This prospectus contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and operating
strategies;
o statements regarding the quality of our loan and investment portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o changes in the interest rate environment that reduce our interest margins
or reduce the fair value of financial instruments;
o increased competitive pressures among financial services companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our business;
o adverse changes in the securities markets;
o our ability to successfully manage our growth;
o changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board or the Public
Company Accounting Oversight Board; and
o our ability to enter into new markets and/or expand product offerings
successfully and take advantage of growth opportunities.
Any of the forward-looking statements that we make in this prospectus
and in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Consequently, no
forward-looking statement can be guaranteed.
16
SELECTED FINANCIAL AND OTHER DATA
The following financial information and other data in this section for
the years ended June 30, 2004, 2003 and 2002 is derived from Kearny Financial
Corp.'s audited consolidated financial statements and should be read together
with the consolidated financial statements and the notes thereto beginning on
page F-1 of this document. The information at and for the years ended June 30,
2001 and 2000 is derived from unaudited consolidated financial statements of
Kearny Financial Corp.
At June 30,
--------------------------------------------------------------------
Balance Sheet Data: .................. 2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(In thousands)
Assets ............................... $ 1,936,518 $ 1,996,482 $ 1,905,638 $ 1,756,257 $ 1,680,846
Loans receivable, net ................ 505,794 509,161 591,142 602,182 591,950
Mortgage-backed securities
held to maturity ................... 771,353 681,619 968,516 689,204 484,971
Securities available for sale ........ 41,564 37,840 39,679 42,367 36,166
Investment securities
held to maturity ................... 435,870 287,321 139,446 193,955 470,219
Cash and cash equivalents ............ 39,488 325,657 97,030 159,901 22,655
Goodwill ............................. 82,263 31,746 15,600 17,911 20,222
Deposits ............................. 1,537,510 1,613,684 1,479,729 1,342,107 1,260,846
Federal Home Loan Bank advances ...... 94,234 75,749 112,080 112,109 138,051
Total stockholders' equity ........... 293,505 278,333 270,706 258,617 241,233
For the Year Ended June 30,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(In thousands)
Summary of Operations:
Interest income ...................... $ 78,654 $ 96,492 $ 106,162 $ 114,566 $ 110,890
Interest expense ..................... 32,100 44,695 54,443 67,318 60,818
----------- ----------- ----------- ----------- -----------
Net interest income .................. 46,554 51,797 51,719 47,248 50,072
Provision for loan losses ............ - - 3 162 102
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses .................... 46,554 51,797 51,716 47,086 49,970
Non-interest income .................. 1,560 1,847 1,765 1,523 2,045
Merger related expenses .............. 592 14,921 619 -- --
Non-interest expense, excluding
merger related expenses ............ 28,880 29,431 28,446 27,519 25,879
----------- ----------- ----------- ----------- -----------
Income before minority interest
and income taxes .................... 18,642 9,292 24,416 21,090 26,136
Minority interest, net of income taxes -- (4,844) 3,140 1,739 2,079
Provisions for income taxes .......... 5,745 5,237 7,926 6,823 8,815
----------- ----------- ----------- ----------- -----------
Net income ........................... $ 12,897 $ 8,899 $ 13,350 $ 12,528 $ 15,242
=========== =========== =========== =========== ===========
17
At or For the Year Ended June 30,
-----------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------ -------
Performance Ratios:
Return on average assets (net income divided by
average total assets) ....................... 0.67% 0.45% 0.74% 0.73% 0.91%
Return on average equity (net income divided by
average equity) .............................. 4.52 3.28 5.03 4.89 6.42
Net interest rate spread ........................ 2.37 2.36 2.35 2.08 2.45
Net interest margin on average
interest-earnings assets ..................... 2.59 2.75 2.95 2.86 3.11
Average interest-earning assets to average
interest-bearing liabilities ................. 112.46 116.54 119.58 119.17 117.56
Efficiency ratio (Non-interest expense divided
by the sum of net interest income and
non-interest income) ......................... 61.25 82.68 54.34 56.42 49.66
Asset Quality Ratios:(1)
Non-performing loans to total loans ............. 0.46 0.57 0.55 0.53 0.55
Non-performing assets to total assets ........... 0.13 0.16 0.18 0.20 0.27
Net charge-offs to average loans outstanding .... 0.01 0.00 0.00 0.01 0.06
Allowance for loan losses to total loans ........ 1.01 1.01 0.87 0.85 0.86
Allowance for loan losses to non-performing loans 220.96 177.64 157.24 160.52 155.56
Capital Ratios:
Average equity to average assets ratios
(average equity divided by average
total assets) ................................ 14.73 13.80 14.63 14.87 14.12
Equity to assets at period end .................. 15.16 13.94 14.21 14.73 14.35
Number of Offices:
Offices (including offices ........................ 25 25 24 23 23
acquired in mergers)
(1) Asset quality ratios are period end ratios.
