SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

 

FORM 10-Q

 

(Mark One)

 

 

 

X

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended

September 30, 2007

 

 

 

OR

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

 

 

For the transition period from

 

to

 

 

 

 

 

 

 

Commission File Number 000-51093

 

 

 

 

 

 

KEARNY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

UNITED STATES

 

22-3803741

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

120 Passaic Ave., Fairfield, New Jersey

 

07004-3510

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code

973-244-4500

 

 

 

 

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer

Accelerated filer X

Non-accelerated filer

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 1, 2007.

 

 

 

$0.10 par value common stock - 71,113,937 shares outstanding

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

 

INDEX

 

 

 

 

Page

 

 

Number

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

at September 30, 2007 and June 30, 2007 (Unaudited)

 

1

 

 

 

 

Consolidated Statements of Income for the Three Months

 

 

 

Ended September 30, 2007 and 2006 (Unaudited)

 

2-3

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three

 

 

 

Months Ended September 30, 2007 and 2006 (Unaudited)

 

4-5

 

 

 

 

Consolidated Statements of Cash Flows for the Three

 

 

 

Months Ended September 30, 2007 and 2006 (Unaudited)

 

6-7

 

 

 

 

Notes to Consolidated Financial Statements

 

8-12

 

 

 

Item 2:

Management’s Discussion and Analysis of

 

 

 

Financial Condition and Results of Operations

 

13-21

 

 

 

Item 3:

Quantitative and Qualitative Disclosure About Market Risk

 

22-23

 

 

 

Item 4:

Controls and Procedures

 

24

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

25-27

 

 

 

 

 

 

SIGNATURES

 

28

 

 

 

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Share Data, Unaudited)

 

 

 

 

September 30,

 

June 30,

 

 

 

2007

 

2007

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and amounts due from depository institutions

 

$

20,853

 

$

18,999

 

Interest-bearing deposits in other banks

 

 

111,709

 

 

144,342

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

132,562

 

 

163,341

 

 

 

 

 

 

 

 

 

Securities available for sale (amortized cost $47,201 and $90,580)

 

 

45,940

 

 

88,869

 

Loans receivable, including net deferred loan costs of $1,061 and $1,511

 

 

936,385

 

 

866,542

 

Less allowance for loan losses

 

 

(6,143

)

 

(6,049

)

 

 

 

 

 

 

 

 

Net Loans Receivable

 

 

930,242

 

 

860,493

 

 

 

 

 

 

 

 

 

Mortgage-backed securities available for sale (amortized cost $683,922 and $655,123)

 

 

679,837

 

 

643,779

 

Premises and equipment

 

 

34,959

 

 

35,369

 

Federal Home Loan Bank of New York (“FHLB”) stock

 

 

8,655

 

 

4,162

 

Interest receivable

 

 

8,368

 

 

8,028

 

Goodwill

 

 

82,263

 

 

82,263

 

Bank owned life insurance

 

 

15,289

 

 

15,154

 

Other assets

 

 

12,356

 

 

15,795

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,950,471

 

$

1,917,253

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

54,916

 

$

56,339

 

Interest-bearing

 

 

1,283,349

 

 

1,355,374

 

 

 

 

 

 

 

 

 

Total Deposits

 

 

1,338,265

 

 

1,411,713

 

 

 

 

 

 

 

 

 

Advances from FHLB

 

 

128,328

 

 

28,488

 

Advance payments by borrowers for taxes

 

 

5,156

 

 

5,460

 

Other liabilities

 

 

9,544

 

 

9,000

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

1,481,293

 

 

1,454,661

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock $0.10 par value, 25,000,000 shares authorized; none issued
and outstanding

 

 

 

 

 

Common stock $0.10 par value, 75,000,000 shares authorized; 72,737,500 shares
issued; 71,113,937 and 71,143,337 shares outstanding, respectively

 

 

7,274

 

 

7,274

 

Paid-in capital

 

 

199,335

 

 

197,976

 

Retained earnings

 

 

305,066

 

 

304,970

 

Unearned Employee Stock Ownership Plan shares; 1,369,889 shares
and 1,406,258 shares, respectively

 

 

(13,699

)

 

(14,063

)

Treasury stock, at cost; 1,623,563 shares and 1,594,163 shares, respectively

 

 

(24,754

)

 

(24,361

)

Accumulated other comprehensive loss

 

 

(4,044

)

 

(9,204

)

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

 

469,178

 

 

462,592

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

1,950,471

 

$

1,917,253

 

 

See notes to consolidated financial statements.

