f10q_123113-0128.htm
 
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   December 31, 2013
     
OR
     
o
 
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 mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
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 o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: February 7, 2014.
     
$0.10 par value common stock  -  66,131,460 shares outstanding


 
 
 

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

INDEX



   
Page
   
Number
PART I - FINANCIAL INFORMATION
   
     
  Item 1:
Financial Statements
   
     
 
Consolidated Statements of Financial Condition
   
 
at December 31, 2013 and June 30, 2013 (Unaudited)
 
1
     
 
Consolidated Statements of Income for the Three and Six Months
   
 
Ended December 31, 2013 and December 31, 2012 (Unaudited)
 
2-3
     
 
Consolidated Statements of Comprehensive Income for the Three and Six
   
 
Months Ended December 31, 2013 and December 31, 2012 (Unaudited)
 
4
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the
   
 
Three and Six Months Ended December 31, 2013 and December 31, 2012
 
5-6
 
(Unaudited)
   
     
 
Consolidated Statements of Cash Flows for the Three and Six Months
 
7-8
 
Ended December 31, 2013 and December 31, 2012  (Unaudited)
   
     
 
Notes to Consolidated Financial Statements (Unaudited)
 
9-69
     
  Item 2:
Management’s Discussion and Analysis of
   
 
Financial Condition and Results of Operations
 
70-97
     
  Item 3:
Quantitative and Qualitative Disclosure About Market Risk
 
98-105
     
  Item 4:
Controls and Procedures
 
106
     
     
PART II - OTHER INFORMATION
 
107-109
     
     
SIGNATURES
 
110
     
 
 
 

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share and Per Share Data)

    
December 31,
   
June 30,
 
   
2013
   
2013
 
Assets
 
(Unaudited)
       
             
Cash and amounts due from depository institutions
  $ 12,423     $ 13,102  
Interest-bearing deposits in other banks
    140,869       113,932  
                 
        Cash and Cash Equivalents
    153,292       127,034  
                 
Debt securities available for sale (amortized cost $304,792 and $305,283)
    298,056       300,122  
Debt securities held to maturity (fair value $203,580 and $202,328)
    211,342       210,015  
Loans receivable, including unamortized yield adjustments of $(1,799) and $(847)
    1,554,788       1,360,871  
  Less allowance for loan losses
    (11,493 )     (10,896 )
                 
  Net Loans Receivable
    1,543,295       1,349,975  
                 
Mortgage-backed securities available for sale (amortized cost $675,197 and $782,866)
     664,480        780,652  
Mortgage-backed securities held to maturity (fair value $94,002 and $96,447)
    100,245       101,114  
Premises and equipment
    37,312       36,994  
Federal Home Loan Bank of New York (“FHLB”) stock
    21,064       15,666  
Interest receivable
    7,925       8,028  
Goodwill
    108,591       108,591  
Bank owned life insurance
    87,494       86,084  
Deferred income tax assets, net
    13,250       9,782  
Other assets
    12,680       11,303  
 
               
        Total Assets
  $ 3,259,026     $ 3,145,360  
Liabilities and Stockholders’ Equity
               
                 
Liabilities
               
                 
Deposits:
               
  Non-interest-bearing
  $ 193,549     $ 190,964  
  Interest-bearing
    2,184,068       2,179,544  
                 
        Total Deposits
    2,377,617       2,370,508  
                 
Borrowings
    396,868       287,695  
Advance payments by borrowers for taxes
    8,202       7,840  
Other liabilities
    11,824       11,610  
                 
        Total Liabilities
    2,794,511       2,677,653  
                 
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; 66,134,860 and 66,500,740 shares outstanding, respectively
    7,274       7,274  
Paid-in capital
    215,857       215,722  
Retained earnings
    331,740       326,167  
Unearned Employee Stock Ownership Plan shares; 460,666 shares and 533,400 shares, respectively
    (4,607 )     (5,334 )
Treasury stock, at cost; 6,602,640 shares and 6,236,760 shares, respectively
    (75,775 )     (71,983 )
Accumulated other comprehensive loss
    (9,974 )     (4,139 )
                 
        Total Stockholders’ Equity
    464,515       467,707  
                 
        Total Liabilities and Stockholders’ Equity
  $ 3,259,026     $ 3,145,360  
 
See notes to unaudited consolidated financial statements.