18
RECENT DEVELOPMENTS
The information at June 30, 2004 is derived from Kearny Financial
Corp.'s audited consolidated financial statements and should be read together
with the consolidated financial statements and the notes thereto beginning on
page F-1 of this document. The information at and for the three months ended
September 30, 2004 and 2003 is unaudited. However, in the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the results of operations for the unaudited periods have
been made. The selected operating data presented below for the three months
ended September 30, 2004 are not necessarily indicative of the results that may
be expected for the full year or any other period.
Balance Sheet Data: At At
September 30, June 30,
2004 2004
------ -----
(In thousands)
Assets.................................. $1,905,659 $1,936,518
Loans receivable, net................... 515,196 505,794
Mortgage-backed securities
held to maturity...................... 724,876 771,353
Securities available for sale........... 41,335 41,564
Investment securities
held to maturity...................... 445,769 435,870
Cash and cash equivalents............... 39,763 39,488
Goodwill................................ 82,263 82,263
Deposits................................ 1,513,539 1,537,510
Federal Home Loan Bank advances......... 84,100 94,234
Total stockholders' equity.............. 297,802 293,505
For the Three Months
Ended September 30,
2004 2003
------- -------
(In thousands)
Summary of Operations:
Interest income......................... $19,907 $19,481
Interest expense........................ 7,262 9,318
----- -------
Net interest income..................... 12,645 10,163
Provision for loan losses............... 151 --
------- -------
Net interest income after provision
for loan losses....................... 12,494 10,163
Non-interest income..................... 500 614
Merger related expenses................. -- 592
Non-interest expense, excluding
merger related expenses............... 7,636 6,992
------- ------
Income before income taxes.............. 5,358 3,193
Provision for income taxes.............. 1,562 958
------- ------
Net income.............................. $ 3,796 $ 2,235
======= =======
19
For the Three
Months
Ended September 30,
-------------------
2004 2003
------ ------
Performance Ratios:
Return on average assets (net income divided by
average total assets)............................ 0.79% 0.46%
Return on average equity (net income divided by
average equity)................................... 5.16 3.35
Net interest rate spread............................. 2.61 2.00
Net interest margin on average
interest-earnings assets.......................... 2.84 2.24
Average interest-earning assets to average
interest-bearing liabilities...................... 114.31 111.69
Efficiency ratio (Non-interest expense divided
by the sum of net interest income and
non-interest income).............................. 58.09 68.80
Asset Quality Ratios:(1)
Non-performing loans to total loans.................. 0.48 0.53
Non-performing assets to total assets................ 0.14 0.14
Net charge-offs to average loans outstanding......... 0.00 0.00
Allowance for loan losses to total loans............. 1.04 1.04
Allowance for loan losses to non-performing loans.... 213.56 197.89
Capital Ratios:
Average equity to average assets ratios
(average equity divided by average
total assets)..................................... 15.30 13.69
Equity to assets at period end....................... 15.63 14.47
Number of Offices:
Offices (including offices
acquired in mergers)................................ 25 25
---------------------
(1) Asset quality ratios are period end ratios.
20
Comparison of Financial Condition at September 30, 2004 and June 30, 2004
Our total assets decreased by $30.9 million, or 1.6%, to $1.91 billion
at September 30, 2004 from $1.94 billion at June 30, 2004, primarily due to a
$46.5 million decrease in mortgage-backed securities held to maturity partially
offset by growth of $9.4 million in loans receivable, net and $9.9 million in
investment securities held to maturity. Total liabilities similarly decreased
due to a $24.0 million net outflow of deposits and $10.1 million decrease in
Federal Home Loan Bank advances.
Mortgage-backed securities held to maturity, which decreased $46.5
million, or 6.0%, to $724.9 million at September 30, 2004, from $771.4 million
at June 30, 2004 was the most significant cause of the decrease in total assets.
We used monthly principal and interest payments to fund the aforementioned
deposit outflow, reduce Federal Home Loan Bank advances, fund loans receivable
and purchase investment securities held to maturity.
Loans receivable, net of deferred fees and the allowance for loan
losses, increased $9.4 million, or 1.9%, to $515.2 million at September 30,
2004, from $505.8 million at June 30, 2004. The increase came primarily in the
home equity loans and home equity lines of credit categories as well as
one-to-four family mortgages, to a lesser extent.
Investment securities held to maturity increased $9.9 million, or 2.3%,
to $445.8 million at September 30, 2004, from $435.9 million at June 30, 2004.
The increase came exclusively in the tax-exempt category.
Deposits, which decreased $24.0 million, or 1.6%, to $1.51 billion at
September 30, 2004, from $1.53 billion at June 30, 2004 was the most significant
cause of the decrease in total liabilities. The primary factor for this decrease
was the runoff of certificates of deposit due to alternative investment
opportunities in the marketplace.
