. One of our key retail
products in recent years has been “Star Banking”, which bundles a number of banking services and
products together for those customers with a checking account with direct deposit and combined deposits
of $20,000 or more, including Internet banking, bill pay, telephone banking, reduced rates on home equity
loans and a 15 basis point premium on certificates of deposit with a term of at least one year, excluding
special promotions. We also offer “High Yield Checking” which is primarily designed to attract core
deposits in the form of customers’ primary checking accounts through interest rate and fee reimbursement
incentives to qualifying customers. The comparatively higher interest expense associated with the “High
Yield Checking” product in relation to our other checking products is partially offset by the transaction
fee income associated with the account.
We may also offer a 15 basis point premium on certificate of deposit accounts with a term of at
least one year, excluding special promotions, to certificate of deposit accountholders that have $500,000
or more on deposit with Kearny Bank. Though certificates of deposit with non-standard maturities are
popular in our market, we generally promote certificates of deposit with traditional maturities, including
three and six months and one, two, three, four and five years. During the term of our non-standard 17-
month and 29-month certificates of deposit, we offer customers a “one-time option” to “step up” the rate
paid from the original rate set on the certificate to the current rate being offered by Kearny Bank for
certificates of that particular maturity.
The determination of interest rates on retail deposits 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 borrowing from the FHLB. Interest rates are reviewed by senior management on
a weekly basis.
49
We also utilize “non-retail” deposits as an alternative source of wholesale funding to traditional
borrowings such as FHLB advances. Such funds are generally used to manage our exposure to interest
rate risk and liquidity risk in conjunction with our overall asset/liability management process. At June 30,
2014, the balance of our interest-bearing checking accounts includes a total of $213.5 million of brokered
money market deposits acquired through Promontory’s IND program. The terms of the program
generally establish a reciprocal commitment for Promontory to deliver and Kearny Bank to accept such
deposits for a period of no less than five years during which time total aggregate balances shall be
maintained within a range of $200.0 million to $230.0 million. Such deposits are generally sourced by
Promontory from large retail and institutional brokerage firms whose individual clients seek to have a
portion of their investments held in interest-bearing accounts at FDIC-insured institutions.
We also acquired a small portfolio of longer-term, brokered certificates of deposit during fiscal
2014 whose balances and weighted average remaining term to maturity totaled approximately $18.5
million and 7.0 years, respectively, at June 30, 2014. In combination with Promontory IND money market
deposits noted above, Kearny Bank’s brokered deposits totaled $232.0 million, or 9.7% of deposits, at
June 30, 2014.
During fiscal 2014, we began to utilize the QwickRate deposit listing service through which we
have attracted “non-brokered” wholesale time deposits targeting institutional investors with a three-to-
five year investment horizon. The balance of time deposits we acquired through the QwickRate listing
during fiscal 2014 totaled $54.2 million at June 30, 2014 with such funds having a weighted average
remaining term to maturity of 3.9 years. We generally prohibit the withdrawal of our listing service
deposits prior to maturity.
Additional sources of non-retail deposits including, but not limited to, deposits acquired through
listing services and other sources of brokered deposits, may be utilized in the future as additional,
alternative sources of wholesale funding.
A large percentage of our deposits are in certificates of deposit, which represented 41.8% and
41.4% of total deposits at June 30, 2014 and June 30, 2013, respectively. Our liquidity could be reduced
if a significant amount of certificates of deposit maturing within a short period were not renewed. At
June 30, 2014 and June 30, 2013, certificates of deposit maturing within one year were $581.5 million
and $646.6 million, respectively. Historically, a significant portion of the certificates of deposit remain
with us after they mature and we believe that this will continue.
At June 30, 2014, $476.6 million or 46.0% of our certificates of deposit were certificates of
$100,000 or more compared to $389.1 million or 39.6% at June 30, 2013. The general level of market
interest rates and money market conditions significantly influence deposit inflows and outflows. The
effects of these factors are particularly pronounced on deposit accounts with larger balances. In
particular, certificates of deposit with balances of $100,000 or greater are traditionally viewed as being a
more volatile source of funding than comparatively lower balance certificates of deposit or non-maturity
transaction accounts. In order to retain certificates of deposit with balances of $100,000 or more, 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.
The balance of deposits reported at June 30, 2014 included deposit balances with fair values
totaling $86.1 million assumed in conjunction with the acquisition of Atlas Bank on June 30, 2014.
50
Deposit balances assumed from Atlas Bank included non-interest-bearing and interest-bearing accounts
totaling $14.6 million and $71.5 million respectively with the latter comprising interest-bearing checking
accounts, savings accounts and certificates of deposit totaling $2.8 million, $31.4 million and $37.3
million, respectively. Kearny Bank also recognized a core deposit intangible of $398,000 in conjunction
with the acquisition of Atlas Bank’s non-maturity deposits.
The balance of certificates of deposit assumed by Kearny Bank in conjunction with the
acquisition of Atlas Bank included $6.4 million of predominantly short-term time deposits acquired by
Atlas Bank through the QwickRate deposit listing service. In combination with the balance of longer-term
time deposits we acquired through our relationship with QwickRate, the aggregate balance of “non-
brokered” listing service deposits totaled $60.6 million, or 2.4% of deposits, at June 30, 2014.
The following table sets 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.
2014
Percent of
Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
For the Years Ended June 30,
2013
Average
Balance
Percent of
Total
Deposits
Weighted
Average
Nominal
Rate
(Dollars in Thousands)
2012
Percent of
Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
Non-interest-bearing demand
Interest-bearing demand .............
Savings and club .........................
Certificates of deposit .................
$
196,490
722,999
473,917
974,426
8.30%
30.53
20.01
41.16
0.00% $
0.52
0.16
1.03
172,954
494,625
445,470
1,037,150
8.04%
23.00
20.72
48.24
0.00% $
0.37
0.20
1.16
145,458
454,166
414,560
1,128,802
6.78%
21.19
19.34
52.69
0.00%
0.59
0.33
1.44
Total deposits .......................... $
2,367,832
100.00%
0.61% $
2,150,199
100.00%
0.69% $
2,142,986
100.00%
0.95%
51
The following table sets forth certificates of deposit classified by interest rate as of the dates
indicated.
Interest Rate
0.00-0.99% ............................. $
1.00-1.99% .............................
2.00-2.99% .............................
3.00-3.99% .............................
4.00-4.99% .............................
5.00-5.99% .............................
2014
At June 30,
2013
(In Thousands)
2012
$
618,650
299,387
100,596
18,582
3
—
$
544,763
313,361
119,309
4,028
3
—
516,645
389,408
165,132
12,409
16,091
5,242
Total ..................................... $
1,037,218
$
981,464
$
1,104,927
The following table shows the amount of certificates of deposit of $100,000 or more by time
remaining until maturity as of the date indicated.
At June 30, 2014
(In Thousands)
Maturity Period
Within three months ..................................................................................... $
Three through six months ............................................................................
Six through twelve months ..........................................................................
Over twelve months .....................................................................................
89,734
57,948
77,313
251,637
Total ........................................................................................................... $
476,632
The following table sets forth the amount and maturities of certificates of deposit at June 30,
2014.
Within
One Year
Over One Year
to Two Years
Amount Due
Over Two
Years to
Three Years
Over Three
Years to
Four Years
(In Thousands)
Over Four
Years to Five
Years
Over Five
Years
Total
0.00-0.99%................. $
1.00-1.99%.................
2.00-2.99%.................
3.00-3.99%.................
4.00-4.99%.................
480,131 $
70,319
29,875
1,215
3
120,354 $
19,924
36,220
10,903
—
17,439 $
54,537
18,102
—
—
564 $
162 $
88,146
2,211
—
—
66,461
14,188
—
—
— $
—
—
6,464
—
618,650
299,387
100,596
18,582
3
Total ........................ $
581,543 $
187,401 $
90,078 $
90,921 $
80,811 $
6,464 $
1,037,218
52
Borrowings. The sources of wholesale funding we utilize include borrowings in the form of
advances from the FHLB of New York as well as other forms of borrowings. We generally use wholesale
funding to manage our exposure to interest rate risk and liquidity risk in conjunction with our overall
asset/liability management process. Toward that end, FHLB advances are primarily utilized to extend the
duration of funding to partially offset the interest rate risk presented by our investment in longer-term
fixed-rate loans and mortgage-backed securities. Extending the duration of funding may be achieved by
simply utilizing fixed-rate borrowings with longer terms to maturity. Alternately, we may utilize
derivatives such as interest rate swaps and caps in conjunction with either short-term fixed-rate or
floating-rate borrowings to effectively extend the duration of those funding sources.
Advances from the FHLB are typically secured by our FHLB capital stock and certain investment
securities as well as residential and multi-family mortgage loans that we choose to utilize as collateral for
such borrowings. Additional information regarding our FHLB advances is included under Note 14 to the
audited consolidated financial statements.
Short-term FHLB advances generally have original maturities of less than one year and include
overnight borrowings which Kearny Bank typically utilizes to address short term funding needs as they
arise. At June 30, 2014, we had a total of $320.0 million of short-term FHLB advances at a weighted
average interest rate of 0.38%. Such advances included $300.0 million of 90-day FHLB term advances
that are generally forecasted to be periodically redrawn at maturity for the same 90 day term as the
original advance. Based on this presumption, we utilized interest rate swaps to effectively extend the
duration of each of these advances at the time they were drawn to effectively fix their cost for a period of
five years. Short-term advances at June 30, 2014 also included $17.0 million of overnight borrowings
from the FHLB drawn for daily liquidity management purposes.
Also included in short-term FHLB advances at June 30, 2014 was a fixed-rate advance with a fair
value of $3.0 million assumed in conjunction with our acquisition of Atlas Bank on June 30, 2014. The
advance had a coupon of 0.35% and matured in July 2014.
Long-term advances generally include term advances with original maturities of greater than one
year. At June 30, 2014, our outstanding balance of long-term FHLB advances totaled $161.5 million.
Such advances included $145.0 million of advances at a weighted average interest rate of 3.04% as well
as a $765,000 amortizing advance at a rate of 4.94%.
Also included in long-term FHLB advances at June 30, 2014 were four FHLB advances with fair
values totaling $15.7 million assumed in conjunction with our acquisition of Atlas Bank on June 30,
2014. Such advances had a weighted average coupon of 1.11% and a weighted average remaining term
of 2.6 years.
53
Our FHLB advances mature as follows:
Maturing in Years Ending June 30,
2015 ..................................................................
2016 ..................................................................
2017 ..................................................................
2018 ..................................................................
2021 ..................................................................
2023 ..................................................................
Fair value adjustments
Total ...........................................................
(In Thousands)
320,000
$
7,500
3,000
5,225
765
145,000
481,490
29
481,519
$
Based upon the market value of investment securities and mortgage loans that are posted as
collateral for FHLB advances at June 30, 2014, we are eligible to borrow up to an additional $327.2
million of advances from the FHLB as of that date. We are further authorized to post additional collateral
in the form of other unencumbered investments securities and eligible mortgage loans that may expand
our borrowing capacity with the FHLB up to 30% of our total assets. Additional borrowing capacity up
to 50% of our total assets may be authorized with the approval of the FHLB’s Board of Directors or
Executive Committee.
The balance of borrowings at June 30, 2014 also included overnight borrowings in the form of
depositor sweep accounts totaling $30.7 million. Depositor sweep accounts are short-term borrowings
representing funds that are withdrawn from a customer’s non-interest bearing deposit account and
invested in an uninsured overnight investment account that is collateralized by specified investment
securities owned by Kearny Bank.
Interest Rate Derivatives and Hedging
We utilize derivative instruments in the form of interest rate swaps and caps to hedge our
exposure to interest rate risk in conjunction with our overall asset/liability management process. In
accordance with accounting requirements, we formally designate all of our hedging relationships as either
fair value hedges, intended to offset the changes in the value of certain financial instruments due to
movements in interest rates, or cash flow hedges, intended to offset changes in the cash flows of certain
financial instruments due to movement in interest rates, and documents the strategy for undertaking the
hedge transactions and its method of assessing ongoing effectiveness.
At June 30, 2014, our derivative instruments are comprised entirely of interest rate swaps and
caps with total notional amounts of $425.0 million and $75.0 million, respectively with Wells Fargo
Bank, N.A. serving as the counterparty to each of the transactions. These instruments are intended to
manage the interest rate exposure relating to certain wholesale funding positions drawn at June 30, 2014.
Additional information regarding our use of interest rate derivatives and our hedging activities is
presented in Note 1 and Note 15 to the audited consolidated financial statements.
Subsidiary Activity
At June 30, 2014, Kearny Federal Savings Bank was the only wholly-owned operating subsidiary
of Kearny Financial Corp. As of that date, Kearny Federal Savings Bank, had two wholly owned
subsidiaries: KFS Financial Services, Inc. and CJB Investment Corp. KFS Financial Services, Inc. was
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incorporated as a New Jersey corporation in 1994 under the name of South Bergen Financial Services,
Inc., was acquired in Kearny Bank’s merger with South Bergen Savings Bank in 1999 and was renamed
KFS Financial Services, Inc. in 2000. It is a service corporation subsidiary originally organized for selling
insurance products to Kearny Bank customers and the general public through a third party networking
arrangement.
During the year ended June 30, 2014, KFS Insurance Services, Inc. was created as a wholly
owned subsidiary of KFS Financial Services, Inc. for the primary purpose of acquiring insurance
agencies. Both KFS Financial Services Inc. and KFS Insurance Services, Inc. were considered inactive
during the year ended June 30, 2014.
CJB Investment Corp. was acquired by Kearny Bank through our acquisition of Central Jersey
Bancorp in November 2010. CJB Investment Corp was organized under New Jersey law as a New Jersey
Investment Company and remained active through the three-year period ended June 30, 2014.
In addition to the subsidiaries noted above, Kearny Bank dissolved its wholly owned subsidiary
KFS Investment Corp. during fiscal 2014 which had remained inactive during the two years ended June
30, 2012 and 2013 and through the date of its dissolution during the year ended June 30, 2014.
Personnel
As of June 30, 2014, we had 410 full-time employees and 64 part-time employees equating to a
total of 442 full time equivalent (“FTE”) employees. The number of employees at June 30, 2014 includes
19 full-time employees employed by Atlas Bank as of that date. By comparison, at June 30, 2013, we had
398 full-time employees and 55 part-time employees equating to a total of 426 FTEs. Our employees are
not represented by a collective bargaining unit and we consider our working relationship with our
employees to be good.
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General
REGULATION
Kearny Bank and Kearny-Federal 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 Bank and Kearny-Federal. 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 savings and
loan holding companies, could have a material adverse impact on Kearny-Federal, Kearny Bank and their
operations. The adoption of regulations or the enactment of laws that restrict the operations of Kearny
Bank and/or Kearny-Federal or impose burdensome requirements upon one or both of them could reduce
their profitability and could impair the value of Kearny Bank’s franchise, resulting in negative effects on
the trading price of our common stock.
Regulation of Kearny Bank
General. As a federally-chartered savings bank with deposits insured by the FDIC, Kearny Bank
is subject to extensive regulation by federal banking regulators. 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 Board. Both state and
federal law regulate a federal savings bank’s relationship with its depositors and borrowers, especially in
such matters as the ownership of savings accounts and the form and content of Kearny Bank’s mortgage
documents.
As a result of the Dodd-Frank Act, the OCC assumed principal regulatory responsibility for
federal savings banks from the OTS effective July 21, 2011. Under the Dodd-Frank Act, all existing OTS
guidance, orders, interpretations, procedures and other advisory in effect prior to that date remained in
effect and enforceable against the OCC until modified, terminated, set aside or superseded by the OCC in
accordance with applicable law. The OCC has adopted most of the substantive OTS regulations on an
interim final basis.
Kearny Bank must file reports with the OCC 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 OCC regularly examines Kearny Bank and prepares
reports to Kearny Bank’s Board of Directors on deficiencies, if any, found in its operations. The OCC has
substantial discretion to take enforcement action with respect to an institution that fails to comply with
applicable regulatory requirements or engages in violations of law or unsafe and unsound practices. Such
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actions can include, among others, the issuance of a cease and desist order, assessment of civil money
penalties, removal of officers and directors and the appointment of a receiver or conservator. In addition,
the FDIC has the authority to recommend to the Comptroller of the Currency to take enforcement action
with respect to a particular federally-chartered savings bank and, if the Comptroller does not take action,
the FDIC has authority to take such action under certain circumstances.
Federal Deposit Insurance. Kearny Bank’s deposits are insured to applicable limits by the
FDIC. Under the Dodd-Frank Act, the maximum deposit insurance amount has been permanently
increased from $100,000 to $250,000.
The FDIC has adopted a risk-based premium system that provides for quarterly assessments.
Assessments are based on an insured institution’s classification among four risk categories determined
from their examination ratings and capital and other financial ratios. The institution is assigned to a
category and the category determines its assessment rate, subject to certain specified risk adjustments.
Insured institutions deemed to pose less risk to the deposit insurance fund pay lower assessments, while
greater risk institutions pay higher assessments.
In February 2011, the FDIC published a final rule under the Dodd-Frank Act to reform the
deposit insurance assessment system. Under the rule, assessments are based on an institution’s average
consolidated total assets minus average tangible equity instead of deposits, which was the FDIC’s prior
practice. The rule revised the assessment rate schedule to establish assessments ranging from 2.5 to 45
basis points, based on an institution’s risk classification and possible risk adjustments.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose
and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and
custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and
Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For
the quarter ended June 30, 2014, the annualized FICO assessment was equal to 0.62 of a basis point of
total assets less tangible capital.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of
estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the
1.35% ratio by June 30, 2020. It is intended that insured institutions with assets of $10 billion or more
will fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving the
maximum ratio to the discretion of the FDIC. The FDIC has exercised that discretion by establishing a
long-term goal of a fund ratio of 2.0%.
The FDIC has authority to increase insurance assessments. Any significant increases would have
an adverse effect on the operating expenses and results of operations of Kearny Bank. Management
cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an 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 FDIC. We do not
currently know of any practice, condition or violation that may lead to termination of our deposit
insurance.
Regulatory Capital Requirements. Under the OCC’s regulations, federal savings banks such as
Kearny Bank are required to comply with minimum leverage capital requirements. For an institution not
anticipating or experiencing significant growth and deemed by the OCC to be, in general, a strong
banking organization rated composite 1 under Uniform Financial Institutions Ranking System, the
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minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other
institutions, the minimum leverage capital ratio is 4.0%. Tier 1 capital is the sum of common
stockholder’s equity, noncumulative perpetual preferred stock (including any related surplus) and
minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and
credit card relationships) and certain other specified items.
OCC regulations also require federal savings institutions to maintain certain ratios of regulatory
capital to regulatory risk-weighted assets, or “risk-based capital ratios.” Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to risk-weighted categories ranging
from 0.0% to 200.0%. Institutions must maintain a minimum ratio of total capital to risk-weighted assets
of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital
plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up
to 1.25% of risk-weighted assets, cumulative preferred stock, subordinated debentures and certain other
capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount
of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital.
Federal savings institutions must also meet a “tangible capital” standard of 1.5% of total adjusted
assets. Tangible capital is generally defined as Tier 1 capital less intangible assets except for certain
mortgage servicing rights.
In July 2013, the OCC and the other federal bank regulatory agencies issued a final rule to revise
the risk-based and leverage capital requirements and the method for calculating risk-weighted assets, to
make them consistent with the agreements that were reached by the international Basel Committee on
Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all
depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or
more and top-tier savings and loan holding companies (“banking organizations”). Among other things,
the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted
assets), sets the minimum leverage ratio for all institutions at a uniform 4% of total assets, increases the
minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and
assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual
status and to certain commercial real estate facilities that finance the acquisition, development or
construction of real property. The final rule also requires unrealized gains and losses on certain
“available-for-sale” securities holdings to be included for purposes of calculating regulatory capital
requirements unless a one-time opt out is exercised. The final rule limits a banking organization’s
dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to
executive officers, if the bank organization does not hold a “capital conservation buffer” consisting of
2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based
requirements. The final rule becomes effective for us on January 1, 2015. The capital conservation buffer
requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full
capital conservation buffer requirement will be effective.
In assessing an institution’s capital adequacy, the OCC considers not only these numeric factors
but also qualitative risk factors and has authority to establish higher capital requirements for individual
institutions as deemed necessary.
Prompt Corrective Regulatory Action. Federal law requires that federal bank regulatory
authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital
requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
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The OCC has adopted regulations to implement the prompt corrective action legislation. An
institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based
capital ratio of 4.0% or greater, and generally a leverage ratio of 4.0% or greater. An institution is
“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital
ratio of less than 4.0%, or generally a leverage ratio of less than 4.0%. An institution is deemed to be
“significantly undercapitalized” if it 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 of less than 3.0%. An institution is considered to
be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total
assets that is equal to or less than 2.0%.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and
other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a
plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal
to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary
to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable
plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must
comply with one or more of a number of additional measures, including, but not limited to, a required sale
of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation
of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on
interest rates paid on deposits, compensation of executive officers and capital distributions by the parent
holding company. “Critically undercapitalized” institutions are subject to additional measures including,
subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it
obtains such status. These actions are in addition to other discretionary supervisory or enforcement
actions that the OCC may take.
The recently adopted final rule that will increase regulatory capital requirements will adjust the
prompt corrective action categories accordingly.
Dividend and Other Capital Distribution Limitations. Federal regulations impose 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 Bank, must file notice with the Federal Reserve Board and an application or a notice with the
OCC at least thirty days before making a capital distribution, such as paying a dividend to Kearny-
Federal. A savings institution must file an application with the OCC for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the applications processing rules; (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 OCC
or applicable regulations. The Federal Reserve Board may disapprove a notice and the OCC 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, enforcement action or agreement or condition imposed in connection with an application.
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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. In addition, the Dodd-Frank Act made failure to satisfy the qualified thrift lender test potentially
subject to enforcement action as a violation of law. To meet the qualified thrift lender requirement, a
savings institution must either (i) be deemed a “domestic building and loan association” under the Internal
Revenue Code of 1986, as amended (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 generally
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 in at least nine out of
every twelve months.
A savings institution that fails the qualified thrift lender test and does not convert to a bank
charter will generally 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. Its holding
company would become regulated as a bank holding company rather than a savings and loan holding
company. 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 making any investment or
engaging in any activity not permissible for a national bank.
Transactions with Related Parties. Transactions between a savings institution (and, generally, its
subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal
Reserve Act. An affiliate of an institution is any company or entity that controls, is controlled by or is
under common control with the institution. In a holding company context, the parent holding company
and any companies which are controlled by such parent holding company are affiliates of the institution.
Generally, Section 23A of the Federal Reserve Act limits the extent to which the institution or its
subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s
capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction”
includes an extension of credit, purchase of assets, issuance of a guarantee or letter of credit and similar
transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required
to be collateralized in accordance with specified requirements. The law also requires that affiliate
transactions be on terms and conditions that are substantially the same, or at least as favorable to the
institution, as those provided to non-affiliates.
Kearny Bank’s authority to extend credit to its directors, executive officers and 10%
stockholders, as well as to entities controlled by such persons, is currently governed by the requirements
of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board.
Among other things and subject to certain exceptions, these provisions generally require that extensions
of credit to insiders:
be made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable transactions
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with unaffiliated persons and that do not involve more than the normal risk of repayment
or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the amount of
Kearny Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Kearny Bank’s
board of directors. Extensions of credit to executive officers are subject to additional limits based on the
type of extension involved.
Community Reinvestment Act. Under the CRA, every insured depository institution, including
Kearny 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 CRA 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 CRA requires the OCC to assess the depository institution’s
record of meeting the credit needs of its community and to consider such record in its evaluation of
certain applications by such institution, such as a merger or the establishment of a branch office by
Kearny Bank. The OCC may use an unsatisfactory CRA examination rating as the basis for the denial of
an application. Kearny Bank received a “satisfactory” CRA rating in its most recent CRA examination.
Federal Home Loan Bank System. Kearny Bank is a member of the FHLB of New York, which
is one of twelve regional Federal Home Loan Banks. Each FHLB 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 FHLB System. It makes
loans to members pursuant to policies and procedures established by the board of directors of the FHLB.
As a member, Kearny Bank is required to purchase and maintain stock in the FHLB of New York
in specified amounts. The FHLB imposes various limitations on advances such as limiting the amount of
certain types of real estate related collateral and limiting total advances to a member.
The FHLB of New York may pay periodic dividends to members. These dividends are affected
by factors such as the FHLB’s operating results and statutory responsibilities that may be imposed such as
providing certain funding for affordable housing and interest subsidies on advances targeted for low- and
moderate-income housing projects. The payment of such dividends or any particular amount cannot be
assumed.
Other Laws and Regulations
Interest and other charges collected or contracted for by Kearny Bank are subject to state usury
laws and federal laws concerning interest rates. Kearny Bank’s operations are also subject to federal laws
(and their implementing regulations) applicable to credit transactions, such as the:
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for
one- to four-family residential real estate receive various disclosures, including good faith
estimates of settlement costs, lender servicing and escrow account practices, and
prohibiting certain practices that increase the cost of settlement services;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit
reporting agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and
Truth in Savings Act, prescribing disclosure and advertising requirements with respect to
deposit accounts.
The operations of Kearny Bank also are subject to the:
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, governing
automatic deposits to and withdrawals from deposit accounts and customers’ rights and
liabilities arising from the use of automated teller machines and other electronic banking
services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives
“substitute checks,” such as digital check images and copies made from that image, the
same legal standing as the original paper check;
USA PATRIOT Act, which requires institutions operating to, among other things,
establish broadened anti-money laundering compliance programs, due diligence policies
and controls to ensure the detection and reporting of money laundering. Such required
compliance programs are intended to supplement existing compliance requirements, also
applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign
Assets Control regulations; and
Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial
information by financial institutions with unaffiliated third parties. Specifically, the
Gramm-Leach-Bliley Act requires all financial institutions offering financial products or
services to retail customers to provide such customers with the financial institution’s
privacy policy and provide such customers the opportunity to “opt out” of the sharing of
certain personal financial information with unaffiliated third parties.
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Regulation of Kearny-Federal
General. Kearny-Federal is a savings and loan holding company within the meaning of Section
10 of the Home Owners’ Loan Act. As a result of the Dodd-Frank Act, it is required to file reports with,
and is be subject to regulation and examination by, the Federal Reserve Board, as successor to the OTS.
Kearny-Federal must also obtain regulatory approval from the Federal Reserve Board before engaging in
certain transactions, such as mergers with or acquisitions of other financial institutions. In addition, the
Federal Reserve Board has enforcement authority over Kearny-Federal and any non-savings institution
subsidiaries. This permits the Federal Reserve Board to restrict or prohibit activities that are determined
to pose a serious risk to Kearny Bank. This regulation is intended primarily for the protection of the
depositors and not for the benefit of stockholders of Kearny-Federal.
The Federal Reserve Board has indicated that, to the greatest extent possible taking into account
any unique characteristics of savings and loan holding companies and the requirements of the Home
Owners’ Loan Act, it intends to apply to savings and loan holding companies its supervisory approach to
the supervision of bank holding companies. The stated objective of the Federal Reserve Board is to
ensure the savings and loan holding company and its non-depository subsidiaries are effectively
supervised, can serve as a source of strength for, and do not threaten the safety and soundness of, the
subsidiary depository institutions. The Federal Reserve Board has generally adopted the substantive
provisions of OTS regulations governing savings and loan holding companies on an interim final basis
with certain modifications as discussed below.
Activities Restrictions. As a savings and loan holding company, Kearny-Federal is subject to
statutory and regulatory restrictions on its business activities. The non-banking activities of Kearny-
Federal and its non-savings institution subsidiaries is restricted to certain activities specified by the
Federal Reserve Board 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 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-Federal must file with the Federal Reserve Board 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. Under the Dodd-Frank Act, a savings and loan holding company may only engage in
activities authorized for financial holding companies if they meet all of the criteria to qualify as a
financial holding company. Accordingly, the Federal Reserve Board will require savings and loan
holding companies to elect to be treated as financial holding companies in order to engage in financial
holding company activities. In order to make such an election, the savings and loan holding company and
its depository institution subsidiaries must be well capitalized and well managed.
Mergers and Acquisitions. Kearny-Federal must obtain approval from the Federal Reserve
Board 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 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 FDIC. In evaluating an application for Kearny-Federal to acquire
control of a savings institution, the Federal Reserve Board would consider factors such as the financial
and managerial resources and future prospects of Kearny-Federal 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.
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Consolidated Capital Requirements. Savings and loan holding companies have historically not
been subjected to consolidated regulatory capital requirements. The Dodd-Frank Act, however, required
the Federal Reserve Board to promulgate consolidated capital requirements for bank and savings and loan
holding companies that are no less stringent, both quantitatively and in terms of components of capital,
than those applicable to their subsidiary depository institutions. Instruments such as cumulative preferred
stock and trust-preferred securities, which are currently includable as Tier 1 capital, by bank holding
companies within certain limits will no longer be includable as Tier 1 capital, subject to certain
grandfathering. The previously discussed final rule regarding regulatory capital requirements implements
the Dodd-Frank Act’s directives as to holding company capital requirements. Consolidated regulatory
capital requirements identical to those applicable to the subsidiary depository institutions will apply to
savings and loan holding companies as of January 1, 2015. As is the case with institutions themselves,
the capital conservation buffer will be phased in between 2016 and 2019.
Source of Strength Doctrine. The Dodd-Frank Act also extended the “source of strength”
doctrine, which has long applied to bank holding companies, to savings and loan holding companies as
well. The Federal Reserve Board has promulgated regulations implementing the “source of strength”
policy, which requires holding companies to act as a source of strength to their subsidiary depository
institutions by providing capital, liquidity and other support in times of financial distress. Further, the
Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding
companies that it has also applied to savings and loan holding companies. In general, the policy provides
that dividends should be paid only out of current earnings and only if the prospective rate of earnings
retention by the holding company appears consistent with the organization’s capital needs, asset quality
and overall financial condition. Regulatory guidance provides for consultation with a holding company’s
Federal Reserve Board as to capital distributions in certain circumstances such as where our net income
for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the
dividend or our overall rate of earnings retention is inconsistent with our capital needs and overall
financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary
depository institution becomes undercapitalized. In addition, a subsidiary savings institution of a savings
and loan holding company must file prior notice with the Federal Reserve Board, and receive its
nonobjection, as well as filing an application or notice with the OCC, and receiving OCC approval or
nonobjection, before paying dividends to the parent savings and loan holding company. Federal Reserve
Board guidance also provides for regulatory review of certain stock redemption and repurchase proposals
by holding companies. These regulatory policies could affect the ability of Kearny-Federal to pay
dividends, engage in stock redemptions or repurchases or otherwise engage in capital distributions.
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be
submitted to the Federal Reserve Board if any person (including a company), or group acting in concert,
seeks to acquire “control” of a savings and loan holding company. 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 as
otherwise defined by the Federal Reserve Board. Under the Change in Bank Control Act, the Federal
Reserve Board 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 is then subject to regulation as a savings and loan
holding company.
64
Item 1A. Risk Factors
The following is a summary of what management currently believes to be the material risks
related to an investment in the Company’s securities.
Changes in interest rates may adversely affect our profitability and financial condition.
We derive our income mainly from the difference or “spread” between the interest earned on
loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other
interest-bearing liabilities. In general, the larger the spread, the more we earn. When market rates of
interest change, the interest we receive on our assets and the interest we pay on our liabilities will
fluctuate. This can cause decreases in our spread and can adversely affect our income.
From an interest rate risk perspective, we have generally been liability sensitive, which indicates
that liabilities generally re-price faster than assets.
In response to negative economic developments, the Federal Reserve Board’s Open Market
Committee steadily reduced its federal funds rate target from 5.25% in September 2007 to between 0.00%
and 0.25% currently, which has had the effect of reducing our cost of funds. Given our historic liability
sensitivity, the decline in our cost of funds initially outpaced the decline in yield on our earning assets
thereby having a positive impact on our net interest rate spread and net interest margin during the years
preceding fiscal 2012. However, from fiscal 2012 through fiscal 2014, the rate of reduction in our cost of
interest-bearing liabilities slowed in relation to the continuing decline in the yield on our interest-earning
assets. Consequently, our net interest rate spread decreased by two basis points to 2.32% for the year
ended June 30, 2014 from 2.34% for the year ended June 30, 2013. Our net interest margin declined six
basis points to 2.44% for the year ended June 30, 2014 from 2.50% for the year ended June 30, 2013.
Our net interest spread declined 12 basis points during fiscal 2013 from 2.46% for the preceding fiscal
year ended June 30, 2012. Our net interest margin declined an additional 15 basis points during fiscal
2013 from 2.65% for the preceding fiscal year ended June 30, 2012.
We continue to be at risk of additional reductions in our net interest rate spread and net interest
margin resulting from further declines in our yield on interest-earning assets that may outpace any
subsequent reductions in our cost of funds. In particular, our ability to further reduce the cost of our
interest-bearing deposits is increasingly limited given that most deposit offering rates are already well
below 1.00% at June 30, 2014. Moreover, our liability sensitivity may adversely affect net income in the
future when market interest rates ultimately increase from historical lows and our cost of interest-bearing
liabilities rises faster than our yield on interest-earning assets.
Interest rates also affect how much money we lend. For example, when interest rates rise, the
cost of borrowing increases and loan originations tend to decrease. In addition, changes in interest rates
can affect the average life of loans and securities. A reduction in interest rates generally results in
increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order
to reduce their borrowing cost. This causes reinvestment risk, because we generally are not able to
reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.
Changes in market interest rates could also reduce the value of our interest-earning assets
including, but not limited to, our securities portfolio. In particular, the unrealized gains and losses on
securities available for sale are reported, net of tax, in accumulated other comprehensive income which is
65
a component of stockholders’ equity. As such, declines in the fair value of such securities resulting from
increases in market interest rates may adversely affect stockholders’ equity.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will
decrease.
We make various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans. In determining the required amount of the allowance
for loan losses, we evaluate certain loans individually and establish loan loss allowances for specifically
identified impairments. For all non-impaired loans, including those not individually reviewed, we
estimate losses and establish loan loss allowances based upon historical and environmental loss factors. If
the assumptions used in our calculation methodology are incorrect, our allowance for loan losses may not
be sufficient to cover losses inherent in our loan portfolio, resulting in further additions to our allowance.
While our allowance for loan losses was 0.71% of total loans at June 30, 2014, significant additions to our
allowance could materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us
to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our
allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a
material adverse effect on our financial condition and results of operations.
A significant portion of our assets consists of investment securities, which generally have lower
yields than loans, and we classify a significant portion of our investment securities as available for
sale which creates potential volatility in our equity and may have an adverse impact on our net
income.
As of June 30, 2014, our securities portfolio, which includes mortgage-backed securities and
collateralized mortgage obligations, totaled $1.36 billion, or 38.7% of our total assets. Investment
securities typically have lower yields than loans. For fiscal 2014, the weighted average yield of our
investment securities portfolio was 2.08% as compared to 4.31% for our loan portfolio. Accordingly, our
net interest margin is lower than it would have been if a higher proportion of our interest-earning assets
had been invested in loans. Additionally, $845.1 million, or 62.3% of our investment securities, are
classified as available for sale and reported at fair value with unrealized gains or losses excluded from
earnings and reported in other comprehensive income which affects our reported equity. Accordingly,
given the significant size of the investment securities portfolio classified as available for sale and due to
possible mark-to-market adjustments of that portion of the portfolio resulting from market conditions, we
may experience greater volatility in the value of reported equity. Moreover, given that we actively
manage our investment securities portfolio classified as available for sale, we may sell securities which
could result in a realized loss, thereby reducing our net income.
Our increased commercial lending exposes us to additional risk.
Our commercial loans increased to 60.3% of total loans at June 30, 2014 from 21.5% of total
loans at June 30, 2010. Our commercial lending operations include commercial mortgages, multi-family
loans and other non-residential mortgage loans. We intend to continue increasing our commercial lending
as part of our planned transition from a traditional thrift to a full-service community bank. We have also
increased our commercial lending staff and are seeking additional commercial lenders to help grow the
commercial loan portfolio. Our increased commercial lending, however, exposes us to greater risks than
one- to four-family residential lending. Unlike single-family, owner-occupied residential mortgage loans,
66
which generally are made on the basis of the borrower’s ability to make repayment from his or her
employment and other income and are secured by real property whose value tends to be more easily
ascertainable and realizable, the repayment of commercial loans typically is dependent on the successful
operation and income stream of the borrower, which can be significantly affected by economic
conditions, and are secured, if at all, by collateral that is more difficult to value or sell or by collateral
which may depreciate in value. In addition, commercial loans generally carry larger balances to single
borrowers or related groups of borrowers than one- to four-family mortgage loans, which increases the
financial impact of a borrower’s default.
Our loan portfolio contains a significant portion of loans that are unseasoned. It is difficult to
evaluate the future performance of unseasoned loans.
Our net loan portfolio has grown to $1.73 billion at June 30, 2014, from $1.00 billion at June 30,
2010. A portion of this increase is due to increases in commercial real estate and commercial business
loans resulting from originations and from purchases of and participations in loans originated by other
financial institutions. It is difficult to assess the future performance of these loans recently added to our
portfolio because our relatively limited experience with such loans does not provide us with a significant
payment history from which to evaluate future collectability. These loans may experience higher
delinquency or charge-off levels than our historical loan portfolio experience, which could adversely
affect our future performance.
Because we intend to continue to increase our commercial business loan originations, our credit
risk will increase.
We intend to increase our originations of commercial business loans, including C&I and SBA
loans, which generally have more risk than one- to four-family residential mortgage loans. Since
repayment of commercial business loans may depend on the successful operation of the borrower’s
business, repayment of such loans can be affected by adverse conditions in the real estate market or the
local economy. Because we plan to continue to increase our originations of these loans, it may be
necessary to increase the level of our allowance for loan losses because of the increased risk
characteristics associated with these types of loans. Any such increase to our allowance for loan losses
would adversely affect our earnings. Additionally, Kearny Bank historically has not had a significant
portfolio of commercial business loans.
Kearny Bank’s reliance on brokered deposits could adversely affect its liquidity and operating
results.
Among other sources of funds, Kearny Bank relies on brokered deposits to provide funds with
which to make loans and provide for other liquidity needs. On June 30, 2014, brokered deposits totaled
$232.0 million, or approximately 9.7% of total deposits. Kearny Bank’s primary source for brokered
money market deposits is the Promontory Interfinancial Network’s (“Promontory”) Insured Network
Deposits (“IND”), a brokered deposit network that is sourced by Promontory from large retail and
institutional brokerage firms whose individual clients seek to have a portion of their investments held in
interest-bearing accounts at FDIC-insured institutions. Our Promontory IND deposits totaled $213.5
million at June 30, 2014. These funds were augmented by a small portfolio of longer-term, brokered
certificates of deposit acquired during fiscal 2014 which totaled approximately $18.5 million at June 30,
2014.
Generally brokered deposits may not be as stable as other types of deposits. In the future, those
depositors may not replace their brokered deposits with us as they mature, or we may have to pay a higher
67
rate of interest to keep those deposits or to replace them with other deposits or other sources of funds. Not
being able to maintain or replace those deposits as they mature would adversely affect our liquidity.
Paying higher deposit rates to maintain or replace brokered deposits would adversely affect our net
interest margin and operating results.
We may be required to record additional impairment charges with respect to our investment
securities portfolio.
We review our securities portfolio at the end of each quarter to determine whether the fair value
is below the current carrying value. When the fair value of any of our investment securities has declined
below its carrying value, we are required to assess whether the impairment is other than temporary. If we
conclude that the impairment is other than temporary, we are required to write down the value of that
security. The “credit-related” portion of the impairment is recognized through earnings whereas the
“noncredit-related” portion is generally recognized through other comprehensive income in the
circumstances where the future sale of the security is unlikely.
At June 30, 2014, we had investment securities with fair values of approximately $1.35 billion on
which we had approximately $14.3 million in gross unrealized losses. All unrealized losses on
investment securities at June 30, 2014 represented temporary impairments of value. However, if changes
in the expected cash flows of these securities and/or prolonged price declines result in our concluding in
future periods that the impairment of these securities is other than temporary, we will be required to
record an impairment charge against income equal to the credit-related impairment.
Our investments in corporate and municipal debt securities and collateralized loan obligations
expose us to additional credit risks.
The composition and allocation of our investment portfolio has historically emphasized U.S.
agency mortgage-backed securities and U.S. agency debentures. While such assets remain a significant
component of our investment portfolio at June 30, 2014, recent enhancements to our investment policies,
strategies and infrastructure have enabled us to diversify the composition and allocation of our securities
portfolio. Such diversification has included investing in bank-qualified municipal obligations, bonds
issued by financial institutions and collateralized loan obligations. Unlike U.S. agency securities, the
municipal and corporate debt securities acquired are backed only by the credit of their issuers while
investments in collateralized loan obligations generally rely on the structural characteristics of an
individual tranche within a larger investment vehicle to protect the investor from credit losses arising
from borrowers defaulting on the underlying securitized loans.
While we have invested primarily in investment grade securities, these securities are not backed
by the federal government and expose us to a greater degree of credit risk than U.S. agency securities.
Any decline in the credit quality of these securities exposes us to the risk that the market value of the
securities could decrease which may require us to write down their value and could lead to a possible
default in payment.
We hold certain intangible assets that could be classified as impaired in the future. If these assets
are considered to be either partially or fully impaired in the future, our earnings would decrease.
At June 30, 2014, we had approximately $109.4 million in intangible assets on our balance sheet
comprising $108.6 million of goodwill and $790,000 of core deposit intangibles. We are required to
periodically test our goodwill and identifiable intangible assets for impairment. The impairment testing
process considers a variety of factors, including the current market price of our common stock, the
68
estimated net present value of our assets and liabilities, and information concerning the terminal valuation
of similarly situated insured depository institutions. If an impairment determination is made in a future
reporting period, our earnings and the book value of these intangible assets will be reduced by the amount
of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book
value of our common stock or our regulatory capital levels, but recognition of such an impairment loss
could significantly restrict Kearny Bank’s ability to make dividend payments to the parent company and
Kearny-Federal’s ability to pay dividends to stockholders.
Recently enacted financial reform legislation could substantially increase our compliance burden
and costs and necessitate changes in the conduct of our business.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act is having a broad
impact on the financial services industry, including significant regulatory and compliance changes. Many
of the requirements called for in the Dodd-Frank Act are being implemented over time. Given the
uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies and through regulations, the full extent of the impact
such requirements will have on our operations is unclear and may not be known for many years. The
changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require
changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage
requirements or otherwise adversely affect our business. In particular, the following provisions of the
Dodd-Frank Act, among others, are impacting our operations and activities, both currently and
prospectively:
elimination of the OTS as our primary federal regulator, which requires us to continue
adapting to a new regulatory regime;
weakening of federal preemption standards applicable to Kearny Bank, which exposes us
to additional state regulation;
changes in methodologies for calculating deposit insurance premiums and increases in
required deposit insurance fund reserve levels, which could increase our deposit
insurance expense;
application of regulatory capital requirements to Kearny-Federal; and
imposition of comprehensive, new consumer protection requirements, which could
substantially increase our compliance burden and potentially expose us to new liabilities.