 
- 1 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data, Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Interest Income
                       
    Loans
  $ 16,509     $ 15,165     $ 32,325     $ 30,941  
    Mortgage-backed securities
    5,505       6,162       11,059       13,165  
    Securities:
                               
      Taxable
    1,221       274       2,499       500  
      Tax-exempt
    460       6       914       12  
    Other interest-earning assets
    238       195       436       390  
        Total Interest Income
    23,933       21,802       47,233       45,008  
                                 
Interest Expense
                               
    Deposits
    3,594       3,773       7,226       8,050  
    Borrowings
    1,864       2,035       3,336       4,089  
        Total Interest Expense
    5,458       5,808       10,562       12,139  
                                 
        Net Interest Income
    18,475       15,994       36,671       32,869  
                                 
Provision for Loan Losses
    559       1,393       1,727       1,732  
                                 
        Net Interest Income after Provision
                               
           for Loan Losses
    17,916       14,601       34,944       31,137  
                                 
Non-Interest Income
                               
    Fees and service charges
    630       617       1,321       1,246  
    Gain on sale of loans
    -       -       53       -  
    Gain on sale of securities
    226       1,097       226       1,097  
    (Loss) gain on sale and write down of
      real estate owned
     -        (239 )      1        (533 )
    Income from bank owned life
      insurance
     707        393        1,409        776  
    Electronic banking fees and charges
    296       285       640       574  
    Miscellaneous
    70       132       140       325  
        Total Non-Interest Income
    1,929       2,285       3,790       3,485  
                                 
Non-Interest Expenses
                               
    Salaries and employee benefits
    8,723       8,791       17,676       17,603  
    Net occupancy expense of
                               
      premises
    1,607       1,655       3,269       3,253  
    Equipment and systems
    2,055       1,896       3,929       3,873  
    Advertising and marketing
    308       275       559       561  
    Federal deposit insurance
                               
      premium
    618       549       1,130       1,101  
    Directors’ compensation
    172       175       344       342  
    Miscellaneous
    2,074       1,850       3,932       3,731  
        Total Non-Interest Expenses
  $ 15,557     $ 15,191     $ 30,839     $ 30,464  

 
- 2 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(In Thousands, Except Per Share Data, Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
 
                         
      Income Before Income Taxes
  $ 4,288     $ 1,695     $ 7,895     $ 4,158  
                                 
Income Taxes
    1,301       518       2,322       1,321  
                                 
      Net Income
  $ 2,987     $ 1,177     $ 5,573     $ 2,837  
                                 
Net Income per Common
                               
  Share (EPS):
                               
    Basic
  $ 0.05     $ 0.02     $ 0.08     $ 0.04  
    Diluted
  $ 0.05     $ 0.02     $ 0.08     $ 0.04  
                                 
Weighted Average Number of
                               
  Common Shares Outstanding:
                               
    Basic
    65,767       66,188       65,851       66,222  
    Diluted
    65,767       66,188       65,851       66,222  
                                 
Dividends Declared Per Common
                               
   Share
  $ -     $ -     $ -     $ -  
 
See notes to unaudited consolidated financial statements.

 
- 3 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands, Unaudited)


   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
 
                         
 Net Income
  $ 2,987     $ 1,177     $ 5,573     $ 2,837  
                                 
Other Comprehensive Loss
                               
                                 
  Net realized gain on securities available for sale, net of deferred income tax expense of 2013 $(93), $(93) and 2012 $(452), $(452)
    (133 )     (651 )     (133 )     (651 )
                                 
 Net unrealized loss on securities available for sale, net of deferred income tax benefit of: 2013 $(4,336), $(3,802) and, 2012 $(3,305), $(371)
    (6,993 )     (4,860 )     (6,050 )     (507 )
                                 
 Net unrealized gain (loss) on derivatives, net of deferred income tax expense (benefit) of: 2013 $1,059, $(96) and 2012 $ -, $ -
    1,532       -       (140 )     -  
                                 
 Benefit plans, net of  deferred income tax expense (benefit) of: 2013 $4, $337 and, 2012 $10, $(464)
    7       15       488       (671 )
                                 
Total Other Comprehensive Loss
    (5,587 )     (5,496 )     (5,835 )     (1,829 )
                                 
Total Comprehensive (Loss) Income
  $ (2,600 )   $ (4,319 )   $ (262 )   $ 1,008  
                                 
 
See notes to unaudited consolidated financial statements.