Federal Home Loan Bank advances decreased $10.1 million, or 10.7%, to
$84.1 million at September 30, 2004, from $94.2 million at June 30, 2004.
Stockholders' equity increased $4.3 million, or 1.5%, to $297.8 million
at September 30, 2004, from $293.5 million at June 30, 2004. The increase
primarily reflects net income of $3.8 million for the three months ended
September 30, 2004, along with an increase in accumulated other comprehensive
income of $500,000 resulting from an increase in the unrealized gain on
available for sale securities.
Comparison of Operating Results for the Three Months Ended September 30, 2004
and 2003
General. Net income for the three months ended September 30, 2004 was
$3.8 million, an increase of $1.6 million, or 72.7%, from $2.2 million for the
three months ended September 30, 2003. The increase in net income resulted
primarily from an increase in net interest income.
Net Interest Income. Net interest income increased by $2.4 million, or
23.5%, to $12.6 million for the three months ended September 30, 2004 from $10.2
million for the three months ended September 30, 2003. The net interest rate
spread increased to 2.61% for the three months ended September 30, 2004 from
2.00% for the three months ended September 30, 2003. The net interest margin
increased 60 basis points to 2.84% for the three months ended September 30, 2004
compared with 2.24% for the three months ended September 30, 2003.
The net interest spread improved due to a 17 basis point increase in
the return on average interest-earning assets to 4.47% for the three months
ending September 30, 2004, from 4.30% for the three months ending September 30,
2003. Additionally, the net interest spread improved due to a 44 basis point
21
decrease in the cost of average interest-bearing liabilities to 1.86% for the
three months ending September 30, 2004, from 2.30% for the three months ending
September 30, 2003.
The increase in the net interest margin is largely reflective of the
increase in the ratio of average interest-earning assets to average
interest-bearing liabilities to 114.31% for the three months ended September 30,
2004, from 111.69% for the three months ended September 30, 2003.
Interest Income. Total interest income increased $426,000, or 2.2%, to
$19.9 million for the three months ended September 30, 2004, from $19.5 million
for the three months ended September 30, 2003. Average interest-earning assets
decreased $30.3 million, or 1.7%, to $1.78 billion for the three months ended
September 30, 2004, from $1.81 billion for the three months ended September 30,
2003. However, the aforementioned 17 basis points increase in yield offset the
decline in average interest-earning assets, leading to the increase in interest
income. We attribute the increase in interest income primarily to the
reinvestment of cash and cash equivalents in higher yielding loans receivable,
investment securities held to maturity and mortgage-backed securities held to
maturity.
Interest income on loans receivable decreased $527,000, or 6.9%, to
$7.1 million for the three months ended September 30, 2004, from $7.6 million
for the three months ended September 30, 2003. The average balance of loans
receivable increased $12.5 million, or 2.5%, to $510.7 million for the three
months ended September 30, 2004, from $498.2 million for the three months ended
September 30, 2003. However, a decrease in the average yield on loans receivable
to 5.59% for the three months ended September 30, 2004, from 6.15% for the three
months ended September 30, 2003, offset the increase in the average balance of
loans outstanding. An increased marketing effort contributed to the increase in
average loans receivable. The lower yield reflects generally lower interest
rates on originations and downward rate adjustments on adjustable rate and
floating rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, increased $788,000, or 24.6%, to $4.0 million for the three
months ended September 30, 2004 from $3.2 million for the three months ended
September 30, 2003. The increase resulted from an increase of $103.4 million, or
27.3%, in the average balance of investment securities to $481.9 million for the
three months ended September 30, 2004 from $378.5 million for the three months
ended September 30, 2003. However, a decrease in the average yield on investment
securities to 3.32% for the three months ended September 30, 2004, from 3.39%
for the three months ended September 30, 2003, partially offset the increase in
the average balance of investment securities. The increased average balance
reflects the reinvestment of cash flows from mortgage-backed securities held to
maturity as well as the redeployment of cash and cash equivalents. The lower
yield resulted from principal repayments on older higher yielding securities
while new purchases occurred in a lower interest rate environment.
Interest income on mortgage-backed securities held to maturity
increased $673,000, or 8.4%, to $8.6 million for the three months ended
September 30, 2004 from $8.0 million for the three months ended September 30,
2003. This was a result of a $95.3 million, or 14.4%, increase in the average
balance of mortgage-backed securities held to maturity to $755.0 million for the
three months ended September 30, 2004 from $659.7 million for the three months
ended September 30, 2003. The increase in the average balance offset the
decrease in the average yield to 4.58% for the three months ended September 30,
2004 from 4.84% for the three months ended September 30, 2003. The increase in
the average balance of mortgage-backed securities held to maturity resulted from
the redeployment of cash and cash equivalents. The decrease in yield resulted
from principal repayments received on older higher yielding securities while new
purchases occurred in a lower interest rate environment.