Further, we may be required to invest significant management attention and resources to evaluate
and continue to make any changes necessary to comply with new statutory and regulatory requirements
under the Dodd-Frank Act. Failure to comply with the new requirements may negatively impact our
results of operations and financial condition. While we cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their interpretations would have on us, these
changes could be materially adverse to our investors.
Strong competition within our market area may limit our growth and profitability.
Competition is intense within the banking and financial services industry in New Jersey and New
York. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage
firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment
69
banking firms operating locally and elsewhere. Many of these competitors have substantially greater
resources, higher lending limits and offer services that we do not or cannot provide. This competition
makes it more difficult for us to originate new loans and retain and attract new deposits. Price
competition for loans may result in originating fewer loans, or earning less on our loans and price
competition for deposits may result in a reduction of our deposit base or paying more on our deposits.
Our business is geographically concentrated in New Jersey and New York and a downturn in
economic conditions within the region could adversely affect our profitability.
A substantial majority of our loans are to individuals and businesses in New Jersey and New
York. The decline in the economy of the region could continue to have an adverse impact on our
earnings. We have a significant amount of real estate mortgages, such that continuing decreases in local
real estate values may 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 may adversely influence our profitability.
The short-term and long-term impact of the changing regulatory capital requirements and new
capital rules is uncertain.
The federal banking agencies have recently adopted proposals that when effective will
substantially amend the regulatory risk-based capital rules applicable to Kearny-Federal and Kearny
Bank. The amendments implement the “Basel III” regulatory capital reforms and changes required by the
Dodd-Frank Act. The new rules will apply regulatory capital requirements to Kearny-Federal. The
amended rules include new minimum risk-based capital and leverage ratios, which will become effective
in January 2015 with certain requirements to be phased in beginning in 2016, and will refine the
definition of what constitutes “capital” for purposes of calculating those ratios.
The new minimum capital level requirements applicable to Kearny Bank would include: (i) a new
common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a
total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all
institutions. The amended rules also establish a “capital conservation buffer” of 2.5% above the new
regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common
equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of
10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at
0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An
institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a
maximum percentage of eligible retained income that could be utilized for such actions.
The Basel III changes and other regulatory capital requirements will result in generally higher
regulatory capital standards. However, it is difficult at this time to predict the precise effect on us. The
application of more stringent capital requirements to Kearny-Federal and Kearny Bank could, among
other things, result in lower returns on invested capital, require the raising of additional capital, and result
in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the
imposition of liquidity requirements in connection with the implementation of Basel III could result in our
having to lengthen the term of our funding, restructure our business models, and/or increase our holdings
of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations,
items included or deducted in calculating regulatory capital and/or additional capital conservation buffers
could result in management modifying its business strategy and could further limit our ability to make
70
distributions, including paying out dividends or buying back shares.
A natural disaster could harm our business.
Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy
the value of the collateral for our loans and negatively affect the local economies in which we operate,
which could have a material adverse effect on our results of operations and financial condition. The
occurrence of a natural disaster could result in one or more of the following: (i) an increase in loan
delinquencies; (ii) an increase in problem assets and foreclosures; (iii) a decrease in the demand for our
products and services; or (iv) a decrease in the value of the collateral for loans, especially real estate, in
turn reducing customers’ borrowing power, the value of assets associated with problem loans and
collateral coverage.
Acts of terrorism and other external events could impact our ability to conduct business.
Financial institutions have been, and continue to be, targets of terrorist threats aimed at
compromising operating and communication systems and the metropolitan New York area and northern
New Jersey remain central targets for potential acts of terrorism. Such events could cause significant
damage, impact the stability of our facilities and result in additional expenses, impair the ability of our
borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result
in the loss of revenue. While we have established and regularly test disaster recovery procedures, the
occurrence of any such event could have a material adverse effect on our business, operations and
financial condition.
Because the nature of the financial services business involves a high volume of transactions, we face
significant operational risks.
We operate in diverse markets and rely on the ability of our employees and systems to process a
high number of transactions. Operational risk is the risk of loss resulting from our operations, including
but not limited to, the risk of fraud by employees or persons outside Kearny-Federal, the execution of
unauthorized transactions by employees, errors relating to transaction processing and technology,
breaches of the internal control system and compliance requirements, and business continuation and
disaster recovery. Insurance coverage may not be available for such losses, or where available, such
losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could
arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory
standards, adverse business decisions or their implementation, and customer attrition due to potential
negative publicity. In the event of a breakdown in the internal control system, improper operation of
systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer
damage to our reputation.
Our risk management framework may not be effective in mitigating risk and reducing the potential
for significant losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to identify,
measure, monitor, report and control our exposure to risk, including strategic, market, liquidity,
compliance and operational risks. While we use a broad and diversified set of risk monitoring and
mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence
or future development of currently unanticipated or unknown risks. Recent economic conditions and
heightened legislative and regulatory scrutiny of the financial services industry, among other
71
developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our
failure to properly anticipate and manage these risks.
We could be adversely affected by failure in our internal controls.
A failure in our internal controls could have a significant negative impact not only on our
earnings, but also on the perception that customers, regulators and investors may have of us. We continue
to devote a significant amount of effort, time and resources to continually strengthening our controls and
ensuring compliance with complex accounting standards and banking regulations.
Risks associated with system failures, interruptions, or breaches of security could negatively affect
our earnings.
Information technology systems are critical to our business. We use various technology systems
to manage our customer relationships, general ledger, securities investments, deposits, and loans. We
have established policies and procedures to prevent or limit the effect of system failures, interruptions,
and security breaches, but such events may still occur or may not be adequately addressed if they do
occur. In addition, any compromise of our systems could deter customers from using our products and
services. Although we rely on security systems to provide security and authentication necessary to effect
the secure transmission of data, these precautions may not protect our systems from security breaches.
In addition, we outsource a majority of our data processing to certain third-party providers. If
these third-party providers encounter difficulties, or if we have difficulty communicating with them, our
ability to adequately process and account for transactions could be affected, and our business operations
could be adversely affected. Threats to information security also exist in the processing of customer
information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage our
reputation and result in a loss of customers and business thereby subjecting us to additional regulatory
scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a
material adverse effect on our financial condition and results of operations.
Acquisitions may disrupt our business and dilute stockholder value.
We regularly evaluate merger and acquisition opportunities with other financial institutions and
financial services companies. As a result, negotiations may take place and future mergers or acquisitions
involving cash, debt, or equity securities may occur at any time. We would seek acquisition partners that
offer us either significant market presence or the potential to expand our market footprint and improve
profitability through economies of scale or expanded services.
Future acquisitions of other banks, businesses, or branches may have an adverse effect on our
financial results and may involve various other risks commonly associated with acquisitions, including,
among other things:
difficulty in estimating the value of the target company;
payment of a premium over book and market values that may dilute our tangible book
value and earnings per share in the short and long term;
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potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality problems of the target company;
potential volatility in reported income associated with goodwill impairment losses;
difficulty and expense of integrating the operations and personnel of the target company;
inability to realize the expected revenue increases, cost savings, increases in geographic
or product presence, and/or other projected benefits;
potential disruption to our business;
potential diversion of our management’s time and attention;
possible loss of key employees and customers of the target company; and
potential changes in banking or tax laws or regulations that may affect the target
company.
Our inability to achieve profitability on new branches may negatively affect our earnings.
We have expanded our presence throughout our market area and we intend to pursue further
expansion through de novo branching or the purchase of branches from other financial institutions. The
profitability of our expansion strategy will depend on whether the income that we generate from the new
branches will offset the increased expenses resulting from operating these branches. We expect that it
may take a period of time before these branches can become profitable, especially in areas in which we do
not have an established presence. During this period, the expense of operating these branches may
negatively affect our net income.
Item 1B. Unresolved Staff Comments
Not applicable.
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Item 2. Properties
The Company and the Bank conduct business from their administrative headquarters at 120
Passaic Avenue in Fairfield, New Jersey and 42 branch offices located in Bergen, Essex, Hudson,
Middlesex, Monmouth, Morris, Ocean, Passaic and Union counties, New Jersey and Kings and Richmond
counties, New York. Eighteen of our offices are leased with remaining terms between one and fifteen
years. At June 30, 2014, our net investment in property and equipment totaled $40.1 million. The
following table sets forth certain information relating to our properties as of June 30, 2014. The net book
values reported include our investment in land, building and/or leasehold improvements by property
location.
Office Location
Executive Office:
120 Passaic Avenue
Fairfield, New Jersey
Main Office:
614 Kearny Avenue
Kearny, New Jersey
Branches:
425 Route 9 & Ocean Gate Drive
Bayville, New Jersey
417 Bloomfield Avenue
Caldwell, New Jersey
20 Willow Street
East Rutherford, New Jersey
534 Harrison Avenue
Harrison, New Jersey
1353 Ringwood Avenue
Haskell, New Jersey
718B Buckingham Drive
Lakewood, New Jersey
630 North Main Street
Lanoka Harbor, New Jersey
307 Stuyvesant Avenue
Lyndhurst, New Jersey
270 Ryders Lane
Milltown, New Jersey
339 Main Road
Montville, New Jersey
119 Paris Avenue
Northvale, New Jersey
Year
Opened
Net Book Value as of
June 30, 2014
(In Thousands)
Square
Footage
Owned/
Leased
2004
$ 10,203
53,000
Owned
887
6,764
Owned
110
267
34
611
—
3,500
Leased
4,400
Owned
3,100
Owned
3,000
Owned
2,500
Leased
7
2,800
Leased
1,911
3,200
Owned
114
3,300
Owned
6
2
3,600
Leased
1,850
Leased
283
1,750
Owned
1928
1973
1968
1969
1995
1996
2008
2005
1970
1989
1996
1965
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Office Location
80 Ridge Road
North Arlington, New Jersey
510 State Highway 34
Old Bridge Township, New Jersey
207 Old Tappan Road
Old Tappan, New Jersey
267 Changebridge Road
Pine Brook, New Jersey
917 Route 23 South
Pompton Plains, New Jersey
653 Westwood Avenue
River Vale, New Jersey
252 Park Avenue
Rutherford, New Jersey
520 Main Street
Spotswood, New Jersey
130 Mountain Avenue
Springfield, New Jersey
827 Fischer Boulevard
Toms River, New Jersey
2100 Hooper Avenue
Toms River, New Jersey
487 Pleasant Valley Way
West Orange, New Jersey
216 Main Street
West Orange, New Jersey
250 Valley Boulevard
Wood-Ridge, New Jersey
661 Wyckoff Avenue
Wyckoff, New Jersey
Central Jersey Division Branch Offices:
Administrative Offices & Branch
1903 Highway 35
Oakhurst, New Jersey
301 Main Street
Allenhurst, New Jersey
611 Main Street
Belmar, New Jersey
Year
Opened
Net Book Value as of
June 30, 2014
(In Thousands)
Square
Footage
Owned/
Leased
3,500
Owned
2,400
Owned
2,200
Owned
3,600
Owned
97
842
496
198
1,225
2,400
Leased
645
1,600
Owned
1,456
1,984
Owned
210
2,400
Owned
1,063
6,500
Owned
559
43
125
229
3,500
Owned
2,000
Leased
3,000
Owned
2,400
Owned
1,432
9,500
Owned
2,245
6,300
Owned
407
15,200
Leased
432
19
3,600
Leased
3,200
Leased
1952
2002
1973
1974
2009
1965
1974
1979
1991
1996
2008
1971
1975
1957
2002
2008
2011
2002
75
Office Location
501 Main Street
Bradley Beach, New Jersey
700 Branch Avenue
Little Silver, New Jersey
444 Ocean Boulevard North
Long Branch, New Jersey
627 Second Avenue
Long Branch, New Jersey
155 Main Street
Manasquan, New Jersey
300 West Sylvania Avenue
Neptune City, New Jersey
61 Main Street
Ocean Grove, New Jersey
2201 Bridge Avenue
Point Pleasant, New Jersey
700 Allaire Road
Spring Lake Heights, New Jersey
2200 Highway 35
Wall Township, New Jersey
Atlas Bank Division Branch Offices:
689 Fifth Avenue
Brooklyn, New York
339 Sand Lane
Staten Island, New York
Year
Opened
Net Book Value as of
June 30, 2014
(In Thousands)
Square
Footage
Owned/
Leased
733
3,100
Owned
—
—
606
—
210
2
24
—
2,500
Leased
1,500
Leased
3,200
Owned
3,000
Leased
3,000
Leased
2,800
Leased
3,500
Leased
2,500
Leased
941
5,000
Owned
811
121
4,900
Owned
1,985
Leased
2001
2001
2004
1998
1998
2000
2002
2001
1999
1997
1923
2009
76
Item 3. Legal Proceedings
We are, from time to time, 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. At June 30, 2014, there were no lawsuits pending or known to be contemplated
against us that would be expected to have a material effect on operations or income.
Item 4. Mine Safety Disclosures
Not applicable.
77
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
(a) Market Information. The Company’s common stock trades on The NASDAQ Global
Select Market under the symbol “KRNY”. The table below shows the reported high and low prices of the
common stock and dividends paid per public share for each quarter during the last two fiscal years.
High
Low
Dividends
Paid
Fiscal Year 2014
Quarter ended June 30, 2014
Quarter ended March 31, 2014
Quarter ended December 31, 2013
Quarter ended September 30, 2013
$ 15.55
$ 15.49
$ 11.99
$ 11.05
Fiscal Year 2013
Quarter ended June 30, 2013
Quarter ended March 31, 2013
Quarter ended December 31, 2012
Quarter ended September 30, 2012
$ 10.56
$ 10.67
$ 9.92
$ 9.99
$ 12.97
$ 10.91
$ 10.10
$ 9.19
$ 9.50
$ 9.63
$ 8.66
$ 9.40
$
$
$
$
$
$
$
$
Declarations of dividends by the Board of Directors 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 are determined by the Board.
The Company’s ability to pay dividends at its historic rates has been dependent on the ability of
Kearny MHC to waive receipt of dividends. In accordance with applicable policies of the OTS, Kearny
MHC waived receipt of all or substantially all of the dividends declared by the Company through the
quarter ended March 31, 2012. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the Federal Reserve assumed jurisdiction over mutual holding company dividend waivers and
imposed onerous new requirements on dividend waivers. Because the MHC was unable to obtain a
waiver of these requirements, the Board of Directors elected to forego the declaration of a dividend in the
fourth quarter of fiscal year 2012 and throughout fiscal 2013 and 2014. No assurances can be given as to
the frequency or amount of future dividends, if any.
The Company’s ability to pay dividends may also depend on the receipt of dividends from the
Bank, which is subject to a variety of limitations under federal banking regulations regarding the payment
of dividends.
As of August 29, 2014 there were 3.291 registered holders of record of the Company’s common
stock, plus approximately 2,026 beneficial (street name) owners.
(b)
Use of Proceeds. Not applicable.
78
(c)
Issuer Purchases of Equity Securities. Set forth below is information regarding the
Company’s stock repurchases during the fourth quarter of the fiscal year ended June 30, 2014.
Issuer Purchases of Equity Securities
Total
Number
of Shares
(or Units)
purchased
Average
Price Paid
Per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs *
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet be
Purchased Under the
Plans or Programs
April 1 – April 30, 2014
May 1 – May 31, 2014
June 1 – June 30, 2014
Total
-
8,300
-
$
-
13.78
-
8,300
$
13.78
-
8,300
-
8,300
708,040
699,740
699,740
699,740
*
762,640 shares or 5% of shares outstanding.
On December 2, 2013, the Company announced the authorization of a stock repurchase program for up to
Stock Performance Graph. The following stock performance graph compares the cumulative
total shareholder return on the Company’s common stock with (a) the cumulative total shareholder return
on stocks included in the NASDAQ Composite Index, (b) the cumulative total shareholder return on
stocks included in the SNL Thrift $1 Billion - $5 Billion Index and (c) the cumulative total shareholder
return on stocks included in the SNL Thrift MHC Index, in each case assuming an investment of $100.00
as of June 30, 2009. The cumulative total returns for the indices and the Company are computed
assuming the reinvestment of dividends that were paid during the period. It is assumed that the investment
in the Company’s common stock was made at the initial public offering price of $10.00 per share.
79
Index
6/30/09
6/30/10
6/30/11
6/30/12
6/30/13
6/30/14
Kearny Financial Corp.
NASDAQ Composite
SNL Thrift $1 B - $5 B Index
SNL Thrift MHC Index
$ 100
100
100
100
$ 82
116
100
109
$ 83
154
110
102
$ 90
165
120
103
$ 97
195
146
132
$ 140
255
178
176
The NASDAQ Composite Index measures all NASDAQ domestic and international based
common type stocks listed on The NASDAQ Stock Market. The SNL indices were prepared by SNL
Financial LC, Charlottesville, Virginia. The SNL Thrift $1 Billion - $5 Billion Index includes all thrift
institutions with total assets between $1.0 billion and $5.0 billion. The SNL Thrift MHC Index includes
all publicly traded mutual holding companies.
There can be no assurance that the Company’s future stock performance will be the same or
similar to the historical stock performance shown in the graph above. The Company neither makes nor
endorses any predictions as to stock performance.
80
Item 6. Selected Financial Data
The following financial information and other data in this section are derived from the
Company’s audited consolidated financial statements and should be read together therewith.
Balance Sheet Data:
Assets .....................................................................
Net loans receivable ..............................................
Mortgage-backed securities
2014
2013
$
3,510,009
1,729,084
$
3,145,360
1,349,975
At June 30,
2012
(In Thousands)
2,937,006
$
1,274,119
2011
2010
$
2,904,136
1,256,584
$
2,339,813
1,005,152
available for sale ..........................................
437,223
780,652
1,230,104
1,060,247
703,455
Mortgage-backed securities
held to maturity ............................................
Debt securities available for sale ..........................
Debt securities held to maturity ............................
Cash and cash equivalents .....................................
Goodwill ................................................................
Deposits .................................................................
Borrowings ............................................................
Total stockholders’ equity .....................................
295,658
407,898
216,414
135,034
108,591
2,479,941
512,257
494,676
101,114
300,122
210,015
127,034
108,591
2,370,508
287,695
467,707
1,090
12,602
34,662
155,584
108,591
2,171,797
249,777
491,617
1,345
44,673
106,467
222,580
108,591
2,149,353
247,642
487,874
2014
For the Years Ended June 30,
2012
(In Thousands, Except Percentage and Per Share Amounts)
2011
2013
95,819
21,998
73,821
3,381
70,440
6,967
1,156
—
64,158
14,405
4,217
10,188
0.16
0.16
$
$
$
88,258
22,001
66,257
4,464
61,793
6,179
10,209
8,688
60,737
8,756
2,250
6,506
0.10
0.10
$
$
$
98,549
28,369
70,180
5,750
64,430
4,767
(2,622)
—
58,721
7,854
2,776
5,078
0.08
0.08
$
$
100,376
32,216
68,160
4,628
63,532
3,640
1,207
—
56,242
12,137
4,286
7,851
0.12
0.12
$
$
$
$
Summary of Operations:
Interest income ........................................................
Interest expense .......................................................
Net interest income .................................................
Provision for loan losses .........................................
Net interest income after provision
for loan losses .................................................
Non-interest income, excluding asset gains,
losses and write downs ...................................
Non-interest income (loss) from asset gains,
losses and write downs ...................................
Debt extinguishment expenses ................................
Other non-interest expenses ....................................
Income before income taxes ...................................
Provisions for income taxes ....................................
Net income ..............................................................
Share and Per Share Data:
Net income per share:
Basic ....................................................................
Diluted ................................................................
Weighted average number of common shares
outstanding:
$
$
$
$
Basic ....................................................................
Diluted ................................................................
Cash dividends per share (1) ....................................
Dividend payout ratio (2) ..........................................
____________________________________
(1)
(2)
Excludes dividends waived by Kearny MHC.
Represents cash dividends paid divided by net income.
65,796
65,836
—
—%
$
66,152
66,152
—
—%
$
66,495
66,495
0.15
54.60%
$
67,118
67,118
0.20
41.00%
$
67,920
67,920
0.20
53.70%
1,700
29,497
255,000
181,422
82,263
1,623,562
210,000
485,926
2010
93,108
36,321
56,787
2,616
54,171
2,413
291
—
45,100
11,775
4,963
6,812
0.10
0.10
81
2014
At or For the Years Ended June 30,
2011
2012
2013
2010
Performance Ratios:
Return on average assets (net income
divided by average total assets) ...........................
0.31%
0.22%
0.17%
0.29%
0.31%
Return on average equity (net income
divided by average equity) .....................................
Net interest rate spread ....................................................
Net interest margin .........................................................
Average interest-earning assets to
2.17
2.32
2.44
1.33
2.34
2.50
1.04
2.46
2.65
1.63
2.56
2.80
1.42
2.45
2.83
average interest-bearing liabilities .........................
116.81
118.83
117.90
117.38
120.88
Efficiency ratio (non-interest expense
divided by the sum of net interest
income and non-interest income) ...........................
Non-interest expense to
average assets .........................................................
Asset Quality Ratios:
Non-performing loans to total loans ...............................
Non-performing assets to total assets .............................
Net charge-offs to average loans outstanding .................
Allowance for loan losses to total loans .........................
Allowance for loan losses to
78.30
84.00
81.19
77.04
75.81
1.96
1.45
0.77
0.12
0.71
2.38
2.27
1.05
0.28
0.80
2.02
2.61
1.27
0.59
0.79
2.10
2.76
1.46
0.12
0.93
2.04
2.13
0.93
0.05
0.84
non-performing loans .............................................
48.96
35.24
30.20
33.65
39.70
Capital Ratios:
Average equity to average assets ....................................
Equity to assets at period end .........................................
Tangible equity to tangible
assets at year end(1) ................................................
14.29
14.09
11.32
16.70
14.87
11.93
16.75
16.74
12.87
17.94
16.80
13.11
21.66
20.77
17.36
____________________________________
(1)
Tangible equity equals total stockholders’ equity reduced by goodwill, core deposit intangible assets, disallowed servicing assets and
accumulated other comprehensive (loss) income.
82
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
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
the business and financial information regarding Kearny Financial Corp and the consolidated financial
statements and notes thereto contained in this Annual Report on Form 10-K.
Overview
Financial Condition. Total assets increased $364.6 million to $3.51 billion at June 30, 2014
from $3.14 billion at June 30, 2013. The increase was funded largely through growth in deposits and
borrowings. The net growth in deposits was reflected in both non-interest bearing and interest-bearing
deposits with the growth in the latter comprised of increases in savings accounts and certificates of
deposit that were partially offset by a decline in interest-bearing checking. The growth in liabilities
funded a net increase in earning assets reflecting growth in loans, non-mortgage-backed securities and
other interest-earning assets that were partially offset by a decline in the balances of mortgage-backed
securities.
We executed a series of balance sheet restructuring and wholesale growth transactions during the
latter half of fiscal 2013 that resulted in both growth and diversification within the securities portfolio.
Notwithstanding the near term effect of these transactions on the composition and allocation of our
earning assets during fiscal 2013, it remains the long-term goal of our business plan to reallocate our
balance sheet to reflect a greater percentage of earning assets in the loan portfolio while, in turn, reducing
the relative size of the securities portfolio.
During fiscal 2014, loans receivable increased by $380.6 million to $1.74 billion, or 53.7% of
earning assets, at June 30, 2014 from $1.36 billion or 47.1% of earning assets at June 30, 2013. For those
same comparative periods, total securities decreased by $43.2 million to $1.36 billion, or 41.8% of
earnings assets, at June 30, 2014 from $1.40 billion, or 48.4% of earning assets, at June 30, 2013.
Our business plan continues to call for increased origination of commercial loans with an
emphasis on commercial mortgages, including multi-family and nonresidential mortgage loans, as well as
secured and unsecured commercial business loans. During fiscal 2014, commercial loans grew by $313.5
million, or 42.5%, to $1.05 billion, or 60.3% of total loans, from $737.5 million, or 54.2% of total loans,
at June 30, 2013. For those same comparative periods, one- to four-family mortgage loans, including first
mortgages and home equity loans and lines of credit, increased by $72.2 million to $680.2 million, or
39.0% of total loans, from $608.1 million, or 44.7% of total loans.
The reported growth in loans for fiscal 2014 included loans with fair values totaling $78.7 million
acquired in conjunction with the acquisition of Atlas Bank on June 30, 2014. The loans acquired from
Atlas Bank primarily included one- to four-family and commercial mortgage loans totaling $72.8 million
and $5.7 million, respectively, plus aggregate net deferred loan origination costs totaling $194,000 as of
that date. Included in the loans acquired from Atlas Bank were four impaired residential mortgage loans
whose aggregate carrying values at the time of acquisition totaled $742,000. We recognized no
expectation for future credit losses in the valuation of the four impaired loans acquired from Atlas Bank.
We continued to diversify the composition and allocation of our securities portfolio during fiscal
2014. Non-mortgage-backed securities, including U.S. agency debentures, corporate bonds, single-issuer
83
trust preferred securities, collateralized loan obligations, municipal obligations, and asset-backed
securities increased to $624.3 million, or 46.0% of securities, at June 30, 2014 from $510.1 million, or
36.7% of securities, at June 30, 2013. For those same comparative periods, the balance of mortgage-
backed securities, comprised primarily of U.S. government and agency pass-through securities and
collateralized mortgage obligations, decreased by $148.9 million to $732.9 million, or 54.0% of
securities, from $881.8 million, or 63.3% of securities.
The changes in the securities portfolio for fiscal 2014 included the addition of securities with fair
values totaling $26.9 million acquired in conjunction with the acquisition of Atlas Bank on June 30, 2014.
The securities acquired from Atlas Bank included mortgage-backed securities, including pass-through
securities and collateralized mortgage obligations, with fair values totaling $23.9 million as well as one
corporate bond with a fair value of $3.0 million at June 30, 2014. All securities acquired from Atlas Bank
were determined to be high-quality, investment grade securities with no “other-than-temporary”
impairment.
For the year ended June 30, 2014, our total deposits increased by $109.4 million to $2.48 billion
from $2.37 billion at June 30, 2013. As noted above, the growth in deposits was partly reflected in the
growth of non-interest-bearing deposits which increased by $33.1 million during fiscal 2014. The
remaining deposit growth was reflected in interest-bearing deposits which increased by $76.3 million to
$2.26 billion at June 30, 2014. For the year ended June 30, 2014, within interest-bearing deposits, the
balance of savings accounts and certificates of deposit increased by $51.9 million and $55.8 million,
respectively. This growth was partially offset by a $31.3 million decline in the balance of interest-bearing
checking accounts.
A portion of the net growth in deposits reflected balances with fair values totaling $86.1 million
assumed in conjunction with the acquisition of Atlas Bank on June 30, 2014. Deposit balances assumed
from Atlas Bank included non-interest-bearing and interest-bearing accounts totaling $14.6 million and
$71.5 million, respectively. In addition to the deposits assumed from Atlas Bank, a portion of the net
growth in deposit balances from period to period reflected changes in the balances of “non-retail”
deposits acquired through various wholesale channels.
The balance of borrowings increased by $224.6 million to $512.3 million at June 30, 2014 from
$287.7 million at June 30, 2013. The increase in borrowings largely reflected utilization of additional
FHLB term advances to fund a portion of the loan growth reported during fiscal 2014. Interest rate
derivatives were used to effectively extend duration of these borrowings for interest rate risk management
purposes. The increase also reflected borrowings with fair values totaling $18.7 million assumed in
conjunction with the Atlas Bank acquisition as well as a $12.0 million increase in overnight borrowings
drawn for short-term liquidity management purposes.
Stockholders’ equity increased by $27.0 million to $494.7 million at June 30, 2014 from $467.7
million at June 30, 2013. The increase in stockholders’ equity was partly attributable to our issuance of
common stock valued at $15.5 million as consideration paid to Kearny MHC for the acquisition of Atlas
Bank, net income of $10.2 million for the fiscal year ended June 30, 2014, a reduction of unearned ESOP
shares relating to the offsets of benefit plan expenses during the year and a net decrease in the unrealized
loss of our available for sale securities portfolios. These were partially offset by an increase in treasury
stock resulting from our share repurchase activity that was partially offset by the issuance of shares for
the exercise of stock options during fiscal 2014.
Results of Operations. Our results of operations depend primarily on our 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
84
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 results of
operations are also affected by our provision for loan losses, non-interest income and non-interest
expense.
Net income for the fiscal year ended June 30, 2014 was $10.2 million or $0.16 per diluted share;
an increase of $3.7 million from $6.5 million or $0.10 per diluted share for the fiscal year ended June 30,
2013. The increase in net income reflected an increase in net interest income and declines in non-interest
expense and the provision for loan losses that were partially offset by a decline in non-interest income.
These factors contributed to an overall increase in pre-tax net income and the provision for income taxes.
Our net interest income increased $7.5 million to $73.8 million for the year ended June 30, 2014
from $66.3 million for the year ended June 30, 2013. The increase in net interest income reflected a $7.5
million increase in interest income to $95.8 million from $88.3 million. The increase in interest income
primarily reflected an increase in the average balance of interest-earning assets that was partially offset by
a decline in their average yield. For the year ended June 30, 2014, the average balance of interest-earning
assets increased by $376.3 million to $3.03 billion compared to $2.65 billion for the year ended June 30,
2013. For those same comparative periods, the average yield on interest-earning assets decreased by 16
basis points to 3.17% from 3.33%.
Interest expense remained generally stable at $22.0 million for the year ended June 30, 2014 and
2013. The nominal decrease in interest expense between the two periods reflected an increase in the
average balance of interest-bearing liabilities that was substantially offset by a decline in their average
cost. For the year ended June 30, 2014 the average balance of interest-bearing liabilities increased by
$360.8 million to $2.59 billion compared to $2.23 billion for the year ended June 30, 2013. For those
same comparative periods, the average cost of interest-bearing liabilities decreased 14 basis points to
0.85% from 0.99%.
In total, the net interest rate spread decreased two basis points to 2.32% for fiscal 2014 from
2.34% for fiscal 2013 while the net interest margin decreased six basis points to 2.44% from 2.50% for
those same comparative periods.
The provision for loan losses decreased $1.1 million to $3.4 million for fiscal 2014 from $4.5
million for fiscal 2013. The net decrease in the provision reflected the effects of recognizing
comparatively lower provisions on loans evaluated individually for impairment. These decreases were
partially offset by increases in provisions attributable to loans evaluated collectively for impairment due
primarily to the overall growth within the non-impaired portion of the portfolio coupled with changes to
certain environmental loss factors that were partially offset by decreases in historical loss factors.
Non-interest income decreased by $8.3 million to $8.1 million for fiscal 2014 from $16.4 million
for fiscal 2013. The decrease in non-interest income primarily reflected a decline in gains on securities
sold arising primarily from the comparatively higher levels recorded during fiscal 2013 in conjunction
with the balance sheet restructuring transactions discussed earlier. The decrease also reflected a decline
in the gain on sale of loans attributable to a decrease in SBA loan origination and sale volume during
fiscal 2014. The decrease in non-interest income was partially offset by an increase in income
attributable to our investment in bank-owned life insurance that was augmented by a decline on losses
relating to write downs and sales of real estate owned. Other variances in non-interest income included
decreases in loan-related and deposit-related fees and charges that were partially offset by an increase in
other miscellaneous income primarily reflecting a gain on bargain purchase recorded in conjunction with
the Atlas Bank acquisition.
85
Non-interest expense decreased by $5.2 million to $64.2 million for the year ended June 30, 2014
from $69.4 million for the year ended June 30, 2013. The decrease in non-interest expense primarily
reflected the absence of any debt extinguishment expenses recognized during fiscal 2013 in conjunction
with the balance sheet restructuring transactions discussed earlier for which no such expenses were
recorded during fiscal 2014. This decrease in expense was partially offset by the recognition of non-
recurring expenses included in equipment and systems expense, and to a lesser extent other categories of
non-interest expense associated with the conversion of the primary core processing systems to Fiserv, Inc.
during fiscal 2014. We also recognized non-recurring merger-related expenses during fiscal 2014 in
conjunction with the acquisition of Atlas Bank. Less noteworthy operating increases in other categories
of non-interest expense were reported in salaries and employee benefits, premises occupancy, advertising
and marketing, deposit insurance expense and other miscellaneous expense.
The combined effects of these factors resulted in higher pre-tax net income and the provision for
income taxes during fiscal 2014 compared with fiscal 2013. The increase in our effective income tax rate
largely reflected the comparatively smaller portion of net income arising from tax favored sources, such
as income from municipal obligations and bank-owned life insurance, during fiscal 2014 compared to
fiscal 2013.
Recent Acquisition Activity. We completed the acquisition of Atlas Bank, a federal mutual
savings bank headquartered in Brooklyn, New York, on June 30, 2014. As of June 30, 2014, Atlas Bank
operated from its main retail banking office in Brooklyn and a branch in Staten Island, New York, and
had assets with a fair value of $120.9 million and liabilities with fair values totaling $105.2 million. Atlas
Bank had no stockholders, and therefore no merger consideration was paid to third parties. We issued
1,044,087 shares of Kearny-Federal common stock to Kearny MHC as consideration for the transaction.
As the merger was completed on June 30, 2014, the transaction is reflected in the consolidated balance
sheets and consolidated statements of operations at and for the relevant periods presented in this report.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported. We describe them in
detail in Note 1 to our audited consolidated financial statements included as an exhibit to this document.
In preparing the audited 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 evaluation of
securities impairment and the impairment testing of goodwill.
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 balance of the allowance is generally maintained through provisions for loan losses that are
charged to income in the period that estimated losses on loans are identified by our loan review system.
We charge losses on loans against the allowance as such losses are actually incurred. Recoveries on loans
previously charged-off are added back to the allowance.
As described in greater detail in the notes to audited consolidated financial statements, our
allowance for loan loss calculation methodology utilizes a “two-tier” loss measurement process that is
performed quarterly. Through the first tier of the process, we identify the loans that must be reviewed
individually for impairment. Such loans generally include our larger and/or more complex loans
including commercial mortgage loans, as well as our one- to four-family mortgage loans, home equity
loans and home equity lines of credit. A reviewed loan is deemed to be impaired when, based on current
86
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. Once a loan is determined to be impaired, management
measures the amount of the estimated impairment associated with that loan which is generally defined as
the amount by which the carrying value of a loan exceeds its fair value. We establish valuation
allowances for loan impairments in the fiscal period during which they are identified. Impairments on
individually evaluated loans generally are charged off against the applicable valuation allowance when
they are determined to be confirmed, expected losses.
The second tier of the loss measurement process involves estimating the probable and estimable
losses on loans not otherwise individually reviewed for impairment. Such loans generally comprise large
groups of smaller-balance homogeneous loans as well as the remaining non-impaired loans of those types
noted above that are otherwise eligible for individual impairment evaluation.
Valuation allowances established through the second tier of the loss measurement process utilize
historical and environmental loss factors to collectively estimate the level of probable losses within
defined segments of our loan portfolio. To calculate the historical loss factors, our allowance for loan
loss methodology generally utilizes a 24-month moving average of annual net charge-off rates (charge-
offs net of recoveries) by loan segment, where available, to calculate the actual, historical loss experience.
The outstanding principal balance of each loan segment is multiplied by the applicable historical loss
factor to estimate the level of probable losses based upon our historical loss experience.
Environmental loss factors are based upon specific qualitative criteria representing key sources of
risk within the loan portfolio. Such risk criteria includes the level of and trends in nonperforming loans;
the effects of changes in credit policy; the experience, ability and depth of the lending function’s
management and staff; national and local economic trends and conditions; credit risk concentrations;
changes in local and regional real estate values; changes in the nature, volume and terms of loans;
changes in the quality of loan review systems and resources and the effects of regulatory, legal and other
external factors. The outstanding principal balance of each loan segment is multiplied by the applicable
environmental loss factor to estimate the level of probable losses based upon the qualitative risk criteria.
The sum of the probable and estimable loan losses calculated in accordance with loss
measurement processes, as described above, represents the total targeted balance for our allowance for
loan losses at the end of a fiscal period. A more detailed discussion of our allowance for loan loss
calculation methodology is presented in Note 1 to our audited consolidated financial statements.
Impairment Testing of Goodwill. We record goodwill, representing the excess of amounts paid
over the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the
date of acquisition. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds
its implied fair value. Goodwill was most recently tested as of June 30, 2014, at which time no
impairment was indicated. As of that date, we reported goodwill of $108.6 million. The value of the
goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant
decrease in the franchise value of Kearny Bank. If an impairment is determined in the future, we will
reflect the loss as an expense in the period in which the impairment is determined, leading to a reduction
of our net income for that period by the amount of the impairment.
Other-than-Temporary Impairment (“OTTI”) of Securities. If the fair value of a security is less
than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with
unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary”
in accordance with applicable accounting guidance.
We account for temporary impairments based upon the classification of the related security as
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either available for sale, held to maturity or a trading. Temporary impairments on “available for sale”
securities are recognized, on a tax-effected basis, through accumulated other comprehensive income with
offsetting entries adjusting the carrying value of the security and the balance of deferred taxes.
Conversely, we do not adjust the carrying value of “held to maturity” securities for temporary
impairments, although information concerning the amount and duration of impairments on held to
maturity securities is generally disclosed in periodic financial statements. The carrying value of securities
held in a trading portfolio is adjusted to their fair value through earnings on a daily basis. However, we
maintained no securities in trading portfolios at or during the periods presented in these financial
statements.
We account for OTTI based upon several considerations. First, OTTI on securities that we have
decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to
the full recovery of their fair value to a level equal to or exceeding their amortized cost, are recognized in
earnings. If neither of these conditions regarding the likelihood of the security’s sale is applicable, then
the OTTI is bifurcated into credit-related and noncredit-related components. A credit-related impairment
generally represents the amount by which the present value of the cash flows that are expected to be
collected on an other-than-temporarily impaired security fall below its amortized cost. The noncredit-
related component represents the remaining portion of the impairment not otherwise designated as credit-
related. We recognize credit-related, OTTI in earnings. However, noncredit-related, other-than-
temporary impairments on debt securities are recognized in accumulated other comprehensive income.
Comparison of Financial Condition at June 30, 2014 and June 30, 2013
General. Total assets increased by $364.6 million to $3.51 billion at June 30, 2014 from $3.15
billion at June 30, 2013. The increase in total assets was primarily attributable to increases in the
balances of loans, debt securities, FHLB stock and cash and cash equivalents that were partially offset by
a decline in the balance of mortgage-backed securities. The net increase in total assets was
complemented by increases in the balances of deposits, borrowings and stockholders’ equity.
Cash and Cash Equivalents. Cash and cash equivalents, which consist primarily of interest-
earning and non-interest-earning deposits in other banks, increased by $8.0 million to $135.0 million at
June 30, 2014 from $127.0 million at June 30, 2013. The increase in the balance largely reflected the
addition of $9.1 million in cash and cash equivalents acquired in conjunction with the acquisition of Atlas
Bank on June 30, 2014 with the remaining variance attributable to normal operating fluctuations in such
balances.
Notwithstanding day-to-day fluctuations in cash and cash equivalents, we generally sought to
maintain lower levels of cash and cash equivalents during the fiscal year ended June 30, 2014 to reduce
the opportunity cost of excess liquidity. Management continues to monitor the level of short-term, liquid
assets in relation to the expected need for such liquidity to fund our strategic initiatives – particularly
those relating to the expansion of our commercial lending functions. We may alter our liquidity
reinvestment strategies based upon the timing and relative success of those initiatives.
Debt Securities Available for Sale. Debt securities classified as available for sale increased by
$107.8 million to $407.9 million at June 30, 2014 from $300.1 million at June 30, 2013. The net increase
primarily reflected security purchases totaling $158.9 million during the year ended June 30, 2014 that
were partially offset by security sales totaling $55.4 million during the same period. The security sales
primarily reflected our decision to reduce our investment in certain collateralized loan obligations that
may become ineligible investments under the terms of the “Volcker Rule” whose provisions were enacted
by regulatory agencies during the quarter ended December 31, 2013 in conjunction with the ongoing
adoption and implementation of the Dodd-Frank Act. Security purchases for the year partly reflected the
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reinvestment of these security sale proceeds into other eligible securities within the portfolio as well as
the reinvestment of mortgage-backed security sale proceeds into shorter-duration investments within this
segment of the portfolio.
In addition to the securities purchased, we also acquired a corporate debt security available for
sale with a fair value of $3.0 million in conjunction with the Atlas Bank acquisition on June 30, 2014.
The net change in debt securities available for sale also reflected a decrease in the net unrealized
loss within the portfolio coupled with repayments of principal attributable to amortization during the year
ended June 30, 2014. The net unrealized loss for the portfolio decreased by $1.9 million to $3.3 million
at June 30, 2014 from $5.2 million at June 30, 2013. The decrease in the net unrealized loss was
primarily attributable to changes in the fair value of the various sectors within the portfolio arising
primarily from movements in market interest rates.
At June 30, 2014, the available for sale debt securities portfolio included U.S. agency debentures,
single-issuer trust preferred securities, corporate bonds, asset-backed securities, collateralized loan
obligations and municipal obligations. Based on its evaluation, management has concluded that no other-
than-temporary impairment is present within this segment of the investment portfolio as of that date.
Additional information regarding debt securities available for sale at June 30, 2014 is presented in
the “Business” section of this report as well as in Note 5 and Note 7 to the audited consolidated financial
statements.
Debt Securities Held to Maturity. Debt securities classified as held to maturity increased by $6.4
million to $216.4 million at June 30, 2014 from $210.0 million at June 30, 2013. The net increase
primarily reflected purchases of municipal obligations totaling $9.1 million during the year ended June
30, 2014 that were partially offset by repayments, calls and maturities of such securities during that same
period.
At June 30, 2014, the held to maturity debt securities portfolio included U.S. agency debentures
and municipal obligations, a small portion of which represent non-rated, short term, bond anticipation
notes (“BANs”) issued by New Jersey municipalities with whom Kearny Bank maintains or seeks to
maintain deposit relationships. Based on its evaluation, management has concluded that no other-than-
temporary impairment is present within this segment of the investment portfolio as of that date.
Additional information regarding debt securities held to maturity at June 30, 2014 is presented in
the “Business” section of this report as well as in Note 6 and Note 7 to the audited consolidated financial
statements.
Loans Receivable. Loans receivable, net of unamortized premiums, deferred costs and the
allowance for loan losses, increased by $379.1 million to $1.73 billion at June 30, 2014 from $1.35 billion
at June 30, 2013. The increase in net loans receivable was primarily attributable to new loan origination,
purchase and acquisition volume outpacing loan repayments during the year ended June 30, 2014.