 
- 4 -

 
 
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended December 31, 2012
(In Thousands, Unaudited)
 
                                       
Accumulated
       
                           
Unearned
         
Other
       
   
Common Stock
   
Paid-In
   
Retained
   
ESOP
   
Treasury
   
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Shares
   
Stock
   
Income
   
Total
 
                                                 
Balance - June 30, 2012
    66,936     $ 7,274     $ 215,539     $ 319,661     $ (6,789 )   $ (67,664 )   $ 23,596     $ 491,617  
                                                                 
Net income
    -       -       -       2,837       -       -       -       2,837  
                                                                 
Other comprehensive loss, net of income tax benefit
    -       -       -       -       -       -       (1,829 )     (1,829 )
                                                                 
ESOP shares committed to be released (72 shares)
    -       -       (33 )     -       727       -       -       694  
                                                                 
Dividends contributed for payment of ESOP loan
    -       -       (2 )     -       -       -       -       (2 )
                                                                 
Stock option expense
    -       -       21       -       -       -       -       21  
                                                                 
Treasury stock purchases
    (171 )     -       -       -       -       (1,635 )     -       (1,635 )
                                                                 
Restricted stock plan shares earned (8 shares)
    -       -       84       -       -       -       -       84  
                                                                 
Balance - December 31, 2012
    66,765     $ 7,274     $ 215,609     $ 322,498     $ (6,062 )   $ (69,299 )   $ 21,767     $ 491,787  
                                                                 
 
See notes to unaudited consolidated financial statements.

                                                                                                                                          
 
- 5 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended December 31, 2013
(In Thousands, Unaudited)

                                       
Accumulated
       
                           
Unearned
         
Other
       
   
Common Stock
   
Paid-In
   
Retained
   
ESOP
   
Treasury
   
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Shares
   
Stock
   
Loss
   
Total
 
                                                 
Balance - June 30, 2013
    66,501     $ 7,274     $ 215,722     $ 326,167     $ (5,334 )   $ (71,983 )   $ (4,139 )   $ 467,707  
                                                                 
Net income
    -       -       -       5,573       -       -       -       5,573  
                                                                 
Other comprehensive income, net of income tax
    -       -       -       -       -       -       (5,836 )     (5,836 )
                                                                 
ESOP shares committed to be released (72 shares)
    -       -       31       -       728       -       -       759  
                                                                 
Stock option expense
    -       -       20       -       -       -       -       20  
                                                                 
Treasury stock purchases
    (366 )     -       -       -       -       (3,792 )     -       (3,792 )
                                                                 
Restricted stock plan shares earned (8 shares)
    -       -       84       -       -       -       -       84  
                                                                 
Balance - December 31, 2013
    66,135     $ 7,274     $ 215,857     $ 331,740     $ (4,606 )   $ (75,775 )   $ (9,975 )   $ 464,515  
 
See notes to unaudited consolidated financial statements.
 