Interest income on other interest-earning assets decreased $563,000, or
91.4%, to $53,000 for the three months ended September 30, 2004 from $616,000
for the three months ended September 30, 2003. This was a result of a $253.1
million, or 91.6%, decrease in the average balance of other interest-earning
22
assets to $23.2 million for the three months ended September 30, 2004 from
$276.3 million for the three months ended September 30, 2003. There was a
minimal increase in the average yield to 0.91% for the three months ended
September 30, 2004, from 0.89% for the three months ended September 30, 2003,
due to little change in short-term market interest rates. The substantial
decrease in the average balance was due to the use of assets in this category to
invest in higher yielding securities.
Interest Expense. Total interest expense decreased $2.0 million, or
21.5%, to $7.3 million for the three months ended September 30, 2004 from $9.3
million for the three months ended September 30, 2003. The decrease resulted
primarily from a decrease in the average cost of interest-bearing liabilities to
1.86% for the three months ended September 30, 2004 from 2.30% for the three
months ended September 30, 2003. The average balance of interest-bearing
liabilities declined to $1.56 billion for the three months ended September 30,
2004 as compared to $1.62 billion for the three months ended September 30, 2003.
Average cost decreased due to lower market interest rates prevailing during the
period.
Interest expense on deposits decreased $2.0 million, or 24.1%, to $6.3
million for the three months ended September 30, 2004 from $8.3 million for the
three months ended September 30, 2003. Interest expense on deposits declined
primarily due to a decrease in the average cost of interest-bearing deposits to
1.70% for the three months ended September 30, 2004 from 2.13% for the three
months ended September 30, 2003 and a decrease in deposits. The average balance
of interest-bearing deposits decreased $74.4 million, or 4.8%, to $1.47 billion
for the three months ended September 30, 2004 from $1.54 billion for the three
months ended September 30, 2003. The average cost of certificates of deposit
declined to 2.13% from 2.81%, the average cost of savings and club accounts
declined to 1.02% from 1.28% and the average cost of interest-bearing demand
accounts declined to 0.72% from 0.94%. Average certificates of deposit declined
to $885.4 million from $952.2 million, average savings and club accounts
increased to $481.7 million from $458.6 million and average interest-bearing
demand accounts decreased to $106.6 million from $108.0 million. We believe this
shift in deposit composition reflects a movement to alternative investment
opportunities in the marketplace as well as a shift to liquidity, while awaiting
possible future interest rate increases.
Interest expense on Federal Home Loan Bank advances decreased $76,000,
or 6.9%, to $990,000 for the three months ended September 30, 2004 from $1.1
million for the three months ended September 30, 2003. The average balance
increased $10.7 million, or 14.1%, to $86.1 million for the three months ended
September 30, 2004 from $75.4 million for the three months ended September 30,
2003. However, a decrease in the average cost to 4.60% for the three months
ended September 30, 2004 from 5.65% for the three months ended September 30,
2003 offset the increase in the average balance. The increase in the average
balance resulted from additional borrowings, but at a lower cost due to their
relatively short remaining term to maturity, in a continuing low interest rate
environment.
Provision for Loan Losses. We charge to operations provisions for loan
losses at a level required to reflect credit losses in the loan portfolio that
are both probable and reasonable to estimate. Management, in determining the
allowance for loan losses, considers the losses inherent in the loan portfolio
and changes in the nature and volume of our loan activities, along with the
general economic and real estate market conditions. We utilize a two-tier
approach: (1) identification of impaired loans and establishment of specific
loss allowances on such loans; and (2) establishment of general valuation
allowances on the remainder of our loan portfolio. We establish a specific loan
loss allowance for an impaired loan based on delinquency status, size of loan,
type of collateral and/or appraisal of the underlying collateral and financial
condition of the borrower. We base general loan loss allowances upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment.
There was a $151,000 provision for loan losses made during the three
months ended September 30, 2004. During the three months ended September 30,
2004, total loans increased to $519.7 million at
23
September 30, 2004 from $510.2 million at June 30, 2004. Non-performing loans
were $2.5 million, or 0.48%, of total loans at September 30, 2004, as compared
to $2.3 million, or 0.46%, of total loans at June 30, 2004. The allowance for
loan losses as a percentage of gross loans outstanding was 1.04% at September
30, 2004 and 1.01% at June 30, 2004, reflecting balances of $5.3 million and
$5.1 million, respectively.
Management assesses the allowance for loan losses monthly. While
management uses available information to recognize losses on loans, additional
loan loss provisions may be necessary in the future based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses and may
require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. We maintained
the allowance for loan losses as of September 30, 2004 at a level that
represented management's best estimate of losses in the loan portfolio to the
extent they were both probable and reasonably estimable.