Residential mortgage loans, including home equity loans and lines of credit, increased by $72.2
million to $680.2 million at June 30, 2014 from $608.1 million at June 30, 2013. The components of the
net increase included an increase in the balance of one- to four-family first mortgage loans of $80.0
million to $580.6 million at June 30, 2014 from $500.6 million at June 30, 2013. Partially offsetting this
increase was a net reduction in the balance of home equity loans of $5.2 million to $75.6 million at June
30, 2014 from $80.8 million for those same comparative periods. Additionally, the balance of home
equity lines of credit decreased by $2.6 million to $24.0 million at June 30, 2014 from $26.6 million at
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June 30, 2013.
Residential mortgage loan activity for the year ended June 30, 2014 continued to reflect our
decreased strategic focus on residential mortgage lending coupled with the combined effects of an
increase in mortgage rates from their historical lows that has slowed the pace of refinancing and the
diminished level of demand for “new purchase” mortgages reflecting continued weakness in the
economy. Moreover, as a portfolio lender cognizant of potential exposure to interest rate risk, we have
generally refrained from lowering our long-term, fixed-rate residential mortgage rates to the levels
available in the marketplace. Consequently, a portion of our residential mortgage borrowers may
continue to seek long-term, fixed-rate refinancing opportunities from other market resources further
limiting growth within this segment of the loan portfolio.
In total, residential mortgage loan origination and purchase volume for the year ended June 30,
2014 was $78.2 million and $22.4 million, respectively, while aggregate originations of home equity
loans and home equity lines of credit totaled $29.0 million for that same period. In addition to the loans
originated and purchased, we also acquired residential mortgage loans with fair values totaling $72.8
million in conjunction with the Atlas Bank acquisition on June 30, 2014.
Commercial loans, in aggregate, increased by $313.5 million to $1.05 billion at June 30, 2014
from $737.5 million at June 30, 2013. The components of the aggregate increase included an increase in
commercial mortgage loans totaling $316.9 million that was partially offset by a decline in commercial
business loans of $3.4 million. The ending balances of commercial mortgage loans and commercial
business loans at June 30, 2014 were $983.8 million and $67.3 million, respectively. Commercial loan
origination volume for the year ended June 30, 2014 totaled $358.4 million comprising $334.3 million
and $24.1 million of commercial mortgage and commercial business loan originations, respectively.
Commercial loan originations were augmented with the purchase of participations in commercial
mortgage loans and commercial business loans totaling $87.0 million and $4.9 million, respectively,
during the year ended June 30, 2014. In addition to the loans originated and purchased, we also acquired
commercial mortgage loans with fair values totaling $5.7 million in conjunction with the Atlas Bank
acquisition on June 30, 2014.
The outstanding balance of construction loans, net of loans-in-process, decreased by $4.6 million
to $7.3 million at June 30, 2014 from $11.9 million at June 30, 2013. Construction loan disbursements
for the year ended June 30, 2014 totaled $3.8 million.
Other loans, primarily comprising account loans, deposit account overdraft lines of credit and
other consumer loans, increased $60,000 to $4.3 million at June 30, 2014. Other loan originations for the
year ended June 30, 2014 totaled approximately $2.3 million.
Additional information regarding loans receivable at June 30, 2014 is presented in the “Business”
section of this report as well as in Note 8 to the audited consolidated financial statements.
Nonperforming Loans. At June 30, 2014, nonperforming loans decreased by $5.6 million to
$25.3 million or 1.45% of total loans from $30.9 million or 2.27% of total loans as of June 30, 2013. The
balance of nonperforming loans at June 30, 2014 included $25.2 million and $125,000 of “nonaccrual”
loans and loans reported as “over 90 days past due and accruing”, respectively. By comparison, the
balance of nonperforming loans at June 30, 2013 was comprised entirely of “nonaccrual” loans.
The composition of nonperforming loans at June 30, 2014 continued to include a
disproportionate balance of residential mortgage loans originally acquired from Countrywide Home
Loans, Inc. (“Countrywide”) which continue to be serviced by their acquirer, Bank of America through its
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subsidiary, BAC Home Loans Servicing, LP (“BOA”). In total, nonperforming Countrywide loans
totaled $8.4 million, or 33.2% of total nonperforming loans, at June 30, 2014. As of that same date, we
owned a total of 77 residential mortgage loans with an aggregate outstanding balance of $33.3 million
that were originally acquired from Countrywide. Of these loans, an additional two loans totaling
$866,000 are 30-89 days past due and are in various stages of collection.
Additional information about our nonperforming loans at June 30, 2014 is presented in the
“Business” section of this report as well as in Note 9 to the audited consolidated financial statements.
Allowance for Loan Losses. During the year ended June 30, 2014, the balance of the allowance
for loan losses increased by approximately $1.5 million to $12.4 million or 0.71% of total loans at June
30, 2014 from $10.9 million or 0.80% of total loans at June 30, 2013. The increase resulted from
provisions of $3.4 million during the year ended June 30, 2014 that were partially offset by charge-offs,
net of recoveries, totaling approximately $1.9 million.
Additional information about the allowance for loan losses at June 30, 2014 is presented in the
Asset Quality section of this report as well as in Note 1 and Note 9 to the audited consolidated financial
statements.
Mortgage-backed Securities Available for Sale. Mortgage-backed securities available for sale
decreased by $343.4 million to $437.2 million at June 30, 2014 from $780.7 million at June 30, 2013.
The net decrease partly reflected sales of securities totaling $114.0 million during the year ended June 30,
2014 partially offset by purchases totaling $50.2 million during the same period. A portion of the
proceeds from mortgage-backed security sales were used to fund loan growth during the period. The
remainder was used to fund purchases of short-duration debt securities, as noted above, as well as fixed-
rate, agency securities including 30-year pass-through securities that were acquired based upon their
Community Reinvestment Act eligibility.
The net decrease in mortgage-backed securities available for sale also reflected cash repayment
of principal, net of discount accretion and premium amortization as well as the transfer of securities with
fair values of $191.9 million from the available-for-sale portfolio to the held-to-maturity portfolio during
the year ended June 30, 2014. The transferred securities were limited to those that we fully intend to hold
until maturity including our agency mortgage-backed securities qualifying for Community Reinvestment
Act eligibility and those comprising securitized commercial real estate project loans. The net decrease in
the portfolio was partially offset by an increase in the fair value of the applicable securities resulting in an
unrealized gain in the portfolio at June 30, 2014 from an unrealized loss at June 30, 2013.
In addition to the securities purchased, we also acquired mortgage-backed securities available for
sale with a fair value of $23.9 million in conjunction with the Atlas Bank acquisition on June 30, 2014.
At June 30, 2014, the available for sale mortgage-backed securities portfolio primarily included
agency pass-through securities and agency collateralized mortgage obligations. As of that date, the
portfolio included one non-agency mortgage-backed security acquired from Atlas Bank with a fair value
of $210,000. Based on its evaluation, management has concluded that no other-than-temporary
impairment is present within this segment of the investment portfolio as of that date.
Additional information regarding mortgage-backed securities available for sale at June 30, 2014
is presented in the “Business” section of this report as well as in Note 5 and Note 7 to the audited
consolidated financial statements.
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Mortgage-backed Securities Held to Maturity. Mortgage-backed securities held to maturity
increased by $194.6 million to $295.7 million at June 30, 2014 from $101.1 million at June 30, 2013.
The increase in the portfolio was primarily attributable to the transfer of securities with fair values of
$191.9 million from the available-for-sale portfolio to the held-to-maturity portfolio during the year ended
June 30, 2014. The increase in the portfolio also reflected purchases of securities totaling $5.1 million.
Partially offsetting these increases was cash repayment of principal, net of discount accretion and
premium amortization, coupled with the sale of one non-agency collateralized mortgage obligation whose
credit quality had deteriorated below investment grade making it eligible for sale from the held to
maturity portfolio.
At June 30, 2014, the held to maturity mortgage-backed securities portfolio primarily included
agency pass-through securities and agency collateralized mortgage obligations. As of that date, we also
held a nominal balance of non-agency mortgage-backed securities whose aggregate carrying values and
market values totaled $54,000 and $53,000, respectively. Based on its evaluation, management has
concluded that no other-than-temporary impairment is present within this segment of the investment
portfolio as of that date.
Additional information regarding mortgage-backed securities held to maturity at June 30, 2014 is
presented in the “Business” section of this report as well as in Note 6 and Note 7 to the audited
consolidated financial statements.
Other Assets. The aggregate balance of other assets, including premises and equipment, FHLB
stock, accrued interest receivable, goodwill, bank owned life insurance, deferred income taxes and other
miscellaneous assets, increased by $12.3 million to $288.7 million at June 30, 2014 from $276.4 million
at June 30, 2013. The increase in other assets largely reflected a $10.3 million increase in the investment
in FHLB stock that primarily reflected the increase in our mandatory investment attributable to the
corresponding increase in the balance of borrowings with the FHLB. The change in other assets also
reflected a $2.7 million increase in the cash surrender value of our bank owned life insurance during fiscal
2014.
In addition to the increases noted above, the balance of other assets also reflected the addition of
premises and equipment, FHLB stock and other miscellaneous assets totaling $2.2 million, $1.0 million
and $3.0 million, respectively, acquired in conjunction with the acquisition of Atlas Bank on June 30,
2014.
The balance of real estate owned (“REO”), included in other assets, decreased by $437,000 to
$1.6 million at June 30, 2014 from $2.1 million at June 30, 2013 representing the net carrying values of
seven and eight properties held at the close of each period, respectively.
The remaining increases and decreases in other assets generally comprised normal growth or
operating fluctuations in their respective balances.
Deposits. The balance of total deposits increased by $109.4 million to $2.48 billion at June 30,
2014 from $2.37 billion at June 30, 2013. The net increase in deposit balances reflected a $76.3 million
increase in interest-bearing deposits as well as an increase of $33.1 million in non-interest-bearing
checking accounts. The net increase in interest-bearing deposit accounts comprised a $51.9 million
increase in savings and club accounts coupled with a $55.8 million increase in certificates of deposit.
These increases were partially offset by a $31.3 million decline in interest-bearing checking accounts.
A portion of the net growth in deposits reflected balances with fair values totaling $86.1 million
assumed in conjunction with the acquisition of Atlas Bank on June 30, 2014. Deposit balances assumed
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from Atlas Bank included non-interest-bearing and interest-bearing accounts totaling $14.6 million and
$71.5 million, respectively, with the latter comprising interest-bearing checking accounts, savings
accounts and certificates of deposit totaling $2.8 million, $31.4 million and $37.3 million, respectively.
In addition to the deposits assumed from Atlas Bank, the change in deposit balances from year to year
reflected changes in the balances of retail deposits as well as “non-retail” deposits acquired through
various wholesale channels. The decline in the balance of interest-bearing checking accounts included a
$16.1 million decrease in the balance of brokered money market deposits acquired through Promontory’s
IND program to $213.5 million at June 30, 2014 from $229.6 million at June 30, 2013. The terms of the
program generally establish a reciprocal commitment for Promontory to deliver and us to accept such
deposits for a period of no less than five years during which time total aggregate balances shall be
maintained within a range of $200.0 million to $230.0 million. Such deposits are generally sourced by
Promontory from large retail and institutional brokerage firms whose individual clients seek to have a
portion of their investments held in interest-bearing accounts at FDIC-insured institutions. The remaining
decline in interest-bearing checking accounts reflected the combined effects of retail deposit outflows and
disintermediation into other interest-bearing deposit accounts.
The certificates of deposit assumed in conjunction with the acquisition of Atlas Bank included
$6.4 million of predominantly short-term time deposits originally acquired by Atlas Bank through the
QwickRate deposit listing service. Separate from the acquisition of Atlas Bank, Kearny Bank also began
to utilize the QwickRate deposit listing service during fiscal 2014 to attract “non-brokered” wholesale
time deposits targeting institutional investors with a three-to-five year investment horizon. The balance
of the time deposits acquired by Kearny Bank during fiscal 2014 through the QwickRate listing service
totaled $54.2 million at June 30, 2014 with such funds having a weighted average remaining term to
maturity of 3.9 years. In combination with the balance of deposits assumed in conjunction with the Atlas
Bank acquisition, the aggregate balance of “non-brokered” listing service deposits totaled $60.6 million
or 2.4% of deposits at June 30, 2014.
Kearny Bank also acquired a small portfolio of longer-term, brokered certificates of deposit
during fiscal 2014 whose balances totaled approximately $18.5 million at June 30, 2014. In combination
with Promontory IND money market deposits noted above, Kearny Bank’s brokered deposits totaled
$232.0 million or 9.7% of deposits at June 30, 2014.
The growth in certificates of deposit acquired through wholesale sources and those assumed from
Atlas Bank were partially offset by a net decline in other retail time deposit balances that largely reflected
our efforts to manage our cost of deposits which allowed for some controlled outflow of shorter-term time
deposits during the year. However, we did maintain our attractive offering rates on certain longer-term
time deposits during fiscal 2014 which continued to attract retail funding within the four-to-five year
maturity tranches and supported our larger goal of extending the duration of time deposits for interest rate
risk management purposes.
Finally, the increase in savings and club accounts largely reflected growth in retail core deposits
coupled with the effects of the deposits assumed from Atlas Bank. A portion of this growth represented
disintermediation from other interest-bearing deposit accounts during fiscal 2014.
Borrowings. The balance of borrowings increased by $224.6 million to $512.3 million at June
30, 2014 from $287.7 million at June 30, 2013. The reported increase primarily reflected an additional
$200.0 million of FHLB advances drawn primarily to fund a portion of our loan growth during the year.
For interest rate risk management purposes, we have utilized interest rate derivatives to effectively swap
the rolling 90-day maturity/repricing characteristics of the new borrowings into a fixed rate for five years.
The increase also reflected borrowings with fair values totaling $18.7 million assumed in conjunction
with the Atlas Bank acquisition on June 30, 2014 as well as a $12.0 million increase in overnight
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borrowings to an outstanding balance of $17.0 million at June 30, 2014 which were drawn for short-term
liquidity management purposes.
The change in borrowing balances also reflected a $6.1 million decline in the balance of customer
sweep accounts to $30.7 million at June 30, 2014, from $36.8 million at June 30, 2013. Sweep accounts
are short-term borrowings representing funds that are withdrawn from a customer’s non-interest-bearing
deposit account and invested in an uninsured overnight investment account that is collateralized by
specified investment securities we own.
Other Liabilities. The balance of other liabilities, including advance payments by borrowers for
taxes and other miscellaneous liabilities, increased by $3.6 million to $23.1 million at June 30, 2014 from
$19.5 million at June 30, 2013. The increase in other liabilities reflected normal operating fluctuations in
such balances coupled with the assumption of other liabilities totaling $421,000 in conjunction with the
Atlas Bank acquisition on June 30, 2014.
Stockholders’ Equity. Stockholders’ equity increased by $27.0 million to $494.7 million at June
30, 2014 from $467.7 million at June 30, 2013. The increase in stockholders’ equity was partly
attributable to our issuance of 1,044,087 shares of our common stock valued at $15.5 million as
consideration paid to Kearny MHC for the acquisition of Atlas Bank. The increase also reflected net
income of $10.2 million for the fiscal year ended June 30, 2014 coupled with a reduction of unearned
ESOP shares relating to the offsets of benefit plan expenses during the year. The increase in
stockholders’ equity also reflected a net decrease in the unrealized loss on our available for sale securities
portfolios whose changes in fair value are reflected in accumulated other comprehensive income on an
after tax basis.
The increase in stockholders’ equity was partially offset by a net increase of $2.8 million in
treasury stock which partly reflected our repurchase of 394,580 shares of our common stock during the
period at an average price of $10.48 per share. The increase in treasury stock due to share repurchases
was partially offset by the issuance of 117,618 shares at an average cost of $11.48 per share resulting
from the exercise of employee stock options during the year.
Comparison of Operating Results for the Years Ended June 30, 2014 and June 30, 2013
General. Net income for the year ended June 30, 2014 was $10.2 million or $0.16 per diluted
share; an increase of $3.7 million compared to $6.5 million or $0.10 per diluted share for the year ended
June 30, 2013. The increase in net income between comparative periods reflected an increase in net
interest income and decreases in non-interest expense and provision for loan losses that were partially
offset by a decline in non-interest income. These factors contributed to an overall increase in pre-tax net
income and the provision for income taxes.
Net Interest Income. Net interest income for the year ended June 30, 2014 was $73.8 million; an
increase of $7.5 million from $66.3 million for the year ended June 30, 2013. The increase in net interest
income between the comparative periods resulted primarily from an increase in interest income that was
augmented by a nominal decline in interest expense. The increase in interest income was primarily
attributable to an increase in the average balance of interest-earning assets that was partially offset by a
decline in their average yield. The nominal decline in interest expense resulted from the largely offsetting
effects of an increase in the average balance of interest-bearing liabilities and concurrent decline in their
average cost. Declines in average yields and costs between comparative periods continued to reflect the
effects of low interest rates that were prevalent in the marketplace throughout most of fiscal 2014.
As a result of these factors, our net interest rate spread decreased two basis points to 2.32% for
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the year ended June 30, 2014 from 2.34% for the year ended June 30, 2013. The decrease in the net
interest rate spread reflected a 16 basis point decline in the yield on earning assets to 3.17% from 3.33%
that was partially offset by a decrease in the average cost of interest-bearing liabilities of 14 basis points
to 0.85% from 0.99% for the same comparative periods. A discussion of the factors contributing to the
overall change in yield on earning assets and average cost of interest-bearing liabilities is presented in the
separate discussion and analysis of interest income and interest expense below.
The factors resulting in the decrease in net interest income and net interest rate spread also
adversely affected our net interest margin. However, additional factors further impacted net interest
margin including, but not limited to, the use of interest-earning assets to fund additions to treasury stock
during fiscal 2014. In total, we reported a six basis point decline in net interest margin to 2.44% for the
year ended June 30, 2014 from 2.50% for the year ended June 30, 2013.
Interest Income. Total interest income increased $7.5 million to $95.8 million for the year ended
June 30, 2014 from $88.3 million for the year ended June 30, 2013. The increase in interest income
reflected an increase in the average balance of interest-earning assets that was partially offset by a decline
in their average yield. The average balance of interest-earning assets increased by $376.3 million to
$3.03 billion for the year ended June 30, 2014 from $2.65 billion for the year ended June 30, 2013. For
those same comparative periods, the average yield on interest-earning assets declined 16 basis points to
3.17% from 3.33%.
Interest income from loans increased $5.3 million to $66.8 million for the year ended June 30,
2014 from $61.5 million for the year ended June 30, 2013. The increase in interest income on loans was
attributable to a net increase in the average balance of loans that was partially offset by decline in their
average yield.
The average balance of loans increased by $239.7 million to $1.55 billion for the year ended June
30, 2014 from $1.31 billion for the year ended June 30, 2013. The reported increase in the average
balance of loans primarily reflected an aggregate increase of $277.4 million in the average balance of
commercial loans to $921.0 million for the year ended June 30, 2014 from $643.6 million for the year
ended June 30, 2013. Our commercial loans generally comprise commercial mortgage loans, including
multi-family and nonresidential mortgage loans, as well as secured and unsecured commercial business
loans.
The increase in the average balance of commercial loans was partially offset by decreases in the
average balances of residential mortgage loans and construction loans. The average balance of residential
mortgage loans decreased by $31.0 million to $615.2 million for the year ended June 30, 2014 from
$646.2 million for the year ended June 30, 2013. Our residential mortgages generally comprise one- to
four-family first mortgage loans, home equity loans and home equity lines of credit. For those same
comparative periods, the average balance of construction loans decreased by $6.5 million to $9.5 million
from $16.0 million.
The change in the average balance of loans also reflected an $89,000 increase in the average
balance of consumer loans to $4.5 million for the year ended June 30, 2014 from $4.4 million for the year
ended June 30, 2013.
The effect on interest income attributable to the net increase in the average balance of loans was
partially offset by the noted decrease in their average yield. The average yield on loans decreased by 39
basis points to 4.31% for the year ended June 30, 2014 from 4.70% for the year ended June 30, 2013. The
reduction in the overall yield on our loan portfolio partly reflects the effect of lower market interest rates
which provides “rate reduction” refinancing incentive to existing borrowers while also contributing to the
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downward re-pricing of adjustable rate loans. Additionally, the average yield on newly originated loans
that have provided the incremental growth in the portfolio during fiscal 2014 reflects the historically low
interest rates prevalent in the marketplace which further reduces the overall yield of the loan portfolio.
Interest income from mortgage-backed securities decreased by $2.9 million to $20.8 million for
the year ended June 30, 2014 from $23.7 million for the year ended June 30, 2013. The decrease in
interest income reflected a decrease in the average balance of mortgage-backed securities that was
partially offset by an increase in their average yield.
The average balance of mortgage-backed securities decreased by $217.2 million to $803.2 million
for the year ended June 30, 2014 from $1.02 billion for the year ended June 30, 2013. The decrease in the
average balance of mortgage-backed securities largely reflects principal repayments and security sales
that outpaced the level of security purchases between comparative periods.
For those same comparative periods, the average yield on mortgage-backed securities increased
by 27 basis points to 2.59% from 2.32%. The increase in the overall yield of the mortgage-backed
securities portfolio partly reflected the comparatively higher yields of securities purchased during the year
reflecting a modest increase in market interest rates between comparative periods. However, the increase
in yield also reflected a decrease in purchased premium amortization during fiscal 2014 resulting from a
decline in loan prepayments attributable to the noted increase in market rates and the resulting decline in
“rate reduction” refinancing incentive to mortgagors.
Interest income from debt securities increased by $4.9 million to $7.2 million for the year ended
June 30, 2014 from $2.3 million for the year ended June 30, 2013. The increase in interest income
reflected an increase in the average balance of debt securities augmented by an increase in their average
yield. The average balance of debt securities increased $359.7 million to $541.4 million for the year
ended June 30, 2014 from $181.7 million for the year ended June 30, 2013. For those same comparative
periods, the average yield of debt securities increased seven basis points to 1.33% from 1.26%.
The increase in the average balance of debt securities was partly attributable to a $286.0 million
increase in the average balance of taxable securities to $446.6 million for the year ended June 30, 2014
from $160.6 million for the year ended June 30, 2013. For those same comparative periods, the average
balance of tax-exempt securities increased by $73.7 million to $94.7 million from $21.1 million.
The increase in the average yield on debt securities reflected a three basis point increase in the
yield on taxable securities to 1.20% during the year ended June 30, 2014 from 1.17% during the year
ended June 30, 2013. For those same comparative periods, the yield on tax-exempt securities decreased
one basis point to 1.94% from 1.95%.
Interest income from other interest-earning assets increased by $243,000 to $1.0 million for the
year ended June 30, 2014 from $775,000 for the year ended June 30, 2013 reflecting an increase in the
average yield that was partially offset by a decline in the average balance. The average yield of other
interest-earning assets increased by 21 basis points to 0.76% for the year ended June 30, 2014 from 0.55%
for the year ended June 30, 2013. For those same comparative periods, the average balance of other
interest-earning assets decreased by $5.8 million to $133.9 million from $139.7 million.
The changes in the average balance and average yield on other interest-earning assets between
comparative periods partly reflects the reinvestment of a portion of our excess liquidity that had been
maintained during the earlier comparative period into FHLB stock, included in other interest-earning
assets, as well as other investments included in our securities portfolios. Such reinvestment reduced the
average balance of interest-earning cash which generally represents the lowest yielding asset within this
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category of interest-earning assets.
Interest Expense. Total interest expense remained stable at approximately $22.0 million for the
years ended June 30, 2014 and June 30, 2013 reflecting a $3,000 decrease between comparative periods.
As noted earlier, the nominal decline in interest expense resulted from the largely offsetting effects of an
increase in the average balance of interest-bearing liabilities and concurrent decline in their average cost.
The average balance of interest-bearing liabilities increased by $360.8 million to $2.59 billion for the year
ended June 30, 2014 from $2.23 billion for the year ended June 30, 2013. For those same comparative
periods, the average cost of interest-bearing liabilities declined 14 basis points to 0.85% from to 0.99%.
Interest expense attributed to deposits decreased by $173,000 to $14.5 million for the year ended
June 30, 2014 from $14.7 million for the year ended June 30, 2013. The decrease in interest expense was
attributable to a decline in the average cost of interest-bearing deposits that was partially offset by an
increase in their average balance.
The cost of interest-bearing deposits declined by seven basis points to 0.67% for the year ended
June 30, 2014 from 0.74% for the year ended June 30, 2013. The net decrease in the average cost was
reflected in the declines in the average cost of savings and club accounts and certificates of deposit that
were partially offset by an increase in the average cost of interest-bearing checking accounts. For the
comparative periods noted, the average cost of savings and club accounts decreased four basis points to
0.16% from 0.20% and the average cost of certificates of deposit declined 13 basis points to 1.03% from
1.16% while the average cost of interest-bearing checking accounts increased by 15 basis points to 0.52%
from 0.37%.
The decreases in the average cost of savings and club accounts and certificates of deposit largely
reflected the effects of low market interest rates on deposit pricing throughout fiscal 2014 which also
affected the pricing applicable to retail interest-bearing checking accounts. However, these effects were
more than offset by the comparatively higher average cost of brokered money market deposits reported in
interest-bearing checking throughout fiscal 2014.
The average balance of interest-bearing deposits increased by $194.1 million to $2.17 billion for
the year ended June 30, 2014 from $1.98 billion for the year ended June 30, 2013. The net increase in the
average balance was reflected an increase in the average balances of interest-bearing checking accounts
and savings and club accounts that were partially offset by a decrease in the average balance of
certificates of deposit. For the comparative periods noted, the average balance of interest bearing
checking accounts increased by $228.4 million to $723.0 million from $494.6 million and the average
balance of savings and club accounts increased $28.4 million to $473.9 million from $445.5 million while
the average balance of certificates of deposit decreased by $62.7 million to $974.4 million from $1.04
billion.
Interest expense attributed to borrowings increased by $170,000 to $7.5 million for the year
ended June 30, 2014 from $7.3 million for the year ended June 30, 2013. The increase in interest expense
on borrowings primarily reflected an increase in their average balance that was partially offset by a
decrease in their average cost. The average balance of borrowings increased by $166.7 million to $420.3
million for the year ended June 30, 2014 from $253.6 million for the year ended June 30, 2013. For those
same comparative periods, the average cost of borrowings declined 110 basis points to 1.77% from
2.87%.
The increase in the average balance of borrowings largely reflected a $169.5 million increase in
the average balance of FHLB advances which increased to $387.6 million for the year ended June 30,
2014 from $218.1 million for the year ended June 30, 2013. For those same comparative periods, the
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average cost of FHLB advances decreased 137 basis points to 1.88% from 3.25%. The noted increase in
the average balance of FHLB advances was partially offset by a $2.8 million decrease in the average
balance of other borrowings, comprised primarily of depositor sweep accounts, to $32.7 million from
$35.5 million. The average cost of sweep accounts declined four basis points to 0.50% from 0.54% for
those same comparative periods.
Provision for Loan Losses. The provision for loan losses decreased $1.1 million to $3.4 million
for the year ended June 30, 2014 from $4.5 million for the year ended June 30, 2013. The net decrease in
the provision partly reflected the effects of recognizing comparatively lower provisions on loans
evaluated individually for impairment. These decreases were partially offset by increases in provisions
attributable to loans evaluated collectively for impairment using historical and environmental loss factors.
Such increases largely reflected the comparatively greater growth within the non-impaired portion of the
portfolio during fiscal 2014 as well as the effects of updates to historical and environmental loss factors in
accordance with our allowance for loan loss calculation methodology.
Additional information regarding the allowance for loan losses and the associated provisions
recognized during the year ended June 30, 2014 is presented in the “Business” section of this report as
well as in Note 1 and Note 9 to the audited consolidated financial statements.
Non-Interest Income. Non-interest income, excluding gains and losses on the sale of securities
and REO, increased by $311,000 to $7.0 million for the year ended June 30, 2014 from $6.7 million for
the year ended June 30, 2013. The increase in non-interest income, excluding securities and REO gains
and losses, was partly attributable to a $769,000 increase in income from bank owned life insurance
resulting primarily from an increase in our average balance between periods. The increase in non-interest
income also reflected a $93,000 increase in miscellaneous income that reflected a $226,000 bargain
purchase gain recorded in conjunction with the Atlas Bank acquisition. This gain was partially offset by
the absence of a $100,000 gain reported during the earlier comparative period related to the sale of a
parcel of vacant land adjacent to one of our branches as well as other less noteworthy variances in
miscellaneous income.
These noted increases in non-interest income were partially offset by a $477,000 decline in loan
sale gains to $80,000 for the year ended June 30, 2014 from $557,000 for the year ended June 30, 2013
attributable to a decline the volume of SBA loan originations and sales during fiscal 2014. We continue
to evaluate strategies to increase the origination and sales volume of SBA loans and expect such volumes
to increase during fiscal 2015.
Less noteworthy variances in non-interest income included net a decrease in loan-related fees and
charges that primarily reflected a decline in loan prepayment charges as well as a decline in deposit-
related fees and charges that primarily reflected our temporary waiver of certain fees and charges to
support our customer service objectives during the core processing system conversion completed during
fiscal 2014.
For the year ended June 30, 2014, net REO sale and write down losses totaled $441,000
compared to $775,000 for the year ended June 30, 2013 with losses during both comparative periods
being primarily attributed to reducing the carrying value of various REO properties to reflect reductions
in expected sales prices below the fair values at which the properties were previously being carried.
Where applicable, such losses were partially offset by REO sale gains.
Finally, non-interest income during the year ended June 30, 2014 reflected net gains on the sale of
securities totaling $1.5 million attributable to the sale of $55.4 million of debt securities and $114.0
million of mortgage-backed securities during the period.
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By comparison, we reported $10.4 million of security sale gains reported during the year ended
June 30, 2013 attributable to the sale of mortgage-backed securities totaling approximately $432.4 million
during the prior year. The securities sold during fiscal 2013 included $330.0 million of agency mortgage-
backed securities sold in conjunction with the restructuring transaction noted earlier through which we
recognized $9.1 million in gains on sale. Those sale gains were augmented by an additional $1.3 million
of sale gains resulting from the sale of an additional $102.3 million of agency mortgage-backed securities
during the year that were separate from the restructuring transaction.
The sale gains during the current year were partially offset by losses totaling $6,000 arising from
the sale of $34,000 of non-agency collateralized mortgage obligations that had fallen below our
investment grade thresholds. We also recognized $6,000 in losses during the prior fiscal year ended June
30, 2013 that resulted from a sale of $24,000 of non-agency collateralized mortgage obligations on that
same basis.
Non-Interest Expenses. Non-interest expense, excluding debt extinguishment and merger-related
expenses, increased $3.1 million to $63.8 million for the year ended June 30, 2014 from $60.7 million for
the year ended June 30, 2013. The net increase in non-interest expense primarily reflected increases in
salary and employee benefit expense, premises occupancy expense, equipment and systems expense,
advertising and marketing expense, federal deposit insurance expense and miscellaneous expense. Less
noteworthy variances in other categories of non-interest expense reflected normal operating fluctuations
within those categories.
Salaries and employee benefits increased by $368,000 to $35.8 million from $35.4 million
reflecting increases in expenses resulting, in part, from increases in wage and salary expense and benefits
expense attributable to the combined effects of our strategic efforts to expand our commercial lending
origination and support staff as well as a temporary increase in employee overtime expense arising from
the conversion of our primary core processing systems during the year. The variance also reflected an
increase in ESOP expense attributable to the increase in our share value during the year coupled with an
increase in stock benefit plan expenses attributable to stock options and shares of restricted stock granted
to employees during the fourth quarter of fiscal 2014. These increases in salaries and employee benefits
were partially offset by a decrease in the expense arising from changes to actuarial assumptions relating to
Kearny Bank’s multi-employer defined benefit pension plan for employees that reduced the required
contributions and associated expense to be recognized during fiscal 2014.
The increase in premises occupancy expense was largely attributable to an increase in facility
repairs and maintenance costs arising from seasonal fluctuations in such expenses including, most
notably, a significant increase in snow removal expenses across our retail branch and administrative
headquarters locations during the winter months of fiscal 2014. The increase in occupancy expense also
reflected a less noteworthy increase in rent expense relating to our leased facilities. These increases were
partially offset by a decrease in property tax expense largely reflecting the recovery of funds during the
current year resulting from our tax appeal efforts to reduce our property tax obligations on certain branch
facilities.
The increase in equipment and systems expense was largely attributable to the recognition of
certain non-recurring expenses supporting our conversion to Fiserv, Inc. systems during fiscal 2014.
We expect to implement several additional technology-based systems available through our
master service agreement with Fiserv, Inc. over the next several quarters. For example, we intend to
enhance and expand our service offerings to include Fiserv, Inc.’s mobile banking, person-to-person
payments and online account opening systems. We also intend to implement additional “back-office”
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systems supporting loan underwriting, credit risk analysis and loan administration as well as financial
systems supporting corporate budgeting, forecasting and profitability analysis.
We expect to recognize a reduced level of non-recurring technology-related expenditures relating
to the implementation of these additional technologies over the next several quarters. Upon completing
all applicable system conversions and integrations with Fiserv, Inc., we anticipate that our recurring
technology service provider expenses will be reduced compared to “pre-conversion” levels. Such
anticipated cost savings are based upon the current composition and transactional characteristics of our
customer account base and may vary over time based upon changes to those factors.
In further support of the conversion of our core processing systems during the period, we
recognized additional customer communication and disclosure expenses during fiscal 2014 which
contributed to the increase in advertising and marketing during the year.
The reported increase in deposit insurance expense reflects an increase in Kearny Bank’s FDIC
insurance premiums arising primarily from the growth in Kearny Bank’s total assets which, when offset
by tangible capital, generally establishes the calculation basis of those premiums.
The reported increase in miscellaneous expense also reflected a variety of other non-recurring
expenses generally supporting our core processing conversion during fiscal 2014. Such expenses
included, but were not limited to, consulting and training expenses, travel and lodging charges as well as
stationary, printing and debit card production costs that were directly attributable to the Fiserv, Inc.
conversion.
In general, we estimate that non-interest expense for the year ended June 30, 2014 included non-
recurring expenses of approximately $1.9 million relating to our core processing conversion that was
completed during the year. Such expenses include approximately $1.6 million in equipment and systems
expense, $175,000 in salaries and employee benefits expense and $165,000 in miscellaneous expense
while additional conversion-related expenses were also recognized in advertising and marketing expenses,
as noted above.
In addition to the non-recurring expenses associated with the Fiserv, Inc. conversion, we
recognized an additional $391,000 of non-recurring, merger-related expenses during the year ended June
30, 2014 attributable to our acquisition of Atlas Bank. Additional information regarding our acquisition
of Atlas Bank is present in Note 2 to the audited consolidated financial statements.
Non-interest expense during the prior year ended June 30, 2013 included debt extinguishment
expenses totaling $8.7 million for which no such expenses were recognized during fiscal 2014. The debt
extinguishment expense recognized during the earlier comparative period was fully attributable to the
balance sheet restructuring and wholesale growth transactions executed during the prior year.
Provision for Income Taxes. The provision for income taxes increased $2.0 million to $4.2
million for the year ended June 30, 2014 from $2.3 million for the year ended June 30, 2013. The
variance in income tax expense between comparative periods partly reflected the underlying differences
in the level of the taxable portion of pre-tax income between comparative periods. However, income tax
expense for the earlier comparative period also reflected Kearny Bank’s recognition of an income tax
benefit arising from the recognition of capital gains resulting from the balance sheet restructuring and
wholesale growth transactions executed during that period. Such gains enabled us to recognize the
income tax benefits attributable to capital losses incurred during prior years for which no deferred benefit
had been previously recognized.
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Our effective tax rate during the year ended June 30, 2014 was 29.3% which, in relation to
statutory income tax rates, reflected the effects of tax-favored income sources included in pre-tax income.
By comparison, our effective tax rate for the year ended June 30, 2013 was 25.7% which reflected those
same tax-favored income sources coupled with the tax benefit recognized from prior capital losses noted
above.
Comparison of Operating Results for the Years Ended June 30, 2013 and June 30, 2012
General. Net income for the year ended June 30, 2013 was $6.5 million or $0.10 per diluted
share; an increase of $1.4 million compared to $5.1 million or $0.08 per diluted share for the year ended
June 30, 2012. The increase in net income between comparative periods reflected an increase in non-
interest income and a decline in the provision for loan losses that was partially offset by a decrease in net
interest income and an increase in non-interest expense. The increase in net income also reflected a
decline in the provision for income taxes.
Net Interest Income. Net interest income for the year ended June 30, 2013 was $66.3 million; a
decrease of $3.9 million from $70.2 million for the year ended June 30, 2012. The decrease in net interest
income between the comparative periods resulted from a decrease in interest income that outpaced a
concurrent decline in interest expense. The decrease in interest income was primarily attributable to a
decrease in the average yield on interest-earning assets while the decrease in interest expense reflected
declines in both the average cost and average balance of interest-bearing liabilities. Declines in average
yields and costs between comparative periods continued to reflect the effects of historically low interest
rates that were prevalent in the marketplace throughout most of fiscal 2013.
As a result of these factors, our net interest rate spread decreased 12 basis points to 2.34% for the
year ended June 30, 2013 from 2.46% for the year ended June 30, 2012. The decrease in the net interest
rate spread reflected a 39 basis point decline in the yield on interest-earning assets to 3.33% from 3.72%
that was partially offset by a decrease in the average cost of interest-bearing liabilities of 27 basis points
to 0.99% from 1.26% for the same comparative periods. A discussion of the factors contributing to the
overall change in yield on earning assets and average cost of interest-bearing liabilities is presented in the
separate discussion and analysis of interest income and interest expense below.
The factors resulting in the decrease in net interest income and net interest rate spread also
adversely affected our net interest margin. However, additional factors further impacted net interest
margin including, but not limited to, the use of interest-earning assets to fund additions to treasury stock
during fiscal 2013. In total, we reported a 15 basis point decline in net interest margin to 2.50% for the
year ended June 30, 2013 from 2.65% for the year ended June 30, 2012.
Interest Income. Total interest income decreased $10.3 million to $88.3 million for the year
ended June 30, 2013 from $98.5 million for the year ended June 30, 2012. As noted above, the decrease
in interest income primarily reflected a decline in the average yield on interest-earning assets while their
average balance for the year remained stable. The average yield on interest-earning assets declined 39
basis points to 3.33% for the year ended June 30, 2013 from 3.72% for the year ended June 30, 2012. For
those same comparative periods, the average balance of interest-earning assets remained stable at $2.65
billion.
Interest income from loans decreased $2.5 million to $61.5 million for the year ended June 30,
2013 from $64.0 million for the year ended June 30, 2012. The decrease in interest income on loans was
attributable to a decrease in the average yield that was partially offset by an increase in the average
balance.
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The average yield on loans decreased by 42 basis points to 4.70% for the year ended June 30,
2013 from 5.12% for the year ended June 30, 2012. The reduction in the overall yield on our loan
portfolio partly reflects the effect of lower market interest rates which provided “rate reduction”
refinancing incentive to existing borrowers while also contributing to the downward re-pricing of
adjustable rate loans. Additionally, the average yield on newly originated loans that have provided the
incremental growth in the portfolio between periods reflects the historically low interest rates prevalent in
the marketplace which further reduces the overall yield of the loan portfolio.
The effect on interest income attributable to the decline in the average yield on loans was partially
offset by the noted increase in their average balance. The average balance of loans increased by $58.8
million to $1.31 billion for the year ended June 30, 2013 from $1.25 billion for the year ended June 30,
2012. The reported increase in the average balance of loans reflected an aggregate increase of $135.8
million in the average balance of commercial loans to $643.6 million for the year ended June 30, 2013
from $507.8 million for the year ended June 30, 2012.
The increase in the average balance of commercial loans was partially offset by a decline in the
average balance of residential mortgage loans which decreased by $72.5 million to $646.2 million for the
year ended June 30, 2013 from $718.7 million for the year ended June 30, 2012.
In general, because our commercial loans comprise comparatively higher yielding multi-family
mortgages, nonresidential mortgage loans and business loans, the continued reallocation within the loan
portfolio from residential mortgages into commercial loans partially offset the adverse impact of lower
market interest rates on the overall yield of the loan portfolio between the comparative periods.
The net increase in the average balance of loans also reflected a $4.9 million decline in the
average balance of construction loans whose aggregate average balances decreased to $16.0 million for
the year ended June 30, 2013 from $20.9 million for the year ended June 30, 2012. For those same
comparative periods, the average balance of consumer loans increased by $360,000 to $4.4 million from
$4.1 million.
Interest income from mortgage-backed securities decreased by $8.7 million to $23.7 million for
the year ended June 30, 2013 from $32.4 million for the year ended June 30, 2012. The decrease in
interest income reflected a decrease in the average yield of mortgage-backed securities coupled with a
decline in their average balance between comparative periods. The average yield on mortgage-backed
securities declined 43 basis points to 2.32% for the year ended June 30, 2013 from 2.75% for the year
ended June 30, 2012. For those same comparative periods, the average balance of these securities
decreased $160.8 million to $1.02 billion from $1.18 billion.
The reduction in the overall yield of the mortgage-backed securities portfolio was attributable to
many of the same factors affecting the yield on our loan portfolio. That is, lower market interest rates
continued to provide a “rate reduction” refinancing incentive to mortgagors resulting in the payoff of
comparatively higher rate mortgage loans underlying our mortgage-backed securities which have been
replaced by lower yielding securities. The decline in yield also reflects an increase in purchased premium
amortization during the current year primarily arising from a comparatively higher level of loan
prepayments.
The decrease in the average balance of mortgage-backed securities largely reflects principal
repayments and security sales that have outpaced the level of security purchases. Such sales include those
affected in conjunction with the balance sheet restructuring transactions noted earlier.
Interest income from debt securities increased by $906,000 to $2.3 million for the year ended
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June 30, 2013 from $1.4 million for the year ended June 30, 2012. The increase in interest income
reflected an increase in the average balance of debt securities that was partially offset by a decline in the
average yield. The average balance of debt securities increased $106.9 million to $181.7 million for the
year ended June 30, 2013 from $74.8 million for the year ended June 30, 2012. For those same
comparative periods, the average yield of debt securities decreased 60 basis points to 1.26% from 1.86%.
The decrease in the average yield on debt securities reflected a 78 basis point decline in the yield
on taxable securities to 1.17% during the year ended June 30, 2013 from 1.95% for the year ended June
30, 2012. For those same comparative periods, the yield on tax-exempt securities increased 96 basis
points to 1.95% from 0.99%. The increase in the average balance of debt securities was partly
attributable to a $92.8 million increase in the average balance of taxable securities to $160.6 million for
the year ended June 30, 2013 from $67.7 million for the year ended June 30, 2012. For those same
comparative periods, the average balance of tax-exempt securities increased by $14.0 million to $21.1
million from $7.0 million.