                                                                                                                                       
 
- 6 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Unaudited)

   
Six Months Ended
 
   
December 31,
 
   
2013
   
2012
 
             
Cash Flows from Operating Activities:
           
    Net income
  $ 5,573     $ 2,837  
    Adjustments to reconcile net income to net cash provided by operating
               
      activities:
               
        Depreciation and amortization of premises and equipment
    1,262       1,307  
        Net amortization of premiums, discounts and loan fees and costs
    1,663       5,759  
        Deferred income taxes
    186       304  
        Amortization of intangible assets
    64       72  
        Amortization of benefit plans’ unrecognized net loss
    22       50  
        Provision for loan losses
    1,727       1,732  
        (Gain) loss on write-down and sales of real estate owned
    (1 )     533  
        Realized gain on sale of loans
    (53 )     -  
        Proceeds from sale of loans
    496       -  
        Realized loss on sale of debt securities available for sale
    1,294       -  
        Realized gain on sale of mortgage-backed securities available for sale
    (1,520 )     (1,103 )
        Realized loss on sale of mortgage-backed securities held to maturity
    -       6  
        Realized gain on disposition of premises and equipment
    -       (100 )
        Increase in cash surrender value of bank owned life insurance
    (1,409 )     (776 )
        ESOP, stock option plan and restricted stock plan expenses
    862       799  
        Decrease in interest receivable
    103       519  
        (Increase) decrease in other assets
    (1,361 )     685  
        Increase in interest payable
    113       14  
        Increase (decrease) in other liabilities
    991       (1,047 )
                 
            Net Cash Provided by Operating Activities
    10,012       11,591  
                 
Cash Flows from Investing Activities:
               
    Purchase of debt securities available for sale
    (55,217 )     -  
    Proceeds from sale of  debt securities available for sale
    54,075       -  
    Proceeds from repayments of debt securities available for sale
    455       389  
    Purchase of debt securities held to maturity
    (2,530 )     (144,163 )
    Proceeds from calls and maturities of debt securities held to maturity
    270       31,068  
    Proceeds from repayments of debt securities held to maturity
    847       518  
    Purchase of loans
    (58,319 )     (8,085 )
    Net increase in loans receivable
    (137,695 )     (12,834 )
    Proceeds from sale of real estate owned
    403       2,249  
    Purchases of mortgage-backed securities available for sale
    (17,061 )     (79,603 )
    Principal repayments on mortgage-backed securities available for sale
    70,719       200,267  
    Principal repayments on mortgage-backed securities held to maturity
    827       134  
    Proceeds from sale of  mortgage-backed securities held to maturity
    -       15  
    Proceeds from sale of  mortgage-backed securities available for sale
    53,613       70,739  
    Purchase of FHLB stock
    (14,445 )     (1,125 )
    Redemption of FHLB stock
    9,047       1,127  
    Purchase of bank owned life insurance
    -       (503 )
    Proceeds from cash settlement of premises and equipment
    -       200  
    Additions to premises and equipment
    (1,580 )     (543 )
                 
            Net Cash (Used in) Provided by Investing Activities
  $ (96,591 )   $ 59,850  
 
 
- 7 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands, Unaudited)

   
Six Months Ended
 
   
December 31,
 
   
2013
   
2012
 
             
Cash Flows from Financing Activities:
           
    Net increase (decrease) in deposits
  $ 7,085     $ (31,167 )
    Repayment of term FHLB advances
    (275,043 )     (42 )
    Proceeds from term FHLB advances
    400,000       -  
    Net change in overnight borrowings
    (5,000 )     -  
    Decrease in other short-term borrowings
    (10,775 )     (7,515 )
    Increase in advance payments by borrowers for taxes
    362       327  
    Purchase of common stock of Kearny Financial Corp. for treasury
    (3,792 )     (1,635 )
    Dividends contributed for payment of ESOP loan
    -       (2 )
                 
            Net Cash Provided by (Used in) Financing Activities
    112,837       (40,034 )
                 
            Net Increase in Cash and Cash Equivalents
    26,258       31,407  
                 
Cash and Cash Equivalents – Beginning
    127,034       155,584  
                 
Cash and Cash Equivalents – Ending
  $ 153,292     $ 186,991  
                 
Supplemental Disclosures of Cash Flows Information:
               
    Cash paid during the year for:
               
        Income taxes, net of refunds
  $ 2,341     $ 714  
                 
        Interest
  $ 10,448     $ 12,125  
                 
    Non-cash investing and financing activities:
               
        Acquisition of  real estate owned in settlement of loans
  $ 720     $ 2,164  
                 
 
See notes to unaudited consolidated financial statements.
 