Non-Interest Income. Non-interest income decreased $114,000, or 18.6%,
to $500,000 for the three months ended September 30, 2004 compared to $614,000
for the three months ended September 30, 2003. The decrease was primarily a
result of a reduction in fees and service charge income.
At September 30, 2004, we had a $3.9 million investment in bank owned
life insurance. The returns on the investment of the cash value of the policy
generate non-interest income. We acquired this investment in connection with our
acquisition of West Essex Bank in 2003; it covers the former president and chief
executive officer and former chief lending officer of West Essex Bank.
During the three months ending September 30, 2004, we recognized a
$71,000 gain, included in non-interest income, from the sale of a security in
our available for sale portfolio. There was no such gain recorded in the three
months ending September 30, 2003.
Non-Interest Expense. Excluding merger related expenses, non-interest
expense increased $644,000, or 9.2%, to $7.6 million for the three months ended
September 30, 2004, from $7.0 million for the three months ended September 30,
2003. The increase consisted primarily from a $449,000 increase in salaries and
employee benefits.
The merger related expenses of $592,000 recorded during the three
months ended September 30, 2003, consisted primarily of fees due to attorneys
and financial advisors.
Salaries and employee benefits increased $449,000, or 10.0%, to $4.9
million for the three months ended September 30, 2004, compared to $4.5 million
for the three months ended September 30, 2003. The increase was the result of
normal salary increases, increased benefit costs and hiring of additional staff,
including four business development officers.
All other elements of non-interest expense totaled $2.7 million for the
three months ended September 30, 2004; an increase of $195,000, or 7.8%, from
the $2.5 million total for the three months ended September 30, 2003. This
increase primarily reflects normal increases in the cost of office occupancy and
equipment.
Management expects increased expenses in the future because of the
establishment of the employee stock ownership plan and the potential stock
benefit plans, as well as increased costs associated with being a public company
such as periodic reporting, annual meetings, retention of a transfer agent and
professional fees.
Furthermore, non-interest expense for the three months ended September
30, 2004 does not reflect the impact of our new 53,000 square feet
administrative building in Fairfield, New Jersey. We estimate the total cost of
this building to be $13.5 million, including furniture, fixtures and equipment;
capitalizing the
24
cost of the building, net of land, with amortization taking place over forty
years. Additionally, we estimate the annual operating expense of this new
building, excluding depreciation, will be approximately $400,000. We also expect
to open a de novo branch office in Lacy, New Jersey in the first quarter of
2005, with a total cost of approximately $2.3 million. We plan during 2005 to
replace three office locations with new buildings, at an estimated cost of
approximately $1.9 million per branch. Expenses related to the planned expansion
of our operations through de novo branching and the acquisition of branches or
other financial institutions could affect earnings in future periods.
Provision for Income Taxes. The provision for income taxes increased
$604,000, or 63.0%, to $1.6 million for the three months ended September 30,
2004 from $958,000 for the three months ended September 30, 2003. The effective
income tax rates were 29.2% for the three months ended September 30, 2004 as
compared to 30.0% for the three months ended September 30, 2003. We attribute
the increase in income tax expense to an increase in pre-tax income, which
increased $2.2 million, or 67.8%, to $5.4 million for the three months ended
September 30, 2004, from $3.2 million for the three months ended September 30,
2003.
25
USE OF PROCEEDS
We are conducting this stock offering principally to raise capital to
support our anticipated future growth. The net proceeds will depend on the
expenses incurred by us in connection with the offering and the total number of
shares of stock issued in the offering, which will depend on the independent
valuation and market considerations. Although the actual net proceeds from the
sale of the common stock cannot be determined until the offering is completed,
we estimate that net proceeds from the sale of common stock will be between
$118.7 million at the minimum and $161.1 million at the maximum of the offering
range (and $185.4 million at the maximum, as adjusted, if the independent
valuation is increased by 15%).