Interest income from other interest-earning assets increased by $10,000 to $775,000 for the year
ended June 30, 2013 from $765,000 for the year ended June 30, 2012 reflecting an increase in the average
yield that was partially offset by a decline in the average balance. The average yield of other interest-
earning assets increased by two basis points to 0.55% for the year ended June 30, 2013 from 0.53% for
the year ended June 30, 2012. For those same comparative periods, the average balance of other interest-
earning assets decreased by $4.8 million to $139.7 million from $144.5 million.
The changes in the average balance and average yield on other interest-earning assets between
comparative periods largely reflects the reinvestment of a portion of our excess liquidity that had been
maintained during the earlier comparative period into the investment securities portfolio. Such
reinvestment reduced the average balance of interest-earning cash which generally represents the lowest
yielding asset within this category of interest-earning assets.
Interest Expense. Total interest expense decreased by $6.4 million to $22.0 million for the year
ended June 30, 2013 from $28.4 million for the year ended June 30, 2012. As noted earlier, the decrease
in interest expense reflected a decrease in the average cost of interest-bearing liabilities which declined 27
basis points to 0.99% for the year ended June 30, 2013 from 1.26% for the year ended June 30, 2012. The
decrease in the average cost was coupled with a $17.5 million decline in the average balance of interest-
bearing liabilities to $2.23 billion from $2.25 billion for the same comparative periods.
Interest expense attributed to deposits decreased $5.6 million to $14.7 million for the year ended
June 30, 2013 from $20.3 million for the year ended June 30, 2012. The decrease in interest expense was
attributable to a decline in the average cost of deposits coupled with a decline in their average balance.
The cost of interest-bearing deposits declined by 27 basis points to 0.74% for the year ended June
30, 2013 from 1.01% for the year ended June 30, 2012. The reported decrease in the average cost was
reflected across all categories of interest-bearing deposits and was primarily attributable to the overall
declines in market interest rates. For those comparative periods, the average cost of interest-bearing
checking accounts decreased by 22 basis points to 0.37% from 0.59% and the average cost of savings and
club accounts decreased 13 basis points to 0.20% from 0.33% while the average cost of certificates of
deposit declined 28 basis points to 1.16% from 1.44%.
The decrease in the average cost was coupled with a $20.3 million decline in the average balance
of interest-bearing deposits to $1.98 billion for the year ended June 30, 2013 from $2.00 billion for the
year ended June 30, 2012. The reported decrease in the average balance was primarily attributable to a
$91.7 million decline in the average balance of certificates of deposit to $1.04 billion for the year ended
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June 30, 2013 from $1.13 billion for the year ended June 30, 2012. The decline in the average balance of
certificates of deposit was partially offset by increases in the average balances of interest-bearing
checking and savings accounts. For the same comparative periods, the average balance of interest-
bearing checking accounts increased $40.5 million to $494.6 million from $454.2 million while the
average balance of savings and club accounts increased $30.9 million to $445.5 million from $414.6
million.
Interest expense attributed to borrowings decreased by $807,000 to $7.3 million for the year
ended June 30, 2013 from $8.1 million for the year ended June 30, 2012. The decrease in interest
expense on borrowings primarily reflected a decrease in their average cost that was partially offset by an
increase in their average balance. The average cost of borrowings declined 36 basis points to 2.87% for
the year ended June 30, 2013 from 3.23% for the year ended June 30, 2012. For those same comparative
periods, the average balance of borrowings increased $2.7 million to $253.6 million from $250.9 million.
The increase in the average balance of borrowings partly reflected a $1.3 million increase in the
average balance of FHLB advances which increased to $218.1 million for the year ended June 30, 2013
from $216.8 million for the year ended June 30, 2012. For those same comparative periods, the average
cost of FHLB advances decreased 38 basis points to 3.25% from 3.63%. The noted increase in the
average balance of FHLB advances was augmented by a $1.4 million increase in the average balance of
other borrowings, comprised primarily of depositor sweep accounts, to $35.5 million from $34.1 million
whose average cost declined 12 basis points to 0.54% from 0.66% for those same comparative periods.
Provision for Loan Losses. The provision for loan losses totaled $4,464,000 for the year ended
June 30, 2013 compared to a provision of $5,750,000 for the year ended June 30, 2012. The provisions
for both periods partly reflected impairment losses identified on specific impaired loans while also
reflecting the impact of changes in the balance of the non-impaired portion of the loan portfolio which is
evaluated collectively for impairment using historical and environmental loss factors. Such factors were
updated during each period in accordance with our allowance for loan loss calculation methodology.
Non-Interest Income. Non-interest income, excluding gains and losses on the sale of securities
and REO, increased by $1.3 million to $6.7 million for the year ended June 30, 2013 from $5.4 million
for the year ended June 30, 2012. The increase in non-interest income, excluding securities and REO
gains and losses, was primarily attributable to a $1.2 million increase in income from bank owned life
insurance resulting from a comparative increase in our average balance between periods. Less
noteworthy variances in non-interest income included an increase in loan prepayment penalties included
in fees and service charges as well as an increase in electronic banking fees and charges arising from an
increase in ATM and debit card usage by customers. Partially offsetting these increases in non-interest
income was a $104,000 decline in loan sale gains to $557,000 for the year ended June 30, 2013 from
$661,000 for the year ended June 30, 2012 reflecting a decline the volume of SBA loan originations and
sales during fiscal 2013.
Miscellaneous income for the year ended June 30, 2013 also included a $100,000 gain on the sale
of a parcel of vacant land adjacent to one of our branches. The parcel had originally been acquired for
branch expansion purposes, but was ultimately sold after we were unable to procure the required
approvals for the expansion. Offsetting this increase in miscellaneous income was the absence in the
current year of a $245,000 payment received by Kearny Bank during the prior fiscal year from a tenant in
return for the discharge of their future obligations under the terms of a commercial lease agreement where
Kearny Bank served as lessor.
For the year ended June 30, 2013, net REO sale losses totaled $775,000 compared to $3.3 million
for the year ended June 30, 2012 with losses during both comparative periods being primarily attributed
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to reducing the carrying value of various REO properties to reflect reductions in expected sales prices
below the fair values at which the properties were previously being carried. Where applicable, such
losses were partially offset by REO sale gains.
As noted earlier, at June 30, 2013, we held a total of eight REO properties with an aggregate
carrying value of $2.1 million. Two REO properties with aggregate carrying values totaling $581,000
were under contract for sale at June 30, 2013 with such values reflecting the net sale proceeds that we
expected to receive based upon the terms of those contracts.
Finally, non-interest income during the year ended June 30, 2013 reflected net gains on sales of
securities totaling $10.4 million attributable to the sale of mortgage-backed securities totaling
approximately $432.4 million during the period. The securities sold during the current period included
$330.0 million of agency mortgage backed securities sold during the quarter ended March 31, 2013 in
conjunction with the restructuring transaction noted earlier through which we recognized $9.1 million in
gains on sale. Those sale gains were augmented by an additional $1.3 million of sale gains resulting from
the sale of an additional $102.3 million of agency mortgage-backed securities during the year that were
separate from the restructuring transaction.
The sale gains during the current year were partially offset by losses totaling $6,000 arising from
the sale of $24,000 of non-agency collateralized mortgage obligations that had fallen below our
investment grade thresholds. We recognized $6,000 in losses during the earlier comparative period ended
June 30, 2012 that resulted from a sale of $38,000 of non-agency collateralized mortgage obligations on
that same basis.
Non-Interest Expenses. Non-interest expense, excluding debt extinguishment expense, increased
$2.0 million to $60.7 million for the year ended June 30, 2013 from $58.7 million for the year ended June
30, 2012. The net increase in non-interest expense primarily reflected increases in salary and employee
benefit expense, premises occupancy expense, equipment and systems expense and federal deposit
insurance expense that were partially offset by decreases in advertising and miscellaneous expense. Less
noteworthy increases and decreases in other categories of non-interest expense reflected normal operating
fluctuations within those categories.
Salaries and employee benefits increased by $1.7 million to $35.4 million from $33.7 million
reflecting increases in expenses resulting, in part, from annual wage and salary increases as well as our
strategic efforts to expand our commercial lending origination and support staff. The increase also
reflected increases in health care benefit costs that went into effect during fiscal 2013.
The noted increase in premises occupancy expense largely reflected non-recurring facility-related
repairs and maintenance expenses, a portion of which were necessitated by damage caused by Hurricane
Sandy at a limited number of our branches located in or near certain New Jersey shore communities. In
general, the facility-related damages caused by the hurricane were cosmetic in nature as evidenced by all
41 of our then-operating branches re-opening within two weeks of the hurricane. The increase in
occupancy expenses also reflected a higher level of seasonal facility maintenance costs during fiscal
2013, including those relating to snow removal, arising from the extraordinarily mild winter that was
experienced during fiscal 2012.
The reported increase in equipment and systems expense reflects, in part, temporary redundancy
of data communication service provider charges associated with the ongoing upgrades to our wide area
network infrastructure. The increase also reflects an increase in overall information technology repairs
and maintenance costs between periods that includes a comparative increase in software maintenance
expenses. Finally, equipment and systems expense during the earlier comparative period also reflected
105
one-time adjustments reducing certain estimated expenses relating to the conversion and integration of
systems and data acquired from Central Jersey Bancorp, Inc. (“Central Jersey”) for which no such
adjustments were recorded during the current period.
The reported increase in federal deposit insurance expense largely reflects changes in Kearny
Bank’s assessment rates charged by the FDIC as well as modest fluctuations in the assessment base used
in the calculation of Kearny Bank’s deposit insurance premiums.
The increases in non-interest expenses noted above were partially offset by a decline in
advertising and marketing expense that largely reflected a reduction in print advertising expenses that was
partially offset by an increase in outdoor and electronic advertising expenses. The reduction in
advertising and marketing expenses was augmented by a net decline in miscellaneous expense reflecting
reductions across several categories including, but not limited to, legal expense, printing and office
supplies as well as a variety of other less noteworthy general and administrative expense categories.
Provision for Income Taxes. The provision for income taxes decreased $526,000 to $2.3 million
for the year ended June 30, 2013 from $2.8 million for the year ended June 30, 2012. The variance in
income taxes between comparative years was partly attributable to the underlying differences in the
taxable portion of pre-tax income between comparative periods. However, the variance also reflected
Kearny Bank’s recognition of income tax benefits during the current period arising from the recognition
of capital gains resulting from the restructuring transaction and sale of land noted earlier. Such gains
enabled us to recognize the income tax benefits attributable to capital losses incurred during prior years
for which no deferred benefit had been previously recognized.
Our effective tax rate during the year ended June 30, 2013 was 25.7% which, in relation to
statutory income tax rates, reflected the combined effects of recurring tax-favored income sources
included in pre-tax income as well as the tax benefit recognized from prior capital losses noted above. By
comparison, our effective tax rate for the year ended June 30, 2012 was 35.3%.
106
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107
Rate/Volume Analysis. The following table reflects the sensitivity of Kearny-Federal’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.
Years Ended June 30,
2014 vs. 2013
Increase (Decrease)
Due to
Rate
Volume
Years Ended June 30,
2013 vs. 2012
Increase (Decrease)
Due to
Rate
Net
Net
Volume
(In Thousands)
Interest and dividend income:
Net loans receivable ...................................... $
Mortgage-backed securities ..........................
Debt securities:
Tax-exempt .................................................
Taxable ........................................................
Other interest-earning assets .........................
Total interest-earning assets ...................... $
Interest expense:
Interest-bearing demand ................................ $
Savings and club ............................................
Certificates of deposit ...................................
Borrowings ....................................................
Total interest-bearing liabilities .................. $
10,669 $
(5,412)
(5,375) $
2,551
5,294
(2,861)
$
2,930 $
(4,071)
(5,390) $
(4,676)
(2,460)
(8,747)
1,430
3,408
(34)
10,061 $
1,035 $
53
(693)
3,632
4,027 $
(2)
49
277
(2,500) $
908 $
(192)
(1,284)
(3,462)
(4,030) $
1,428
3,457
243
7,561
1,943
(139)
(1,977
170
(3)
$
$
$
229
1,255
(22)
321 $
112
(690)
32
(10,612) $
341
565
10
(10,291)
223 $
92
(1,243)
90
(838) $
(1,066) $
(590)
(2,977)
(897)
(5,530) $
(843)
(498)
(4,220)
(807)
(6,368)
Change in net interest income ........................ $
6,034 $
1,530 $
7,564
$
1,159 $
(5,082) $
(3,923)
108
Liquidity and Commitments
Our liquidity, represented by cash and cash equivalents, is a product of our operating, investing
and financing activities. Our primary sources of funds are deposits, amortization, prepayments and
maturities of mortgage-backed securities and outstanding loans, maturities and calls of securities and
funds provided from operations. In addition, we invest excess funds in short-term interest-earning assets,
such as overnight deposits, which provide liquidity to meet lending requirements. While scheduled
payments from the amortization of loans and mortgage-backed securities and maturing securities and
short-term investments are relatively predictable sources of funds, general interest rates, economic
conditions and competition greatly influence deposit flows and prepayments on loans and mortgage-
backed securities.
Kearny Bank is required to have enough investments that qualify as liquid assets in order to
maintain sufficient liquidity to ensure a safe operation. Liquidity may increase or decrease depending
upon the availability of funds and comparative yields on investments in relation to the return on loans.
We attempt to maintain adequate but not excessive liquidity and liquidity management is both a daily and
long-term function of business management.
Cash and cash equivalents, consisting primarily of deposits in other banks, increased by $8.0
million to $135.0 million at June 30, 2014 from $127.0 million at June 30, 2013. The balances reported
at June 30, 2014 included interest-earning and non-interest-earning accounts in other banks totaling
$120.6 million and $4.1 million, respectively, primarily representing deposit relationships with two
money center banks as well as accounts with the FHLB of New York and Federal Reserve Bank of New
York. The largest money center account relationship totaled approximately $3.6 million at June 30, 2014
with the next largest money center banking relationship totaling approximately $283,000 as of that same
date. Management routinely transfers funds between depository institutions to maximize the return on the
funds.
Management reviews cash flow projections regularly and updates them monthly in order to
maintain liquid assets at levels believed to meet the requirements of normal operations, including loan
commitments and potential deposit outflows from maturing certificates of deposit and savings
withdrawals. At June 30, 2014, Kearny Bank had commitments to originate and purchase loans totaling
$29.2 million compared to $60.6 million at June 30, 2013. As of those same comparative dates,
construction loans in process and unused lines of credit were $6.4 million and $59.8 million, respectively,
compared to $11.1 million and $69.4 million, respectively. Kearny Bank had $581.5 million of
certificates of deposit maturing in one year at June 30, 2014 compared to $646.6 million at June 30, 2013.
Deposits increased $109.4 million to $2.48 billion at June 30, 2014 from $2.37 billion at June 30,
2013. Between those comparative periods, non-interest-bearing demand deposits increased $33.1 million
to $224.1 million, interest-bearing demand deposits decreased $31.3 million to $700.2 million, savings
and club deposits increased $51.9 million to $518.4 million while certificates of deposit increased $55.8
million to $1.04 billion. The decrease in interest-bearing checking accounts partly reflects fluctuations in
the balances of “non-retail” funding sources in the form of brokered money market deposits utilized in
conjunction with our wholesale growth transactions discussed earlier coupled with some degree of
disintermediation of retail deposits into other interest-bearing accounts.
Borrowings from the FHLB of New York and other sources are generally available to supplement
Kearny Bank’s liquidity position and to the extent that maturing deposits do not remain with us,
management may replace the funds with such borrowings. Kearny Bank has the capacity to borrow
additional funds from the FHLB by taking additional long-term or short-term advances including
overnight borrowings. As of June 30, 2014, Kearny Bank’s borrowing potential was $327.2 million
109
without pledging additional collateral.
The following table discloses our contractual obligations and commitments as of June 30, 2014.
Total
Less Than
One Year
One to
Three Years
(In Thousands)
Over Three
Years to
Five Years
Over
Five Years
Operating lease obligations ................................................... $
Certificates of deposit ...........................................................
Federal Home Loan Bank advances .....................................
10,038 $
1,761 $
1,037,218
481,490
581,543
320,000
3,084
277,479
10,500
$
1,932
171,732
5,225
$
3,261
6,464
145,765
Total ................................................................................. $
1,528,746 $
903,304 $
291,063
$
178,889
$
155,490
Total
Committed
Less Than
One Year
One to
Three Years
(In Thousands)
Over Three
Years to
Five Years
Over
5 Years
Undisbursed funds from approved lines of credit(1) ............. $
Construction loans in process(1) ............................................
Other commitments to extend credit(1)..................................
59,835 $
6,385
29,176
17,237 $
6,385
29,176
$
6,029
—
—
$
4,784
—
—
31,785
—
—
Total ................................................................................. $
95,396 $
52,798 $
6,029
$
4,784
$
31,785
(1) Represents amounts committed to customers.
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 Bank’s facilities. These financial instruments include significant purchase commitments, such as
commitments related to capital expenditure plans and commitments to purchase securities or mortgage-
backed securities and commitments to extend credit to meet the financing needs of our customers. At June
30, 2014, we had no significant off-balance sheet commitments to purchase securities or for capital
expenditures.
In addition to the commitments noted above, Kearny Bank is party to standby letters of credit
totaling approximately $519,000 at June 30, 2014 through which we guarantee certain specific business
obligations of our commercial customers.
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 June 30,
2014, outstanding loan commitments totaled $94.5 million compared to $141.1 million at June 30, 2013.
Since some 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 June 30, 2014, see Note 19 to the audited consolidated financial
statements.
110
Capital
Consistent with our goals to operate as a sound and profitable financial organization, Kearny
Bank actively seeks to maintain our well capitalized status in accordance with regulatory standards. As of
June 30, 2014, Kearny Bank exceeded all capital requirements of the federal banking regulators. Kearny
Bank’s regulatory capital ratios at June 30, 2014 were as follows: Tier 1 leverage ratio 10.75%; Tier I
risk-based capital 19.78%; and total risk-based capital 20.45%. The regulatory capital requirements to be
considered well capitalized are 5.0%, 6.0% and 10.0%, respectively. For additional information
regarding regulatory capital at June 30, 2014, see Note 17 to the audited consolidated financial
statements. Kearny Bank will be considered to be well capitalized under the new capital requirements
effective January 1, 2015.
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
For a discussion of the expected impact of recently issued accounting pronouncements that have
yet to be adopted by us, please refer to Note 3 to the audited consolidated financial statements.
111
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. The majority of our assets and liabilities are sensitive to changes in interest
rates. Consequently, interest rate risk is a significant form of business risk that we must manage. Interest
rate risk is generally defined in regulatory nomenclature as the risk to our earnings or capital arising from
the movement of interest rates. It arises from several risk factors including: the differences between the
timing of rate changes and the timing of cash flows (re-pricing risk); the changing rate relationships
among different yield curves that affect bank activities (basis risk); the changing rate relationships across
the spectrum of maturities (yield curve risk); and the interest-rate-related options embedded in bank
products (option risk).
Regarding the risk to our earnings, movements in interest rates significantly influence the amount
of net interest income we recognized. Net interest income is the difference between:
the interest income recorded on our earning assets, such as loans, securities and other
interest-earning assets; and
the interest expense recorded on our costing liabilities, such as interest-bearing deposits
and borrowings.
Net interest income is, by far, our largest revenue source to which we add our non-interest income
and from which we deduct our provision for loan losses, non-interest expense and income taxes to
calculate net income. Movements in market interest rates, and the effect of such movements on the risk
factors noted above, significantly influence the “spread” between the interest we earned on our loans,
securities and other interest-earning assets and the interest paid on our deposits and borrowings.
Movements in interest rates that increase, or “widen”, that net interest spread enhance our net income.
Conversely, movements in interest rates that reduce, or “tighten”, that net interest spread adversely impact
our net income.
For any given movement in interest rates, the resulting degree of movement in an institution’s
yield on interest-earning assets compared with that of its cost of interest-bearing liabilities determines if
an institution is deemed “asset sensitive” or “liability sensitive”. An asset sensitive institution is one
whose yield on interest-earning assets reacts more quickly to movements in interest rates than its cost of
interest-bearing liabilities. In general, the earnings of asset sensitive institutions are enhanced by upward
movements in interest rates through which the yield on its interest-earning assets increases faster than its
cost of interest-bearing liabilities resulting in a widening of its net interest spread. Conversely, the
earnings of asset sensitive institutions are adversely impacted by downward movements in interest rates
through which the yield on its interest-earning assets decreases faster than its cost of interest-bearing
liabilities resulting in a tightening of its net interest spread.
In contrast, a liability sensitive institution is one whose cost of interest-bearing liabilities reacts
more quickly to movements in interest rates than its yield on interest-earning assets. In general, the
earnings of liability sensitive institutions are enhanced by downward movements in interest rates through
which the cost of interest-bearing liabilities decreases faster than its yield on its interest-earning assets
resulting in a widening of its net interest spread. Conversely, the earnings of liability sensitive
institutions are adversely impacted by upward movements in interest rates through which the cost of
interest-bearing liabilities increases faster than its yield on its interest-earning assets resulting in a
tightening of its net interest spread.
112
The degree of an institution’s asset or liability sensitivity is traditionally represented by its “gap
position”. In general, gap is a measurement that describes the net mismatch between the balance of an
institution’s interest-earning assets that are maturing and/or re-pricing over a selected period of time
compared to that of its interest-costing liabilities. Positive gaps represent the greater dollar amount of
interest-earning assets maturing or re-pricing over the selected period of time than interest-costing
liabilities. Conversely, negative gaps represent the greater dollar amount of interest-costing liabilities
maturing or re-pricing over the selected period of time than interest-earning assets. The degree to which
an institution is asset or liability sensitive is reported as a negative or positive percentage of assets,
respectively. The industry commonly focuses on cumulative one-year and three-year gap percentages as
fundamental indicators of interest rate risk sensitivity.
Based upon the findings of our internal interest rate risk analysis, we are considered to be liability
sensitive. Liability sensitivity characterizes the balance sheets of many thrift institutions and is generally
attributable to the comparatively shorter contractual maturity and/or re-pricing characteristics of the
institution’s deposits and borrowings versus those of its loans and investment securities.
With respect to the maturity and re-pricing of our interest-bearing liabilities, at June 30, 2014,
$581.5 million or 56.1% of our certificates of deposit mature within one year with an additional $187.4
million or 18.1% maturing after one year but within two years. The remaining $268.3 million, or 25.9%
of certificates, at June 30, 2014 have remaining terms to maturity exceeding two years. Based on current
market interest rates, the majority of these certificates are projected to re-price to a level at or below their
current rates to the extent they remain with us at maturity and are renewed at the same original term to
maturity.
Excluding fair value adjustments, the balance of FHLB advances totaled $481.5 million at June
30, 2014 and comprises both short-term and long-term advances with fixed rates of interest. Short-term
FHLB advances generally have original maturities of less than one year and include overnight borrowings
which Kearny Bank typically utilizes to address short term funding needs as they arise. At June 30, 2014,
Kearny Bank had a total of $320.0 million of short-term FHLB advances, including $300.0 million of 90-
day FHLB term advances that are generally forecasted to be periodically redrawn at maturity for the same
90 day term as the original advance. Based on this presumption, Kearny Bank has utilized interest rate
swaps to effectively extend the duration of each of these advances at the time they were drawn to
effectively fix their cost for period of five years.
Short-term advances also included one fixed-rate FHLB advance with a fair value of $3.0 million
assumed in conjunction with Kearny Bank’s acquisition of Atlas Bank on June 30, 2014 as well as $17.0
million of overnight borrowings from the FHLB drawn for daily liquidity management purposes.
Long-term advances generally include term advances with original maturities of greater than one
year. At June 30, 2014, our outstanding balance of long-term FHLB advances totaled $161.5 million.
Such advances included $145.0 million of advances as well as a $764,000 amortizing advance. Long-
term advances also included four FHLB advances with fair values totaling $15.7 million assumed in
conjunction with Kearny Bank’s acquisition of Atlas Bank on June 30, 2014.
With respect to the maturity and re-pricing of our interest-earning assets, at June 30, 2014, $64.1
million, or 3.7% of our total loans will reach their contractual maturity dates within one year with the
remaining $1.68 billion, or 96.3% of total loans having remaining terms to contractual maturity in excess
of one year. Of loans maturing after one year, $1.07 billion had fixed rates of interest while the remaining
$613.4 million had adjustable rates of interest with such loans representing 63.5% and 36.5% of total
loans, respectively.
113
At June 30, 2014, $5.8 million or 0.4% of our securities will reach their contractual maturity dates
within one year with the remaining $1.35 billion, or 99.6% of total securities, having remaining terms to
contractual maturity in excess of one year. Of the latter category, $969.4 million comprising 71.5% of
our total securities had fixed rates of interest while the remaining $380.9 million comprising 28.1% of our
total securities had adjustable or floating rates of interest.
At June 30, 2014, mortgage-related assets, including mortgage loans and mortgage-backed
securities, total $2.4 billion and comprise 73.4% of total earning assets. In addition to remaining term to
maturity and interest rate type as discussed above, other factors contribute significantly to the level of
interest rate risk associated with mortgage-related assets. In particular, the scheduled amortization of
principal and the borrower’s option to prepay any or all of a mortgage loan’s principal balance, where
applicable, have a significant effect on the average lives of such assets and, therefore, the interest rate risk
associated with them. In general, the prepayment rate on lower yielding assets tends to slow as interest
rates rise due to the reduced financial incentive for borrowers to refinance their loans. By contrast, the
prepayment rate of higher yielding assets tends to accelerate as interest rates decline due to the increased
financial incentive for borrowers to prepay or refinance their loans to comparatively lower interest rates.
These characteristics tend to diminish the benefits of falling interest rates to liability sensitive institutions
while exacerbating the adverse impact of rising interest rates.
We generally retained our liability sensitivity throughout fiscal 2014 while the degree of that
sensitivity, as measured internally by the institution’s one-year and three-year gap percentages, increased
during the period. Specifically, our cumulative one-year gap percentage changed to (12.08)% from
(1.87)% at June 30, 2013 while our cumulative three-year gap percentage changed from (14.20)% to
0.11% over those same comparative periods.
The change in our one-year and three-year gaps between comparative periods reflects, in part,
modeling assumption changes regarding our brokered money market deposits. This change resulted in a
reallocation of brokered money market balances into the one-month re-pricing bucket for gap analysis
reporting purposes for periods beginning in fiscal 2014. By contrast, at June 30, 2013, core deposit decay
assumptions had been utilized to allocate such balances across the various re-pricing intervals across the
maturity gap horizon. This change increased the balance of liabilities re-pricing within the cumulative
one and three year periods thereby widening the negative gap reported for those periods.
Other factors contributing to the widening of the negative gaps for the cumulative one and three
year intervals include a reduced balance of loan-related cash flows re-pricing within those periods due to
slowing of mortgage loan prepayment assumptions coupled with the additional utilization of short-term
FHLB advances which increased the balance of interest-bearing liabilities re-pricing within those periods.
Our one-year and three-year gap measures do not currently reflect the effect of our interest rate
derivatives and the effective extension of liability duration arising from their use as cash flow hedges.
As a liability-sensitive institution, our net interest spread is generally expected to benefit from
overall reductions in market interest rates. Conversely, our net interest spread is generally expected to be
adversely impacted by overall increases in market interest rates. However, the general effects of
movements in market interest rates can be diminished or exacerbated by “nonparallel” movements in
interest rates across a yield curve. Nonparallel movements in interest rates generally occur when shorter
term and longer term interest rates move disproportionately in a directionally consistent manner. For
example, shorter term interest rates may decrease faster than longer term interest rates which would
generally result in a “steeper” yield curve. Alternately, nonparallel movements in interest rates may also
occur when shorter term and longer term interest rates move in a directionally inconsistent manner. For
example, shorter term interest rates may rise while longer term interest rates remain steady or decline
which would generally result in a “flatter” yield curve.
114
At its extreme, a yield curve may become “inverted” for a period of time during which shorter
term interest rates exceed longer term interest rates. While inverted yield curves do occasionally occur,
they are generally considered a “temporary” phenomenon portending a change in economic conditions
that will restore the yield curve to its normal, positively sloped shape.
In general, the interest rates paid on our deposits tend to be determined based upon the level of
shorter term interest rates. By contrast, the interest rates earned on our loans and investment securities
generally tend to be based upon the level of longer term interest rates to the extent such assets are fixed
rate in nature. As such, the overall “spread” between shorter term and longer interest rates when earning
assets and costing liabilities re-price greatly influences our overall net interest spread over time. In
general, a wider spread between shorter term and longer term interest rates, implying a “steeper” yield
curve, is beneficial to our net interest spread. By contrast, a narrower spread between shorter term and
longer term interest rates, implying a “flatter” yield curve, or a negative spread between those measures,
implying an inverted yield curve, adversely impacts our net interest spread.
We continue to execute various strategies to mitigate the risk to our net interest rate spread and
margin arising from adverse changes in interest rates and the shape of the yield curve. Such strategies
include deploying excess liquidity in higher yielding interest-earning assets, such as commercial loans
and investment securities, while continuing to lower our cost of interest-bearing liabilities by reducing
deposit offering rates. More recently, we have extended the duration of our wholesale funding sources
through cost effective use of interest rate derivatives that effectively converted short-term wholesale
funding sources into longer-term, fixed-rate funding sources. Through various deposit pricing strategies,
we have allowed for some controlled outflow of shorter term certificates while attracting term deposits
with longer maturities through both our retail and “non-retail” deposit listing service channels.
Notwithstanding these efforts, the risk of further net interest rate spread and margin compression
is significant as the yield on our interest-earning assets continues to reflect the impact of the greater
declines in longer term market interest rates in recent years compared to the lesser concurrent reductions
in shorter term market interest rates that affect our cost of interest-bearing liabilities. In particular, our
ability to further reduce the cost of our interest-bearing deposits is increasingly limited since most deposit
offering rates already well below 1.00% at June 30, 2014. Moreover, our liability sensitivity may
adversely affect net income in the future when market interest rates ultimately increase from their
historical lows and our cost of interest-bearing liabilities may rise faster than our yield on interest-earning
assets.
Given the inherent liability sensitivity of our balance sheet, our business plan also calls for greater
expansion into C&I lending. Toward that end, we are continuing to expand our retail lending resources
with an experienced team of business lenders focused on the origination of floating-rate and shorter-term
fixed-rate loans and the corresponding core deposit account balances typically associated with such
relationships. As a complement to this retail business lending strategy, we have implemented strategies
through which floating-rate and other shorter-term fixed-rate C&I loans are acquired through wholesale
resources.
We maintain an Asset/Liability Management (“ALM”) Program to address all matters relating to
the management of interest rate risk and liquidity risk. The program is overseen by the Board of
Directors through our Interest Rate Risk Management Committee comprising five members of the Board
with our Chief Operating Officer, Chief Financial Officer and Chief Risk/Investment Officer participating
as management’s liaison to the committee. The committee meets quarterly to address management of our
assets and liabilities, including review of our liquidity and interest rate risk profiles, loan and deposit
pricing and production volumes, investment and wholesale funding strategies, and a variety of other asset
115
and liability management topics. The results of the committee’s quarterly review are reported to the full
Board, which adjusts our ALM policies and strategies, as it considers necessary and appropriate.
The Board of Directors has assigned the responsibility for the operational aspects of the ALM
program to our Asset/Liability Management Committee (“ALCO”). The ALCO is a management
committee comprising the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer,
Chief Lending Officer, Branch Administrator, Chief Risk/Investment Officer, Treasurer and Controller.
Additional members of our management team may be asked to participate on the ALCO, as appropriate.
Responsibilities conveyed to the ALCO by the Board of Directors include:
developing ALM-related policies and associated operating procedures and controls that
will identify and measure the risks associated with ALM while establishing the limits and
thresholds relating thereto;
developing ALM-related operating strategies and tactics designed to manage the relevant
risks within the applicable policy thresholds and limits while supporting the achievement
of the goals and objectives of our strategic business plan;
developing, implementing and maintaining a management- and Board-level ALM
monitoring and reporting system;
ensuring that the ALCO and the Board of Directors are kept abreast of current
technologies, procedures and industry best practices that may be utilized to carry out their
ALM-related duties and responsibilities;
ensuring the periodic independent validation of Kearny Bank’s ALM risk management
policies and operating practices and controls; and
conducting periodic ALCO committee meetings to review all matters relating to ALM
strategies and risk management activities.
Quantitative Analysis. The quantitative analysis regularly conducted by management measures
interest rate risk from both a capital and earnings perspective. With regard to capital, our internal interest
rate risk analysis calculates the sensitivity of our EVE ratio to movements in interest rates. EVE
represents the present value of the expected cash flows from our assets less the present value of the
expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The
EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a
given interest rate scenario. In essence, EVE attempts to quantify our economic value using a discounted
cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. The degree to
which the EVE ratio changes for any hypothetical interest rate scenario from its “base case” measurement
is a reflection of an institution’s sensitivity to interest rate risk.
Our EVE ratio is first calculated in a “base case” scenario that assumes no change in interest rates
as of the measurement date. The model then measures the change in the EVE ratio throughout a series of
interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve up and
down 100, 200 and 300 basis points with additional scenarios modeled where appropriate. The model
requires that interest rates remain positive for all points along the yield curve for each rate scenario which
may preclude the modeling of certain “down rate” scenarios during periods of lower market interest rates.
Our interest rate risk management policy establishes acceptable floors for the EVE ratio and caps for the
maximum change in the EVE ratio throughout the scenarios modeled.
As illustrated in the tables below, our EVE would be negatively impacted by an increase in
interest rates. This result is expected given our liability sensitivity noted earlier. Specifically, based upon
the comparatively shorter maturity and/or re-pricing characteristics of our interest-bearing liabilities
116
compared with that of our interest-earning assets, an upward movement in interest rates would have a
disproportionately adverse impact on the present value of our assets compared to the beneficial impact
arising from the reduced present value of our liabilities. Hence, our EVE and EVE ratio decline in the
increasing interest rate scenarios. Historically low interest rates at June 30, 2014 and June 30, 2013
precluded the modeling of certain scenarios as parallel downward shifts in the yield curve of 100 basis
points or more would result in negative interest rates for many points along that curve.
The following tables present the results of our internal EVE analysis as of June 30, 2014 and June
30, 2013, respectively.
Changes in Rates (1)
$ Amount
$ Change
% Change
Net Portfolio Value
Net Portfolio Value
as % of Present Value of Assets
Net Portfolio
Value Ratio
Basis Point
Change
At June 30, 2014
+300 bps
+200 bps
+100 bps
0 bps
(In Thousands)
221,884
297,815
365,983
417,990
Net Portfolio Value
(196,106)
(120,175)
(52,007)
—
(47)%
(29)%
(12)%
—
At June 30, 2013
7.20%
9.34%
11.11%
12.29%
(509) bps
(295) bps
(118) bps
—
Net Portfolio Value
as % of Present Value of Assets
Net Portfolio
Value Ratio
Basis Point
Change
Changes in Rates (1)
$ Amount
$ Change
% Change
+300 bps
+200 bps
+100 bps
0 bps
(In Thousands)
225,946
309,100
378,311
418,729
(192,783)
(109,629)
(40,418)
—
(46)%
(26)%
(10)%
—
8.13%
10.71%
12.67%
13.63%
(550) bps
(292) bps
(96) bps
—
(1) The (100) bps, (200) bps and (300) bps scenarios are not shown due to the low prevailing interest rate environment.
The dollar amount of EVE throughout the scenarios modeled remained generally stable between
comparative periods. As such, the declines in the EVE ratio largely reflect the overall growth in interest-
earning assets and interest-bearing liabilities during the period. Notwithstanding the noted changes in
EVE and the EVE ratios, the sensitivity of those measures to movements in interest rates between
comparative periods remained fairly stable as reflected by consistent percentage changes in EVE across
the various interest rate scenarios modeled.
There are numerous internal and external factors that may contribute to changes in an institution’s
EVE sensitivity. Internally, changes in the composition and allocation of an institution’s balance sheet
and the interest rate risk characteristics of its components can significantly alter the exposure to interest
rate risk as quantified by the changes in the EVE sensitivity measures. However, changes to certain
external factors, most notably changes in the level of market interest rates and overall shape of the yield
curve, can significantly alter the projected cash flows of the institution’s interest-earning assets and
interest-costing liabilities and the associated present values thereof. Changes in internal and external
factors from period to period can complement one another’s effects to reduce overall sensitivity, partly or
wholly offset one another’s effects, or exacerbate one another’s adverse effects and thereby increase the
institution’s exposure to interest rate risk as quantified by EVE sensitivity measures.
Our internal interest rate risk analysis also includes an “earnings-based” component which,
compared to EVE-based analysis, generally focuses on shorter-term exposure to interest rate risk. A
quantitative, earnings-based approach to measuring interest rate risk is strongly encouraged by bank
regulators as a complement to the “EVE-based” methodology. However, there are no commonly
117
accepted “industry best practices” that specify the manner in which “earnings-based” interest rate risk
analysis should be performed with regard to certain key modeling variables. Such variables include, but
are not limited to, those relating to rate scenarios (e.g., immediate and permanent rate “shocks” versus
gradual rate change “ramps”, “parallel” versus “nonparallel” yield curve changes), measurement periods
(e.g., one year versus two year, cumulative versus noncumulative), measurement criteria (e.g., net interest
income versus net income) and balance sheet composition and allocation (“static” balance sheet,
reflecting reinvestment of cash flows into like instruments, versus “dynamic” balance sheet, reflecting
internal budget and planning assumptions).
We are aware that the absence of a commonly shared, industry-standard set of analysis criteria
and assumptions on which to base an “earnings-based” analysis could result in inconsistent or
misinterpreted disclosure concerning an institution’s level of interest rate risk. Consequently, we limit the
presentation of our earnings-based interest rate risk analysis to the scenarios presented in the table below.
Consistent with the EVE analysis above, such scenarios utilize immediate and permanent rate “shocks”
that result in parallel shifts in the yield curve. For each scenario, projected net interest income is
measured over a one year period utilizing a static balance sheet assumption through which incoming and
outgoing asset and liability cash flows are reinvested into the same instruments. Product pricing and
earning asset prepayment speeds are appropriately adjusted for each rate scenario.
As illustrated in the tables below, our net interest income would be negatively impacted by a
parallel upward shift in the yield curve. Like the EVE results presented earlier, this result is expected
given our liability sensitivity noted earlier. The tables below reflect a noteworthy decrease in the
sensitivity of net interest income to movements in interest rates between the comparative periods as
analyzed from this earnings-based perspective. Such decreases largely reflect the aggregate effects of the
various balance sheet management strategies we are currently undertaking to reduce our exposure to
interest rate risk.
Rate Change Type
Yield
Curve
Shift
Balance Sheet
Composition &
Allocation
Change in
Rates
Measurement
Period
Net Interest
Income
Change in
Net Interest
Income
Change in
Net Interest
Income
At June 30, 2014
(In Thousands)
Base case
(No change)
Immediate and
permanent
Immediate and
permanent
Immediate and
permanent
—
Parallel
Parallel
Parallel
Static
Static
Static
Static
0 bps
One Year
$ 77,238
$
—
— %
100 bps
One Year
76,140
(1,098)
(1.42)
200 bps
One Year
75,506
(1,732)
(2.24)
300 bps
One Year
74,726
(2,512)
(3.25)
Rate Change Type
Yield
Curve
Shift
Balance Sheet
Composition &
Allocation
Change in
Rates
Measurement
Period
Net Interest
Income
Change in
Net Interest
Income
Change in
Net Interest
Income
At June 30, 2013
(In Thousands)
Base case
(No change)
Immediate and
permanent
Immediate and
permanent
Immediate and
permanent
—
Parallel
Parallel
Parallel
Static
Static
Static
Static
0 bps
One Year
$
72,762
$
—
— %
100 bps
One Year
70,604
(2,158)
(2.97)
200 bps
One Year
68,736
(4,026)
(5.53)
300 bps
One Year
66,337
(6,425)
(8.83)
Notwithstanding the rate change scenarios presented in the EVE and earnings-based analyses
above, future interest rates and 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
118
numerous 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
re-pricing, they may react at different times and in different degrees to changes in 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.
119
Item 8. Financial Statements and Supplementary Data
The Company’s consolidated financial statements are contained in this Annual Report on Form
10-K immediately following Item 15.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
On July 3, 2013, we dismissed ParenteBeard LLC, which had previously served as our
independent accountant. The decision to dismiss ParenteBeard LLC was approved by the Audit
Committee of the Board of Directors.
The audit report of ParenteBeard LLC on the consolidated statements of financial condition,
income, comprehensive income, changes in stockholders’ equity, and cash flows of Kearny-Federal for
the year ended June 30, 2012 did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal year ended
June 30, 2012 and through the subsequent interim period preceding the date of ParenteBeard LLC’s
dismissal, there were: (1) no disagreements between us and ParenteBeard LLC on any matter of
accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of ParenteBeard LLC would have caused them to make
reference thereto in their report on Kearny-Federal’s financial statements for such year, and (2) no
reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
On July 3, 2013, the Audit Committee of the Board of Directors engaged BDO USA, LLP as
Kearny-Federal’s independent registered public accounting firm. During the fiscal years ended June 30,
2012 and 2011 and the subsequent interim period preceding the engagement of BDO USA, LLP, Kearny-
Federal did not consult with BDO USA, LLP regarding (1) the application of accounting principles to a
specified transaction, either completed or proposed; (2) the type of audit opinion that might be rendered
on Kearny-Federal’s financial statements, and BDO USA, LLP did not provide any written report or oral
advice that BDO USA, LLP concluded was an important factor considered by Kearny-Federal in reaching
a decision as to any such accounting, auditing or financial report issues; or (3) any matter that was either
the subject of a disagreement with ParenteBeard LLC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure or the subject of a reportable event.
Item 9A. Controls and Procedures
(a)
Disclosure Controls and Procedures
Based on their evaluation of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the
Company’s principal executive officer and principal financial officer have concluded that as of the end of
the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and is accumulated and communicated
to the Company’s management, including the principal executive and principal financial officer, as
appropriate to allow timely decisions regarding required disclosures.
120
(b)
Internal Control over Financial Reporting
1.
Management’s Annual Report on Internal Control Over Financial Reporting.
Management’s report on the Company’s internal control over financial reporting appears in the
Company’s consolidated financial statements that are contained in this Annual Report on Form 10-K
immediately following Item 15. Such report is incorporated herein by reference.
2.
Report of Independent Registered Public Accounting Firm.
The report of BDO USA, LLP on the Company’s internal control over financial reporting appears
in the Company’s consolidated financial statements that are contained in this Annual Report on Form 10-
K immediately following Item 15. Such report is incorporated herein by reference.
3.
Changes in Internal Control Over Financial Reporting.