 

 

1

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data, Unaudited)

 

 

 

 

Three Months Ended
September 30,

 

 

 

 

2007

 

 

2006

 

 

 

 

 

 

 

 

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

13,171

 

$

10,311

 

Mortgage-backed securities

 

 

8,203

 

 

8,021

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

352

 

 

400

 

Tax-exempt

 

 

549

 

 

1,885

 

Other interest-earning assets

 

 

1,138

 

 

2,667

 

 

 

 

 

 

 

 

 

Total Interest Income

 

 

23,413

 

 

23,284

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

Deposits

 

 

11,250

 

 

10,745

 

Borrowings

 

 

791

 

 

851

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

 

12,041

 

 

11,596

 

 

 

 

 

 

 

 

 

Net Interest Income

 

 

11,372

 

 

11,688

 

 

 

 

 

 

 

 

 

Provision for Loan Losses

 

 

94

 

 

158

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

 

11,278

 

 

11,530

 

 

 

 

 

 

 

 

 

Non-Interest Income:

 

 

 

 

 

 

 

Fees and service charges

 

 

335

 

 

228

 

Gain on sale of securities available for sale

 

 

7

 

 

 

Miscellaneous

 

 

370

 

 

340

 

 

 

 

 

 

 

 

 

Total Non-Interest Income

 

 

712

 

 

568

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,323

 

 

6,807

 

Net occupancy expense of premises

 

 

890

 

 

858

 

Equipment

 

 

1,036

 

 

1,076

 

Advertising

 

 

251

 

 

393

 

Federal insurance premium

 

 

141

 

 

142

 

Amortization of intangible assets

 

 

159

 

 

159

 

Directors’ compensation

 

 

560

 

 

657

 

Miscellaneous

 

 

1,001

 

 

1,004

 

 

 

 

 

 

 

 

 

Total Non-Interest Expenses

 

 

10,361

 

 

11,096

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

 

1,629

 

 

1,002

 

Income Taxes

 

 

599

 

 

76

 

 

 

 

 

 

 

 

 

Net Income

 

$

1,030

 

$

926

 

 

 

2

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(In Thousands, Except Per Share Data, Unaudited)

 

 

Three Months Ended
September 30,

 

2007

 

2006

Net Income per Common

 

 

 

 

 

Share (EPS):

 

 

 

 

 

Basic

$

0.01

 

$

0.01

Diluted

 

0.01

 

 

0.01

 

 

 

 

 

 

Weighted Average Number of

 

 

 

 

 

Common Shares Outstanding:

 

 

 

 

 

Basic

 

68,718

 

 

69,751

Diluted

 

68,933

 

 

70,097

 

 

 

 

 

 

Dividends Declared Per Common

 

 

 

 

 

Share

$

0.05

 

$

0.05

 

See notes to consolidated financial statements.

 

 

3

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2006

(In Thousands, Except Per Share Data, Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Paid-In
Capital

 

 

 

Retained
Earnings

 

 

 

Unearned
ESOP
Shares

 

 

 

Treasury
Stock

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2006

 

72,738

 

 

 

$

7,274

 

 

 

$

192,534

 

 

 

$

306,728

 

 

 

$

(15,517

)

 

 

$

 

 

 

$

(15,885

)

 

 

$

475,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

926

 

Unrealized gain on securities available for sale, net of deferred income tax of $5,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,345

 

 

 

 

10,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP shares committed to be released (36 shares)

 

 

 

 

 

 

 

 

 

172

 

 

 

 

 

 

 

 

363

 

 

 

 

 

 

 

 

 

 

 

 

535

 

Stock option expense

 

 

 

 

 

 

 

 

 

498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

498

 

Treasury stock purchases

 

(283

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,251

)

 

 

 

 