Kearny Financial Corp. intends to distribute the net proceeds from the
offering as follows:
MAXIMUM,
MINIMUM MIDPOINT MAXIMUM As Adjusted
------------------ -------------------- -------------------- --------------------
Percent Percent Percent Percent
of Net of Net of Net of Net
Amount Proceeds Amount Proceeds Amount Proceeds Amount Proceeds
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Gross offering proceeds......... $121,125 $142,500 $163,875 $188,456
Less offering expenses.......... (2,406) (2,603) (2,799) (3,025)
-------- -------- -------- --------
Estimated net proceeds....... 118,719 100.0% 139,897 100.0% 161,076 100.0% 185,431 100.0%
Less:
Investment in Kearny
Federal Savings Bank........ 59,360 50.0% 69,949 50.0% 80,538 50.0% 92,715 50.0%
Loan to employee
stock ownership plan....... 9,690 8.2% 11,400 8.1% 13,110 8.1% 15,077 8.1%
-------- -------- -------- --------
Proceeds retained by
Kearny Financial Corp........ $49,669 41.8% $58,548 41.9% $67,428 41.9% $77,639 41.9%
======= ======= ======= =======
We will use 50% of the net proceeds from the offering to make a capital
contribution to Kearny Federal Savings Bank. We will also lend the Kearny
Federal Savings Bank's employee stock ownership plan cash to enable the plan to
buy up to 8% of the shares sold in the offering. If the employee stock ownership
plan does not purchase common stock in the offering, it may purchase shares of
common stock in the open market after the stock offering. If the purchase price
of the common stock is higher than $10 per share, the amount of proceeds
required for the purchase by the employee stock ownership plan will increase and
the resulting stockholders' equity will decrease. The balance of the net
proceeds will be retained by Kearny Financial Corp. and used for general
business purposes, which may include investment in securities, repurchasing
shares of our common stock, paying cash dividends or supporting acquisitions by
Kearny Federal Savings Bank. However, under current regulations of the Office of
Thrift Supervision, we may not repurchase shares of our common stock during the
first year following the offering, except where extraordinary circumstances
exist and with prior regulatory approval. We will initially invest these
proceeds in short to intermediate term investment securities.
The funds received by Kearny Federal Savings Bank will be used for
general business purposes, including originating loans and purchasing
securities. In addition to building our core banking business through internal
growth and de novo branching, we will also actively consider expansion
opportunities such as the acquisition of branches and of other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. There can be no assurance that we will be successful in
implementing this growth strategy. We may have difficulty finding suitable sites
for de novo branches and identifying and successfully acquiring branches or
other financial institutions. We may also pursue other business activities,
including possibly offering asset management services, acquiring a title
insurance company and/or acquiring a mortgage
26
banking operation. There are, however, no current understandings, arrangements
or agreements for these activities and we cannot assure you that we will be able
to commence such activities.
The net proceeds may vary significantly because total expenses of the
stock offering may be significantly more or less than those estimated. The net
proceeds will also vary if the number of shares to be issued in the stock
offering are adjusted to reflect a change in the estimated pro forma market
value of Kearny Financial Corp. Payments for shares made through withdrawals
from existing deposit accounts at Kearny Federal Savings Bank will not result in
the receipt of new funds for investment but will result in a reduction of Kearny
Federal Savings Bank's deposits and interest expense as funds are transferred
from interest-bearing certificates or other deposit accounts.
OUR POLICY REGARDING DIVIDENDS
We intend to pay dividends but have not yet established a definitive
dividend policy or determined the amount or timing of cash dividends that Kearny
Financial Corp. may pay after the offering. Future declarations of dividends by
the Board of Directors will depend on a number of factors, including investment
opportunities, growth objectives, financial condition, profitability, tax
considerations, minimum capital requirements, regulatory limitations, stock
market characteristics and general economic conditions. The timing, frequency
and amount of dividends will be determined by the Board. There can be no
assurance that dividends will in fact be paid on the stock or that, if paid,
dividends will not be reduced or eliminated in future periods.
Kearny Financial Corp.'s ability to pay dividends also depends on the
receipt of dividends from Kearny Federal Savings Bank, which is subject to a
variety of regulatory limitations on the payment of dividends. See Regulation -
Regulation of Kearny Federal Savings Bank - Dividend and Other Capital
Distribution Limitations on page __. Furthermore, as a condition to the Office
of Thrift Supervision giving its authorization to conduct the stock offering,
Kearny Financial Corp. has agreed that it will not initiate any action within
one year of completion of the stock offering in the furtherance of payment of a
special distribution or return of capital to stockholders of Kearny Financial
Corp.
If Kearny Financial Corp. pays dividends to its stockholders, it is
anticipated that dividends payable to Kearny MHC would be waived. Under Office
of Thrift Supervision regulations, public stockholders would not be diluted for
any dividends waived by Kearny MHC in the event that Kearny MHC converts to
stock form. See Regulation - Regulation of Kearny Financial Corp. on page __.
MARKET FOR THE STOCK
There is not, at this time, any market for Kearny Financial Corp.'s
stock. We have received approval to have our common stock listed for trading on
the Nasdaq National Market under the symbol "KRNY." Sandler O'Neill & Partners,
L.P. has advised us that it intends to make a market in our common stock
following the offering, but it is under no obligation to do so.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of our stock
at any particular time may be limited. Under such circumstances, you could have
difficulty selling your shares of common stock. We cannot assure you that an
active and liquid trading market for the shares of common stock will develop or,
if developed, will be maintained. Nor can we assure you that, if you purchase
shares of common stock in the offering, you will be able to sell them at a price
equal to or above $10.00 per share.