During the last quarter of the year under report, there was no change in the Company’s internal
control over financial reporting that has materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
121
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information that appears under the headings “Section 16(a) Beneficial Ownership Reporting
Compliance”, “Proposal I – Election of Directors” and “Corporate Governance” in the Registrant’s
definitive proxy statement for the Registrant’s 2014 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of the Registrant’s fiscal year end (the “Proxy
Statement”) is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its principal executive officer, principal
financial officer and principal accounting officer. A copy of the code of ethics is available without charge
upon request to the Corporate Secretary, Kearny Financial Corp., 120 Passaic Avenue, Fairfield, New
Jersey 07004.
Item 11. Executive Compensation
The information that appears under the headings “Executive Compensation”, “Director
Compensation” and “Compensation Discussion and Analysis” in the Proxy Statement is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
(a)
(b)
(c)
Security Ownership of Certain Beneficial Owners. Information required by this item
is incorporated herein by reference to the section captioned “Principal Holders of Our
Common Stock” in the Proxy Statement.
Security Ownership of Management. Information required by this item is incorporated
herein by reference to the section captioned “Proposal I – Election of Directors” in the
Proxy Statement.
Changes in Control. Management of the Company knows of no arrangements,
including any pledge by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the registrant.
122
(d)
Securities Authorized for Issuance Under Equity Compensation Plans. Set forth
below is information as of June 30, 2014 with respect to compensation plans under which
equity securities of the Registrant are authorized for issuance.
Equity Compensation Plan Information
(A)
(B)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
(C)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (A))
Equity compensation plans
approved by shareholders:
2005 Stock Compensation
and Incentive Plan (1)
Equity compensation plans not
approved by stockholders:
None.
Total
3,035,122
$
12.37
N/A
N/A
3,035,122
$
12.27
411,856
N/A
411,856
(1) The number of securities reported in column (A) includes 2,824,122 vested options and 211,000 non-vested options
outstanding as of June 30, 2014. In addition to these options, restricted stock awards of 87,500 shares were also non-
vested as of June 30, 2014. The non-vested options and restricted stock awards are earned at the rate of 20% one year
after the date of the grant and 20% annually thereafter. As of June 30, 2014, there were 18,959 restricted shares and
392,897 options remaining available for award under the approved equity compensation plans and are reported under
column (C) as securities remaining available for future issuance under such plans.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information that appears under the section captioned “Corporate Governance – Related Party
Transactions” and “ – Director Independence” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information relating to this item is incorporated herein by reference to the information
contained under the section captioned “Information Regarding Independent Auditor” in the Proxy
Statement.
123
Item 15. Exhibits, Financial Statement Schedules
PART IV
(1)
The following financial statements and the independent auditors’ report appear in this
Annual Report on Form 10-K immediately after this Item 15:
Management Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firms
Consolidated Statements of Financial Condition as of June 30, 2014 and 2013
Consolidated Statements of Income For the Years Ended June 30, 2014, 2013 and 2012
Consolidated Statements of Comprehensive (Loss) Income For the Years Ended June 30, 2014,
2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended
June 30, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended June 30, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
F-1
F-2
F-5
F-6
F-7
F-8
F-11
F-14
(2)
All schedules are omitted because they are not required or applicable, or the required
information is shown in the consolidated financial statements or the notes thereto.
(3)
The following exhibits are filed as part of this report:
10.2
10.3
10.4
3.1 Charter of Kearny Financial Corp.*
3.2
4
10.1
Bylaws of Kearny Financial Corp. **
Stock Certificate of Kearny Financial Corp*
Employment Agreement between Kearny Federal Savings Bank and William C.
Ledgerwood**†
Employment Agreement between Kearny Federal Savings Bank and Erika K.
Parisi**†
Employment Agreement between Kearny Federal Savings Bank and Patrick M.
Joyce**†
Employment Agreement between Kearny Federal Savings Bank and Craig
Montanaro***†
Employment Agreement between Kearny Financial Corp. and Craig Montanaro†
10.5
10.6 Directors Consultation and Retirement Plan*†
10.7 Benefit Equalization Plan for Pension Plan*†
10.8 Benefit Equalization Plan for Employee Stock Ownership Plan*†
10.9 Kearny Financial Corp. 2005 Stock Compensation and Incentive Plan ****†
10.10 Kearny Federal Savings Bank Director Life Insurance Agreement*****†
10.11 Kearny Federal Savings Bank Executive Life Insurance Agreement*****†
10.12 Employment Agreement between Kearny Federal Savings Bank and Eric B.
Heyer******†
10.13 Kearny Federal Savings Bank Senior Management Incentive Plan*******
11
16
21
Statement regarding computation of earnings per share
Letter regarding Change in Certifying Accountant ********
Subsidiaries of the Registrant
124
23.1 Consent of BDO USA, LLP
23.2 Consent of ParenteBeard LLC
31
32
101
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certification
Interactive Data Files‡
__________
†
‡
Management contract or compensatory plan or arrangement required to be filed as an exhibit.
Attached as Exhibits 101 to this Annual Report on Form 10-K are documents formatted in
XBRL (Extensible Business Reporting Language).
Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-
1 (File No. 333-118815).
Incorporated by reference to the identically numbered exhibit to the Registrant’s Annual Report
on Form 10-K for the year ended June 30, 2008 (File No. 000-51093)
Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K for
the year ended June 30, 2012 (File No. 000-51093)
Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8
(File No. 333-130204)
Incorporated by reference to the exhibits to the Registrant’s Current Report on Form 8-K filed
on August 18, 2005. (File No. 000-51093).
Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed
on June 30, 2011. (File No. 000-51093).
Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed
on September 2, 2014. (File No. 000-51093).
*
**
***
****
*****
******
*******
******** Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed
on July 5, 2013. (File No. 000-51093).
125
(This page intentionally left blank)
120 PASSAIC AVENUE ● FAIRFIELD, NJ 07004-3510 ● 973-244-4500
September 5, 2014
Management Report on Internal Control over Financial Reporting
The management of Kearny Financial Corp. and Subsidiaries (collectively the “Company”) is
responsible for establishing and maintaining adequate internal control over financial reporting. The
Company’s internal control system is a process designed to provide reasonable assurance to the
management and board of directors regarding the preparation and fair presentation of published
consolidated financial statements.
The Company’s internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to
permit preparation of consolidated financial statements in accordance with U.S. generally accepted
accounting principles and that receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on our consolidated financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
consolidated financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
General guidance from the SEC staff provides that if a registrant consummates a material
purchase business combination during its fiscal year and it is not possible to conduct an assessment of the
acquired business's internal control over financial reporting in the period between the consummation date
and the date of management's assessment, management may exclude the acquired business from
management's report on internal control over financial reporting. As previously described in this annual
report, the Company completed an acquisition of Atlas Bank on June 30, 2014, with Atlas Bank merging
with and into the Company. In accordance with the SEC staff guidance, our management excluded Atlas
Bank from management's report on internal control over financial reporting as of June 30, 2014. The fair
value of net assets acquired through the merger at June 30, 2014 was $15.7 million constituting 0.4% of
the Company's total assets as of that date.
The Company’s management assessed the effectiveness of internal control over financial
reporting as of June 30, 2014. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework (1992). Based on its assessment, management believes that, as of June 30, 2014, the
Company’s internal control over financial reporting is effective based on those criteria.
F-1
The Company’s independent registered public accounting firm that audited the consolidated
financial statements has issued an audit report on the effective operation of the Company’s internal
control over financial reporting as of June 30, 2014, a copy of which is included in this annual report.
/s/ Craig L. Montanaro
Craig L. Montanaro
President and Chief Executive Officer
/s/ Eric B. Heyer
Eric B. Heyer
Executive Vice President and Chief Financial
Officer
F-2
Tel: +212 885-8000
Fax: +212 697-1299
www.bdo.com
100 Park Avenue
New York, NY 10017
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Kearny Financial Corp.
Fairfield, New Jersey
We have audited Kearny Financial Corp. and Subsidiaries’ (collectively the “Company”) internal control
over financial reporting as of June 30, 2014, based on criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Kearny Financial Corp.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying “Management’s Report on Internal Control Over
Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial
reporting did not include the internal controls of Atlas Bank, which was acquired on June 30, 2014, and
which is included in the consolidated balance sheets of the Company as of June 30, 2014, and the related
consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and
cash flows for the year then ended. Atlas Bank constituted 3.4% and 3.2% of total assets and net assets,
respectively, as of June 30, 2014, and had no impact on revenues and net income for the year then ended.
Management did not access the effectiveness of internal control over financial reporting of Atlas Bank
because of the timing of the acquisition which was completed on June 30, 2014. Our audit of internal
control over financial reporting of the Company also did not include an evaluation of the internal control
over financial reporting of Atlas Bank.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part
of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
F-3
In our opinion, Kearny Financial Corp. and Subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated statements of financial condition of Kearny Financial Corp. and
Subsidiaries as of June 30, 2014 and 2013, and the related consolidated statements of income,
comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended
and our report dated September 5, 2014 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
New York, New York
September 5, 2014
F-4
Tel: +212 885-8000
Fax: +212 697-1299
www.bdo.com
100 Park Avenue
New York, NY 10017
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Kearny Financial Corp.
Fairfield, New Jersey
We have audited the accompanying consolidated statements of financial condition of Kearny
Financial Corp. and Subsidiaries (collectively the “Company”) as of June 30, 2014 and 2013
and the related consolidated statements of income, comprehensive income (loss), changes in
stockholders’ equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Kearny Financial Corp. and Subsidiaries at
June 30, 2014 and 2013, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States
of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Kearny Financial Corp.’s internal control over financial
reporting as of June 30, 2014, based on criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated September 5, 2014, expressed an unqualified
opinion thereon.
/s/ BDO USA, LLP
New York, New York
September 5, 2014
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part
of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
F-5
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Kearny Financial Corp.
We have audited the accompanying consolidated statements of income, comprehensive income,
changes in stockholders’ equity and cash flows of Kearny Financial Corp. and Subsidiaries (collectively
the “Company”) for the year ended June 30, 2012. The Company’s management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit 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 that our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of Kearny Financial Corp. and
Subsidiaries for the year ended June 30, 2012, in conformity with accounting principles generally
accepted in the United States of America.
/s/ ParenteBeard LLC
Pittsburgh, Pennsylvania
September 13, 2012
except for the first paragraph of Note 3,
as to which the date is September 13, 2013
F-6
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
Assets
Cash and amounts due from depository institutions
Interest-bearing deposits in other banks
Cash and cash equivalents
Debt securities available for sale (amortized cost; 2014 $411,228; 2013 $305,283)
Debt securities held to maturity (fair value; 2014 $213,472; 2013 $202,328)
Loans receivable, including net yield adjustments 2014 $(1,397); 2013 $(847)
Less allowance for loan losses
Net loans receivable
Mortgage-backed securities available for sale (amortized cost; 2014 $432,802;
2013 $782,866)
Mortgage-backed securities held to maturity (fair value; 2014 $293,781;
2013 $96,447)
Premises and equipment
Federal Home Loan Bank of New York stock
Interest receivable
Goodwill
Bank owned life insurance
Deferred income tax assets, net
Other assets
June 30,
2014
2013
(In Thousands, Except Share
and Per Share Data)
$ 14,403
120,631
$ 13,102
113,932
135,034
407,898
216,414
1,741,471
(12,387)
1,729,084
437,223
295,658
40,105
25,990
9,013
108,591
88,820
10,314
5,865
127,034
300,122
210,015
1,360,871
(10,896)
1,349,975
780,652
101,114
36,994
15,666
8,028
108,591
86,084
9,782
11,303
Total Assets
$ 3,510,009
$ 3,145,360
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing
Interest-bearing
Total deposits
Borrowings
Advance payments by borrowers for taxes
Other liabilities
Total Liabilities
Stockholders’ Equity
$ 224,054
2,255,887
$ 190,964
2,179,544
2,479,941
2,370,508
512,257
9,001
14,134
287,695
7,840
11,610
3,015,333
2,677,653
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;
2014 73,781,587 shares issued, 2013 72,737,500 shares issued;
2014 67,267,865 outstanding; 2013 66,500,740 outstanding
Paid-in capital
Retained earnings
Unearned Employee Stock Ownership Plan shares; 2014 387,924; 2013 533,400 shares
Treasury stock, at cost; 2014 6,513,722; 2013 6,236,760 shares
Accumulated other comprehensive loss
Total Stockholders’ Equity
-
-
7,378
231,870
336,355
(3,879)
(74,768)
(2,280)
494,676
7,274
215,722
326,167
(5,334)
(71,983)
(4,139)
467,707
Total Liabilities and Stockholders’ Equity
$ 3,510,009
$ 3,145,360
See notes to consolidated financial statements.
F-7
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Income
Interest Income
Loans
Mortgage-backed securities
Securities:
Taxable
Tax-exempt
Other interest-earning assets
Total Interest Income
Interest Expense
Deposits
Borrowings
Total Interest Expense
Net Interest Income
Provision for Loan Losses
Net Interest Income after Provision for Loan Losses
Non-Interest Income
Fees and service charges
Gain on sale of securities
Gain on sale of loans
Loss on sale and write down of real estate owned
Income from bank owned life insurance
Electronic banking fees and charges
Miscellaneous
Total Non-Interest Income
Non-Interest Expenses
Salaries and employee benefits
Net occupancy expense of premises
Equipment and systems
Advertising and marketing
Federal deposit insurance premium
Directors’ compensation
Merger-related expenses
Debt extinguishment expenses
Miscellaneous
Total Non-Interest Expenses
Income before Income Taxes
Income Taxes
Net Income
Net Income per Common Share (EPS)
Basic
Diluted
Weighted Average Number of Common Shares Outstanding
Basic
Diluted
See notes to consolidated financial statements.
F-8
2014
Years Ended June 30,
2013
(In Thousands, Except Per Share Data)
2012
$ 66,794
20,827
$ 61,500
23,688
$ 63,960
32,435
5,341
1,839
1,018
95,819
14,538
7,460
21,998
73,821
3,381
70,440
2,452
1,517
80
(441)
2,735
1,160
620
8,123
35,774
7,031
8,982
1,262
2,288
690
391
-
7,740
64,158
14,405
4,217
1,884
411
775
88,258
14,711
7,290
22,001
66,257
4,464
61,793
2,541
10,427
557
(775)
1,966
1,145
527
16,388
35,406
6,625
7,596
1,002
2,166
698
-
8,688
7,244
69,425
8,756
2,250
1,319
70
765
98,549
20,272
8,097
28,369
70,180
5,750
64,430
2,435
47
661
(3,330)
748
957
627
2,145
33,688
6,528
7,190
1,100
2,082
678
-
-
7,455
58,721
7,854
2,776
$ 10,188
$ 6,506
$ 5,078
$ 0.16
$ 0.10
$ 0.08
$ 0.16
$ 0.10
$ 0.08
65,796
66,152
66,495
65,836
66,152
66,495
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
2014
Years Ended June 30,
2013
(In Thousands)
2012
Net Income
$ 10,188
$ 6,506
$ 5,078
Other Comprehensive Income (Loss):
Realized gain on securities available for sale, net of income tax expense
of: 2014 $(622); 2013 $(4,277); 2012 $(22)
Unrealized gain (loss) on securities available for sale arising during the
period, net of deferred income tax expense (benefit) of: 2014 $3,235;
2013 $(13,886); 2012 $5,401
Net loss on securities transferred from available for sale to held to
maturity, net of deferred income tax benefit of:
2014 $(404); 2013 $ -; 2012 $ -
Fair value adjustments on derivatives, net of deferred income tax
(benefit) expense of: 2014 $(2,699); 2013 $1,269; 2012 $ -
Benefit plan adjustments, net of deferred income tax
expense (benefit) of: 2014 346; 2013 $(443); 2012 $132
Total Other Comprehensive Income (Loss)
(901)
(6,156)
(31)
6,754
(22,776)
8,004
(586)
-
(3,909)
1,838
501
1,859
(641)
(27,735)
-
-
191
8,164
Total Comprehensive Income (Loss)
$ 12,047
$ (21,229)
$ 13,242
See notes to consolidated financial statements.
F-9
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K
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of premises and equipment
Net amortization of premiums, discounts and loan fees
and costs
Deferred income taxes
Realized gain on bargain purchase
Amortization of intangible assets
Amortization of benefit plans’ unrecognized net loss
Provision for loan losses
Realized loss (gain) on sale of debt securities
available for sale
Realized gain on sale of mortgage-backed securities
available for sale
Realized loss on sale of mortgage-backed securities
held to maturity
Realized loss on debt extinguishment
Realized gain on sale of loans
Proceeds from sale of loans
Realized (gain) loss on disposition of premises and
equipment
Increase in cash surrender value of bank owned life
insurance
ESOP, stock option plan and restricted stock plan expenses
Loss on sale and write down of real estate owned
(Increase) decrease in interest receivable
Decrease in other assets
Increase (decrease) in interest payable
Increase in other liabilities
2014
Years Ended June 30,
2013
(In Thousands)
2012
$ 10,188
$ 6,506
$ 5,078
2,645
2,667
83
(226)
122
43
3,381
1,294
2,610
9,163
278
-
138
100
4,464
-
(2,817)
(10,433)
6
-
(80)
6,092
-
(2,735)
2,062
441
(611)
367
71
3,014
6
8,688
(557)
5,332
(105)
(1,966)
1,640
775
367
2,882
(41)
76
2,665
8,881
96
-
155
40
5,750
(53)
-
6
-
(661)
7,123
8
(748)
1,576
3,330
1,345
2,655
(46)
157
Net Cash Provided by Operating Activities
$ 26,007
$ 29,923
$ 37,357
See notes to consolidated financial statements.
F-13
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
2014
Years Ended June 30,
2013
(In Thousands)
2012
Cash Flows from Investing Activities
Purchases of debt securities available for sale
Proceeds from sales of debt securities available for sale
Proceeds from calls and maturities of debt securities available for
sale
Proceeds from repayments of debt securities available for sale
Purchases of debt securities held to maturity
Proceeds from calls and maturities of debt securities held to
maturity
Proceeds from repayments of debt securities held to maturity
Purchases of loans
Net (increase) decrease in loans receivable
Proceeds from sale of real estate owned
Purchases of mortgage-backed securities available for sale
Principal repayments on mortgage-backed securities available for
sale
Proceeds from sale of mortgage-backed securities available for
sale
Purchases of mortgage-backed securities held to maturity
Principal repayments on mortgage-backed securities held to
maturity
Proceeds from sale of mortgage-backed securities held to maturity
Purchase of cash flow hedges
Additions to premises and equipment
Proceeds from cash settlement on premises and equipment
Purchase of bank owned life insurance
Purchases of FHLB stock
Redemptions of FHLB stock
Cash acquired in merger
$ (158,909)
$ (291,418)
54,075
-
737
(9,056)
2,077
404
(114,343)
(196,468)
1,484
(50,155)
-
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732
(208,610)
32,236
984
(17,773)
(69,663)
3,847
(373,003)
$ -
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30,598
838
(2,236)
73,019
966
(80,014)
48,566
2,142
(523,211)
114,107
335,914
305,665
116,838
(5,094)
2,299
28
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(3,560)
-
-
(28,170)
18,883
9,133
442,806
(100,357)
312
18
(2,538)
(1,042)
220
(35,503)
(18,675)
17,151
-
51,306
-
228
32
-
(1,797)
3
(23,397)
(5,760)
5,178
-
Net Cash Used in Investing Activities
(245,690)
(284,362)
(117,874)
Cash Flows from Financing Activities
Net increase in deposits
Repayment of term FHLB advances
Proceeds from term FHLB advances
Net change in overnight borrowings
(Decrease) increase in sweep accounts
Increase in advance payments by borrowers for taxes
Dividends paid to stockholders of Kearny Financial Corp.
Purchase of common stock of Kearny Financial Corp. for treasury
Dividends contributed for payment of ESOP loan
Treasury stock reissued
23,326
(800,088)
1,000,000
12,000
(6,026)
1,111
-
(4,135)
-
1,495
198,899
(218,774)
145,000
105,000
(1,781)
1,866
-
(4,319)
(2)
-
Net Cash Provided by Financing Activities
227,683
225,889
22,978
(80)
-
-
2,364
180
(3,617)
(8,464)
160
-
13,521
Net Increase (Decrease) in Cash and Cash Equivalents
8,000
(28,550)
(66,996)
Cash and Cash Equivalents - Beginning
127,034
155,584
222,580
Cash and Cash Equivalents - Ending
$ 135,034
$ 127,034
$ 155,584
See notes to consolidated financial statements.
F-14
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
2014
Years Ended June 30,
2013
(In Thousands)
2012
Supplemental Disclosures of Cash Flows Information
Cash paid during the year for:
Income taxes, net of refunds
$ 3,503
$ 1,687
$ 1,836
Interest
$ 21,919
$ 22,042
$ 28,415
Non-cash investing activities:
Real estate owned acquired in settlement of loans
Fair value of assets acquired, net of cash and cash equivalents
acquired
$ 1,489
$ 2,873
$ 1,786
$ 111,806
$ -
$ -
Fair value of liabilities assumed
$ 105,213
$ -
$ -
Transfer of securities available for sale to
securities held to maturity
Non-cash financing activities:
$ 191,890
$ -
$ -
Issuance of common stock to mutual holding company
$ 15,500
$ -
$ -
See notes to consolidated financial statements.
F-15
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Basis of Consolidated Financial Statement Presentation
The consolidated financial statements include the accounts of Kearny Financial Corp. (the “Company”), its
wholly-owned subsidiary, Kearny Federal Savings Bank (the “Bank”) and the Bank’s wholly-owned
subsidiaries, KFS Investment Corp., CJB Investment Corp. and KFS Financial Services, Inc. and its wholly-
owned subsidiary, KFS Insurance Services, Inc. The Company conducts its business principally through the
Bank. Management prepared the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”), including the elimination of all significant
inter-company accounts and transactions during 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. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses, the evaluation of goodwill for impairment,
identification of other-than-temporary impairment of securities and the determination of the amount of
deferred tax assets which are more likely than not to be realized. The allowance for loan losses represents
management’s best estimate of losses known and inherent in the loan portfolio that are both probable and
reasonable to estimate, impairment testing of goodwill and evaluation for other-than-temporary impairment of
securities are done in accordance with GAAP; and deferred tax assets are properly recognized. 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. Moreover, 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. Additionally, subsequent
evaluations of the Company’s goodwill that originated from the application of purchase accounting associated
with the Company’s prior acquisition of four community banks could identify impairments to the intangible
asset that would result in future charges to earnings. Finally, the determination of the amount of deferred tax
assets more likely than not to be realized is dependent on projections of future earnings, which are subject to
frequent change.
Business of the Company and Subsidiaries
The Company’s primary business is the ownership and operation of the Bank. The Bank is principally
engaged in the business of attracting deposits from the general public at its 42 locations in New Jersey and
New York and using these deposits, together with other funds, to originate or purchase loans for its portfolio
and invest in securities. Loans originated or purchased by the Bank generally include loans collateralized by
residential and commercial real estate augmented by secured and unsecured loans to businesses and
consumers. The investment securities purchased by the Bank generally include U.S. agency mortgage-backed
securities, U.S. government and agency debentures, bank-qualified municipal obligations, corporate bonds,
asset-backed securities and collateralized loan obligations. The Bank maintains a small balance of single
issuer trust preferred securities and non-agency mortgage-backed securities which were acquired through the
Company’s purchase of other institutions and does not actively purchase such securities.
F-16
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
At June 30, 2014, the Bank had two wholly owned subsidiaries: KFS Financial Services, Inc., and CJB
Investment Corp. KFS Financial Services, Inc., 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
originally organized for selling insurance products to Bank customers and the general public through a third
party networking arrangement.
During the year ended June 30, 2014, KFS Insurance Services, Inc. was created as a wholly owned subsidiary
of KFS Financial Services, Inc. for the primary purpose of acquiring insurance agencies. Both KFS Financial
Services Inc. and KFS Insurance Services Inc. were considered inactive during the year ended June 30, 2014.
CJB Investment Corp. was acquired by the Bank through the Company’s acquisition of Central Jersey
Bancorp in November 2010. CJB Investment Corp was organized under New Jersey law as a New Jersey
Investment Company and remained active through the three-year period ended June 30, 2014.
In addition to the subsidiaries noted above, the Bank dissolved its wholly owned subsidiary KFS Investment
Corp. during fiscal 2014 which had remained inactive during the two years ended June 30, 2012 and 2013 and
through the date of its dissolution during the year ended June 30, 2014.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing
deposits in other banks, all with original maturities of three months or less.
Securities
In accordance with applicable accounting standards, the Company classifies its investment securities into one
of three portfolios: held to maturity, available for sale or trading. Investments in debt securities that we have
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 or 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 (“OCI”) component of stockholders’ equity.
If the fair value of a security is less than its amortized cost, the security is deemed to be impaired.
Management evaluates all securities with unrealized losses quarterly to determine if such impairments are
“temporary” or “other-than-temporary”.
The Company accounts for temporary impairments based upon their classification as either available for sale,
held to maturity or managed within a trading portfolio. Temporary impairments on “available for sale”
securities are recognized, on a tax-effected basis, through OCI with offsetting entries adjusting the carrying
value of the security and the balance of deferred taxes. Conversely, the Company does not adjust the carrying
value of “held to maturity” securities for temporary impairments, although information concerning the
amount and duration of impairments on held to maturity securities is disclosed in periodic financial
statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value through
earnings on a daily basis. However, the Company did not maintain any securities in trading portfolios at or
during the periods presented in these financial statements.
F-17
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
The Company accounts for other-than-temporary impairments based upon several considerations. First,
other-than-temporary impairments on securities that the Company has decided to sell as of the close of a fiscal
period, or will, more likely than not, be required to sell prior to the full recovery of their fair value to a level
equal to or exceeding their amortized cost, are recognized in earnings. If neither of these conditions regarding
the likelihood of the securities’ sale are applicable, then, for debt securities, the other-than-temporary
impairment is bifurcated into credit-related and noncredit-related components. A credit-related impairment
generally represents the amount by which the present value of the cash flows that are expected to be collected
on a debt security fall below its amortized cost. The noncredit-related component represents the remaining
portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related,
However, noncredit-related, other-than-temporary
other-than-temporary
impairments on debt securities are recognized in OCI.
in earnings.
impairments
Premiums and discounts on all securities are generally amortized/accreted to maturity by use of the level-yield
method considering the impact of principal amortization and prepayments on mortgage-backed securities.
Premiums on callable securities are generally amortized to the call date whereas discounts on such securities
are accreted to the maturity date. Gain or loss on sales of securities is based on the specific identification
method.
Concentration of Risk
Financial instruments which potentially subject the Company and its subsidiaries to concentrations of credit
risk consist of cash and cash equivalents, mortgage-backed and non-mortgage-backed securities and loans
receivable. Cash and cash equivalents include deposits placed in other financial institutions. At June 30,
2014, the Company had cash and cash equivalents of $135.0 million comprising funds on deposit at other
institutions totaling $124.7 million and other cash-related items, consisting primarily of vault cash, totaling
$10.3 million. Cash and equivalents on deposit at other institutions at June 30, 2014 was comprised of $64.6
million held by the Federal Home Loan Bank of New York (“FHLB”), $47.5 million held by the Federal
Reserve Bank of New York (“FRB”) and a total of $3.9 million held at two U.S. domestic money center
banks representing funds on deposit totaling $3.6 million and $283,000, respectively, at June 30, 2014. Such
balances also included a total of $8.7 million of cash held at or invested through Atlantic Community Bankers
Bank (“ACBB”) including cash on deposit of $230,000 and federal funds sold of $8.5 million.
Securities include concentrations of investments backed by U.S. government agencies and U.S. government
sponsored enterprises (“GSEs”), including the Federal National Mortgage Association (“Fannie Mae”), the
Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association
(“Ginnie Mae”) and the Small Business Administration (“SBA”). Additional concentration risk exists in the
Company’s municipal and corporate obligations, asset-backed securities and collateralized loan obligations.
Lesser concentration risk exists in the Company’s non-agency mortgage-backed securities and single issuer
trust preferred securities due to comparatively lower total balances of such securities held by the Company
and the variety of issuers represented.
The Company’s lending activity is primarily concentrated in loans collateralized by real estate in the states of
New Jersey and New York. As a result, credit risk is broadly dependent on the real estate market and general
economic conditions in these states. Additionally, the Company’s lending policies limit the amount of credit
extended to any single borrower and their related interests thereby limiting the concentration of credit risk to
any single borrower.
F-18
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Loans Receivable
Loans receivable, net are stated at unpaid principal balances, net of deferred loan origination fees and costs,
purchased discounts and premiums and the allowance for loan losses. Certain direct loan origination costs net
of loan origination fees, are deferred and amortized, using the level-yield method, as an adjustment of yield
over the contractual lives of the related loans. Unearned premiums and discounts are amortized or accreted by
use of the level-yield method over the contractual lives of the related loans.
Past Due Loans
A loan’s “past due” status is generally determined based upon its “P&I delinquency” status in conjunction
with its “past maturity” status, where applicable. A loan’s “P&I delinquency” status is based upon the
number of calendar days between the date of the earliest P&I payment due and the “as of” measurement date.
A loan’s “past maturity” status, where applicable, is based upon the number of calendar days between a loan’s
contractual maturity date and the “as of” measurement date. Based upon the larger of these criteria, loans are
categorized into the following “past due” tiers for financial statement reporting and disclosure purposes:
Current (including 1-29 days past due), 30-59 days, 60-89 days and 90 or more days.
Nonaccrual Loans
Loans are generally placed on nonaccrual status when contractual payments become 90 days or more past
due, and are otherwise placed on nonaccrual when the Company does not expect to receive all P&I payments
owed substantially in accordance with the terms of the loan agreement. Loans that become 90 days past
maturity, but remain non-delinquent with regard to ongoing P&I payments, may remain on accrual status if:
(1) the Company expects to receive all P&I payments owed substantially in accordance with the terms of the
loan agreement, past maturity status notwithstanding, and (2) the borrower is working actively and
cooperatively with the Company to remedy the past maturity status through an expected refinance, payoff or
modification of the loan agreement that is not expected to result in a troubled debt restructuring (“TDR”)
classification. All TDRs are placed on nonaccrual status for a period of no less than six months after
restructuring, irrespective of past due status. The sum of nonaccrual loans plus accruing loans that are 90
days or more past due are generally defined collectively as “nonperforming loans”.
Payments received in cash on nonaccrual loans, including both the principal and interest portions of those
payments, are generally applied to reduce the carrying value of the loan for financial statement purposes.
When a loan is returned to accrual status, any accumulated interest payments previously applied to the
carrying value of the loan during its nonaccrual period are recognized as interest income as an adjustment to
the loan’s yield over its remaining term.
Loans that are not considered to be TDRs are generally returned to accrual status when payments due are
brought current and the Company expects to receive all remaining P&I payments owed substantially in
accordance with the terms of the loan agreement. Non-TDR loans may also be returned to accrual status
when a loan’s payment status falls below 90 days past due and the Company: (1) expects receipt of the
remaining past due amounts within a reasonable timeframe, and (2) expects to receive all remaining P&I
payments owed substantially in accordance with the terms of the loan agreement.
F-19
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Acquired Loans
Loans that we acquire through acquisitions are recorded at fair value with no carryover of the related
allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing
of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a
market rate of interest.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable
yield and is recognized into interest income over the remaining life of the loan. The difference between
contractually required payments at acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable yield. The nonaccretable yield represents estimated future credit losses
expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require us
to evaluate the need for an allowance for credit losses. Subsequent improvements in expected cash flows
result in the reversal of a corresponding amount of the nonaccretable yield which we then reclassify as
accretable yield that is recognized into interest income over the remaining life of the loan using the interest
method. Our evaluation of the amount of future cash flows that we expect to collect is performed in a similar
manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on
acquired loans would be first applied to the nonaccretable yield portion of the fair value adjustment.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered
performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can
reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully
collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or
nonperforming and may accrue interest on these loans, including the impact of any accretable yield.
Classification of Assets
In compliance with the regulatory guidelines, the Company’s loan review system includes an evaluation
process through which certain loans exhibiting adverse credit quality characteristics are classified “Special
Mention”, “Substandard”, “Doubtful” or “Loss”.
An asset is classified as “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 as “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 or of so little value that their continuance as assets is not
warranted.
F-20
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Management evaluates loans classified as substandard or doubtful for impairment in accordance with
applicable accounting requirements. As discussed in greater detail below, a valuation allowance is
established through the provision for loan losses for any impairment identified through such evaluations.
To the extent that impairment identified on a loan is classified as “Loss”, that portion of the loan is charged
off against the allowance for loan losses. The classification of loan impairment as “Loss” is based upon a
confirmed expectation for loss. For loans primarily secured by real estate, the expectation for loss is generally
confirmed when: (a) impairment is identified on a loan individually evaluated in the manner described below,
and (b) the loan is presumed to be collateral-dependent such that the source of loan repayment is expected to
arise solely from sale of the collateral securing the applicable loan. Impairment identified on non-collateral-
dependent loans may or may not be eligible for a “Loss” classification depending upon the other salient facts
and circumstances that effect the manner and likelihood of loan repayment. However, loan impairment that is
classified as “Loss” is charged off against the allowance for loan losses concurrent with that classification.
The timeframe between when loan impairment is first identified by the Company and when such impairment
may ultimately be charged off varies by loan type. For example, unsecured consumer and commercial loans
are generally classified as “Loss” at 120 days past due, resulting in their outstanding balances being charged
off at that time. For the Company’s secured loans, the condition of collateral dependency generally serves as
the basis upon which a “Loss” classification is ascribed to a loan’s impairment thereby confirming an
expected loss and triggering charge off of that impairment. While the facts and circumstances that effect the
manner and likelihood of repayment vary from loan to loan, the Company generally considers the referral of a
loan to foreclosure, coupled with the absence of other viable sources of loan repayment, to be demonstrable
evidence of collateral dependency. Depending upon the nature of the collections process applicable to a
particular loan, an early determination of collateral dependency could result in a nearly concurrent charge off
of a newly identified impairment. By contrast, a presumption of collateral dependency may only be
determined after the completion of lengthy loan collection and/or workout efforts, including bankruptcy
proceedings, which may extend several months or more after a loan’s impairment is first identified.
In a limited number of cases, the entire net carrying value of a loan may be determined to be impaired based
upon a collateral-dependent impairment analysis. However, the borrower’s adherence to contractual
repayment terms precludes the recognition of a “Loss” classification and charge off. In these limited cases, a
valuation allowance equal to 100% of the impaired loan’s carrying value may be maintained against the net
carrying value of the asset.
Assets which do not currently expose the Company to a sufficient degree of risk to warrant an adverse
classification but have some credit deficiencies or other potential weaknesses are designated as “Special
Mention” by management. Adversely classified assets, together with those rated as “Special Mention”, are
generally referred to as “Classified Assets”. Non-classified assets are internally rated within one of four
“Pass” categories or as “Watch” with the latter denoting a potential deficiency or concern that warrants
increased oversight or tracking by management until remediated.
Management performs a classification of assets review, including the regulatory classification of assets,
generally on a monthly basis. The results of the classification of assets review are validated by the
Company’s third party loan review firm during their quarterly independent review. In the event of a
difference in rating or classification between those assigned by the internal and external resources, the
Company will generally utilize the more critical or conservative rating or classification. Final loan ratings
and regulatory classifications are presented monthly to the Board of Directors and are reviewed by regulators
during the examination process.
F-21
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Allowance for Loan Losses
The allowance for loan losses is a valuation account that reflects the Company’s estimation of the losses in its
loan portfolio to the extent they are both probable and reasonable to estimate. The balance of the allowance is
generally maintained through provisions for loan losses that are charged to income in the period that
estimated losses on loans are identified by the Company’s loan review system. The Company charges
confirmed losses on loans against the allowance as such losses are identified. Recoveries on loans previously
charged-off are added back to the allowance.
The Company’s allowance for loan loss calculation methodology utilizes a “two-tier” loss measurement
process that is generally performed monthly. Based upon the results of the classification of assets and credit
file review processes described earlier, the Company first identifies the loans that must be reviewed
individually for impairment. Factors considered in identifying individual loans to be reviewed include, but
may not be limited to, loan type, classification status, contractual payment status, performance/accrual status
and impaired status.
The loans considered by the Company to be eligible for individual impairment review include its commercial
mortgage loans, comprising multi-family and nonresidential real estate loans, construction loans, commercial
business loans as well as its one-to-four family mortgage loans, home equity loans and home equity lines of
credit.
A reviewed loan 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. Once a
loan is determined to be impaired, management performs an analysis to determine the amount of impairment
associated with that loan.
In measuring the impairment associated with collateral-dependent loans, the fair value of the collateral
securing the loan is generally used as a measurement proxy for that of the impaired loan itself as a practical
expedient. In the case of real estate collateral, such values are generally determined based upon a discounted
market value obtained through an automated valuation module or prepared by a qualified, independent real
estate appraiser. The value of non-real estate collateral is similarly determined based upon an independent
assessment of fair market value by a qualified resource.
The Company generally obtains independent appraisals on properties securing mortgage loans when such
loans are initially placed on nonperforming or impaired status with such values updated approximately every
six to twelve months thereafter throughout the collections, bankruptcy and/or foreclosure processes.
Appraised values are typically updated at the point of foreclosure, where applicable, and approximately every
six to twelve months thereafter while the repossessed property is held as real estate owned.
As supported by accounting and regulatory guidance, the Company reduces the fair value of the collateral by
estimated selling costs, such as real estate brokerage commissions, to measure impairment when such costs
are expected to reduce the cash flows available to repay the loan.
The Company establishes valuation allowances in the fiscal period during which the loan impairments are
identified. The results of management’s individual loan impairment evaluations are validated by the
Company’s third party loan review firm during their quarterly independent review. Such valuation
allowances are adjusted in subsequent fiscal periods, where appropriate, to reflect any changes in carrying
value or fair value identified during subsequent impairment evaluations which are generally updated monthly
by management.
F-22
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
The second tier of the loss measurement process involves estimating the probable and estimable losses which
addresses loans not otherwise reviewed individually for impairment as well as those individually reviewed
loans that are determined to be non-impaired. Such loans include groups of smaller-balance homogeneous
loans that may generally be excluded from individual impairment analysis, and therefore collectively
evaluated for impairment, as well as the non-impaired loans within categories that are otherwise eligible for
individual impairment review.
Valuation allowances established through the second tier of the loss measurement process utilize historical
and environmental loss factors to collectively estimate the level of probable losses within defined segments of
the Company’s loan portfolio. These segments aggregate homogeneous subsets of loans with similar risk
characteristics based upon loan type. For allowance for loan loss calculation and reporting purposes, the
Company currently stratifies its loan portfolio into seven primary segments: residential mortgage loans,
commercial mortgage loans, construction loans, commercial business loans, home equity loans, home equity
lines of credit and other consumer loans.
The risks presented by residential mortgage loans are primarily related to adverse changes in the borrower’s
financial condition that threaten repayment of the loan in accordance with its contractual terms. Such risk to
repayment can arise from job loss, divorce, illness and the personal bankruptcy of the borrower. For
collateral dependent residential mortgage loans, additional risk of loss is presented by potential declines in the
fair value of the collateral securing the loan.
Home equity loans and home equity lines of credit generally share the same risks as those applicable to
residential mortgage loans. However, to the extent that such loans represent junior liens, they are
comparatively more susceptible to such risks given their subordinate position behind senior liens.
In addition to sharing similar risks as those presented by residential mortgage loans, risks relating to
commercial mortgage also arise from comparatively larger loan balances to single borrowers or groups of
related borrowers. Moreover, the repayment of such loans is typically dependent on the successful operation
of an underlying real estate project and may be further threatened by adverse changes to demand and supply
of commercial real estate as well as changes generally impacting overall business or economic conditions.
The risks presented by construction loans are generally considered to be greater than those attributable to
residential and commercial mortgage loans. Risks from construction lending arise, in part, from the
concentration of principal in a limited number of loans and borrowers and the effects of general economic
conditions on developers and builders. Moreover, a construction loan can involve additional risks because of
the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost,
including interest, of the project. The nature of these loans is such that they are comparatively more difficult
to evaluate and monitor than permanent mortgage loans.
Commercial business loans are also considered to present a comparatively greater risk of loss due to the
concentration of principal in a limited number of loans and/or borrowers and the effects of general economic
conditions on the business. Commercial business loans may be secured by varying forms of collateral
including, but not limited to, business equipment, receivables, inventory and other business assets which may
not provide an adequate source of repayment of the outstanding loan balance in the event of borrower default.
Moreover, the repayment of commercial business loans is primarily dependent on the successful operation of
the underlying business which may be threatened by adverse changes to the demand for the business’
products and/or services as well as the overall efficiency and effectiveness of the business’ operations and
infrastructure.
F-23
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Finally, our unsecured consumer loans generally have shorter terms and higher interest rates than other forms
of lending but generally involve more credit risk due to the lack of collateral to secure the loan in the event of
borrower default. Consumer loan repayment is dependent on the borrower's continuing financial stability, and
therefore is more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. By
contrast, our consumer loans also include account loans that are fully secured by the borrower’s deposit
accounts and generally present nominal risk to the Bank.
Each primary segment is further stratified to distinguish between loans originated and purchased through third
parties from loans acquired through business combinations. Commercial business loans include secured and
unsecured loans as well as loans originated through SBA programs. Additional criteria may be used to further
group loans with common risk characteristics. For example, such criteria may distinguish between loans
secured by different collateral types or separately identify loans supported by government guarantees such as
those issued by the SBA.
In regard to historical loss factors, the Company’s allowance for loan loss calculation calls for an analysis of
historical charge-offs and recoveries for each of the defined segments within the loan portfolio. The
Company utilizes a two-year moving average of annual net charge-off rates (charge-offs net of recoveries) by
loan segment, where available, to calculate its actual, historical loss experience. The outstanding principal
balance of the non-impaired portion of each loan segment is multiplied by the applicable historical loss factor
to estimate the level of probable losses based upon the Company’s historical loss experience.
As noted, the second tier of the Company’s allowance for loan loss calculation also utilizes environmental
loss factors to estimate the probable losses within the loan portfolio. Environmental loss factors are based
upon specific qualitative criteria representing key sources of risk within the loan portfolio. Such risk criteria
includes the level of and trends in nonperforming loans; the effects of changes in credit policy; the
experience, ability and depth of the lending function’s management and staff; national and local economic
trends and conditions; credit risk concentrations and changes in local and regional real estate values. During
fiscal 2014, the environmental factors utilized by the Company in its allowance for loan loss calculation were
expanded to include changes in the nature, volume and terms of loans, changes in the quality of loan review
systems and resources and the effects of regulatory, legal and other external factors.