 

 

 

(4,251

)

Restricted stock plan shares purchased (54 shares)

 

 

 

 

 

 

 

 

 

(789

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(789

)

Restricted stock plan shares earned (67 shares)

 

 

 

 

 

 

 

 

 

826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

826

 

Cash dividends declared ($0.05/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(920

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(920

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – September 30, 2006 (Restated)

 

72,455

 

 

 

$

7,274

 

 

 

$

193,241

 

 

 

$

306,734

 

 

 

$

(15,154

)

 

 

$

(4,251

)

 

 

$

(5,540

)

 

 

$

482,304

 

 

See notes to consolidated financial statements.

 

 

4

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2007

(In Thousands, Except Per Share Data, Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Paid-In
Capital

 

 

 

Retained
Earnings

 

 

 

Unearned
ESOP
Shares

 

 

 

Treasury
Stock

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2007

 

71,143

 

 

 

$

7,274

 

 

 

$

197,976

 

 

 

$

304,970

 

 

 

$

(14,063

)

 

 

$

(24,361

)

 

 

$

(9,204

)

 

 

$

462,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

1,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,030

 

Realized gain on securities available for
sale, net of income tax of $3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

(4

)

Unrealized gain on securities available for sale, net of deferred income tax expense of $2,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,769

 

 

 

 

4,769

 

Benefit plans, net of deferred income tax
of $263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

395

 

 

 

 

395

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP shares committed to be released (36 shares)

 

 

 

 

 

 

 

 

 

104

 

 

 

 

 

 

 

 

364

 

 

 

 

 

 

 

 

 

 

 

 

468

 

Dividends contributed for payment of ESOP loan

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Stock option expense

 

 

 

 

 

 

 

 

 

477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

477

 

Treasury stock purchases

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(469

)

 

 

 

 

 

 

 

(469

)

Treasury stock reissued

 

5

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

63

 

Restricted stock plan shares earned (63 shares)

 

 

 

 

 

 

 

 

 

771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

771

 

Tax benefit from stock based compensation

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Cash dividends declared ($0.05/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(934

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(934

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – September 30, 2007

 

71,114

 

 

 

$

7,274

 

 

 

$

199,335

 

 

 

$

305,066

 

 

 

$

(13,699

)

 

 

$

(24,754

)

 

 

$

(4,044

)

 

 

$

469,178

 

 

 

See notes to consolidated financial statements.

 

5

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Unaudited)

 

 

 

 

Three Months Ended
September 30,

 

 

 

2007

 

2006

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

1,030

 

$

926

 

Adjustments to reconcile net income to net cash provided by operating

 

 

 

 

 

 

 

activities:

 

 

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

 

469

 

 

489

 

Net amortization of premiums, discounts and loan fees and costs

 

 

182

 

 

243

 

Deferred income taxes

 

 

(606

)

 

(151

)

Amortization of intangible assets

 

 

159

 

 

159

 

Amortization of benefit plans’ unrecognized net loss, net of gain
from curtailment and tax effects

 

 

18

 

 

 

Provision for loan losses

 

 

94

 

 

158

 

Realized gains on sale of securities available for sale

 

 

(7

)

 

 

Increase in cash surrender value of bank owned life insurance

 

 

(135

)

 

(131

)

ESOP, stock option plan and restricted stock plan expenses

 

 

1,716

 

 

1,859

 

(Increase) decrease in interest receivable

 

 

(340

)

 

127

 

Decrease (increase) in other assets

 

 

690

 

 

(116

)

Increase (decrease) in interest payable

 

 

306

 

 

(1

)

Increase in other liabilities

 

 

779

 

 

1,180

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

 

4,355

 

 

4,742

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(104

)

 

(92

)

Proceeds from sale of securities available for sale

 

 

43,241

 

 

 

Proceeds from calls and maturities of securities available for sale

 

 

 

 

1,305

 

Proceeds from repayments of securities available for sale

 

 

249

 

 

1,011

 

Purchase of loans

 

 

(26,562

)

 

(13,528

)

Net increase in loans receivable

 

 

(43,326

)

 

(26,414

)

Purchases of mortgage-backed securities available for sale

 