27
CAPITALIZATION
Set forth below is the historical capitalization as of June 30, 2004 of
Kearny Financial Corp. and the pro forma capitalization of Kearny Financial
Corp. as of June 30, 2004 after giving effect to the offering. The table also
gives effect to the assumptions set forth under Pro Forma Data on page __. A
change in the number of shares sold in the offering may materially affect the
pro forma capitalization.
Pro Forma Capitalization at June 30, 2004
-------------------------------------------------------
Kearny Maximum,
Financial Minimum Midpoint14, Maximum as adjusted
Corp. 12,112,500 250,000 16,387,500 18,845,625
Historical, at shares sold shares sold shares sold shares sold
June 30, at $10.00 at $10.00 at $10.00 at $10.00
2004 per share per share per share per share(1)
---------------- --------- --------- --------- ------------
(In thousands)
Deposits(2).............................. $1,537,510 $1,537,510 $1,537,510 $1,537,510 $1,537,510
Borrowed funds........................... 94,234 94,234 94,234 94,234 94,234
---------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds........ $1,631,744 $1,631,744 $1,631,744 $1,631,744 $1,631,744
========== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock, $0.10 par value,
25,000,000 shares authorized;
none to be issued.................... - - - - -
Common stock, $0.10 par value,
75,000,000 shares authorized,
assuming shares outstanding
as shown(3)(4)....................... 1 4,038 4,750 5,463 6,282
Additional paid-in capital(3)(4)(5)...... 499 115,181 135,647 156,113 179,649
Retained earnings........................ 282,959 282,959 282,959 282,959 282,959
Accumulated other comprehensive
income, net of tax.................... 10,046 10,046 10,046 10,046 10,046
Less:
Common stock acquired by
employee stock ownership plan(6)..... - (9,690) (11,400) (13,110) (15,077)
Common stock acquired by restricted
stock plan(7)....................... - (7,914) (9,310) (10,707) (12,312)
-------- -------- -------- -------- --------
Total stockholders' equity............... $293,505 $394,620 $412,692 $430,764 $451,547
======== ======== ======== ======== ========
28
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. Any withdrawals would reduce pro forma deposits by
an amount equal to the withdrawals.
(3) Pro forma data includes shares to be held by Kearny MHC after completion of
the stock offering. Kearny MHC is currently the sole stockholder of Kearny
Financial Corp. and holds 10,000 shares of common stock of Kearny Financial
Corp. Upon completion of the offering, Kearny MHC will hold 70% of the
total shares of Kearny Financial Corp. to be outstanding.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plan that may be adopted by Kearny Financial
Corp. and presented for approval by the stockholders after the offering. An
amount equal to 4.9% of the total number of shares outstanding after the
offering, including the shares held by Kearny MHC, would be reserved for
issuance upon the exercise of options to be granted under the stock option
plan following the stock offering. See Management - Potential Stock Benefit
Plans - Stock Option Plan on page __.
(5) The historical additional paid-in capital amount represents the initial
capitalization of the mid-tier holding company upon its formation in 2001
($500,000 was received by Kearny Financial Corp. for the 10,000 shares
issued to Kearny MHC. The pro forma additional paid-in capital amounts
include this initial $500,000 capitalization. The pro forma additional
paid-in capital amounts are net of stock offering expenses and represent
the amount paid for the shares sold in the offering at $10.00 per share,
less the par value of outstanding shares. Because Kearny Financial Corp. is
selling only 30% of the total shares to be outstanding upon completion of
the offering, the additional paid-in capital represents the net proceeds
for the sale of those shares, less the par value of all of the shares
outstanding upon completion of the offering including the shares that will
be held by Kearny MHC. For example, at the midpoint, 47,500,000 shares will
be outstanding upon completion of the offering, 30% of which (14,250,000
shares) would have been sold at $10.00 per share for gross proceeds of
$142,500,000. With estimated stock offering expenses of $2,603,000 at the
midpoint, estimated net proceeds are $139,897,000. The additional paid-in
capital at the midpoint represents the net proceeds of $139,897,000 plus
the existing capital of $500,000 (totaling $140,397,000) less the par value
of 47,500,000 shares, or $4,750,000, resulting in additional paid-in
capital of $135,647,000.
(6) Assumes that 8% of the shares sold in the offering will be purchased by the
employee stock ownership plan, and that the funds used to acquire the
employee stock ownership plan shares will be borrowed from Kearny Financial
Corp., concurrent with the offering. For an estimate of the impact of the
loan on earnings, see Pro Forma Data on page __. Kearny Federal Savings
Bank intends to make scheduled discretionary contributions to the employee
stock ownership plan sufficient to enable the plan to service and repay its
debt over a ten year period. The amount of shares to be acquired by the
employee stock ownership plan is reflected as a reduction of stockholders'
equity. See Management - Potential Stock Benefit Plans - Employee Stock
Ownership Plan on page __. If the employee stock ownership plan is unable
to purchase stock in the stock offering due to an oversubscription in the
offering by eligible account holders having first priority, and the
purchase price in the open market is greater than the original $10.00 price
per share, there will be a corresponding reduction in stockholders' equity.