For each category of the loan portfolio, a level of risk, developed from a number of internal and external
resources, is assigned to each of the qualitative criteria utilizing a scale ranging from zero (negligible risk) to
15 (high risk), with higher values potentially ascribed to exceptional levels of risk that exceed the standard
range, as appropriate. The sum of the risk values, expressed as a whole number, is multiplied by .01% to
arrive at an overall environmental loss factor, expressed in basis points, for each loan category.
F-24
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
The Company incorporates its credit-rating classification system into the calculation of environmental loss
factors by loan type by including risk-rating classification “weights” in its calculation of those factors. The
Company’s risk-rating classification system ascribes a numerical rating of “1” through “9” to each loan within
the portfolio. The ratings “5” through “9” represent the numerical equivalents of the traditional loan
classifications “Watch”, “Special Mention”, “Substandard”, “Doubtful” and “Loss”, respectively, while lower
ratings, “1” through “4”, represent risk-ratings within the least risky “Pass” category. The environmental loss
factor applicable to each non-impaired loan within a category, as described above, is “weighted” by a
multiplier based upon the loan’s risk-rating classification. Within any single loan category, a “higher”
environmental loss factor is ascribed to those loans with comparatively higher risk-rating classifications
resulting in a proportionately greater ALLL requirement attributable to such loans compared to the
comparatively lower risk-rated loans within that category.
In evaluating the impact of the level and trends in nonperforming loans on environmental loss factors, the
Company first broadly considers the occurrence and overall magnitude of prior losses recognized on such
loans over an extended period of time. For this purpose, losses are considered to include both charge offs as
well as loan impairments for which valuation allowances have been recognized through provisions to the
allowance for loan losses, but have not yet been charged off. To the extent that prior losses have generally
been recognized on nonperforming loans within a category, a basis is established to recognize existing losses
on loans collectively evaluated for impairment based upon the current levels of nonperforming loans within
that category. Conversely, the absence of material prior losses attributable to delinquent or nonperforming
loans within a category may significantly diminish, or even preclude, the consideration of the level of
nonperforming loans in the calculation of the environmental loss factors attributable to that category of loans.
Once the basis for considering the level of nonperforming loans on environmental loss factors is established,
the Company then considers the current dollar amount of nonperforming loans by loan type in relation to the
total outstanding balance of loans within the category. A greater portion of nonperforming loans within a
category in relation to the total suggests a comparatively greater level of risk and expected loss within that
loan category and vice-versa.
In addition to considering the current level of nonperforming loans in relation to the total outstanding balance
for each category, the Company also considers the degree to which those levels have changed from period to
period. A significant and sustained increase in nonperforming loans over a 12-24 month period suggests a
growing level of expected loss within that loan category and vice-versa.
As noted above, the Company considers these factors in a qualitative, rather than quantitative fashion when
ascribing the risk value, as described above, to the level and trends of nonperforming loans that is applicable
to a particular loan category. As with all environmental loss factors, the risk value assigned ultimately
reflects the Company’s best judgment as to the level of expected losses on loans collectively evaluated for
impairment.
F-25
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
The sum of the probable and estimable loan losses calculated through the first and second tiers of the loss
measurement processes as described above, represents the total targeted balance for the Company’s allowance
for loan losses at the end of a fiscal period. As noted earlier, the Company establishes all additional valuation
allowances in the fiscal period during which additional individually identified loan impairments and
additional estimated losses on loans collectively evaluated for impairment are identified. The Company
adjusts its balance of valuation allowances through the provision for loan losses as required to ensure that the
balance of the allowance for loan losses reflects all probable and estimable loans losses at the close of the
fiscal period. Notwithstanding calculation methodology and the noted distinction between valuation
allowances established on loans collectively versus individually evaluated for impairment, the Company’s
entire allowance for loan losses is available to cover all charge-offs that arise from the loan portfolio.
Although the Company’s allowance for loans losses is 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.
Troubled Debt Restructurings
A modification to the terms of a loan is generally considered a TDR if the Company grants a concession to
the borrower, that it would not otherwise consider for economic or legal reasons, related to the debtor’s
financial difficulties. In granting the concession, the Company’s general objective is to make the best of a
difficult situation by obtaining more cash or other value from the borrower or otherwise increase the
probability of repayment.
A TDR may include, but is not necessarily limited to, the modification of loan terms such as a temporary or
permanent reduction of the loan’s stated interest rate, extension of the maturity date and/or reduction or
deferral of amounts owed under the terms of the loan agreement. In measuring the impairment associated
with restructured loans that qualify as TDRs, the Company compares the cash flows under the loan’s existing
terms with those that are expected to be received in accordance with its modified terms. The difference
between the comparative cash flows is discounted at the loan’s effective interest rate prior to modification to
measure the associated impairment. The impairment is charged off directly against the allowance for loan
loss at the time of restructuring resulting in a reduction in carrying value of the modified loan that is accreted
into interest income as a yield adjustment over the remaining term of the modified cash flows.
All restructured loans that qualify as TDRs are placed on nonaccrual status for a period of no less than six
months after restructuring, irrespective of the borrower’s adherence to a TDR’s modified repayment terms
during which time TDRs continue to be adversely classified and reported as impaired. TDRs may be returned
to accrual status if (1) the borrower has paid timely P&I payments in accordance with the terms of the
restructured loan agreement for no less than six consecutive months after restructuring, and (2) the Company
expects to receive all P&I payments owed substantially in accordance with the terms of the restructured loan
agreement at which time the loan may also be returned to a non-adverse classification while retaining its
impaired status.
F-26
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
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:
Building and improvements
Furnishings and equipment
Leasehold improvements
Years
10 - 50
3 - 20
Shorter of useful
lives or lease term
Construction in progress primarily represents facilities under construction for future use in our 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 Company’s average cost of interest-bearing liabilities.
Significant renewals and betterments are charged to the premises 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.
Federal Home Loan Bank Stock
Federal law requires a member institution of the FHLB system to hold restricted stock of its district FHLB
according to a predetermined formula. The restricted stock is carried at cost, less any applicable impairment.
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. 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 impairment evaluation must be performed. That additional evaluation compares the implied fair
value of the reporting unit’s goodwill 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. No impairment
charges were required to be recorded in the years ended June 30, 2014, 2013 or 2012. 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. The balance of other intangible assets at
June 30, 2014 totaled $790,000 representing the remaining unamortized balance of the core deposit
intangibles ascribed to the value of deposits acquired by the Bank through the acquisition of Central Jersey
Bancorp in November 2010 and Atlas Bank in June 2014.
Bank Owned Life Insurance
Bank owned life insurance is accounted for using the cash surrender value method and is recorded at its net
realizable value. The change in the net asset value is recorded as a component of non-interest income. A
deferred liability has been recorded for the estimated cost of postretirement life insurance benefits accruing to
applicable employees and directors covered by an endorsement split-dollar life insurance arrangement. The
Company recorded additional (gain) expense of approximately $(9,000), $14,000 and $25,000 for the years
ended June 30, 2014, 2013 and 2012, respectively, attributable to this deferred liability.
F-27
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the
Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other
receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them before their maturity or the
ability to unilaterally cause the holder to return specific assets.
Income Taxes
The Company and its subsidiaries file consolidated federal income tax returns. Federal income taxes are
allocated to each entity based on their respective contributions to the taxable income of the consolidated
income tax returns. Separate state income tax returns are filed for the Company and each of its subsidiaries
on an unconsolidated basis.
Federal and state income taxes have been provided on the basis of the Company’s income or loss as reported
in accordance with GAAP. The amounts reflected on the Company’s state and federal income tax returns
differ from these provisions due principally to temporary differences in the reporting of certain items for
financial statement reporting and income tax reporting purposes. The tax effect of these temporary
differences is accounted for as deferred taxes applicable to future periods. Deferred income tax expense or
benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and
a valuation allowance provided for the full amount which is not more likely than not to be realized.
The Company identified no significant income tax uncertainties through the evaluation of its income tax
positions as of June 30, 2014 and June 30, 2013. Therefore, the Company has no unrecognized income tax
benefits as of those dates. Our policy is to recognize interest and penalties on unrecognized tax benefits in
income tax expense in the consolidated statements of income. The Company recognized no interest and
penalties during the years ended June 30, 2014, 2013 and 2012. The tax years subject to examination by the
taxing authorities are the years ended June 30, 2013, 2012 and 2011.
Other Comprehensive Income
The Company records unrealized gains and losses, net of deferred income taxes, on available for sale
mortgage-backed and non-mortgage-backed securities in accumulated other comprehensive income.
Unrealized losses on available for sale securities recorded through OCI are generally considered “temporary”
security impairments. Realized gains and losses, if any, are reclassified to non-interest income upon sale of
the related securities.
The Company also records changes in the fair value of interest rate derivatives used in its cash flow hedging
activities, net of deferred income tax, in accumulated other comprehensive income.
F-28
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
OCI also includes benefit plan amounts recognized in accordance with applicable accounting standards. This
adjustment to OCI reflects, net of deferred income tax, transition obligations, prior service costs and
unrealized net losses that had not been recognized in the consolidated financial statements prior to the
implementation of those standards.
Derivatives and Hedging
The Company utilizes derivative instruments in the form of interest rate swaps and caps to hedge its exposure
to interest rate risk in conjunction with its overall asset/liability management process. In accordance with
accounting requirements, the Company formally designates all of its hedging relationships as either fair value
hedges, intended to offset the changes in the value of certain financial instruments due to movements in
interest rates, or cash flow hedges, intended to offset changes in the cash flows of certain financial
instruments due to movement in interest rates, and documents the strategy for undertaking the hedge
transactions and its method of assessing ongoing effectiveness. The Company does not use derivative
instruments for speculative purposes.
All derivatives are recognized as either assets or liabilities in the Consolidated Financial Statements at their
fair values. For a derivative designated as a cash flow hedge, the ineffective portion of changes in fair value
(i.e. gain or loss) is reported in current period earnings. The effective portion of the change in fair value is
initially recorded as a component of other comprehensive income (loss) and subsequently reclassified into
earnings when the hedged transaction effects earnings. For a derivative designated as a fair value hedge, the
gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in current earnings.
Derivative instruments qualify for hedge accounting treatment only if they are designated as such on the date
on which the derivative contracted is entered and are expected to be, and are, effective in substantially
reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk.
Those derivative financial instruments that do not meet the hedging criteria discussed below would be
classified as undesignated derivatives and would be recorded at fair value with changes in fair value recorded
in income.
Derivative hedge contracts must meet specific effectiveness tests (i.e., over time the change in their fair values
due to the designated hedge risk must be within 80 to 125 percent of the opposite change in the fair values of
the hedged assets or liabilities). Changes in fair value of the derivative financial instruments must be effective
at offsetting changes in the fair value of the hedged items due to the designated hedge risk during the term of
the hedge.
The Company formally assesses, both at the hedges’ inception, and on an on-going basis, whether derivatives
used in hedging transactions have been highly effective in offsetting changes in cash flows of hedged items
and whether those derivatives are expected to remain highly effective in subsequent periods. The Company
discontinues hedge accounting when (a) it determines that a derivative is no longer effective in offsetting
changes in cash flows of a hedged item; (b) the derivative expires or is sold, terminated or exercised; (c)
probability exists that the forecasted transaction will no longer occur; or (d) management determines that
designating the derivative as a hedging instrument is no longer appropriate. In all cases in which hedge
accounting is discontinued and a derivative remains outstanding, the Company will carry the derivative at fair
value in the Consolidated Financial Statements, recognizing changes in fair value in current period income in
the consolidated statement of income.
F-29
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
In accordance with the applicable accounting guidance, the Company takes into account the impact of
collateral and master netting agreements that allow it to settle all derivative contracts held with a single
counterparty on a net basis, and to offset the net derivative position with the related collateral when
recognizing derivative assets and liabilities. As a result, the Company’s Statements of Financial Condition
could reflect derivative contracts with negative fair values included in derivative assets, and contracts with
positive fair values included in derivative liabilities.
The Company’s interest rate derivatives are comprised entirely of interest rate swaps and caps hedging
floating-rate and forecasted issuances of fixed-rate liabilities and accounted for as cash flow hedges. The
carrying value of interest rate derivatives is included in the balance of other assets or other liabilities and
comprises the remaining unamortized cost of interest rate caps and the cumulative changes in the fair value of
interest rate derivatives. Such changes in fair value are offset against accumulated other comprehensive
income, net of deferred income tax.
In general, the cash flows received and/or exchanged with counterparties for those derivatives qualifying as
interest rate hedges, and the amortization of the original cost of qualifying caps, are generally classified in the
financial statements in the same category as the cash flows of the items being hedged.
Interest differentials paid or received under the swap and cap agreements are reflected as adjustments to
interest expense. The notional amounts of the interest rate swaps are not exchanged and do not represent
exposure to credit loss. In the event of default by a counter party, the risk in these transactions is the cost of
replacing the agreements at current market rates.
Net Income per Common Share (“EPS”)
Basic EPS is based on the weighted average number of common shares actually outstanding adjusted for the
Employee Stock Ownership Plan (“the ESOP”) shares not yet committed to be released. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock, such as
outstanding stock options, were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the
weighted average number of shares of common stock outstanding to include the effect of contracts or
securities exercisable or which could be converted into common stock, if dilutive, using the treasury stock
method. Shares issued and reacquired during any period are weighted for the portion of the period they were
outstanding.
Stock Compensation Plans
Upon approval of the Kearny Financial Corp. 2005 Stock Compensation and Incentive Plan on October 24,
2005, the Company adopted applicable accounting standards requiring the expensing of the fair value of all
options granted over their vesting periods and the fair value of all share-based compensation granted over the
requisite service periods.
Advertising and Marketing Expenses
The Company expenses advertising and marketing costs as incurred.
F-30
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the consolidated statement of
condition date of June 30, 2014, for items that should potentially be recognized or disclosed in these
consolidated financial statements. The evaluation was conducted through the date these consolidated
financial statements were issued and resulted in the identification and disclosure of the subsequent event
discussed below.
On September 4, 2014, the Boards of Directors of Kearny MHC (the majority stockholder of the Company),
the Company and the Bank adopted a Plan of Conversion and Reorganization (the “Plan”). Pursuant to the
Plan, Kearny MHC will convert from the mutual holding company form of organization to the fully public
form. Kearny MHC will be merged into the Company, and Kearny MHC will no longer exist. The Company
will then merge into a new Maryland corporation also named Kearny Financial Corp.
As part of the conversion, Kearny MHC’s ownership interest of the Company will be offered for sale in a
public offering. The existing publicly held shares of the Company, which represent the remaining ownership
interest in the Company, will be exchanged for new shares of common stock of the new Maryland
corporation. The exchange ratio will ensure that immediately after the conversion and public offering, the
public shareholders of the Company will own the same aggregate percentage of common stock of the new
Maryland corporation that they owned immediately prior to the completion of the conversion and public
offering (excluding shares purchased in the stock offering and cash received in lieu of fractional shares).
When the conversion and public offering are completed, all of the capital stock of the Company will be
owned by the new Maryland corporation. The Plan provides for the establishment, upon the completion of the
conversion, of special “liquidation accounts” for the benefit of certain depositors of the Company in an
amount equal to the greater of Kearny MHC’s ownership interest in the retained earnings of the Company as
of the date of the latest balance sheet contained in the prospectus plus the value of the net assets of Kearny
MHC as of the date of the latest statement of financial condition of Kearny MHC prior to the consummation
of the conversion (excluding its ownership of the Company).
Following the completion of the conversion, under the rules of the FRB, the Bank will not be permitted to pay
dividends on its capital stock to the Company, its sole shareholder, if the Company’s shareholder’s equity
would be reduced below the amount of the liquidation accounts. The liquidation accounts will be reduced
annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder’s interest in the liquidation accounts. Direct costs of the
conversion and public offering will be deferred and reduce the proceeds from the shares sold in the public
offering. No costs have been incurred as of June 30, 2014 related to the conversion.
Merger-related Expenses
Merger-related expenses are recorded in the consolidated statements of income and include $391,000 of direct
costs relating to the Bank’s acquisition of Atlas Bank on June 30, 2014. Acquisition-related transaction and
restructuring costs incurred by the Company are charged to expense as incurred.
F-31
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Acquisition of Atlas Bank
On June 30, 2014, the Company completed its acquisition of Atlas Bank (“Atlas”), a federally chartered mutual
savings bank headquartered in Brooklyn, New York. The transaction qualified as a tax-free reorganization for
federal income tax purposes. Based upon an independent appraised valuation of Atlas, the Company issued
1,044,087 shares of its common stock with an aggregate value of $15.5 million to Kearny MHC as consideration
for the acquisition of Atlas.
The Company accounted for the transaction using applicable accounting guidance regarding business
combinations resulting in the recognition of pre-tax merger-related expenses totaling $391,000 during the year
ended June 30, 2014. Additionally, the Company recorded the assets acquired and liabilities assumed through the
merger at fair value as summarized in the following table (in thousands).
Consideration Paid:
Shares of capital stock issued to mutual holding company
Total consideration paid
Recognized amounts of identifiable assets acquired and liabilities assumed, at
fair value:
Cash and cash equivalents
Debt securities
Net loans receivable
Mortgage-backed securities
Premises and equipment
Federal Home Loan Bank stock
Interest receivable
Deferred income tax assets, net
Core deposit intangible
Other assets
Fair value of assets acquired
$
$
$
Deposits
Federal Home Loan Bank advances
Other liabilities
Fair value of liabilities assumed
Total identifiable net assets
Gain on bargain purchase
Total
15,500
15,500
9,133
2,998
78,725
23,896
2,196
1,037
374
511
398
1,671
120,939
86,099
18,693
421
105,213
15,726
(226)
15,500
$
F-32
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Acquisition of Atlas Bank (continued)
The fair value amounts included in the table above, including those relating to income taxes, are preliminary
estimates and are subject to adjustment but are not expected to be materially different than those shown.
The Company estimated the fair value of non-impaired loans acquired from Atlas by utilizing a methodology
wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and
repricing terms. Cash flows for each pool were projected using an estimate of future credit losses and rate of
prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market
rate for similar loans. The portion of the fair valuation attributable to expected future credit losses on non-
impaired loans totaled approximately $1.2 million or 1.50% of their outstanding balances.
Included in the loans acquired from Atlas were four impaired residential mortgage loans whose aggregate
carrying values at the time of acquisition totaled $742,000. To estimate the fair value of these impaired loans, the
Company analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans are
derived from the eventual sale of the collateral. The value of the collateral was generally based on recently
completed appraisals. The Company discounted these values using market derived rates of return, with
consideration given to the period of time and cost associated with the foreclosure and disposition of the collateral.
Based on this analysis, the Company recognized no expectation for future credit losses in its valuation of the four
impaired loans acquired from Atlas.
At June 30, 2014, the remaining outstanding principal balance and carrying amount of the loans acquired from
Atlas totaled approximately $79,088,000 and $78,725,000, respectively.
The fair values of investment securities, including mortgage-backed and non-mortgage-backed securities, were
primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry
to value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities.
The fair value of savings and transaction deposit accounts acquired from Atlas was assumed to approximate the
carrying value as these accounts have no stated maturity and are payable on demand. The fair valuation of these
deposits included a core deposit analysis which considered several factors in estimating the value of the intangible
associated with such accounts. Such factors included an assumption for an initial run off rate of five percent
coupled with an annual attrition rate thereafter based upon the weighted average age of the products by deposit
category. Other factors considered included assumptions for the ongoing non-interest income and non-interest
expenses relating to the applicable accounts which were based upon historical information. Based upon these
factors, the Company projected cash flows which were present valued using applicable market interest rates for
discounting. These cash flows were then compared to those applicable to alternative funding sources assumed to
be brokered certificates of deposit. Based upon this analysis, a core deposit intangible totaling approximately
$398,000 or 0.82% of applicable core deposit balances at acquisition was ascribed to the value of non-maturity
deposits.
Certificates of deposit accounts were valued utilizing a discounted cash flow analysis based upon the underlying
accounts’ contractual maturities and interest rates. The present value of the projected cash flows was then
determined using discount rates based upon certificate of deposit interest rates available in the marketplace for
accounts with similar terms.
F-33
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Acquisition of Atlas Bank (continued)
The acquired borrowings were valued utilizing a discounted cash flow analysis based upon the underlying
contractual maturities, interest rates and, where applicable, repricing and amortization terms applicable to each
borrowing. The present value of the projected cash flow for each borrowing was then determined using discount
rates based upon interest rates available in the marketplace for borrowings with similar terms.
Direct costs related to the merger were expensed as incurred. During the year ended June 30, 2014, the Company
incurred $391,000 in merger-related expenses attributable to the acquisition of Atlas. Such costs included legal
expenses of $198,000, investment banking fees totaling $175,000 and other professional service fees totaling
$18,000.
The following table presents unaudited pro forma information as if the acquisition of Atlas had occurred on July
1, 2012. This pro forma information does not adjust for the effects of purchase accounting or the recognition of
merger-related expenses due to their immateriality. The pro forma information does not necessarily reflect the
results of operations that would have occurred had the Company merged with Atlas at the beginning of fiscal
2013. In particular, expected cost savings and acquisition integration costs are not fully reflected in the unaudited
pro forma amounts.
Pro Forma
Year Ended
June 30, 2014
(In Thousands,
Except Per Share Data)
June 30, 2013
(In Thousands,
Except Per Share Data)
Net interest income
Non-interest income
Non-interest expense
Net income
Net income per common shares (EPS)
$
Basic and diluted
77,077 $
8,255
68,508
9,535
68,867
16,340
73,361
5,567
0.14
0.08
Note 3 – Recent Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update 2011-05 which amends FASB ASC Topic 220,
Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting
Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of
stockholder’s equity. Reporting entities are allowed to present either: a statement of comprehensive income,
which reports both net income and other comprehensive income; or separate, but consecutive, statements of net
income and other comprehensive income. Under previous GAAP, all three presentations were acceptable.
Regardless of the presentation selected, the Reporting Entity is required to present all reclassifications between
other comprehensive and net income on the face of the new statement or statements. ASU 2011-05 was effective
for the Company as of June 30, 2013. The impact of adoption of ASU 2011-05 as of June 30, 2013 and all prior
periods presented was a separate, but consecutive, statements of income and other comprehensive income.
F-34
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight
Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU allows the Fed Funds
Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes. In the past, only
rates on U.S. Treasury obligations and LIBOR were permitted. The ASU was issued as a result of changes in the
marketplace that have occurred since the issuance of Statement 133, and more particularly, as a result of the 2008
financial crisis. ASU 2013-10 is applicable to all entities that elect to apply hedge accounting of the benchmark
interest rate under Topic 815, Derivatives and Hedging. The ASU was effective July 17, 2013, but only for
qualifying new or redesignated hedging relationships entered into on or after that date. In other words,
retrospective adoption is not available because it would be inconsistent with the requirement to prepare
appropriate documentation at the inception of a hedge. The new pronouncement did not have an impact on the
Company’s consolidated financial statements.
In January 2014, the FASB issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors
(Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon
Foreclosure. The purpose of the ASU is to reduce diversity by clarifying when an in substance repossession or
foreclosure occurs, that is, when a creditor should be considered to have received physical possession of
residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be
derecognized and the real estate property recognized. This ASU is effective for public business entities for annual
periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is
currently evaluating the impact of adopting this ASU on its consolidated financial statements.
Note 4 – Stock Offering and Stock Repurchase Plans
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 subsequently sold common stock representing a minority ownership of the estimated pro
forma market value of the Company to eligible depositors of the Bank. Kearny MHC (the “MHC”) retained 70%
of the outstanding common stock, or 50,916,250 shares. The MHC is a federally-chartered mutual holding
company organized on March 30, 2001, and was previously subject to regulation by the Office of Thrift
Supervision. Concurrent with the elimination of the Office of Thrift Supervision on July 21, 2011, the Federal
Reserve Board became the primary regulator of the MHC. So long as the MHC is in existence, it will continue to
own at least a majority of the outstanding common stock of the Company.
On March 23, 2012, the Company announced that the Board of Directors authorized a stock repurchase plan to
acquire up to 802,780 shares, or 5% of the Company’s outstanding stock held by persons other than Kearny
MHC. Through June 30, 2013, the Company had repurchased a total of 471,100 shares in accordance with this
repurchase plan at a total cost of approximately $4,654,000 and at an average cost per share of $9.88. During the
fiscal year ended June 30, 2014, the Company completed the repurchases under this plan by repurchasing an
additional 331,680 shares at a total cost of $3,434,000 and at an average cost per share of $10.35. In total,
802,780 shares were repurchased under this plan at a total cost of $8,088,000 and at an average cost of $10.07 per
share.
On December 2, 2013, the Company announced that the Board of Directors authorized a stock repurchase plan to
acquire up to 762,640 shares, or 5% of the Company’s outstanding stock held by persons other than Kearny
MHC. Through June 30, 2014, the Company has repurchased a total of 62,900 shares in accordance with this
repurchase plan at a total cost of approximately $700,000 and at an average cost per share of $11.13.
During the year ended June 30, 2012, Kearny MHC waived its right, upon non-objection from the Office of Thrift
Supervision, to receive cash dividends of $7,187,000 declared by the Company during the year. The MHC
elected to receive $450,000 of such dividends during the year ended June 30, 2012. The Company did not pay
cash dividends during fiscal 2014 or 2013.
F-35
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Securities Available for Sale
Amortized cost, gross unrealized gains and losses and fair value of debt securities and mortgage-backed securities
at June 30, 2014 and 2013 and stratification by contractual maturity of debt securities at June 30, 2014 are
presented below:
Amortized
Cost
June 30, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Carrying
Value
Securities available for sale:
Debt securities:
U.S. agency securities
Obligations of state and political subdivisions
Asset-backed securities
Collateralized loan obligations
Corporate bonds
Trust preferred securities
$ 4,159
27,537
87,480
120,089
163,076
8,887
$ 48
9
663
-
617
32
$ 2
773
827
517
1,459
1,121
$ 4,205
26,773
87,316
119,572
162,234
7,798
Total debt securities
Mortgage-backed securities:
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Non-agency securities
Total collateralized mortgage obligations
Mortgage pass-through securities:
Residential pass-through securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total residential pass-through securities
Total mortgage-backed securities
411,228
1,369
4,699
407,898
33,505
51,277
210
84,992
3,055
196,882
147,873
347,810
432,802
-
12
-
12
221
3,937
4,750
8,908
8,920
485
1,249
-
1,734
33,020
50,040
210
83,270
-
1,929
836
3,276
198,890
151,787
2,765
353,953
4,499
437,223
Total securities available for sale
$ 844,030
$ 10,289
$ 9,198
$ 845,121
F-36
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Securities Available for Sale (continued)
Debt securities available for sale:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
June 30, 2014
Amortized
Cost
Fair
Value
(In Thousands)
$ -
20,059
172,269
218,900
$ -
20,221
171,118
216,559
$ 411,228
$ 407,898
Amortized
Cost
June 30, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Carrying
Value
Securities available for sale:
Debt securities:
U.S. agency securities
Obligations of state and political subdivisions
Asset-backed securities
Collateralized loan obligations
Corporate bonds
Trust preferred securities
$ 4,955
27,560
25,417
78,366
160,107
8,878
$ 60
-
1
190
34
-
$ -
2,253
620
70
949
1,554
$ 5,015
25,307
24,798
78,486
159,192
7,324
Total debt securities
Mortgage-backed securities:
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total collateralized mortgage obligations
Mortgage pass-through securities:
Residential pass-through securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
305,283
285
5,446
300,122
9,825
56,158
65,983
-
24
24
470
3,055
3,525
9,355
53,127
62,482
5,889
290,133
326,356
444
4,827
9,050
-
4,600
3,945
6,333
290,360
331,461
Total residential pass-through securities
622,378
14,321
8,545
628,154
Commercial pass-through securities:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total commercial pass-through securities
116
94,389
94,505
2
3
5
-
4,494
118
89,898
4,494
90,016
Total mortgage-backed securities
782,866
14,350
16,564
780,652
Total securities available for sale
$ 1,088,149
$ 14,635
$ 22,010
$ 1,080,774
F-37
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Securities Available for Sale (continued)
During the years ended June 30, 2014, 2013 and 2012, proceeds from sales of securities available for sale totaled
$170.9 million, $442.8 million and $51.3 million and resulted in gross gains of $3.6 million, $10.6 million and
$53,000 and gross losses of $2.1 million, $135,000 and $-0-, respectively.
At June 30, 2014 and 2013, securities available for sale with carrying value of approximately $76.1 million and
$99.4 million, respectively, were utilized as collateral for borrowings through the FHLB of New York. As of
those same dates, securities available for sale with total carrying values of approximately $1.8 million and $4.4
million, respectively, were pledged to secure public funds on deposit.
At June 30, 2014, the Company’s available for sale mortgage-backed securities were secured by residential
mortgage loans with original contractual maturities of ten to thirty years. At June 30, 2013, such securities had
similar contractual maturities but were secured by both residential and commercial mortgage loans. The effective
lives of mortgage-backed securities are generally shorter than their contractual maturities due to principal
amortization and prepayment of the mortgage loans comprised within those securities. Investors in mortgage pass-
through securities generally share in the receipt of principal repayments on a pro-rata basis as paid by the
borrowers. By comparison, collateralized mortgage obligations generally represent individual tranches within a
larger investment vehicle that is designed to distribute cash flows received on securitized mortgage loans to
investors in a manner determined by the overall terms and structure of the investment vehicle and those applying
to the individual tranches within that structure.
F-38
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Securities Held to Maturity
Amortized cost, gross unrealized gains and losses and fair value of debt securities and mortgage-backed securities
at June 30, 2014 and 2013 and stratification by contractual maturity of debt securities at June 30, 2014 are
presented below:
Carrying
Value
June 30, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair Value
Securities held to maturity:
Debt securities:
U.S. agency securities
Obligations of state and political subdivisions
$ 144,349
72,065
$ 6
15
$ 1,408
1,555
$ 142,947
70,525
216,414
21
2,963
213,472
Total debt securities
Mortgage-backed securities:
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Non-agency securities
Total collateralized mortgage obligations
Mortgage pass-through securities:
Residential pass-through securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
20
264
54
338
9
283
114,276
Total residential pass-through securities
114,568
Commercial pass-through securities:
Federal National Mortgage Association
180,752
Total commercial pass-through securities
180,752
2
30
-
32
-
4
140
144
73
73
-
-
1
1
-
-
83
22
294
53
369
9
287
114,333
83
114,629
2,042
178,783
2,042
178,783
Total mortgage-backed securities
295,658
249
2,126
293,781
Total securities held to maturity
$ 512,072
$ 270
$ 5,089
$ 507,253
F-39
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Securities Held to Maturity (continued)
Debt securities held to maturity:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
June 30, 2014
Amortized
Cost
Fair
Value
(In Thousands)
$ 5,809
146,079
37,107
27,419
$ 5,825
144,664
36,442
26,541
$ 216,414
$ 213,472
Carrying
Value
June 30, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair Value
Securities held to maturity:
Debt securities:
U.S. agency securities
Obligations of state and political subdivisions
$ 144,747
65,268
Total debt securities
Mortgage-backed securities:
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Non-agency securities
Total collateralized mortgage obligations
Mortgage pass-through securities:
Residential pass-through securities:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total residential pass-through securities
Commercial pass-through securities:
Federal National Mortgage Association
210,015
22
350
105
477
98
231
329
100,308
Total commercial pass-through securities
100,308
$ 14
4
18
$ 3,622
4,083
$ 141,139
61,189
7,705
202,328
3
32
3
38
4
9
13
-
-
-
-
2
2
-
-
-
25
382
106
513
102
240
342
4,716
95,592
4,716
4,718
95,592
96,447
Total mortgage-backed securities
101,114
51
Total securities held to maturity
$ 311,129
$ 69
$ 12,423
$ 298,775
F-40
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Securities Held to Maturity (continued)
During the years ended June 30, 2014, 2013 and 2012, proceeds from sales of securities held to maturity totaled
$28,000, $18,000 and $32,000, respectively, resulting in gross losses of $6,000, $6,000 and $6,000, respectively.
The proceeds and losses for each year were fully attributable to the sale of the Company’s non-investment grade,
non-agency collateralized mortgage obligations. These securities were originally acquired as investment grade
securities upon the in-kind redemption of the Bank’s interest in the AMF Fund during the first quarter of fiscal
2009. The ratings of these securities subsequently declined below investment grade with most ultimately being
identified as other-than-temporarily impaired resulting in their eligibility for sale from the held-to-maturity
portfolio.
At June 30, 2014 and 2013, securities held to maturity with carrying value of approximately $128.1 million and
$123.3 million were utilized as collateral for borrowings from the FHLB of New York. As of those same dates,
securities held to maturity with total carrying values of approximately $4.5 million and $-0- million, respectively,
were pledged to secure public funds on deposit.
At June 30, 2014 and 2013, the Company’s held to maturity mortgage-backed securities were secured by both
residential and commercial mortgage loans with original contractual maturities of ten to thirty years. The
effective lives of mortgage-backed securities are generally shorter than their contractual maturities due to
principal amortization and prepayment of the mortgage loans comprised within those securities. Investors in
mortgage pass-through securities generally share in the receipt of principal repayments on a pro-rata basis as paid
by the borrowers. By comparison, collateralized mortgage obligations generally represent individual tranches
within a larger investment vehicle that is designed to distribute cash flows received on securitized mortgage loans
to investors in a manner determined by the overall terms and structure of the investment vehicle and those
applying to the individual tranches within that structure.
F-41
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities
The following two tables summarize the fair values and gross unrealized losses within the available for sale and
held to maturity portfolios. The gross unrealized losses, presented by security type, represent temporary
impairments of value within each portfolio as of the dates presented. Temporary impairments within the available
for sale portfolio have been recognized through other comprehensive income as reductions in stockholders’ equity
on a tax-effected basis.
The tables are followed by a discussion that summarizes the Company’s rationale for recognizing certain
impairments as “temporary” versus those identified as “other-than-temporary”. Such rationale is presented by
investment type and generally applies consistently to both the “available for sale” and “held to maturity”
portfolios, except where specifically noted.
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
(In Thousands)
Total
Fair
Value
Unrealized
Losses
Securities available for
sale:
June 30, 2014:
U.S. agency securities
Obligations of state and
political subdivisions
Asset-backed securities
Collateralized loan
obligations
Corporate bonds
Trust preferred securities
Collateralized mortgage
$ 826
$ 1
$ 84
$ 1
$ 910
$ 2
946
28,404
84,705
19,790
-
3
630
270
210
-
23,140
25,169
770
197
24,086
53,573
24,829
53,811
6,766
247
1,249
1,121
109,534
73,601
6,766
773
827
517
1,459
1,121
obligations
21,806
219
50,028
1,515
71,834
1,734
Residential pass-through
securities
-
-
123,666
2,765
123,666
2,765
Total
$ 156,477
$ 1,333
$ 307,493
$ 7,865
$ 463,970
$ 9,198
June 30, 2013:
Obligations of state and
political subdivisions
Asset-backed securities
Collateralized loan
obligations
Corporate bonds
Trust preferred securities
Collateralized mortgage
$ 25,307
19,675
$ 2,253
620
$ -
-
$ -
-
$ 25,307
19,675
$ 2,253
620
27,930
149,190
-
70
949
-
-
-
6,324
-
-
1,554
27,930
149,190
6,324
70
949
1,554
obligations
60,740
3,525
Residential pass-through
securities
244,429
8,545
Commercial pass-through
securities
89,695
4,494
-
-
-
-
-
-
60,740
3,525
244,429
8,545
89.695
4,494
Total
$ 616,966
$ 20,456
$ 6,324
$ 1,554
$ 623,290
$ 22,010
F-42
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
The number of available for sale securities with unrealized losses at June 30, 2014 totaled 111 and included four
U.S. agency securities, 63 municipal obligations, five asset-backed securities, 16 collateralized loan obligations,
six corporate obligations, four trust preferred securities, six collateralized mortgage obligations and seven
residential pass-through securities. The number of available for sale securities with unrealized losses at June 30,
2013 totaled 153 and included 70 municipal obligations, two asset-backed securities, five collateralized loan
obligations, 13 corporate obligations, four trust preferred securities, four collateralized mortgage obligations and
55 mortgage-backed securities comprising 38 residential pass-through securities and 17 commercial pass-through
securities.
Securities held to maturity:
June 30, 2014:
U.S. agency securities
Obligations of state and
political subdivisions
Collateralized mortgage
obligations
Residential pass-through
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
(In Thousands)
Total
Fair
Value
Unrealized
Losses
$ -
$ -
$ 141,919
$ 1,408
$ 141,919
$ 1,408
5,808
36
57,056
1,519
62,864
1,555
30
1
-
-
30
1
83
securities
59,993
83
-
-
59,993
Commercial pass-through
securities
56,234
230
96,937
1,812
153,171
2,042
Total
$ 122,065
$ 350
$ 295,912
$ 4,739
$ 417,977
$ 5,089
June 30, 2013:
U.S. agency securities
Obligations of state and
political subdivisions
Collateralized mortgage
obligations
Commercial pass-through
$ 139,699
$ 3,622
$ -
$ -
$ 139,699
$ 3,622
59,109
4,083
-
-
59,109
4,083
4
1
44
1
48
2
securities
90,935
4,716
-
-
90,935
4,716
Total
$ 289,747
$ 12,422
$ 44
$ 1
$ 289,791
$ 12,423
The number of held to maturity securities with unrealized losses at June 30, 2014 totaled 198 and included seven
U.S. agency securities, 137 municipal obligations and 54 mortgage-backed securities comprising three
collateralized mortgage obligations, 26 residential pass-through securities and 25 commercial pass-through
securities. The number of held to maturity securities with unrealized losses at June 30, 2013 totaled 162 and
included seven U.S. agency securities, 132 municipal obligations and 23 mortgage-backed securities comprising
four collateralized mortgage obligations and 19 commercial pass-through securities.
F-43
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
In general, if the fair value of a debt security is less than its amortized cost basis at the time of evaluation, the
security is “impaired” and the impairment is to be evaluated to determine if it is other than temporary. The
Company evaluates the impaired securities in its portfolio for possible other than temporary impairment (OTTI)
on at least a quarterly basis. The following represents the circumstances under which an impaired security is
determined to be other than temporarily impaired:
When the Company intends to sell the impaired debt security;
When the Company more likely than not will be required to sell the impaired debt security before
recovery of its amortized cost (for example, whether liquidity requirements or contractual or regulatory
obligations indicate that the security will be required to be sold before a forecasted recovery occurs); or
When an impaired debt security does not meet either of the two conditions above, but the Company does
not expect to recover the entire amortized cost of the security. According to applicable accounting
guidance for debt securities, this is generally when the present value of cash flows expected to be
collected is less than the amortized cost of the security.
In the first two circumstances noted above, the amount of OTTI recognized in earnings is the entire difference
between the security’s amortized cost basis and its fair value at the balance sheet date. In the third circumstance,
however, the OTTI is to be separated into the amount representing the credit loss from the amount related to all
other factors. The credit loss component is to be recognized in earnings while the non-credit loss component is to
be recognized in other comprehensive income. In these cases, OTTI is generally predicated on an adverse change
in cash flows (e.g. principal and/or interest payment deferrals or losses) versus those expected at the time of
purchase. The absence of an adverse change in expected cash flows generally indicates that a security’s
impairment is related to other “non-credit loss” factors and is thereby generally not recognized as OTTI.
The Company considers a variety of factors when determining whether a credit loss exists for an impaired
security including, but not limited to:
The length of time and the extent (a percentage) to which the fair value has been less than the amortized
cost basis;
Adverse conditions specifically related to the security, an industry, or a geographic area (e.g. changes in
the financial condition of the issuer of the security, or in the case of an asset backed debt security, in the
financial condition of the underlying loan obligors, including changes in technology or the discontinuance
of a segment of the business that may affect the future earnings potential of the issuer or underlying loan
obligors of the security or changes in the quality of the credit enhancement);
The historical and implied volatility of the fair value of the security;
The payment structure of the debt security;
Actual or expected failure of the issuer of the security to make scheduled interest or principal payments;
Changes to the rating of the security by external rating agencies; and
Recoveries or additional declines in fair value subsequent to the balance sheet date.
F-44
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
At June 30, 2014 and June 30, 2013, the Company held no securities on which credit-related OTTI had been
recognized in earnings. The following discussion summarizes the Company’s rationale for recognizing the
impairments reported in the tables above as “temporary” versus “other-than-temporary”. Such rationale is
presented by investment type and generally applies consistently to both the available for sale and held to maturity
portfolios, except where specifically noted.
Mortgage-backed Securities.
The carrying value of the Company’s mortgage-backed securities totaled $732.9 million at June 30, 2014 and
comprised 54.0% of total investments and 20.9% of total assets as of that date. This category of securities
primarily includes mortgage pass-through securities and collateralized mortgage obligations issued by U.S.
government agencies and/or government-sponsored entities (“GSEs”) such as Ginnie Mae, Fannie Mae and
Freddie Mac who guarantee the contractual cash flows associated with those securities. Those guarantees were
strengthened during the 2008-2009 financial crisis at which time Fannie Mae and Freddie Mac were placed into
receivership by the federal government. Through those actions, the U.S. government effectively reinforced the
guarantees of their agencies thereby strengthening the creditworthiness of the mortgage-backed securities issued
by those agencies.
With credit risk being reduced to negligible levels due primarily to the U.S. government’s support of most of
these agencies, the unrealized losses on the Company’s investment in U.S. agency mortgage-backed securities are
due largely to the combined effects of several market-related factors including, most notably, changes in market
interest rates. In general, the fair value of certain debt securities, including the Company’s mortgage-backed
securities, move inversely with changes in market interest rates. As market interest rates increase, the value of the
securities, which are generally characterized by fixed interest rates or adjustable rates that lag the movement in
market interest rates, decline and vice-versa.
Additionally, movements in market interest rates significantly impact the average lives of mortgage-backed
securities by influencing the rate of principal prepayment attributable to refinancing activity. Changes in the
expected average lives of such securities significantly impact their fair values due to the extension or contraction
of the cash flows that an investor expects to receive over the life of the security. Generally, lower market interest
rates prompt greater refinancing activity thereby shortening the average lives of mortgage-backed securities and
vice-versa. The historically low mortgage rates prevalent in the marketplace during recent years created
significant refinancing incentive for qualified borrowers.
Prepayment rates are also influenced by fluctuating real estate values and the overall availability of credit in the
marketplace which significantly impacts the ability of borrowers to qualify for refinancing. The residential real
estate marketplace in recent years has been characterized by diminished property values and reduced availability
of credit due to tightening underwriting standards. As a consequence, the ability of certain borrowers to qualify
for the refinancing of existing loans has been reduced while residential real estate purchase activity has been
stifled. These factors have partially offset the effects of historically low interest rates on mortgage-backed
security prepayment rates.
The market price of mortgage-backed securities, being the key measure of the fair value to an investor in such
securities, is also influenced by the overall supply and demand for such securities in the marketplace. Absent
other factors, an increase in the demand for, or a decrease in the supply of a security increases its price.