 

(63,747

)

 

(19,419

)

Principal repayments on mortgage-backed securities available for sale

 

 

34,811

 

 

35,979

 

Additions to premises and equipment

 

 

(59

)

 

(277

)

Purchase of FHLB stock

 

 

(4,500

)

 

 

Redemption of FHLB stock

 

 

7

 

 

7

 

 

 

 

 

 

 

 

 

Net Cash Used In Investing Activities

 

$

(59,990

)

$

(21,428

)

 

 

 

 

 

 

 

 

 

 

6

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands, Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

 

2007

 

 

2006

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

$

(73,360

)

 

$

22,555

 

Repayment of long-term FHLB advances

 

 

(160

)

 

 

(151

)

Long-term FHLB advances

 

 

100,000

 

 

 

 

Decrease in advance payments by borrowers for taxes

 

 

(304

)

 

 

(268

)

Dividends paid to minority stockholders of Kearny Financial Corp.

 

 

(934

)

 

 

(934

)

Purchase of common stock of Kearny Financial Corp. for treasury

 

 

(469

)

 

 

(4,251

)

Treasury stock reissued

 

 

63

 

 

 

 

Purchase of common stock of Kearny Financial Corp. for restricted
stock plan

 

 

 

 

 

(789

)

Dividends contributed for payment of ESOP loan

 

 

12

 

 

 

 

Tax benefit from stock based compensation

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Financing Activities

 

$

24,856

 

 

$

16,162

 

 

 

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

$

(30,779

)

 

$

(524

)

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents – Beginning

 

 

163,341

 

 

 

230,279

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents – Ending

 

$

132,562

 

 

$

229,755

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flows Information:

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$

 

 

$

500

 

 

 

 

 

 

 

 

 

 

Interest

 

$

11,735

 

 

$

11,597

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

7

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of Kearny Financial Corp. (the “Company”), its wholly-owned subsidiaries, Kearny Federal Savings Bank (the “Bank”) and Kearny Financial Securities, Inc., and the Bank’s wholly-owned subsidiaries, KFS Financial Services, Inc. and Kearny Federal Investment Corp. The Company conducts its business principally through the Bank. Management prepared the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, including the elimination of all significant inter-company accounts and transactions during consolidation.

 

2. BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting of normal adjustments) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three-month period ended September 30, 2007, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other period.

 

The data in the consolidated statements of financial condition for June 30, 2007 was derived from the Company’s annual report on Form 10-K. That data, along with the interim financial information presented in the consolidated statements of financial condition, income, changes in stockholders’ equity and cash flows should be read in conjunction with the 2007 consolidated financial statements, including the notes thereto included in the Company’s annual report on Form 10-K.

 

3. NET INCOME PER COMMON SHARE (“EPS”)

 

Basic EPS is based on the weighted average number of common shares actually outstanding adjusted for Employee Stock Ownership Plan (“ESOP”) shares not yet committed to be released and unvested restricted stock awards. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as unvested restricted stock awards and outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable or which could be converted into common stock, if dilutive, using the treasury stock method. Shares issued and reacquired during any period are weighted for the portion of the period they were outstanding.

 

8

 


The following is a reconciliation of the numerator and denominators of the basic and diluted earnings per share computations:

 

 

 

Three Months Ended
September 30, 2007

 

 

 

Income (Numerator)

 

Shares (Denominator)

 

Per Share Amount

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,030

 

 

 

 

 

 

Basic earnings per share,
income available to
common stockholders

 

$

1,030

 

68,718

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

13

 

 

 

 

Restricted stock awards

 

 

 

202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,030

 

68,933

 

$

0.01

 

 

 

 

 

Three Months Ended
September 30, 2006

 

 

 

Income (Numerator)

 

Shares (Denominator)

 

Per Share Amount

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

926

 

 

 

 

 

 

Basic earnings per share,
income available to
common stockholders

 

$

926

 

69,751

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

53

 

 

 

 

Restricted stock awards

 

 

 

293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

926

 

70,097

 

$

0.01

 

 

4. DIVIDEND WAIVER

 

During the quarter ended September 30, 2007, Kearny MHC, the federally chartered mutual holding company of the Company waived its right, in accordance with the non-objection previously granted by the Office of Thrift Supervision (“OTS”), to receive cash dividends of approximately $2.5 million declared during the quarter, on the shares of Company common stock it owns.