 
- 8 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.  PRINCIPLES OF CONSOLIDATION

The unaudited 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 unaudited 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.

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, income, comprehensive income, changes in stockholders’ equity and cash flows in conformity with GAAP.  However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the unaudited consolidated financial statements have been included.  The results of operations for the three-and six-month periods ended December 31, 2013, 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 statement of financial condition for June 30, 2013 was derived from the Company’s 2013 annual report on Form 10-K.  That data, along with the interim unaudited financial information presented in the consolidated statements of financial condition, income, comprehensive income (loss), changes in stockholders’ equity and cash flows should be read in conjunction with the  audited consolidated financial statements, including the notes thereto included in the Company’s 2013 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 including restricted stock awards (see following paragraph) adjusted for Employee Stock Ownership Plan (“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.

The Financial Accounting Standards Board (“FASB”) has issued guidance on determining whether instruments granted in share-based payment transactions are participating securities.  This guidance clarifies that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders.  Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied.

 
- 9 -

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

 
Three Months Ended
   
Six Months Ended
 
 
December 31, 2013
   
December 31, 2013
 
 
Income
 
Shares
 
Per Share
   
Income
 
Shares
 
Per Share
 
 
(Numerator)
 
(Denominator)
 
Amount
   
(Numerator)
 
(Denominator)
 
Amount
 
 
(In Thousands, Except Per Share Data)
   
(In Thousands, Except Per Share Data)
 
                                     
Net income
  $ 2,987                 $ 5,573              
Basic earnings per share,
                                       
     income available to
                                       
     common stockholders
  $ 2,987       65,767     $ 0.05     $ 5,573       65,851     $ 0.08  
Effect of dilutive securities:
                                               
     Stock options
    -       -               -       -          
                                                 
    $ 2,987       65,767     $ 0.05     $ 5,573       65,851     $ 0.08  


 
Three Months Ended
   
Six Months Ended
 
 
December 31, 2012
   
December 31, 2012
 
 
Income
 
Shares
 
Per Share
   
Income
 
Shares
 
Per Share
 
 
(Numerator)
 
(Denominator)
 
Amount
   
(Numerator)
 
(Denominator)
 
Amount
 
 
(In Thousands, Except Per Share Data)
   
(In Thousands, Except Per Share Data)
 
                                     
Net income
  $ 1,177                 $ 2,837              
Basic earnings per share,
                                       
     income available to
                                       
     common stockholders
  $ 1,177       66,188     $ 0.02     $ 2,837       66,222     $ 0.04  
Effect of dilutive securities:
                                               
     Stock options
    -       -               -       -          
                                                 
    $ 1,177       66,188     $ 0.02     $ 2,837       66,222     $ 0.04  

During the three and six months ended December 31, 2013, the average number of options which were considered anti-dilutive totaled approximately 3,053,000 and 3,122,000, respectively. During the three and six months ended December 31, 2012, the average number of options which were considered anti-dilutive totaled approximately 3,193,000 and 3,193,000, respectively.

4.  SUBSEQUENT EVENTS
 
    On January 30, 2014, the Company announced the execution of a merger agreement with Atlas Bank (“Atlas”) pursuant to which Atlas will merge with and into the Bank.  Atlas is headquartered in Brooklyn, New York and had approximately $112.8 million in total assets at December 31, 2013.  The acquisition will add Atlas’s branch offices located in Brooklyn and Staten Island, New York to Kearny’s 41 branch network located throughout northern and central New Jersey.  Atlas’s branch offices are expected to operate under the name, “Atlas Bank, a division of Kearny Federal Savings Bank,” for a period of at least one year following the merger.

 
- 10 -

 
 
Under the terms of the merger agreement, depositors of Atlas will become depositors of the Bank and will have the same rights and privileges in Kearny MHC, the mutual holding company parent of the Company, as if their accounts had been established at the Bank on the date they were originally established at Atlas.  As part of the transaction, the Company will issue additional shares of its common stock to Kearny MHC in an amount equal to the fair value of Atlas as determined by an independent appraiser.  These shares are expected to be issued immediately prior to the completion of the merger.