Conversely, a decrease in the demand for, or an increase in the supply of a security decreases its price.
F-45
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
In sum, the factors influencing the fair value of the Company’s U.S. agency mortgage-backed securities, as
described above, generally result from movements in market interest rates and changing real estate and financial
market conditions which affect the supply and demand for such securities. Such market conditions may fluctuate
over time resulting in certain securities being impaired for periods in excess of 12 months. However, the
longevity of such impairment is not necessarily reflective of an expectation for an adverse change in cash flows
signifying a credit loss. Consequently, the impairments of value resulting directly from these changing market
conditions are considered “noncredit-related” and “temporary” in nature.
Finally, the Company has the stated ability and intent to “hold to maturity” those securities so designated at June
30, 2014 and does not intend to sell the temporarily impaired available for sale securities prior to the recovery of
their fair value to a level equal to or greater than the Company’s amortized cost. Moreover, the Company has
concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely
based upon its strong liquidity, asset quality and capital position as of that date. In light of the factors noted, the
Company does not consider its U.S. agency and GSE mortgage-backed securities with unrealized losses at June
30, 2014 to be “other-than-temporarily” impaired as of that date.
In addition to those mortgage-backed securities issued by U.S. agencies and GSEs, the Company held a nominal
balance of non-agency mortgage-backed securities at June 30, 2014. Unlike agency and GSE mortgage-backed
securities, non-agency collateralized mortgage obligations are not explicitly guaranteed by a U.S. government
sponsored entity. Rather, such securities generally utilize the structure of the larger investment vehicle to
reallocate credit risk among the individual tranches comprised within that vehicle. Through this process,
investors in different tranches are subject to varying degrees of risk that the cash flows of their tranche will be
adversely impacted by borrowers defaulting on the underlying mortgage loans. The creditworthiness of certain
tranches may also be further enhanced by additional credit insurance protection embedded within the terms of the
total investment vehicle.
The fair values of the non-agency mortgage-backed securities are subject to many of the factors applicable to the
agency securities that may result in “temporary” impairments in value. However, due to the lack of agency
guaranty, the Company also monitors the general level of credit risk for each of its non-agency mortgage-backed
securities based upon a variety of factors including, but not limited to, the ratings assigned to its specific tranches
by one or more credit rating agencies, where available. As noted above, the level of such ratings and changes
thereto, is one of several factors considered by the Company in identifying those securities that may be other-
than-temporarily impaired.
The applicable securities generally maintained their credit-ratings at levels supporting the investment grade
assessment by the Company. The Company has the stated ability and intent to “hold to maturity” those securities
at June 30, 2014 and has further concluded that the possibility of being required to sell the securities prior to their
anticipated recovery is unlikely based upon its strong liquidity, asset quality and capital position as of that date.
In light of the factors noted, the Company does not consider its non-agency mortgage-backed securities with
unrealized losses at June 30, 2014 to be “other-than-temporarily” impaired as of that date.
U.S. Agency Debt Securities.
The carrying value of the Company’s U.S. agency debt securities totaled $148.6 million at June 30, 2014 and
comprised 10.9% of total investments and 4.2% of total assets as of that date. Such securities included $144.3
million of fixed-rate U.S. agency debentures and $4.2 million of securities representing securitized pools of loans
issued and fully guaranteed by the Small Business Administration (“SBA”), a U.S. government agency.
F-46
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
With credit risk being reduced to negligible levels due to the issuer’s guarantee, the unrealized losses on the
Company’s investment in U.S. agency debentures are due largely to the combined effects of several market-
related factors including, most notably, changes in market interest rates. In general, the fair value of certain debt
securities, including the Company’s U.S. agency debentures, move inversely with changes in market interest
rates. As market interest rates increase, the value of the securities, which are generally characterized by fixed
interest rates, decline and vice-versa.
The market price of U.S. agency debentures is also influenced by the overall supply and demand for such
securities in the marketplace. Absent other factors, an increase in the demand for, or a decrease in the supply of a
security increases its price. Conversely, a decrease in the demand for, or an increase in the supply of, a security
decreases its price.
In sum, the factors influencing the fair value of the Company’s U.S. agency debentures, as described above,
generally result from movements in market interest rates and changing market conditions which affect the supply
and demand for such securities. Those market conditions may fluctuate over time resulting in certain securities
being impaired for periods in excess of 12 months. However, the longevity of such impairment is not necessarily
reflective of an expectation for an adverse change in cash flows signifying a credit loss. Consequently, the
impairments of value resulting directly from these changing market conditions are considered “noncredit-related”
and “temporary” in nature.
Finally, the Company has the stated ability and intent to “hold to maturity” those securities so designated at June
30, 2014 and does not intend to sell the temporarily impaired available for sale securities prior to the recovery of
their fair value to a level equal to or greater than the Company’s amortized cost. Furthermore, the Company has
concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely
based upon its strong liquidity, asset quality and capital position as of that date. In light of the factors noted, the
Company does not consider its balance of U.S. agency securities with unrealized losses at June 30, 2014 to be
“other-than-temporarily” impaired as of that date.
Obligations of State and Political Subdivisions.
The carrying value of the Company’s securities representing obligations of state and political subdivisions totaled
$98.8 million at June 30, 2014 and comprised 7.3% of total investments and 2.8% of total assets as of that date.
Such securities include approximately $95.7 million of fixed-rate, bank-qualified securities representing general
obligations of municipalities located within the U.S. or the obligations of their related entities such as boards of
education or school districts. The portfolio also includes $3.1 million of non-rated bond anticipation notes
(“BANs”) comprising seven short-term obligations issued by a total of four New Jersey municipalities with whom
the Company maintains or seeks to maintain deposit relationships. At June 30, 2014, the fair value of each of the
Company’s BANs equaled or exceeded their respective carrying values resulting in no reported impairment on
those securities as of that date.
As noted earlier, the Company considers the ratings assigned by one or more credit rating agencies, where
available, in its evaluation of the impairment attributable to each of its municipal obligations. The Company uses
such ratings, in conjunction with the other criteria noted earlier, to identify those securities whose impairments are
potentially “credit-related” versus “noncredit-related”.
Unrealized losses associated with municipal obligations whose credit ratings exceed certain internally defined
thresholds are considered to be indicative of “noncredit-related” impairment given the nominal level of credit
losses that would be expected based upon such ratings. That conclusion is generally reinforced, as appropriate, by
additional internal analysis supporting the Company’s periodic internal investment grade assessment of the
security.
F-47
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
At June 30, 2014, each of the Company’s impaired municipal obligations were consistently rated by Moody’s
Investors Service (“Moody’s”) and Standard & Poor’s Financial Services (“S&P”) well above the thresholds that
generally support the Company’s investment grade assessment with such ratings equaling “A” or higher by S&P
and/or “A1” or higher by Moody’s, where rated by those agencies. In the absence of such ratings, the Company
relies upon its own internal analysis of the issuer’s financial condition to validate its investment grade assessment.
Given the absence of any expectation for an adverse change in cash flows signifying a credit loss, the unrealized
losses on the Company’s investment in municipal obligations are due largely to the combined effects of several
market-related factors including, most notably, changes in market interest rates. In general, the fair value of
certain debt securities, including the Company’s municipal obligations, move inversely with changes in market
interest rates. As market interest rates increase, the value of the securities, which are generally characterized by
fixed interest rates, decline and vice-versa.
The market price of municipal obligations is also influenced by the overall supply and demand for such securities
in the marketplace. While these factors may generally reflect the level of available liquidity in the marketplace,
demand for individual securities will specifically reflect investors’ assessment of an issuer’s creditworthiness and
resulting expectations for timely and full repayment in accordance with the terms of the applicable security
agreement. Absent other factors, an increase in the demand for, or a decrease in the supply of, a security increases
its price. Conversely, a decrease in the demand for, or an increase in the supply of, a security decreases its price.
In sum, the factors influencing the fair value of the Company’s municipal obligations, as described above,
generally result from movements in market interest rates and changing market conditions which affect the supply
and demand for such securities. Those market conditions may fluctuate over time resulting in certain securities
being impaired for periods in excess of 12 months. However, the longevity of such impairment is not necessarily
reflective of an expectation for an adverse change in cash flows signifying a credit loss. Consequently, the
impairments of value resulting directly from these changing market conditions are considered “noncredit-related”
and “temporary” in nature.
Finally, the Company has the stated ability and intent to “hold to maturity” those securities so designated at June
30, 2014 and does not intend to sell the temporarily impaired available for sale securities prior to the recovery of
their fair value to a level equal to or greater than the Company’s amortized cost. Furthermore, the Company has
concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely
based upon its strong liquidity, asset quality and capital position as of that date. In light of the factors noted, the
Company does not consider its balance of obligations of state and political subdivisions with unrealized losses at
June 30, 2014 to be “other-than-temporarily” impaired as of that date.
Asset-backed Securities.
The carrying value of the Company’s asset-backed securities totaled $87.3 million at June 30, 2014 and
comprised 6.4% of total investments and 2.5% of total assets as of that date. This category of securities is
comprised entirely of structured, floating-rate securities representing securitized federal education loans with 97%
U.S. government guarantees. The securities represent tranches of a larger investment vehicle designed to
reallocate credit risk among the individual tranches comprised within that vehicle. Through this process,
investors in different tranches are subject to varying degrees of risk that the cash flows of their tranche will be
adversely impacted by borrowers defaulting on the underlying loans. The Company’s securities represent the
highest credit-quality tranches within the overall structures with each being rated “AA+” by S&P at June 30,
2014.
F-48
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
With credit risk being reduced to nominal levels due to the guarantees and structural support noted above, the
unrealized losses on the Company’s investment in asset-backed securities are due largely to the combined effects
of several market-related factors, including changes in market interest rates and fluctuating demand for such
securities in the marketplace. In general, the fair value of certain debt securities, including the Company’s asset-
backed securities, move inversely with changes in market interest rates. As market interest rates increase, the
value of the securities decline and vice-versa. However, the floating-rate nature of the Company’s asset-backed
securities greatly reduces their sensitivity to such changes in market rates.
More significantly, the market price of asset-backed securities is also influenced by the overall supply and
demand for such securities in the marketplace. Absent other factors, an increase in the demand for, or a decrease
in the supply of, a security increases its price. Conversely, a decrease in the demand for, or an increase in the
supply of, a security decreases its price.
In sum, the factors influencing the fair value of the Company’s asset-backed securities, as described above,
generally result from movements in market interest rates and changing market conditions which affect the supply
and demand for such securities. Those market conditions may fluctuate over time resulting in certain securities
being impaired for periods in excess of 12 months. However, the longevity of such impairment is not necessarily
reflective of an expectation for an adverse change in cash flows signifying a credit loss. Consequently, the
impairments of value resulting directly from these changing market conditions are considered “noncredit-related”
and “temporary” in nature.
Finally, the Company does not intend to sell the temporarily impaired available for sale securities prior to the
recovery of their fair value to a level equal to or greater than the Company’s amortized cost. Furthermore, the
Company has concluded that the possibility of being required to sell the securities prior to their anticipated
recovery is unlikely based upon its strong liquidity, asset quality and capital position as of June 30, 2014. In light
of the factors noted, the Company does not consider its balance of asset-backed securities with unrealized losses
at June 30, 2014 to be “other-than-temporarily” impaired as of that date.
Collateralized Loan Obligations.
The outstanding balance of the Company’s collateralized loan obligations totaled $119.6 million at June 30, 2014
and comprised 8.8% of total investments and 3.4% of total assets as of that date. This category of securities is
comprised entirely of structured, floating-rate securities comprised of securitized commercial loans to large U.S.
corporations. The Company’s securities represent tranches of a larger investment vehicle designed to reallocate
cash flows and credit risk among the individual tranches comprised within that vehicle. Through this process,
investors in different tranches are subject to varying degrees of risk that the cash flows of their tranche will be
adversely impacted by borrowers defaulting on the underlying loans.
As noted earlier, the Company considers the ratings assigned by one or more credit rating agencies, where
available, in its evaluation of the impairment attributable to each of its collateralized loan obligations. The
Company uses such ratings, in conjunction with the other criteria noted earlier, to identify those securities whose
impairments are potentially “credit-related” versus “noncredit-related”.
Unrealized losses associated with collateralized loan obligations whose credit ratings exceed certain internally
defined thresholds are considered to be indicative of “noncredit-related” impairment given the nominal level of
credit losses that would be expected based upon such ratings. That conclusion is generally reinforced, as
appropriate, by additional internal analysis supporting the Company’s periodic internal investment grade
assessment of the security.
F-49
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
At June 30, 2014, each of the Company’s impaired collateralized loan obligations were consistently rated by
Moody’s and S&P well above the thresholds that generally support the Company’s investment grade assessment,
with such ratings equaling “AA” or higher by S&P and “Aa2” or higher by Moody’s, where rated by those
agencies.
Given the absence of any expectation for an adverse change in cash flows signifying a credit loss, the unrealized
losses on the Company’s investment in collateralized loan obligations are due largely to the combined effects of
several market-related factors, including changes in market interest rates and fluctuating demand for such
securities in the marketplace. In general, the fair value of certain debt securities, including the Company’s
collateralized loan obligations, move inversely with changes in market interest rates. As market interest rates
increase, the value of the securities decline and vice-versa. However, the floating-rate nature of the Company’s
collateralized loan obligations greatly reduces their sensitivity to such changes in market rates.
More significantly, the market price of collateralized loan obligations is also influenced by the overall supply and
demand for such securities in the marketplace. While these factors may generally reflect the level of available
liquidity in the marketplace, demand for individual securities will specifically reflect the performance of the
underlying collateral in conjunction with the resiliency of the security’s structural support as they affect investors’
expectations for timely and full repayment. Absent other factors, an increase in the demand for, or a decrease in
the supply of, a security increases its price. Conversely, a decrease in the demand for, or an increase in the supply
of, a security decreases its price.
In sum, the factors influencing the fair value of the Company’s collateralized loan obligations, as described above,
generally result from movements in market interest rates and changing market conditions which affect the supply
and demand for such securities. Those market conditions may fluctuate over time resulting in certain securities
being impaired for periods in excess of 12 months. However, the longevity of such impairment is not necessarily
reflective of an expectation for an adverse change in cash flows signifying a credit loss. Consequently, the
impairments of value resulting directly from these changing market conditions are considered “noncredit-related”
and “temporary” in nature.
Finally, the Company does not intend to sell the temporarily impaired available for sale securities prior to the
recovery of their fair value to a level equal to or greater than the Company’s amortized cost. The Company
evaluated its entire portfolio of collateralized loan obligations during the first half of fiscal 2014 and sold those
securities that it identified as potentially ineligible investments under the terms of the “Volcker Rule” and related
regulations enacted by regulatory agencies during the latter half of fiscal 2014 in conjunction with the ongoing
implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Company concluded
that the possibility of being required to sell its current collateralized loan obligations prior to their anticipated
recovery is unlikely based upon their eligibility under the terms of the Volcker Rule in conjunction with the
overall strength of the Company’s liquidity, asset quality and capital position as of June 30, 2014.
In light of the factors noted, the Company does not consider its balance of collateralized loan obligations with
unrealized losses at June 30, 2014 to be “other-than-temporarily” impaired as of that date.
Corporate Bonds.
The carrying value of the Company’s corporate bonds totaled $162.2 million at June 30, 2014 and comprised
12.0% of total investments and 4.6% of total assets as of that date. This category of securities is comprised
entirely of floating-rate corporate debt obligations of large financial institutions.
F-50
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
As noted earlier, the Company considers the ratings assigned by one or more credit rating agencies, where
available, in its evaluation of the impairment attributable to each of its corporate bonds. The Company uses such
ratings, in conjunction with the other criteria noted earlier, to identify those securities whose impairments are
potentially “credit-related” versus “noncredit-related”.
Unrealized losses associated with corporate bonds whose credit ratings exceed certain internally defined
thresholds are considered to be indicative of “noncredit-related” impairment given the nominal level of credit
losses that would be expected based upon such ratings. That conclusion is generally reinforced, as appropriate, by
additional internal analysis supporting the Company’s periodic internal investment grade assessment of the
security.
At June 30, 2014, each of the Company’s impaired corporate bonds were consistently rated by Moody’s and S&P
above the thresholds that generally support the Company’s investment grade assessment with such ratings
equaling “A-” or higher by S&P and/or “Baa1” or higher by Moody’s, where rated by those agencies.
Given the absence of any expectation for an adverse change in cash flows signifying a credit loss, the unrealized
losses on the Company’s investment in corporate bonds are due largely to the combined effects of several market-
related factors including changes in market interest rates and fluctuating demand for such securities in the
marketplace. In general, the fair value of certain debt securities, including the Company’s corporate bonds, move
inversely with changes in market interest rates. As market interest rates increase, the value of the securities
decline and vice-versa. However, the floating-rate nature of the Company’s corporate bonds greatly reduces their
sensitivity to such changes in market rates.
More significantly, the market price of corporate bonds is also influenced by the overall supply and demand for
such securities in the marketplace. While these factors may generally reflect the level of available liquidity in the
marketplace, demand for individual securities will specifically reflect investors’ assessment of an issuer’s
creditworthiness and resulting expectations for timely and full repayment in accordance with the terms of the
applicable security agreement. Absent other factors, an increase in the demand for, or a decrease in the supply of,
a security increases its price. Conversely, a decrease in the demand for, or an increase in the supply of, a security
decreases its price.
In sum, the factors influencing the fair value of the Company’s corporate bonds, as described above, generally
result from movements in market interest rates and changing market conditions which affect the supply and
demand for such securities. Those market conditions may fluctuate over time resulting in certain securities being
impaired for periods in excess of 12 months. However, the longevity of such impairment is not necessarily
reflective of an expectation for an adverse change in cash flows signifying a credit loss. Consequently, the
impairments of value resulting directly from these changing market conditions are considered “noncredit-related”
and “temporary” in nature.
Finally, the Company does not intend to sell the temporarily impaired available for sale securities prior to the
recovery of their fair value to a level equal to or greater than the Company’s amortized cost. Furthermore, the
Company has concluded that the possibility of being required to sell the securities prior to their anticipated
recovery is unlikely based upon its strong liquidity, asset quality and capital position as of June 30, 2014. In light
of the factors noted, the Company does not consider its balance of corporate bonds with unrealized losses at June
30, 2014 to be “other-than-temporarily” impaired as of that date.
F-51
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
Trust Preferred Securities.
The carrying value of the Company’s trust preferred securities totaled $7.8 million at June 30, 2014 and
comprised less than one percent of total investments and total assets as of that date. The category comprises a
total of five “single-issuer” (i.e. non-pooled) trust preferred securities, four of which are impaired as of June 30,
2014, that were originally issued by four separate financial institutions. As a result of bank mergers involving the
issuers of these securities, the Company’s five trust preferred securities currently represent the de-facto
obligations of three separate financial institutions.
As noted earlier, the Company considers the ratings assigned by one or more credit rating agencies, where such
ratings are available, in its evaluation of the impairment attributable to each of its trust preferred securities. The
Company uses such ratings, in conjunction with other criteria, to identify those securities whose impairments are
potentially “credit-related” versus “noncredit-related”.
Unrealized losses associated with trust preferred securities whose credit ratings exceed certain internally defined
thresholds are considered to be indicative of “noncredit-related” impairment given the nominal level of credit
losses that would be expected based upon such ratings. That conclusion is generally reinforced, as appropriate, by
additional internal analysis supporting the Company’s internal investment grade assessment of the security.
At June 30, 2014, the Company owned two securities at an amortized cost of $3.0 million that were consistently
rated by Moody’s and S&P above the thresholds that generally support the Company’s investment grade
assessment. The securities were originally issued through Chase Capital II and currently represent de-facto
obligations of JPMorgan Chase & Co.
The Company has attributed the unrealized losses on these securities to the combined effects of several market-
related factors, including movements in market interest rates and general level of liquidity of such securities in the
marketplace based on overall supply and demand.
With regard to interest rates, the Company’s impaired trust preferred securities are variable rate securities whose
interest rates generally float with three-month LIBOR plus a margin. Based upon the historically low level of
short-term market interest rates, the current yield on these securities is comparatively low. Consequently, the fair
value of the securities, as determined based upon their market price, reflects the adverse effects of the historically
low market interest rates at June 30, 2014.
More significantly, the market prices of the impaired trust preferred securities also currently reflect the effect of
reduced demand for such securities in the current marketplace. Additionally, such prices reflect the effects of
increased supply arising from financial institutions selling such investments..
In addition to the securities noted above, the Company owned two additional trust preferred securities at an
amortized cost of $4.9 million whose external credit ratings by both S&P and Moody’s fell below the thresholds
that the Company normally associates with investment grade securities. The securities were originally issued
through BankBoston Capital Trust IV and MBNA Capital B and currently represent de-facto obligations of Bank
of America Corporation.
F-52
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Impairment of Securities (continued)
The Company’s evaluation of the unrealized loss associated with these securities considered a variety of factors to
determine if any portion of the impairment was credit-related at June 30, 2014. Factors generally considered in
such evaluations included the financial strength and viability of the issuer and its parent company, the security’s
historical performance through prior business and economic cycles, rating consistency or variability among rating
companies, the security’s current and anticipated status regarding payment default or deferral of contractual
payments to investors and the impact of these factors on the present value of the security’s expected future cash
flows in relation to its amortized cost basis.
In its evaluation, the Company noted the overall financial strength and continuing expected viability of the issuing
entity’s parent, particularly given their systemically critical role in the marketplace. The Company noted the
security’s absence of historical defaults or payment deferrals throughout prior business cycles including the recent
fiscal crisis that triggered the current economic weaknesses prevalent in the marketplace. Given these factors, the
Company had no basis upon which to estimate an adverse change in the expected cash flows over the securities’
remaining terms to maturity.
In sum, the factors influencing the fair value of the Company’s trust preferred securities and the resulting
impairment attributable to each generally resulted from movements in market interest rates and changing market
conditions which affect the supply and demand for such securities. Such market conditions may generally
fluctuate over time resulting in the securities being impaired for periods in excess of 12 months. However, the
longevity of such impairment is not reflective of an expectation for an adverse change in cash flows signifying a
credit loss. Consequently, the impairments of value arising from these changing market conditions are both
“noncredit-related” and “temporary” in nature.
Finally, the Company does not intend to sell the temporarily impaired available for sale securities prior to the
recovery of their fair value to a level equal to or greater than the Company’s amortized cost. Furthermore, the
Company has concluded that the possibility of being required to sell the securities prior to their anticipated
recovery is unlikely based upon its strong liquidity, asset quality and capital position as of June 30, 2014.
Moreover, as “single issuer” obligations, these securities fall outside the scope of the Volcker Rule discussed
earlier that originally identified pooled trust preferred securities as potentially ineligible investments for banks. In
light of the factors noted, the Company does not consider its investments in trust preferred securities with
unrealized losses at June 30, 2014 to be “other-than-temporarily” impaired as of that date.
F-53
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 – Loans Receivable
Real estate mortgage:
One-to-four family residential
Commercial mortgage:
Multi-family
Nonresidential
Construction
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Passbook or certificate
Other
Total Loans
Unamortized yield adjustments including net premiums on
purchased loans and net deferred loan costs and fees
June 30,
2014
2013
(In Thousands)
$ 580,612
$ 500,647
431,007
552,748
983,755
211,817
455,011
666,828
1,564,367
1,167,475
7,281
67,261
75,611
24,010
3,965
373
103,959
11,851
70,688
80,813
26,613
3,887
391
111,704
1,742,868
1,361,718
(1,397)
(847)
$ 1,741,471
$ 1,360,871
The Bank has granted loans to officers and directors of the Company and its subsidiaries 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 collectability. As of June 30, 2014 and 2013 such loans totaled approximately $4.7 million and $3.7
million, respectively. During the year ended June 30, 2014, the Bank granted three new loans to related parties
totaling $1.1 million.
Note 9 – Loan Quality and the Allowance for Loan Losses
The following tables present the balance of the allowance for loan losses at June 30, 2014, 2013 and 2012 based
upon the calculation methodology described in Note 1. The tables identify the valuation allowances attributable
to specifically identified impairments on individually evaluated loans, including those acquired with deteriorated
credit quality, as well as valuation allowances for impairments on loans evaluated collectively. The tables include
the underlying balance of loans receivable applicable to each category as of those dates as well as the activity in
the allowance for loan losses for the years ended June 30, 2014, 2013 and 2012. Unless otherwise noted, the
balance of loans reported in the tables below excludes yield adjustments and the allowance for loan loss.
F-54
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Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 – Loan Quality and the Allowance for Loan Losses (continued)
The manner in which the terms of a loan are modified through a troubled debt restructuring generally
includes one or more of the following changes to the loan’s repayment terms:
Interest Rate Reduction: Temporary or permanent reduction of the interest rate charged against
the outstanding balance of the loan.
Capitalization of Prior Past Dues: Capitalization of prior amounts due to the outstanding balance
of the loan.
Extension of Maturity or Balloon Date: Extending the term of the loan past its original balloon or
maturity date.
Deferral of Principal Payments: Temporary deferral of the principal portion of a loan payment.
Payment Recalculation and Re-amortization: Recalculation of the recurring payment obligation
and resulting loan amortization/repayment schedule based on the loan’s modified terms.
At June 30, 2014, the remaining outstanding principal balance and carrying amount of acquired credit-impaired
loans totaled approximately $11,778,000 and $ 10,138,000 respectively. By comparison, at June 30, 2013, the
remaining outstanding principal balance and carrying amount of such loans totaled approximately $9,874,000 and
$6,050,000, respectively.
The carrying amount of acquired credit-impaired loans for which interest is not being recognized due to the
uncertainty of the cash flows relating to such loans totaled $2,374,000 and $1,952,000 at June 30, 2014 and June
30, 2013, respectively.
The balance of the allowance for loan losses at June 30, 2014 and June 30, 2013 included approximately $98,000
and $17,000 of valuation allowances, respectively, for a specifically identified impairment attributable to acquired
credit-impaired loans. The valuation allowances were attributable to additional impairment recognized on the
applicable loans subsequent to their acquisition, net of any charge offs recognized during that time.
The following table presents the changes in the accretable yield relating to the acquired credit-impaired loans for
the years ended June 30, 2014 and 2013.
Beginning balance
Accretion to interest income
Disposals
Reclassifications from nonaccretable difference
Ending balance
Year Ended
June 30, 2014
(In Thousands)
$ 741
(326)
(38)
1,514
$ 1,891
Year Ended
June 30, 2013
(In Thousands)
1,461
(567)
(153)
-
741
$
$
F-73
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 – Premises and Equipment
Land
Buildings and improvements
Leasehold improvements
Furnishings and equipment
Construction in progress
Less accumulated depreciation and amortization
June 30,
2014
2013
(In Thousands)
$ 9,931
35,080
4,253
18,151
1,959
69,374
$ 9,924
32,920
4,021
15,285
1,530
63,680
29,269
26,686
$ 40,105
$ 36,994
Land included properties held for future branch expansion totaling $2,419,000 at June 30, 2014 and 2013.
Note 11 – Interest Receivable
Loans
Mortgage-backed securities
Debt securities
Note 12 – Goodwill and Other Intangible Assets
Balance at June 30, 2011
Amortization
Balance at June 30, 2012
Amortization
Balance at June 30, 2013
Acquisition of Atlas Bank
Amortization
Balance at June 30, 2014
F-74
June 30,
2014
2013
(In Thousands)
$ 5,525
1,796
1,692
$ 4,632
2,326
1,070
$ 9,013
$ 8,028
Goodwill
Core Deposit
Intangibles
(In Thousands)
108,591
-
807
(155)
108,591
-
652
(138)
108,591
-
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514
398
(122)
$ 108,591
$ 790
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 – Goodwill and Other Intangible Assets (continued)
Scheduled amortization of core deposit intangibles for each of the next five years and thereafter is as follows:
Years Ending June 30:
2015
2016
2017
2018
2019
Thereafter
$
(In Thousands)
194
166
139
111
84
96
Note 13 – Deposits
June 30,
2014
2013
Weighted
Average
Interest
Rate
Weighted
Average
Interest
Rate
Amount
(Dollars In Thousands)
Amount
Non-interest bearing demand
Interest-bearing demand (1)
Savings and club
Certificates of deposit (2)
$ 224,054
700,248
518,421
1,037,218
-
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$ 190,964
731,521
466,559
981,464
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-
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0.16
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$ 2,479,941
0.56 %
$ 2,370,508
0.55 %
(1)
Interest-bearing demand deposits at June 30, 2014 and June 30, 2013 include $213.5 million and $229.6 million,
respectively, of brokered deposits at a weighted average interest rate of 0.15% and 0.19%, excluding cost of interest
rate derivatives used to hedge interest expense.
(2) Certificates of deposit at June 30, 2014 include $18.5 million of brokered deposits at a weighted average interest rate
of 3.49%. The Company held no brokered certificates of deposit at June 30, 2013.
Certificates of deposit with balances of $100,000 or more at June 30, 2014 and 2013, totaled approximately
$476.6 million and $389.1 million, respectively. The Bank’s deposits are insurable to applicable limits by the
Federal Deposit Insurance Corporation.
A summary of certificates of deposit by maturity follows:
One year or less
After one to two years
After two to three years
After three to four years
After four to five years
After five years
F-75
June 30,
2014
2013
(In Thousands)
$ 581,543
187,401
90,078
90,921
80,811
6,464
$ 646,590
174,223
68,155
48,211
44,285
-
$ 1,037,218
$ 981,464
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 – Deposits (continued)
Interest expense on deposits consists of the following:
Demand
Savings and club
Certificates of deposit
2014
Years Ended June 30,
2013
(In Thousands)
2012
$ 3,790
739
10,009
$ 1,847
878
11,986
$ 2,690
1,376
16,206
$ 14,538
$ 14,711
$ 20,272
Note 14 – Borrowings
Fixed-rate advances from FHLB of New York mature as follows:
June 30,
2014
2013
Weighted
Average
Interest
Rate
(Dollars in Thousands)
Amount
Weighted
Average
Interest
Rate
Amount
$ -
320,000
7,500
3,000
5,225
765
145,000
481,490
29
$ 481,519
- % $ 105,000
-
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145,000
250,854
77
0.38
1.09
1.05
1.18
4.94
3.04
1.21 %
$ 250,931
0.39 %
-
-
-
-
4.94
3.04
1.94 %
Maturing in years ending June 30:
2014
2015
2016
2017
2018
2021
2023
Fair value adjustments
At June 30, 2014, $320.0 million in advances are due within one year while the remaining $161.5 million in
advances are due after one year of which $145.0 million are callable in April 2018.
At June 30, 2014, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and
mortgage loans and securities with carrying values totaling approximately $739.4 million and $204.2 million,
respectively. At June 30, 2013, FHLB advances were collateralized by the FHLB capital stock owned by the
Bank and mortgage loans and securities with carrying values totaling approximately $433.2 million and $222.7
million, respectively.
Borrowings at June 30, 2014 and 2013 also included overnight borrowings in the form of depositor sweep
accounts totaling $30.7 million and $36.8 million, respectively. Depositor sweep accounts are short term
borrowings representing funds that are withdrawn from a customer’s noninterest-bearing deposit account and
invested in an uninsured overnight investment account that is collateralized by specified investment securities
owned by the Bank.
F-76
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 – Derivative Instruments and Hedging Activities
At June 30, 2014 and 2013, the Company was subject to the terms of certain interest rate derivative agreements
that were utilized by the Company to manage the interest rate exposure arising from specific wholesale funding
positions. Such wholesale funding sources include floating-rate brokered money market deposits indexed to one-
month LIBOR as well as a number of 90 day fixed-rate FHLB advances that are forecasted to be periodically
redrawn at maturity for the same 90 day term as the original advance. The derivatives, comprising five interest
rate swaps and two interest rate caps, were designated as cash flow hedges with changes in their fair value
recorded as an adjustment through other comprehensive income on an after-tax basis. The Company had no
interest rate derivatives as of or during the prior years ended June 30, 2012.
The effects of derivative instruments on the Consolidated Financial Statements for June 30, 2014 are as follows:
Derivatives designated as hedging instruments
Interest rate swaps:
Effective July 1, 2013
Effective August 19, 2013
Effective October 9, 2013
Effective March 28, 2014
Effective June 5, 2015
Interest rate caps:
Effective June 5, 2013
Effective July 1, 2013
Notional/
Contract
Amount
June 30, 2014
Fair Value
Balance Sheet
Location
Expiration
Date
(Dollars in Thousands)
$ 165,000
75,000
50,000
75,000
60,000
$ 103
(1,109)
(234)
(1,203)
(271)
Other liabilities July 1, 2018
Other liabilities August 20, 2018
Other liabilities October 9, 2018
Other liabilities March 28, 2019
Other liabilities June 5, 2020
40,000
35,000
913
826
Other liabilities June 5, 2018
Other liabilities July 1, 2018
Total
$ 500,000
$ (975)
Year Ended June 30, 2014
Amount of
Gain (Loss)
Recognized in
OCI on
Derivatives, net
of tax (Effective
Portion)
Location of Gain
(Loss) Recognized
in Income on
Derivatives
(Ineffective
Portion)
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion)
(Dollars in Thousands)
$ (896)
(656)
(138)
(711)
(883)
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
$ -
-
-
-
-
(333)
(292)
Not Applicable
Not Applicable
-
-
Derivatives in cash flow hedges
Interest rate swaps:
Effective July 1, 2013
Effective August 19, 2013
Effective October 9, 2013
Effective March 28, 2014
Effective June 5, 2015
Interest rate caps:
Effective June 5, 2013
Effective July 1, 2013
Total
$ (3,909)
$ -
F-77
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 – Derivative Instruments and Hedging Activities (continued)
The effects of derivative instruments on the Consolidated Financial Statements for June 30, 2013 are as follows:
Derivatives designated as hedging instruments
Interest rate swaps:
Effective July 1, 2013
Effective June 5, 2015
Interest rate caps:
Effective June 5, 2013
Effective July 1, 2013
Notional/
Contract
Amount
June 30, 2013
Fair Value
Balance Sheet
Location
Expiration
Date
(Dollars in Thousands)
$ 165,000
60,000
$ 1,617
1,220
Other assets
Other assets
July 1, 2018
June 5, 2020
40,000
35,000
1,485
1,323
Other assets
Other assets
June 5, 2018
July 1, 2018
Total
$ 300,000
$ 5,645
Amount of
Gain (Loss)
Recognized in
OCI on
Derivatives, net
of tax (Effective
Portion)
June 30, 2013
Location of Gain
(Loss) Recognized
in Income on
Derivatives
(Ineffective
Portion)
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion)
(Dollars in Thousands)
$ 957 Not Applicable
722 Not Applicable
$ -
-
128 Not Applicable
31 Not Applicable
-
-
Derivatives in cash flow hedges
Interest rate swaps:
Effective July 1, 2013
Effective June 5, 2015
Interest rate caps:
Effective June 5, 2013
Effective July 1, 2013
Total
$ 1,838
$ -
The Company has in place an enforceable master netting arrangement with every counterparty. All master netting
arrangements include rights to offset associated with the Company’s recognized derivative assets, derivative
liabilities, and cash collateral received and pledged.
At June 30, 2014, three of the Company’s derivatives were in an asset position totaling $1.8 million while the
remaining four derivatives were in a liability position totaling $2.8 million. In total, the Company’s derivatives
were in a net liability position of $975,000 at June 30, 2014 and included in other liabilities as of that date. As
required under the enforceable master netting arrangement with its derivatives counterparty, the Company posted
financial collateral in the amount of $1,090,000 at June 30, 2014 that was not included as an offsetting amount.
F-78
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 – Derivative Instruments and Hedging Activities (continued)
At June 30, 2013, all derivatives were in an asset position so that no offset was required. Both the gross amount
of assets and net amount included in other assets was $5,645,000 at June 30, 2013. As required under the
enforceable master netting arrangement, the Company’s derivatives counterparty posted financial collateral in the
amount $5,500,000 at June 30, 2013 that was not included as an offsetting amount.
Note 16 – Benefit Plans
Employee Stock Ownership Plan
Effective upon completion of the Company’s initial public offering in February 2005, the Bank established an
Employee Stock Ownership Plan (“ESOP”) for all eligible employees who complete a twelve-month period
of employment with the Bank, have attained the age of 21 and complete at least 1,000 hours of service in a
plan year. The ESOP used $17,457,000 in proceeds from a term loan obtained from the Company to purchase
1,745,700 shares of Company common stock. The remaining term loan principal is payable over 42 equal
installments through March 31, 2017. The interest rate on the term loan is 5.50%. Each year, the Bank
intends to make discretionary contributions to the ESOP, which will be equal to principal and interest
payments required on the term loan. The Bank may substitute dividends paid, if any, on the Company
common stock held by the ESOP for discretionary contributions.
Shares purchased with the loan proceeds provide collateral for the term loan and are held in a suspense
account for future allocations among participants. Contributions to the ESOP and shares released from the
suspense account are to be allocated among the participants on the basis of compensation, as described by the
ESOP, in the year of allocation.
ESOP shares pledged as collateral were initially recorded as unearned ESOP shares in the consolidated
statements of financial condition. Thereafter, on a monthly basis, 12,123 shares are committed to be released,
compensation expense is recorded equal to the number of shares committed to be released times the monthly
average market price of the shares, and the committed shares become outstanding for basic net income per
common share computations. ESOP compensation expense was approximately $1,742,000, $1,431,000 and
$1,367,000 for the years ended June 30, 2014, 2013 and 2012, respectively.
At June 30, 2014 and 2013, the ESOP shares were as follows:
Allocated shares
Total shares distributed due to employee resignations/terminations
Shares committed to be released
Unearned shares
Total ESOP Shares
Fair value of unearned shares
June 30,
2014
2013
1,113,602
159,514
84,660
387,924
989,049
138,657
84,594
533,400
1,745,700
1,745,700
$ 5,873,169
$ 5,595,366
F-79
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Employee Stock Ownership Plan Benefit Equalization Plan ("ESOP BEP")
The Bank has a non-qualified plan to compensate its senior officers who participate in the Bank's ESOP for
certain benefits lost under such plan by reason of benefit limitations imposed by the Internal Revenue Code
(“IRC”). The ESOP BEP expense was approximately $36,000, $6,000 and $-0- for the years ended June 30,
2014, 2013 and 2012, respectively. The liability totaled approximately $15,000 and $6,000 at June 30, 2014
and 2013, respectively.
Thrift Plan
The Bank sponsors the Employees' Savings and Profit Sharing Plan and Trust (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 $543,000, $527,000 and $510,000 for
the years ended June 30, 2014, 2013 and 2012, respectively.
Multi-Employer Retirement Plan
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB
Plan”), a tax-qualified defined-benefit pension plan. The Pentegra DB Plan’s Employer Identification
Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer
plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income
Security Act of 1974 and the IRC. There are no collective bargaining agreements in place that require
contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the
assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions made by a
participating employer may be used to provide benefits to participants of other participating employers.
The Pentegra DB Plan is non-contributory and covers all eligible employees. In April 2007, the Board of
Directors of the Bank approved, effective July 1, 2007, “freezing” all future benefit accruals under the Bank’s
defined benefit pension plan.
Funded status (market value of plan assets divided by funding target) of the Bank’s plan based on valuation
reports as of July 1, 2013 and 2012 was 101.13% and 104.56%, respectively. Total contributions made to the
Pentegra DB Plan, as reported on Form 5500, were $136.5 million and $196.5 million for the plan years
ending June 30, 2013 and June 30, 2012, respectively. The Bank’s contributions to the Pentegra DB Plan
were not more than 5% of the total contributions to the Pentegra DB Plan. During the years ended June 30,
2014, 2013 and 2012, the total expense recorded for the Pentegra DB Plan was approximately $303,000,
$1,254,000 and $1,238,000, respectively.
F-80
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Atlas Bank Retirement Income Plan (“ABRIP”)
Through the merger with Atlas Bank, the Company acquired a non-contributory defined benefit pension plan
covering all eligible employees of Atlas Bank. Effective January 31, 2013, the ABRIP was frozen by Atlas
Bank. All benefits for eligible participants accrued in the ABRIP to the freeze date have been retained. The
benefits are based on years of service and employee’s compensation. The ABRIP is funded in conformity
with funding requirements of applicable government regulations.
The following table sets forth the ABRIP’s funded status at June 30, 2014:
Reconciliation of funded status:
Projected benefit obligation
Fair value of assets
Funded status, included in other assets
Valuation assumptions:
Discount rate
Salary increase rate
June 30,
2014
(In Thousands)
$ 2,646
3,885
$ 1,239
4.50%
N/A
There was no net periodic pension expense for the year ended June 30, 2014 as the acquisition of Atlas Bank
occurred on June 30, 2014. The Bank does not expect to contribute to the ABRIP in the year ending June 30,
2015.
The assets of the ABRIP are invested in a Guaranteed Deposit Fund (“GDF”) with Prudential Financial, Inc.
The GDF is a group annuity fund invested in public and private-issue debt securities through various sub-
accounts. The underlying assets are valued based on quoted prices for similar assets with similar terms and
other observable market data and have no redemption restrictions. The investments in the plan were
monitored to ensure that they complied with the investment policies set forth by the Employee Benefits
Committee of Atlas Bank. The plan’s assets were reviewed periodically by management, which included an
analysis of the asset allocation and the performance of the GDF prepared by Prudential Financial, Inc.
The overall investment objective of the ABRIP is to ensure safety of principal and seek an attractive rate of
return. The GDF utilizes a full spectrum of fixed income asset classes to provide the opportunity to maximize
portfolio returns and diversification. Such asset classes are as follows:
Private Placement Bonds
Commercial Mortgage Loans
Public Corporate Bonds
Residential Mortgage Securities
Public Asset Backed Securities
Commercial Mortgage-backed Securities
Private Securitized Investments
F-81
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Atlas Bank Retirement Income Plan (“ABRIP”) (continued)
The long-term rate-of-return-on-assets assumption was set 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. Equities and fixed-income securities were assumed to earn real rates of return in
the ranges of 5-9% and 2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these
overall return expectations are applied to the plan’s allocation, the result is an expected rate of return of 7% to
11%.
The fair values of the ABRIP’s assets at June 30, 2014, by asset category (see Note 20 for the definitions of
levels), are as follows:
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Balance
At June 30, 2014:
Prudential Guaranteed
Deposit Fund
$ -
$ 3,885
$ -
$ 3,885
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 defined benefit plan for certain benefits lost under such plans by reason of benefit limitations
imposed by Sections 415 and 401 of the IRC. There were approximately $265,000, $221,000 and $257,000
in contributions made to and benefits paid under the BEP during each of the years ended June 30, 2014, 2013
and 2012, respectively.