 

5. STOCK REPURCHASES PLAN

 

On January 18, 2007, the Company announced that the Board of Directors authorized an additional stock repurchase plan to acquire up to 1,036,634 shares, or 5% of the Company’s outstanding stock held by persons other than Kearny MHC. Such purchases will be made from time to time in the open market or in privately negotiated stock purchases, based on stock availability, price and the Company’s financial performance. During the quarter ended September 30, 2007, the Company purchased 34,400 shares at a cost of $469,000, or approximately $13.65 per share. This brings the total purchased under this plan to 551,000 shares at a cost of $7.6 million, or approximately $13.87 per share.

 

9

 


 

6. BENEFIT PLANS – COMPONENTS OF NET PERIODIC EXPENSE  

 

The following table sets forth the aggregate net periodic benefit expense for the Bank’s Benefit Equalization Plan, Postretirement Welfare Plan and Directors’ Consultation and Retirement Plan:

 

 

 

Three Months
Ended September 30,

 

 

 

2007

 

2006

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

Service cost

 

$

40

 

$

57

 

Interest cost

 

 

81

 

 

85

 

Curtailment (Gain)

 

 

(35

)

 

 

Amortization of unrecognized transition
obligation

 

 

11

 

 

11

 

Amortization of unrecognized past service
liability

 

 

18

 

 

14

 

Amortization of unrecognized net actuarial
loss

 

 

36

 

 

46

 

 

 

 

 

 

 

 

 

Net periodic benefit expense

 

$

151

 

$

213

 

 

 

Effective July 1, 2007, the Company implemented a freeze on all future benefit accruals under the Bank’s non-contributory defined benefit pension plan and related benefit equalization plan. A curtailment gain of $682,000 related to the reduction in the projected benefit obligation for the benefit equalization plan was applied against the unrecognized net actuarial loss. In addition, a curtailment gain of $35,000 was recorded as part of the net periodic benefit expense due to the immediate recognition of the unrecognized prior service cost for the benefit equalization plan.

 

7. NEW ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 157 on our consolidated financial condition, results of operations and cash flows.

 

In September 2006, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principals Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in

 

10

 


accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The new guidance is effective for fiscal years beginning after December 15, 2007, with early adoption permitted. We are currently evaluating the impact of adopting EITF Issue No. 06-4 on our financial statements.

 

On September 7, 2006, the FASB’s EITF issued EITF Issue No. 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (“EITF 06-5”). The scope of EITF 06-5 consists of six separate issues relating to accounting for life insurance policies purchased by entities protecting against the loss of “key persons.” The six issues are clarifications of previously issued guidance on FASB Technical Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

 

On September 29, 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which amends SFAS No. 87 and SFAS No. 106 to require recognition of the over funded or under funded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date — the date at which the benefit obligation and plan assets are measured — is required to be the company’s fiscal year end. SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company July 1, 2008. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on our consolidated financial statements.

 

In March 2007, the FASB ratified EITF Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements.” EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of EITF 06-10 on its consolidated financial position and results of operations.

 

In March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its financial position, results of operations or cash flows.

 

11

 


8. RESTATEMENT

 

During the quarter ended March 31, 2006, the entire portfolio of government agency notes, which was classified as “held to maturity,” was sold. As a result of this action, the remaining mortgage-backed securities and securities classified as “held to maturity” should have been re-classified as “available for sale.” Due to a misapplication of SFAS No. 115, the reclassification was not done. This error was discovered during the year ended June 30, 2007, and accordingly, the 2006 consolidated financial statements have been restated to correct the error. All mortgage-backed securities and securities are classified as “available for sale” and are reported at fair value instead of at amortized cost, which results in a change in the value of these assets originally reported on the Consolidated Statements of Financial Condition at September 30, 2006. The adjustments made to the consolidated financial statements are non-cash in nature and do not result in changes to the income statements or previously reported total net income for any period.