The transaction is expected to close during the fourth fiscal quarter ending June 30, 2014 or the subsequent quarter ending September 30, 2014 subject to certain conditions, including approval by Atlas’s depositors and customary regulatory approvals.
 
5.  RECENT ACCOUNTING PRONOUNCEMENTS

In January, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.  In the past, the FASB issued ASU 2011-11 as the result of a joint project with the IASB to enhance and provide converged disclosures about financial and derivative instruments that are offset on the balance sheet or are subject to an enforceable master netting arrangement.  ASU 2011-11 did not change the conditions for when offsetting is appropriate in US GAAP.  However, those conditions differ under IFRS, which results in the single largest financial reporting difference for certain financial institutions.  As a result, ASU 2011-11 established new disclosures to reconcile US GAAP and IFRS primarily through the requirement to present information on both a “gross” and “net” basis in the footnotes.

After the issuance of ASU 2011-11, stakeholders informed the FASB that the scope of the new disclosures was unclear, particularly because many contracts contain standard commercial provisions that would equate to a master netting arrangement.  In order to clarify its intent and narrow the scope of the new disclosures, the Board issued ASU 2013-01.  It states that the disclosures established in ASU 2011-11 only apply to recognized derivative instruments accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset on the balance sheet under ASC 210-20-45 or 815-10-45, or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset under ASC 210-20-45 or 815-10-45.

ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013 and interim periods within those years.  Retrospective application is required.  The new pronouncement did not have an impact on the Company’s consolidated financial statements.
 
On July 17, 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 is 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.
 
 
- 11 -

 

6.  STOCK REPURCHASE PLANS
 
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.  The Company completed that share repurchase plan during the quarter ended December 31, 2013 at a total cost of approximately $8,088,000 and at an average cost per share of $10.07.
 
On December 2, 2013, the Company announced that the Board of Directors authorized a subsequent 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 December 31, 2013 the Company has repurchased a total of 34,200 shares in accordance with this repurchase plan at a total cost of approximately $358,000 and at an average cost per share of $10.46.
 
 
- 12 -

 
 
7.  SECURITIES AVAILABLE FOR SALE

The amortized cost, gross unrealized gains and losses and fair values of debt and mortgage-backed securities available for sale at December 31, 2013 and June 30, 2013 and stratification by contractual maturity of debt securities available for sale at December 31, 2013 are presented below:
 
      At December 31, 2013  
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
 Value
 
   
(In Thousands)
 
Securities available for sale:
                       
  Debt securities:
                       
    U.S. agency securities
  $ 4,466     $ 19     $ 3     $ 4,482  
    Obligations of state and political subdivisions
    27,548       -       2,463       25,085  
    Asset-backed securities
    73,741       -       1,159       72,582  
    Collateralized loan obligations
    30,060       -       272       29,788  
    Corporate bonds
    160,094       126       1,525       158,695  
    Trust preferred securities
    8,883       -       1,459       7,424  
          Total debt securities
    304,792       145       6,881       298,056  
Mortgage-backed securities:
                               
  Collateralized mortgage obligations:
                               
    Federal Home Loan Mortgage Corporation
    9,487       -       728       8,759  
    Federal National Mortgage Association
    53,582       12       4,364       49,230  
          Total collateralized mortgage obligations
    63,069       12       5,092       57,989  
  Mortgage pass-through securities:
                               
   Residential pass-through securities:
                               
    Government National Mortgage Association
    5,288       297       -       5,585  
    Federal Home Loan Mortgage Corporation
    251,131       3,987       5,705       249,413  
    Federal National Mortgage Association
    270,496       6,460       5,706       271,250  
         Total residential pass-through securities
    526,915       10,744       11,411       526,248  
   Commercial pass-through securities:
                               
    Federal Home Loan Mortgage Corporation
    94       2       -       96  
    Federal National Mortgage Association
    85,119       2       4,974       80,147  
         Total commercial pass-through securities
    85,213       4       4,974       80,243  
           Total mortgage-backed securities
    675,197       10,760       21,477       664,480  
Total securities available for sale
  $ 979,989     $ 10,905     $ 28,358     $ 962,536  