The following tables set forth the BEP’s funded status and components of net periodic pension cost:
Change in benefit obligation:
Benefit obligation - beginning
Interest cost
Actuarial (gain) loss
Benefit payments
Benefit obligation - ending
Change in plan assets:
Fair value of assets - beginning
Contributions
Benefit payments
Fair value of assets - ending
F-82
June 30,
2014
2013
(Dollars in Thousands)
$ 3,430
154
(218)
(265)
$ 2,859
143
649
(221)
$ 3,101
$ 3,430
$ -
265
(265)
$ -
221
(221)
$ -
$ -
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Benefit Equalization Plan (“BEP”) (continued)
Reconciliation of funded status:
Accumulated benefit obligation
Projected benefit obligation
Fair value of assets
June 30,
2014
2013
(Dollars in Thousands)
$ (3,101)
$ (3,430)
$ (3,101)
-
$ (3,430)
-
Accrued pension cost included in other liabilities
$ (3,101)
$ (3,430)
Valuation assumptions:
Discount rate
Salary increase rate
Net periodic pension expense:
Interest cost
Amortization of net actuarial loss
Valuation assumptions:
Discount rate
Salary increase rate
4.50%
N/A
5.00%
N/A
2014
Years Ended June 30,
2013
(Dollars in Thousands)
2012
$ 154
37
$ 143
50
$ 162
10
$ 191
$ 193
$ 172
5.00%
N/A
4.25%
N/A
5.75%
N/A
It is estimated that contributions of approximately $225,000 will be made during the year ending June 30,
2015.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2015
2016
2017
2018
2019
2020-2024
(In Thousands)
225
227
229
230
232
1,157
In April 2007, the Board of Directors of the Bank approved, effective July 1, 2007, “freezing” all future
benefit accruals under the BEP related to the Bank’s defined benefit pension plan.
At June 30, 2014 and 2013, unrecognized net loss of $777,000 and $1,032,000, respectively, was included in
accumulated other comprehensive income. For the fiscal year ending June 30, 2015, $47,000 of the
unrecognized net loss is expected to be recognized as a component of net periodic pension cost.
F-83
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Postretirement Welfare Plan
The Bank has an unfunded postretirement group term life insurance plan covering all eligible employees. The
benefits are based on age and years of service. During the years ended June 30, 2014, 2013 and 2012,
contributions and benefits paid totaled $6,000, $5,000 and $5,000, respectively.
The following tables set forth the accrued accumulated postretirement benefit obligation and the net periodic
postretirement benefit cost:
Change in benefit obligation:
Benefit obligation - beginning
Service cost
Interest cost
Actuarial (gain) loss
Premiums/claims paid
Benefit obligation - ending
Change in plan assets:
Fair value of assets - beginning
Contributions
Premiums/claims paid
June 30,
2014
2013
(Dollars in Thousands)
$ 1,043
54
45
(144)
(6)
$ 655
62
40
291
(5)
$ 992
$ 1,043
$ -
6
(6)
$ -
5
(5)
Fair value of assets - ending
$ -
$ -
Reconciliation of funded status:
Accumulated benefit obligation
Fair value of assets
Accrued postretirement benefit cost included
in other liabilities
Valuation assumptions:
Discount rate
Salary increase rate
$ (992)
-
$ (1,043)
-
$ (992)
$ (1,043)
4.50%
3.25%
5.00%
3.25%
F-84
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Postretirement Welfare Plan (continued)
Net periodic postretirement benefit cost:
Service cost
Interest cost
Amortization of past service liability
Amortization of unrecognized loss (gain)
Valuation assumptions:
Discount rate
Salary increase rate
2014
Years Ended June 30,
2013
(Dollars in Thousands)
2012
$ 54
45
-
-
$ 62
40
-
4
$ 23
34
3
(12)
$ 99
$ 106
$ 48
5.00%
3.25%
4.25%
3.25%
5.75%
3.25%
It is estimated that contributions of approximately $9,000 will be made during the year ending June 30, 2015.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2015
2016
2017
2018
2019
2020-2024
(In Thousands)
9
11
12
14
16
106
At June 30, 2014 and 2013, unrecognized net gain (loss) of $18,000 and $(126,000), respectively, were
included in accumulated other comprehensive income. For the fiscal year ending June 30, 2015, $-0- of
unrecognized net gain is expected to be recognized as a component of net periodic postretirement benefit cost.
F-85
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
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. During each of the years ended June 30, 2014, 2013 and 2012, contributions and
benefits paid totaled $60,000, $98,000 and $117,000, respectively.
The following table sets forth the DCRP’s funded status and components of net periodic cost:
Change in benefit obligation:
Projected benefit obligation - beginning
Service cost
Interest cost
Actuarial (gain) loss
Benefit payments
June 30,
2014
2013
(Dollars in Thousands)
$ 3,201
147
136
(441)
(60)
$ 2,761
168
125
245
(98)
Projected benefit obligation - ending
$ 2,983
$ 3,201
Change in plan assets:
Fair value of assets - beginning
Contributions
Benefit payments
$ -
60
(60)
$ -
98
(98)
Fair value of assets - ending
$ -
$ -
Reconciliation of funded status:
Accumulated benefit obligation
Projected benefit obligation
Fair value of assets
$ (2,524)
$ (2,278)
$ (2,983)
-
$ (3,201)
-
Accrued cost included in other liabilities
$ (2,983)
$ (3,201)
Valuation assumptions:
Discount rate
Fee increase rate
4.50%
3.25%
5.00%
3.25%
F-86
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Directors’ Consultation and Retirement Plan (“DCRP”) (continued)
Net periodic plan cost:
Service cost
Interest cost
Amortization of unrecognized gain
Amortization of past service liability
Valuation assumptions:
Discount rate
Fee increase rate
2014
Years Ended June 30,
2013
(Dollars in Thousands)
2012
$ 147
136
(39)
46
$ 168
125
-
48
$ 131
146
(23)
61
$ 290
$ 341
$ 315
5.00%
3.25%
4.25%
3.25%
5.75%
3.25%
It is estimated that contributions of approximately $80,000 will be made during the year ending June 30,
2015.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2015
2016
2017
2018
2019
2020-2024
(In Thousands)
80
101
123
146
169
1,137
At June 30, 2014 and 2013, unrecognized net gain of $661,000 and $259,000, respectively, and unrecognized
past service cost of $108,000 and $154,000, respectively, were included in accumulated other comprehensive
income. For the fiscal year ending June 30, 2015, $18,000 of unrecognized gain and $46,000 of unrecognized
past service cost are expected to be recognized as a component of net periodic plan cost.
F-87
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Stock Compensation Plans
The Company has two stock-related compensation plans: stock options and restricted stock awards. The
plans authorized up to 3,564,137 shares as stock option grants and 1,425,655 shares as restricted stock
awards. At June 30, 2014, there were 392,897 shares remaining available for future stock option grants and
18,959 shares remaining available for future restricted stock awards under the plans.
Stock option grants generally vest over a five-year service period and have a contractual maturity of ten years.
The Company recognizes compensation expense for the fair values of these grants, which have graded
vesting, on a straight-line basis over the requisite service period of the grants.
The Company granted 185,000 options during the year ended June 30, 2014. No options were granted during
the years ended June 30, 2013 and 2012.
Management used the following assumptions to estimate the fair value of the options granted during the year
ended June 30, 2014:
Weighted average risk-free interest rate
Expected dividend yield
Weighted average volatility factors of the expected market
price of the Company’s stock
Weighted average expected life of the options
2.17%
2.00%
33.14%
6.5 years
The weighted average fair value of stock options granted during the year ended June 30, 2014 was $4.30 per
option.
Restricted stock awards generally vest in full after five years. The Company recognizes compensation
expense for the fair value of restricted shares on a straight-line basis over the requisite service period of five
years.
The Company awarded 54,500 shares of restricted stock during the year ended June 30, 2014. There were no
restricted stock awards granted during the years ended June 30, 2013 and 2012.
During the years ended June 30, 2014, 2013 and 2012, the Company recorded $289,000, $209,000 and
$209,000, respectively, of share-based compensation expense, comprised of stock option expense of $81,000,
$41,000 and $41,000, respectively, and restricted stock expense of $208,000, $168,000 and $168,000,
respectively.
During the years ended June 30, 2014, 2013 and 2012, the income tax benefit attributed to non-qualified stock
options expense was approximately $1,000, $-0- and $-0-, respectively, and attributed to restricted stock
expense was approximately $85,000, $68,000 and $68,000, respectively.
F-88
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Benefit Plans (continued)
Stock Compensation Plans (continued)
The following is a summary of the Company's stock option activity and related information for its option
plans for the year ended June 30, 2014:
Weighted
Average
Exercise
Price
Range of
Prices
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(In Thousands)
Options
(In Thousands)
Outstanding at June 30, 2013
Granted
Exercised
Forfeited
Outstanding at June 30, 2014
3,133
185
(118)
(165)
3,035
$ 12.26
14.79
12.71
12.71
$ 12.37
$10.16 - $12.71
14.79
12.71
12.71
$10.16 - $14.79
2.5 years
2.0 years
$ 9,034
Exercisable at June 30, 2014
2,824
$ 12.24
$10.16 - $12.71
1.5 years
$ 8,795
The Company generally utilizes treasury stock to issue shares upon the exercise of vested options. A total of
117,618 vested options with an aggregate intrinsic value of $256,000 were exercised during the fiscal year
ended June 30, 2014 with all such shares being issued from treasury stock carrying an average cost of $11.48
per share. There were no vested options exercised during the years ended June 30, 2013 and 2012. As of
June 30, 2014, the Company has 6,513,722 shares of treasury stock.
The cash proceeds from stock options exercises during the year ended June 30, 2014 totaled approximately
$1.5 million. A portion of such exercises represented disqualifying dispositions of incentive stock options for
which the Company recognized $98,000 in income tax benefit.
Expected future compensation expense relating to the 211,000 non-exercisable options outstanding as of June
30, 2014 is $829,000 over a weighted average period of 4.39 years.
The following is a summary of the status of the Company's non-vested restricted share awards as of June 30,
2014 and changes during the year ended June 30, 2014:
Non-vested at June 30, 2013
Awarded
Vested
Non-vested at June 30, 2014
Weighted
Average
Grant Date
Fair Value
Restricted
Shares
(In Thousands)
49
54
(16)
87
$ 10.16
$ 14.79
$ 10.16
$ 13.04
During the years ended June 30, 2014, 2013 and 2012, the total fair value of vested restricted shares were
$244,000, $166,000 and $160,000, respectively. Expected future compensation expense relating to the
87,500 non-vested restricted shares at June 30, 2014 is $1,059,000 over a weighted average period of 3.62
years.
F-89
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 – Stockholders’ Equity and Regulatory Capital
Federal banking regulators impose 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 federal banking regulators 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 federal banking regulators; (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
federal banking regulators or applicable regulations.
During the fiscal years ended June 30, 2014 and 2012, applications for capital distributions from the Bank to the
Company were approved by federal banking regulators in the amounts of $5,000,000 and $6,000,000,
respectively, which were paid by the Bank to the Company in September 2013 and May 2013, respectively. No
capital distributions from the Bank to the Company were initiated during the fiscal year ended June 30, 2013.
Federal banking regulators 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 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 off-balance-sheet items as calculated 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.
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 information
regarding the Bank’s regulatory capital levels at the dates presented.
F-90
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 – Stockholders’ Equity and Regulatory Capital (continued)
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
As of June 30, 2014:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Core (Tier 1) capital (to adjusted total
assets)
Tangible capital (to adjusted total assets)
As of June 30, 2013:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Core (Tier 1) capital (to adjusted total
assets)
Tangible capital (to adjusted total assets)
$ 376,343
363,956
363,956
363,956
$ 353,386
342,490
342,490
342,490
20.45 % $ 147,232
73,616
19.78
8.00 % $ 184,040
110,424
4.00
10.00 %
6.00
10.75
10.75
135,420
50,783
4.00
1.50
169,275
-
5.00
-
21.77 % $ 129,850
64,925
21.10
8.00 % $ 162,313
97,388
4.00
10.00 %
6.00
11.32
11.32
121,054
45,395
4.00
1.50
151,317
-
5.00
-
Based upon most recent notification from federal banking regulators dated November 12, 2013 the Bank was
categorized as well capitalized as of September 30, 2013, 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-91
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 – Income Taxes
Retained earnings at June 30, 2014, 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 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:
Current income tax expense:
Federal income
State income
Deferred income tax expense:
Federal
State
Valuation allowance
2014
Years Ended June 30,
2013
(In Thousands)
2012
$ 3,196
938
4,134
$ 1,629
343
1,972
$ 2,210
470
2,680
49
122
171
(88)
411
102
513
(235)
(24)
120
96
-
$ 4,217
$ 2,250
$ 2,776
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 for the
years ended June 30, 2014, 2013 and 2012:
Federal income tax expense at statutory rate
(Reductions) increases in income taxes resulting
from:
Tax exempt interest
New Jersey state tax, net of federal income
tax effect
Incentive stock options compensation
expense
Income from BOLI
Other items, net
Valuation allowance
Total income tax expense
Effective income tax rate
2014
Years Ended June 30,
2013
(Dollar in Thousands)
2012
$ 5,042
$ 3,065
$ 2,749
(635)
632
28
(959)
197
4,305
(88)
(142)
284
15
(680)
(66)
2,476
(226)
(21)
389
15
(250)
(106)
2,776
-
$ 4,217
$ 2,250
$ 2,776
29.27%
25.70%
35.35%
The effective income tax rate represents total income tax expense divided by income before income taxes.
F-92
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 – Income Taxes (continued)
As a result of a redemption-in-kind transaction during the year ended June 30, 2009, the Company incurred a
realized capital loss which was partially utilized as a capital loss carry back against capital gains in the three
preceding years. As of June 30, 2010, the Company established a deferred tax asset for the remaining capital loss
carry forward. Since it was not currently more likely than not that the deferred tax asset related to incurred capital
losses would be realized, the Company established a valuation allowance thereon during the year ended June 30,
2010. The Company utilized a portion of the federal capital loss carryover with a capital gain for the year ended
June 30, 2013 which decreased the related valuation allowance. As of June 30, 2014, the capital loss carryover
had expired resulting in the write-off of the associated deferred tax asset against the remaining valuation
allowance.
During the years ended June 30, 2014 and 2013, the Company maintained an additional valuation allowance
against the deferred tax asset arising from the portion of the unrealized losses on securities available for sale that
would represent capital losses if such losses were to be realized.
The tax effects of existing temporary differences that give rise to deferred income tax assets and liabilities are as
follows:
Deferred income tax assets:
Purchase accounting
Accumulated other comprehensive income
Defined benefit plans
Unrealized loss on securities available for sale
Unrealized loss on securities available for sale transferred
to held to maturity
Derivatives
Allowance for loan losses
Benefit plans
Compensation
Stock based compensation
Capital loss carryover
Uncollected interest
Depreciation
Other
Valuation allowance
Deferred income tax liabilities:
Deferred costs
Goodwill
Accumulated other comprehensive income
Unrealized gain on securities available for sale
Derivatives
Other
Net deferred income tax asset
F-93
June 30,
2014
2013
(In Thousands)
$ 615
$ 920
84
-
404
1,430
5,060
2,816
239
3,255
-
2,431
928
809
18,071
(134)
17,937
815
6,198
430
2,928
-
-
4,451
2,709
-
3,320
88
2,290
747
705
18,588
(995)
17,593
617
5,716
458
-
152
7,623
$ 10,314
-
1,269
209
7,811
$ 9,782
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 – Commitments
The Bank has non-cancelable operating leases for branch offices. The following is a schedule by years of future
minimum rental payments required under operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of June 30, 2014:
Years Ending June 30:
2015
2016
2017
2018
2019
Thereafter
(In Thousands)
$ 1,761
1,629
1,455
1,126
806
3,261
Total Minimum Payments Required
$ 10,038
The following schedule shows the composition of total rental expense for all operating leases:
2014
June 30,
2013
(In Thousands)
2012
Minimum rentals
$ 1,716
$ 1,629
$ 1,520
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:
June 30,
2014
2013
(In Thousands)
$ 27,452
1,374
350
6,385
35,765
24,070
$ 58,448
1,692
500
11,100
37,972
31,434
$ 95,396
$ 141,146
Mortgage loans
Home equity loans
Business loans
Construction loans in process
Consumer home equity and overdraft lines of credit
Commercial lines of credit
F-94
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 – Commitments (continued)
At June 30, 2014, the outstanding mortgage loan commitments included $20.0 million for fixed-rate loans with
interest rates ranging from 3.00% to 6.00% and $935,000 for adjustable-rate loans with initial rates of 6.00%.
The remaining $6.5 million of mortgage loan commitments represent the remaining balance of an outstanding
blanket commitment with a third party loan originator to purchase newly originated residential mortgage loans
whose rates may either be fixed or adjustable-rate. Home equity loan commitments include $1.4 million for
fixed-rate loans with interest rates ranging from 3.125% to 6.00%. Business loan commitments total $350,000
representing funding commitments on floating rate loans with initial rates ranging from 3.75% to 5.50%.
Undisbursed funds from home equity and business lines of credit are adjustable-rate loans with interest rates
ranging from 1.25% below to 5.00% above the prime rate published in the Wall Street Journal. Lines of credit
providing overdraft protection for checking accounts are adjustable-rate loans with interest rates ranging from
3.50% to 4.00% above prime.
At June 30, 2013, the outstanding mortgage loan commitments included $57.2 million for fixed-rate loans with
interest rates ranging from 2.75% to 5.50% and $1.0 million for adjustable-rate loans with initial rates ranging
from 4.25% to 6.0%. The remaining $185,000 of mortgage loan commitments represent the remaining balance of
an outstanding blanket commitment with a third party loan originator to purchase newly originated residential
mortgage loans whose rates may either be fixed or adjustable-rate. Home equity loan commitments include $1.7
million for fixed rate loans with interest rates ranging from 3.25% to 6.00%. Business loan commitments total
$500,000 representing funding commitments on floating rate loans with initial rates ranging from 4.25% to
6.00%. Undisbursed funds from home equity and business lines of credit are adjustable-rate loans with interest
rates ranging from 1.25% below to 3.00% above the prime rate published in the Wall Street Journal. Lines of
credit providing overdraft protection for checking accounts are adjustable-rate loans with interest rates ranging
from 3.5% to 5.00% above prime.
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.
In addition to the commitments noted above, the Bank is party to standby letters of credit through which it
guarantees certain specific business obligations of its commercial customers. The balance of standby letters of
credit at June 30, 2014 and 2013 were approximately $519,000 and $1,791,000, respectively.
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-95
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments
The guidance on fair value measurement establishes a hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:
Level 1:
Quoted prices in active markets for identical assets or liabilities.
Level 2:
Level 3:
Observable inputs other than Level 1 prices, such as quoted for similar assets or
liabilities; quoted prices in markets that are not active; or inputs that are observable
or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments
for which the determination of fair value requires significant management judgment
or estimation.
In addition, the guidance requires the Company to disclose the fair value for assets and liabilities on both a
recurring and non-recurring basis.
F-96
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
Those assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Balance
$ -
$ 4,205
$ -
$ 4,205
At June 30, 2014:
Debt securities
available for sale:
U.S. agency securities
Obligations of state
and political subdivisions
Asset-backed
securities
Collateralized loan
obligations
Corporate
bonds
Trust preferred
securities
-
-
-
-
-
26,773
87,316
119,572
162,234
7,798
Total debt securities
-
407,898
Mortgage-backed securities
available for sale:
Collateralized mortgage
obligations
Residential pass-through
securities
Total mortgage-
backed securities
Total securities
available for sale
Derivative instruments:
-
-
-
-
$
Interest rate swaps
$ -
Interest rate caps
-
Total derivatives
$ -
$
$
$
83,270
353,953
437,223
845,121
$
(2,714)
$ -
1,739
-
(975)
$ -
-
-
-
-
-
-
-
-
-
-
26,773
87,316
119,572
162,234
7,798
407,898
83,270
353,953
437,223
845,121
(2,714)
1,739
(975)
$
$
$
F-97
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Balance
At June 30, 2013:
Debt securities
available for sale:
U.S. agency securities
Obligations of state
and political subdivisions
Asset-backed
securities
Collateralized loan
obligations
Corporate
bonds
Trust preferred
securities
$ -
$ 5,015
$ -
$ 5,015
-
-
-
-
-
25,307
24,798
78,486
159,192
6,324
-
-
-
-
1,000
25,307
24,798
78,486
159,192
7,324
Total debt securities
-
299,122
1,000
300,122
Mortgage-backed securities
available for sale:
Collateralized mortgage
obligations
Residential pass-through
securities
Commercial pass-through
securities
Total mortgage-
backed securities
Total securities
available for sale
Derivative instruments:
$
-
-
-
-
-
62,482
628,154
90,016
780,652
-
-
-
-
62,482
628,154
90,016
780,652
$
1,079,774
$
1,000
$
1,080,774
Interest rate swaps
$ -
$ 2,837
$ -
$ 2,837
Interest rate caps
-
2,808
-
2,808
Total derivatives
$ -
$ 5,645
$ -
$ 5,645
The fair values of securities available for sale (carried at fair value) or held to maturity (carried at amortized cost)
are primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather
by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
F-98
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
At June 30, 2014, the Company held a trust preferred security with a par value of $1.0 million, a de-facto
obligation of Mercantil Commercebank Florida Bancorp, Inc. which is a part of a $40.0 million private placement
with a coupon of 8.90% issued in 1998 and maturing in 2028. The security’s value at June 30, 2014 was
determined using the matrix pricing (Level 2 inputs) noted above. However, the security’s fair value had
previously been determined by using Level 3 inputs because management had been unable to obtain a market
quote due to a lack of trading activity for this security. Consequently, the security’s fair value as reported at June
30, 2013 was based upon the present value of its expected future cash flows assuming the security continued to
meet all its payment obligations and utilizing a discount rate based upon the security’s contractual interest rate.
The Company has contracted with a third party vendor to provide periodic valuations for its interest rate
derivatives to determine the fair value of its interest rate caps and swaps. The vendor utilizes standard valuation
methodologies applicable to interest rate derivatives such as discounted cash flow analysis and extensions of the
Black-Scholes model. Such valuations are based upon readily observable market data and are therefore
considered Level 2 valuations by the Company.
For the year ended June 30, 2014, there were no purchases, sales, issuances, or settlements of assets or liabilities
whose fair values are determined based upon Level 3 inputs on a recurring basis. For that same period, there were
no transfers of assets or liabilities within the fair valuation measurement hierarchy between Level 1 and Level 2
inputs.
F-99
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
Those assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
$
-
$
-
-
$
$
-
$
10,387
-
-
$
14,603
229
Balance
$
$
10,387
14,603
229
At June 30, 2014
Impaired loans
At June 30, 2013
Impaired loans
Real estate owned
The following table presents additional quantitative information about assets measured at fair value on a non-
recurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
Valuation
Techniques
Unobservable
Input
Range
Weighted
Average
Fair
Value
Estimate
(In
Thousands)
At June 30, 2014
Impaired loans
At June 30, 2013
Impaired loans
$ 10,387
Market valuation of
underlying collateral (1)
Direct disposal
costs (3)
6% - 10%
7.10%
$ 14,603
Market valuation of
underlying collateral (1)
Direct disposal
costs (3)
6% - 10%
7.21%
Real estate owned
$ 229
Market valuation property (2)
Direct disposal
costs (3)
6% - 10%
8.51%
(1) The fair value basis of impaired loans is generally determined based on an independent appraisal of the market value
of a loan’s underlying collateral.
(2) The fair value basis of real estate owned is generally determined based upon the lower of an independent appraisal of
the property’s market value or the applicable listing price or contracted sales price.
(3) The fair value basis of impaired loans and real estate owned is adjusted to reflect management estimates of disposal
costs including, but not necessarily limited to, real estate brokerage commissions and title transfer fees, with such
cost estimates generally ranging from 6% to 10% of collateral or property market value.
An impaired loan is evaluated and valued at the time the loan is identified as impaired at the lower of cost or
market value. Loans for which it is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are considered impaired. Market value is measured
based on the value of the collateral securing the loan and is classified at a Level 3 in the fair value hierarchy.
Once a loan is identified as individually impaired, management measures impairment in accordance with the
FASB’s guidance on accounting by creditors for impairment of a loan with the fair value estimated using the
market value of the collateral reduced by estimated disposal costs. Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded
investments in such loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional
impairment and adjusted accordingly.
F-100
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
At June 30, 2014, impaired loans valued using Level 3 inputs comprised loans with principal balances totaling
$12.1 million and valuation allowances of $1.7 million reflecting fair values of $10.4 million. By comparison, at
June 30, 2013, impaired loans valued using Level 3 inputs comprised loans with principal balances totaling $16.7
million and valuation allowances of $2.1 million reflecting fair values of $14.6 million.
Once a loan is foreclosed, the fair value of the real estate owned continues to be evaluated based upon the market
value of the repossessed real estate originally securing the loan. At June 30, 2014, the Company held no real
estate owned whose carrying value was written down utilizing Level 3 inputs during fiscal 2014. By comparison,
at June 30, 2013, real estate owned whose carrying value was written down utilizing Level 3 inputs during the
year ended June 30, 2013 comprised one property with a fair value totaling $229,000.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments
at June 30, 2014 and June 30, 2013:
Cash and Cash Equivalents, Interest Receivable and Interest Payable. The carrying amounts for cash and
cash equivalents, interest receivable and interest payable approximate fair value because they mature in three
months or less.
Securities. See the discussion presented above concerning assets measured at fair value on a recurring basis.
Loans Receivable. Except for certain impaired loans as previously discussed, 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.
FHLB of New York Stock. The carrying amount of restricted investment in bank stock approximates fair
value, and considers the limited marketability of such securities.
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.
Interest Rate Derivatives. See the discussion presented above concerning assets measured at fair value on a
recurring basis.
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 loan
commitments, fair value also considers the difference between current levels of interest and the committed
rates. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and
the fair value, determined by discounting the remaining contractual fee over the term of the commitment
using fees currently charged to enter into similar agreements with similar credit risk, is not considered
material for disclosure. The contractual amounts of unfunded commitments are presented in Note 19.
F-101
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of financial instruments are as follows:
Carrying Amount and Fair Value Measurements at
June 30, 2014
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
(In Thousands)
Significant
Other
Observable
Inputs
(Level 2)
Fair
Value
Carrying
Amount
Financial assets:
Cash and cash equivalents
Debt securities
available for sale
Debt securities
held to maturity
Loans receivable
Mortgage-backed
securities available for sale
Mortgage-backed
securities held to maturity
FHLB stock
Interest receivable
Financial liabilities:
Deposits (A)
Borrowings
Interest payable on
borrowings
Derivative instruments:
Interest rate swaps
Interest rate caps
$
135,034 $
135,034 $
135,034 $
- $
407,898
407,898
216,414
1,729,084
213,472
1,711,972
437,223
437,223
295,658
25,990
9,013
293,781
25,990
9,013
-
-
-
-
-
-
9,013
2,479,941
512,257
2,490,933
521,839
1,442,723
-
1,001
1,001
1,001
407,898
213,472
-
437,223
293,781
-
-
-
-
-
(2,714)
1,739
(2,714)
1,739
-
-
(2,714)
1,739
(A) Includes accrued interest payable on deposits of $69,000 at June 30, 2014.
F-102
Significant
Unobservable
Inputs
(Level 3)
-
-
-
1,711,972
-
-
25,990
-
1,048,210
521,839
-
-
-
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
Carrying Amount and Fair Value Measurements at
June 30, 2013
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
(In Thousands)
Significant
Other
Observable
Inputs
(Level 2)
Fair
Value
Carrying
Amount
Financial assets:
Cash and cash equivalents
Debt securities
available for sale
Debt securities
held to maturity
Loans receivable
Mortgage-backed
securities available for sale
Mortgage-backed
securities held to maturity
FHLB stock
Interest receivable
Financial liabilities:
Deposits (A)
Borrowings
Interest payable on
borrowings
Derivative instruments:
Interest rate swaps
Interest rate caps
$
127,034 $
127,034 $
127,034 $
- $
300,122
300,122
210,015
1,349,975
202,328
1,359,799
780,652
780,652
101,114
15,666
8,028
96,447
15,666
8,028
-
-
-
-
-
-
8,028
2,370,508
287,695
2,376,290
295,914
1,389,044
-
938
938
2,837
2,808
2,837
2,808
938
-
-
299,122
202,328
-
780,652
96,447
-
-
-
-
-
2,837
2,808
(A) Includes accrued interest payable on deposits of $47,000 at June 30, 2013.
Significant
Unobservable
Inputs
(Level 3)
-
1,000
-
1,359,799
-
-
15,666
-
987,246
295,914
-
-
-
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 instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments 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.
The fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting
to value 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.
F-103
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 – Fair Value of Financial Instruments (continued)
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.
Note 21 – Comprehensive Income
The components of accumulated other comprehensive income (loss) included in stockholders’ equity are as
follows:
Net unrealized loss on securities available for sale
Tax effect
Net of tax amount
Net unrealized loss on securities available for sale transferred
to held to maturity
Tax effect
Net of tax amount
Fair value adjustments on derivatives
Tax effect
Net of tax amount
Benefit plan adjustments
Tax effect
Net of tax amount
June 30,
2014
2013
(In Thousands)
$ 1,091
(592)
$ (7,375)
2,021
499
(5,354)
(990)
404
(586)
(3,501)
1,430
(2,071)
(206)
84
(122)
-
-
-
3,107
(1,269)
1,838
(1,053)
430
(623)
Accumulated other comprehensive loss
$ (2,280)
$ (4,139)
F-104
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 – Comprehensive Income (continued)
Other comprehensive income (loss) and related tax effects are presented in the following table:
Realized gain on sale of securities
available for sale (1)
Unrealized holding gain (loss) on securities
available for sale arising during the period
Unrealized holding loss on securities
available for sale transferred to held to maturity
Amortization of unrealized holding loss on securities
available for sale transferred to held to maturity (2)
2014
Years Ended June 30,
2013
(In Thousands)
2012
$ (1,523)
$ (10,433)
$ (53)
9,989
(36,662)
13,405
(1,009)
19
-
-
Fair value adjustments on derivatives
(6,608)
3,107
Benefit plans:
Amortization of:
Actuarial (gain) loss (3)
Past service cost (3)
New actuarial gain (loss)
Net change in benefit plans accrued expense
Other comprehensive income (loss) before taxes
Tax effect
(2)
46
803
847
1,715
144
54
48
(1,186)
(1,084)
(45,072)
17,337
-
-
-
(25)
64
284
323
13,675
(5,511)
Other comprehensive income (loss)
$ 1,859
$ (27,735)
$ 8,164
(1) Represents amount reclassified out of accumulated other comprehensive income and included in gain on sale of securities on the consolidated
statements of income.
(2) Represents amounts reclassified out of accumulated other comprehensive income and included in interest income on taxable securities.
(3) Represents amounts reclassified out of accumulated other comprehensive income and included in the computation of net periodic pension
expense. See Note 16 – Benefit Plans for additional information.
F-105
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 – Parent Only Financial Information
Kearny Financial Corp. operates its wholly owned subsidiary Kearny Federal Savings Bank and the Bank’s
wholly-owned subsidiaries. The consolidated earnings of the subsidiaries are recognized by the Company using
the equity method of accounting. Accordingly, the consolidated earnings of the subsidiaries are recorded as
increases in the Company’s investment in the subsidiaries. The following are the condensed financial statements
for Kearny Financial Corp. (Parent Company only) as June 30, 2014 and 2013, and for each of the years in the
three-year period ended June 30, 2014.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and amounts due from depository institutions
Loans receivable
Investment in subsidiaries
Other assets
Liabilities and Stockholders’ Equity
Other liabilities
Stockholders’ equity
June 30,
2014
2013
(In Thousands)
$ 17,413
5,065
472,110
154
$ 13,524
6,726
447,498
62
$ 494,742
$ 467,810
$ 66
494,676
$ 103
467,707
$ 494,742
$ 467,810
F-106
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 – Parent Only Financial Information (continued)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Dividends from subsidiary
Interest income
Equity in undistributed earnings (loss) of subsidiaries
Gain on sale of securities
Directors’ compensation
Other expenses
Income before Income Taxes
Income tax benefit
Net income
2014
Years Ended June 30,
2013
(In Thousands)
2012
$ 5,000
341
5,398
-
10,739
$ -
450
6,550
38
$ 6,000
566
(864)
-
7,038
5,702
123
539
662
10,077
(111)
117
436
553
6,485
(21)
124
526
650
5,052
(26)
$ 10,188
$ 6,506
$ 5,078
Comprehensive income (loss)
$ 12,047
$ (21,229)
$ 13,242
CONDENSED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (earnings) loss of
subsidiaries
Amortization of premiums
Realized gain on sale of mortgage-backed
securities available for sale
Decrease in interest receivable
Payments received on intercompany
liabilities
(Increase) decrease in other assets
(Decrease) increase in other liabilities
Net Cash Provided by Operating Activities
2014
Years Ended June 30,
2013
(In Thousands)
2012
$ 10,188
$ 6,506
$ 5,078
(5,398)
-
-
-
231
(116)
(37)
$ 4,868
(6,550)
8
(38)
5
174
52
22
864
14
-
2
12,469
41
1
$ 179
$ 18,469
F-107
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 – Parent Only Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS
2014
Years Ended June 30,
2013
(In Thousands)
2012
$ 1,661
$ 1,573
$ 1,489
697
-
9
2,195
(3,617)
(8,464)
-
160
(1)
(11,922)
8,742
6,260
Cash Flows from Investing Activities
Repayment of loan to ESOP
Principal repayments on mortgage-backed
securities available for sale
Proceeds from sale of mortgage-backed
securities available for sale
Return of subsidiary investment
Net Cash Provided by Investing Activities
Cash Flows from Financing Activities
Dividends paid to minority stockholders of
Kearny Financial Corp.
Purchase of common stock of Kearny
Financial Corp. for treasury
Treasury stock reissued
Dividends contributed for payment of ESOP
loan
Dividends paid on vested ESOP distribution
Net Cash Used in Financing Activities
-
-
-
1,661
-
(4,135)
1,495
-
-
(2,640)
424
667
-
2,664
-
(4,319)
-
(2)
-
(4,321)
Net Increase (Decrease) in
Cash and Cash Equivalents
3,889
(1,478)
Cash and Cash Equivalents - Beginning
13,524
15,002
Cash and Cash Equivalents - Ending
$ 17,413
$ 13,524
$ 15,002
F-108
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 23 – Net Income per Common Share (EPS)
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share
computations:
Income
(Numerator)
Year Ended June 30, 2014
Shares
(Denominator)
Per Share
Amount
(In Thousands, Except Per Share Data)
Net income
Basic earnings per share, income available to common
$ 10,188
stockholders
Effect of dilutive securities:
Stock options
Diluted earnings per share
$ 10,188
65,796
$ 0.16
-
40
$ 10,188
65,836
$ 0.16
Income
(Numerator)
Year Ended June 30, 2013
Shares
(Denominator)
Per Share
Amount
(In Thousands, Except Per Share Data)
Net income
Basic earnings per share, income available to common
$ 6,506
stockholders
Effect of dilutive securities:
Stock options
Diluted earnings per share
$ 6,506
66,152
$ 0.10
-
-
$ 6,506
66,152
$ 0.10
Income
(Numerator)
Year Ended June 30, 2012
Shares
(Denominator)
Per Share
Amount
(In Thousands, Except Per Share Data)
Net income
Basic earnings per share, income available to common
$ 5,078
stockholders
Effect of dilutive securities:
Stock options
Diluted earnings per share
$ 5,078
66,495
$ 0.08
-
-
$ 5,078
66,495
$ 0.08
During the years ended June 30, 2014, 2013 and 2012, the average number of options which were anti-dilutive
totaled approximately 1,910,000, 3,193,000 and 3,221,000, respectively.
F-109
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 24 – Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for the years ended June 30, 2014 and
2013:
Interest income
Interest expense
Net Interest Income
Provision for loan losses
Net Interest Income after Provision
for Loan Losses
Non-interest income
Non-interest expenses
Income before Income Taxes
Income taxes
First
Quarter
Year Ended June 30, 2014
Second
Quarter
Third
Quarter
(In Thousands, Except Per Share Data)
Fourth
Quarter
$ 23,300
5,104
$ 23,933
5,458
$ 23,956
5,475
$ 24,630
5,961
18,196
1,168
17,028
1,861
15,282
3,607
1,021
18,475
559
17,916
1,929
15,557
4,288
1,301
18,481
18,669
880
774
17,601
2,385
17,515
2,471
685
17,895
1,948
15,804
4,039
1,210
Net Income
$ 2,586
$ 2,987
$ 1,786
$ 2,829
Net income per common share:
Basic
Diluted
Weighted Average Number of Common
Shares Outstanding:
Basic
Diluted
$ 0.04
$ 0.05
$ 0.03
$ 0.04
$ 0.04
$ 0.05
$ 0.03
$ 0.04
65,936
65,936
65,767
65,767
65,684
65,782
65,796
66,228
Dividends declared per common share
$ 0.00
$ 0.00
$ 0.00
$ 0.00
F-110
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 24 – Quarterly Results of Operations (Unaudited) (continued)
Interest income
Interest expense
Net Interest Income
Provision for loan losses
Net Interest Income after Provision for
Loan Losses
Non-interest income
Non-interest expenses
Income before Income Taxes
Income taxes
First
Quarter
Year Ended June 30, 2013
Second
Quarter
Third
Quarter
(In Thousands, Except Per Share Data)
Fourth
Quarter
$ 23,206
6,331
$ 21,802
5,808
$ 21,644
5,298
$ 21,606
4,564
16,875
339
16,536
1,200
15,273
2,463
803
15,994
1,393
14,601
2,285
15,191
1,695
518
16,346
1,407
14,939
11,070
23,942
2,067
323
17,042
1,325
15,717
1,833
15,019
2,531
606
Net Income
$ 1,660
$ 1,177
$ 1,744
$ 1,925
Net income per common share:
Basic and diluted
Weighted Average Number of Common
Shares Outstanding:
Basic and diluted
$ 0.03
$ 0.02
$ 0.03
$ 0.03
66,256
66,188
66,141
66,019
Dividends declared per common share
$ 0.00
$ 0.00
$ 0.00
$ 0.00
F-111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 5, 2014
KEARNY FINANCIAL CORP.
/s/ Craig L. Montanaro
By: Craig L. Montanaro
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on September 5, 2014 on behalf of the Registrant and in the
capacities indicated.
/s/ Craig L. Montanaro
Craig L. Montanaro
President, Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ Eric B. Heyer
Eric B. Heyer
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
/s/ Theodore J. Aanensen
Theodore J. Aanensen
Director
/s/ John J. Mazur, Jr.
John J. Mazur, Jr.
Director
/s/ Matthew T. McClane
Matthew T. McClane
Director
/s/ Leopold W. Montanaro
Leopold W. Montanaro
Director
/s/ John N. Hopkins
John N. Hopkins
Director
/s/ Joseph P. Mazza
Joseph P. Mazza
Director
/s/ John F. McGovern
John F. McGovern
Director
/s/ John F. Regan
John F. Regan
Director
6081 Annual Report inside pages 2014 V7:4570 Annual Report mech. 9/16/14 3:34 PM Page 2
Board of Directors
Craig L. Montanaro
President/CEO
John J. Mazur, Jr.
Chairman
Theodore J. Aanensen
Director
John N. Hopkins
Director
Dr. Joseph P. Mazza
Director
Matthew T. McClane
Director
John F. McGovern
Director
Leopold W. Montanaro
Director
John F. Regan
Director
Corporate Officers
Craig L. Montanaro
President/CEO
William C. Ledgerwood
Sr. Executive Vice
President/COO
Eric B. Heyer
Executive Vice President/CFO
Patrick M. Joyce
Executive Vice President/CLO
Sharon Jones
Executive Vice President/
Corporate Secretary
Erika K. Parisi
Executive Vice President/
Branch Administrator
Khanh Vuong
Executive Vice President/
Chief Risk & Investment Officer
Kearny Federal Savings Bank Officers
Craig L. Montanaro
President/CEO
William C. Ledgerwood
Sr. Executive Vice President/COO
Eric B. Heyer
Executive Vice President/CFO
Sharon Jones
Executive Vice President/
Corporate Secretary
Patrick M. Joyce
Executive Vice President/CLO
Erika K. Parisi
Executive Vice President/Branch
Administrator
Khanh Vuong
Executive Vice President/Chief Risk
& Investment Officer
William S. Clement
Sr.Vice President/
Director of C&I Lending
Thomas DeMedici
Sr.Vice President/Chief
Credit Officer
Linda Hanlon
Sr.Vice President/Director of
Retail Banking
Cheryl L. Lyons
Sr.Vice President/Assistant
Secretary/Loan Operations
Kimberly T. Manfredo
Sr.Vice President/Director
of HR/Assistant Secretary
Keith Suchodolski
Sr.Vice President/Controller
Timothy Swansson
Sr.Vice President/Director of IT
Robert S. Vuono
Sr.Vice President/
CJB Division President
Mary E. Webb
Sr.Vice President/Operations
Peter A. Cappello Jr.
1st Vice President/Director
of Insurance Services
Grace Cruz-Beyer
1st Vice President/Director of
Financial Reporting
Carmine DiSomma
1st Vice President/Director of
Internal Auditing
Nancy Malinconico
1st Vice President/Chief
Compliance & CRA Officer
Thomas McGurk
1st Vice President/Treasurer
Andrew Antanaitis
2nd Vice President/Special
Assets Manager
Eric Kesselman
2nd Vice President/
Director of Marketing
Johanna Maggiore
2nd Vice President/Loan
Originations
Vincent Micco
2nd Vice President/
Director of Sales
Maryann Haberthur
Vice President/Operational
Training Officer
Jay A. Ruisi
Vice President/Consumer
Loan Manager
Danuta Sieminski
Vice President/NY Retail Market
Marlene Sirianni
Vice President/IRA Specialist
Shareholder Information
Annual Meeting
The annual meeting is scheduled for Thursday, October 30, 2014 at
10:00 a.m., at the Crowne Plaza located at 690 Route 46 East,
Fairfield, NJ 07004-3510.
Stock Listing
The common stock is traded over-the-counter on the NASDAQ Global
Select Market under the ticker symbol KRNY. Stock quotations can
be found in the Wall Street Journal and local daily newspapers. As of
September 5, 2014, the closing price of the common stock was
$15.16 bid and $15.19 ask.
Inquiries
Eric B. Heyer, Executive Vice President/CFO
120 Passaic Avenue, Fairfield, NJ 07004-3510
(973) 244-4024
eheyer@kearnyfederalsavings.net
Auditor
BDO USA, LLP
100 Park Avenue
New York, NY 10017
Legal Counsel
Luse Gorman Pomerenk & Schick, P.C.
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive, Cranford NJ 07016-3572
1-800-368-5948
Number of Shares Outstanding
As of September 5, 2014 Kearny Financial Corp.
had 67,375,247 shares of common stock
outstanding, owned by 3,283 registered
holders plus approximately 2,026 beneficial
(street name) owners.