 

12

 


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This Form 10-Q may include certain forward-looking statements based on current management expectations. The actual results of Kearny Financial Corp. (the “Company”) could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities. Additional potential factors include changes in interest rates, deposit flows, cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of loan and investment portfolios of Kearny Federal Savings Bank, the Company’s wholly-owned subsidiary, (the “Bank”). Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.

 

Comparison of Financial Condition at September 30, 2007 and June 30, 2007

 

Total assets increased $33.2 million or 1.7%, to $1.95 billion at September 30, 2007 from $1.92 billion at June 30, 2007. The increase was due primarily to increases of $69.7 million and $36.1 million, respectively, in net loans receivable and mortgage-backed securities. Partially offsetting these increases were decreases of $43.0 million and $30.7 million, respectively, in securities and cash and cash equivalents.

 

Cash and cash equivalents, consisting primarily of interest-bearing deposits in other banks, decreased $30.7 million or 18.8%, to $132.6 million at September 30, 2007 from $163.3 million at June 30, 2007. The Bank borrowed $100.0 million from the Federal Home Loan Bank during the quarter ended September 30, 2007 to replenish its liquidity, which tightened due to the use of cash and cash equivalents to fund loan originations and deposit outflows. Late in the fiscal year ended June 30, 2007, management began to utilize excess liquidity to fund deposit outflows.

 

Between June 30, 2007 and September 30, 2007, the securities portfolio, all of which is available for sale, decreased $43.0 million or 48.4%, to $45.9 million from $88.9 million. The decrease resulted from a decrease in amortized cost of $43.4 million due primarily to the sale of securities, partially offset by a $450,000 decrease in unrealized losses. Management sold securities from the municipal bond portfolio with an amortized cost of $43.2 million, which resulted in a gain of $7,000. During the fiscal year ended June 30 2007, management’s decision to sell municipal bonds was prompted by the below market yield on such bonds as well as the overall decline in the Company’s pre-tax income, which reduces the advantage of holding tax-exempt instruments. Notwithstanding an improvement in pre-tax income during the quarter ended September 30, 2007, management continues to sell municipal bonds when opportunities arise in an attempt to remove securities from the portfolio that do not provide a steady cash flow.

 

Loans receivable, net of deferred fees and costs and the allowance for loan losses, increased $69.7 million or 8.1%, to $930.2 million at September 30, 2007, compared to $860.5 million at June 30, 2007. In keeping with the Bank’s business plan, management continued to emphasize growth of the loan portfolio

 

13

 


during the quarter ended September 30, 2007. Total loans constituted 48.0% of assets at September 30, 2007, compared to 45.1% at June 30, 2007.

 

Between June 30, 2007 and September 30, 2007, loan growth was concentrated in one-to-four family residential first mortgage loans, which increased by $47.8 million to $607.1 million at September 30, 2007. Nonresidential mortgages increased by $15.5 million to $157.0 million at September 30, 2007. Multi-family mortgages increased by $2.2 million to $19.9 million at September 30, 2007. Home equity loans increased by $4.5 million to $118.2 million at September 30, 2007. Commercial loans increased by $673,000 and totaled $4.9 million at September 30, 2007. There was a nominal decrease in the disbursed portion of home equity lines of credit of $737,000 to $12.0 million at September 30, 2007. Construction loans outstanding and gross construction loans increased $613,000 to $12.0 million and $1.6 million to $18.1 million, respectively, at September 30, 2007. To supplement the Bank’s in-house loan originations, we purchased one-to-four family residential mortgages totaling $26.6 million during the three months ended September 30, 2007. The Bank does not originate or purchase any interest only mortgages, pay option adjustable rate mortgages or sub-prime mortgages.

 

Between June 30, 2007 and September 30, 2007, the mortgage-backed securities portfolio, all of which are available for sale, increased by $36.0 million or 5.6%, to $679.8 million from $643.8 million. The increase resulted from a $7.3 million decrease in unrealized losses and purchases totaling $63.7 million, partially offset by principal repayments and maturities. Management purchased mortgage-backed securities issued by Fannie Mae or Freddie Mac composed of $31.6 million of adjustable rate mortgages and $7.3 million of 30 year fixed rate Community Reinvestment Act eligible issues needed to meet CRA investment requirements. Management also implemented a nominal leverage strategy utilizing a part of the proceeds from Federal Home Loan Bank (“FHLB”) advances taken during the quarter to fund the purchase of $24.8 million of 15 year and 20 year fixed rate mortgage-backed securities. Generally, management redeployed cash flows from principal and interest payments to fund the purchases of additional securities.