 
- 13 -

 
 
    At December 31, 2013                    
   
Amortized Cost
   
Fair
 Value
                   
   
(In Thousands)
                   
Debt securities available for sale:
                             
    Due in one year or less
  $ -     $ -                    
    Due after one year through five years
    20,038       19,978                    
    Due after five years through ten years
    156,517       154,853                    
    Due after ten years
    128,237       123,225                    
          Total
  $ 304,792     $ 298,056                    


      At June 30, 2013    
   
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
 Value
 
 
   
(In Thousands)
   
Securities available for sale:
                     
  Debt securities:
                     
    U.S. agency securities
  $ 4,955     $ 60     $ -     $ 5,015  
    Obligations of state and political subdivisions
    27,560       -       2,253       25,307  
    Asset-backed securities
    25,417       1       620       24,798  
    Collateralized loan obligations
    78,366       190       70       78,486  
    Corporate bonds
    160,107       34       949       159,192  
    Trust preferred securities
    8,878       -       1,554       7,324  
          Total debt securities
    305,283       285       5,446       300,122  
Mortgage-backed securities:
                                 
  Collateralized mortgage obligations:
                                 
    Federal Home Loan Mortgage Corporation
    9,825       -       470       9,355  
    Federal National Mortgage Association
    56,158       24       3,055       53,127  
          Total collateralized mortgage obligations
    65,983       24       3,525       62,482  
  Mortgage pass-through securities:
                                 
   Residential pass-through securities:
                                 
    Government National Mortgage Association
    5,889       444       -       6,333  
    Federal Home Loan Mortgage Corporation
    290,133       4,827       4,600       290,360  
    Federal National Mortgage Association
    326,356       9,050       3,945       331,461  
         Total residential pass-through securities
    622,378       14,321       8,545       628,154  
   Commercial pass-through securities:
                                 
    Federal Home Loan Mortgage Corporation
    116       2       -       118  
    Federal National Mortgage Association
    94,389       3       4,494       88,898  
         Total commercial pass-through securities
    94,505       5       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  
 
 
- 14 -

 

During the six months ended December 31, 2013, proceeds from sales of securities available for sale totaled $107.7 million and resulted in gross gains of $2,060,000 and gross losses of $1,834,000. Proceeds from sales of securities available for sale during the six months ended December 31, 2012, totaled $70.7 million and resulted in gross gains of $1,150,000 and gross losses of $47,000.
 
At December 31, 2013 and June 30, 2013, securities available for sale with carrying values of approximately $73.1 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 carrying values of approximately $6.8 million and $4.4 million, respectively, were pledged to secure public funds on deposit.
 
The Company’s available for sale mortgage-backed securities are generally 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.
 
 
- 15 -

 

8.  SECURITIES HELD TO MATURITY

The amortized cost, gross unrealized gains and losses and fair values of debt and mortgage-backed securities held to maturity at December 31, 2013 and June 30, 2013 and stratification by contractual maturity of debt securities held to maturity at December 31, 2013 are presented below:
 
   
At December 31, 2013
 
   
Amortized
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(In Thousands)
 
Securities held to maturity:
                       
  Debt securities:
                       
    U.S. agency securities
  $ 144,480     $ 10     $ 3,330     $ 141,160  
    Obligations of state and political subdivisions
    66,862       12       4,454       62,420  
          Total debt securities
    211,342       22       7,784       203,580  
Mortgage-backed securities:
                               
  Collateralized mortgage obligations:
                               
    Federal Home Loan Mortgage Corporation
    19       1       -       20  
    Federal National Mortgage Association
    296       24       -       320  
    Non-agency securities
    93       1       1       93  
          Total collateralized mortgage obligations
    408       26       1       433  
  Mortgage pass-through securities:
                               
   Residential pass-through securities:
                               
    Federal Home Loan Mortgage Corporation
    87       4       -       91  
    Federal National Mortgage Association
    210       7       -       217  
          Total residential pass-through securities
    297       11