 

FHLB of New York stock increased $4.5 million or 107.1%, to $8.7 million at September 30, 2007, compared to $4.2 million at June 30, 2007 due to a required purchase of stock related to the $100.0 million increase in advances from FHLB. The FHLB declared an 8.05% annualized cash dividend during the quarter ended September 30, 2007, which followed several quarters of cash dividends paid at an annualized rate of 7.50%.

 

Deposits decreased $73.4 million or 5.2%, to $1.34 billion at September 30, 2007, compared to $1.41 billion at June 30, 2007. During the quarter, certificates of deposit, savings deposits and non-interest-bearing demand accounts decreased $62.3 million, $12.0 million and $1.4 million, respectively. Interest-bearing demand deposits increased $2.3 million. At September 30, 2007, the Bank deposits included certificates of deposit totaling $825.7 million, savings deposits totaling $306.4 million, non-interest-bearing demand accounts totaling $54.9 million and interest-bearing demand deposits totaling $151.3 million. Focusing on lowering the Bank’s cost of deposits, management reduced the interest rates available to depositors whose maturing certificates of deposit were the product of an earlier marketing campaign designed to attract deposits by offering promotional interest rates. The recent reductions in the federal funds rate by the Federal Reserve Board of Governors, amounting to a 75 basis point cut in aggregate, appear to be gradually lowering interest rates in the marketplace. As a result, management expects deposit attrition to slow during the quarter ending December 31, 2007.

 

FHLB advances increased $99.8 million or 350.2%, to $128.3 million at September 30, 2007, compared to $28.5 million at June 30, 2007. The increase in borrowings resulted primarily from a need to replenish liquidity utilized to fund loan originations and deposit outflows. The cost of this funding source, relative to the cost of retail certificates of deposit, encouraged management to borrow $100.0 million during the

 

14

 


quarter ended September 30, 2007. Partially offsetting the increase was $160,000 in scheduled principal payments on amortizing advances.

 

During the quarter ended September 30, 2007, stockholders’ equity increased $6.6 million or 1.4%, to $469.2 million from $462.6 million at June 30, 2007. The increase was primarily the result of a $5.2 million decrease in accumulated other comprehensive loss due to mark-to-market adjustments to the available for sale securities portfolio and benefit plan related adjustments to equity per SFAS No. 158. Also contributing to the increase was net income for the quarter of $1.0 million, the release of $468,000 of Employee Stock Ownership Plan shares and $771,000 of restricted stock plan shares and an adjustment to equity of $477,000 for expensing stock options. Partially offsetting the increase was a $393,000 increase in treasury stock due to the purchase of 34,400 shares of the Company’s common stock at a cost of $469,000, partially offset by shares reissued for stock option exercises, and a $934,000 cash dividend declared for payment to minority shareholders. The Company’s quarterly dividend was $0.05 per share.

 

Comparison of Operating Results for the Three Months Ended September 30, 2007 and 2006

 

General. Net income for the quarter ended September 30, 2007 was $1.03 million or $0.01 per diluted share, an increase of $104,000 or 11.2%, from $926,000 or $0.01 per diluted share for the quarter ended September 30, 2006. The increase in net income year-over-year resulted from a decrease in non-interest expense, an increase in non-interest income and a decrease in the provision for loan losses, partially offset by a decrease in net interest income and an increase in income taxes.

 

Net Interest Income. Net interest income for the quarter ended September 30, 2007 was $11.4 million, a decrease of $316,000 or 2.7%, compared to $11.7 million for the quarter ended September 30, 2006. The decrease in net interest income was due to an increase in interest expense partially offset by an increase in interest income.

 

The Company’s net interest rate spread was unchanged at 1.83% during the quarters ended September 30, 2007 and September 30, 2006. Year-over-year, the yield on average interest-earning assets increased 31 basis points to 5.34% while the cost of average interest-bearing liabilities also increased 31 basis points to 3.51%. The increase in the yield on average interest-earning assets was due to increases in the yields on average loans receivable, mortgage-backed securities and securities partially offset by a decrease in the yield on other interest-earning assets. The cost of average interest-bearing liabilities increased due to an increase in the cost of average interest-bearing deposits partially offset by a decrease in the cost of average borrowings. Since the Bank continues to be liability sensitive, the recent reductions in the federal funds rate should result in an improvement in net interest income as the cost of interest-bearing deposits begins to decline.

 

The Company’s net interest margin increased eight basis points to 2.60% during the quarter ended September 30, 2007, compared with 2.52% during the quarter ended September 30, 2006. Average interest-earning assets during the quarter ended September 30, 2007 were $1.75 billion or $100.0 million less than average interest-earning assets of $1.85 billion during the quarter ended September 30, 2006. The decrease resulted in part from the use of cash to fund deposit outflows and stock repurchases. Average interest-bearing liabilities during the quarter ended September 30, 2007 were $1.37 billion or $79.5 million less than average interest-bearing liabilities of $1.45 billion during the quarter ended September 30, 2006. The ratio of average interest-earning assets to average interest-bearing liabilities was 127.9% during the quarter ended September 30, 2007, compared to 127.8% during the quarter ended September 30, 2006.

 

Interest Income. Total interest income increased $129,000 or 0.6%, to $23.4 million during the quarter ended September 30, 2007, from $23.3 million during the quarter ended September 30, 2006. The

 

15

 


increase in interest income resulted from increases in interest on loans and mortgage-backed securities partially offset by decreases in interest from securities and other interest-earning assets. Generally, management utilized cash flows from principal and interest payments on the securities portfolio, calls and maturities of securities and proceeds from the sale of the municipal bonds to fund loan originations during the quarter.

 

Interest income from loans receivable increased $2.9 million or 28.2%, to $13.2 million during the quarter ended September 30, 2007, from $10.3 million during the quarter ended September 30, 2006 due primarily to growth in the portfolio as well as an improvement in yield. Average loans receivable increased $179.3 million to $906.6 million during the quarter ended September 30, 2007, from $727.3 million during the quarter ended September 30, 2006. In keeping with the Bank’s business plan, management continued to emphasize growth of the loan portfolio year-over-year. Average loans receivable constituted 51.7% of average interest-earning assets during the quarter ended September 30, 2007, compared to 39.3% during the quarter ended September 30, 2006. The yield on average loans receivable increased 14 basis points to 5.81% during the quarter ended September 30, 2007, compared to 5.67% during the quarter ended September 30, 2006. The improvement in yield was due in part to growth in the nonresidential and multi-family mortgage categories, with average balances outstanding increasing in aggregate $55.9 million to $171.3 million.

 

Interest income from mortgage-backed securities increased $182,000 or 2.3%, to $8.2 million during the quarter ended September 30, 2007, compared to $8.0 million during the quarter ended September 30, 2006 due to an increase in yield partially offset by a decrease in average mortgage-backed securities. Average mortgage-backed securities decreased $13.9 million to $669.8 million during the quarter ended September 30, 2007, from $683.7 million during the quarter ended September 30, 2006. The yield on average mortgage-backed securities increased 21 basis points to 4.90% during the quarter ended September 30, 2007, from 4.69% during the quarter ended September 30, 2006. Generally, management reinvested cash flows from principal and interest payments from mortgage-backed securities into cash equivalents pending redeployment into other interest-earning assets, which contributed to the decrease in the average balance year-over-year. During the current quarter, management implemented a nominal leverage strategy utilizing a part of the proceeds from Federal Home Loan Bank advances to fund the purchase of $24.8 million of 15 year and 20 year fixed rate mortgage-backed securities, which contributed to the increase in yield. Rate adjustments on pass-through certificates containing adjustable rate mortgages and higher coupons on securities purchased this quarter compared to purchases in the prior quarter also contributed to the increase in yield.