See The Stock Offering - Subscription Offering - Subscription Rights on
page __.
(7) Assumes that an amount equal to 1.96% of the total number of shares
outstanding after the offering, including the shares held by Kearny MHC, is
purchased by the restricted stock plan following the stock offering. The
stock purchased by the restricted stock plan is reflected as a reduction of
stockholders' equity. See footnote (2) to the table under Pro Forma Data on
page __.
PRO FORMA DATA
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. However, investable net proceeds to Kearny
Financial Corp. are currently estimated to be between $101.1 million at the
minimum and $137.3 million at the maximum of the offering range, respectively
(or $158.0 million at the maximum, as adjusted, if the independent valuation is
increased by 15%), based on the following assumptions:
o shares sold in the offering will be sold in either the subscription
offering or the community offering, with no shares being sold in a
syndicated community offering;
29
o an amount equal to the cost of purchasing 8% of the shares sold in the
offering will be loaned to the employee stock ownership plan to fund its
purchase;
o an amount equal to 1.96% of the total number of outstanding shares,
including the shares held by Kearny MHC, will be acquired by the restricted
stock plan through open market purchases at an assumed purchase price of
$10.00 per share; and
o expenses of the offering, including the fees and expenses of Sandler
O'Neill & Partners, L.P., are estimated to be approximately $2.4 million at
the minimum and $2.8 million at the maximum of the offering range ($3.0
million at the maximum, as adjusted).
The following table sets forth Kearny Financial Corp.'s historical net
income and stockholders' equity prior to the offering and pro forma net income
and stockholders' equity following the offering. In preparing this table and in
calculating pro forma data, we have made the following assumptions:
o Pro forma earnings have been calculated assuming the stock had been sold at
the beginning of the period and the net proceeds had been invested at an
average yield of 2.09%, which approximates the average of the yield on a
one-year U.S. Treasury bill on March 31, 2004 and June 30, 2004. The yield
on a one-year U.S. Treasury bill, rather than an arithmetic average of the
average yield on interest-earning assets and the average rate paid on
deposits, has been used to estimate income on net proceeds because we
believe that the one-year U.S. Treasury bill rate is a more accurate
estimate of the rate that would be obtained on an investment of net
proceeds from the offering.
o The pro forma after-tax yield on the net proceeds is assumed to be 1.24%
for the year ended June 30, 2004, based on an effective tax rate of 40.85%.
The effective tax rate of 40.85% is used in calculating the pro-forma
after-tax yield because that is the marginal effective tax rate. The 30.82%
effective tax rate for the year ended June 30, 2004 as stated in Note 15 to
the consolidated financial statements takes into account the effect of
tax-exempt income from obligations of state and political subdivisions.
o We did not include any withdrawals from deposit accounts to purchase shares
in the offering.
o Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of
stock, as adjusted in the pro forma net earnings per share to give effect
to the purchase of shares by the employee stock ownership plan.
o Pro forma stockholders' equity amounts have been calculated as if the stock
had been sold on June 30, 2004 and no effect has been given to the assumed
earnings effect of the transaction.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if Kearny Financial Corp. were liquidated.
The pro forma data does not predict how much we will earn in the future. You
should not use the following information to predict future results of
operations.
The table on the following page summarizes historical and pro forma
data of Kearny Financial Corp. at or for the year ended June 30, 2004 based on
the assumptions set forth above and in the notes to the tables and should not be
used as a basis for projections of market value of the stock following the stock
offering. No effect has been given in the table to the possible issuance of
additional stock reserved for future issuance pursuant to a stock option plan
that may be adopted by the Board of Directors of Kearny Financial Corp. and
approved by stockholders following the stock offering. Pro forma stockholders'
equity per share does not take into account the effect of intangible assets if
Kearny Financial Corp. were liquidated. See Management - Potential Stock Benefit
Plans - Stock Option Plan on page __.
30
At or For the Year Ended June 30, 2004
-----------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
12,112,500 14,250,000 16,387,500 18,845,625
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
------------- --------------- --------------- -------------
(Dollars in thousands, except share and per share amounts)
Gross proceeds ........................................ $ 121,125 $ 142,500 $ 163,875 $ 188,456
Less expenses ......................................... (2,406) (2,603) (2,799) (3,025)
------------ ------------ ------------ ------------
Estimated net proceeds ............................. 118,719 139,897 161,076 185,431
Less ESOP funded by Kearny Financial Corp. ............ (9,690) (11,400) (13,110) (15,077)
Less restricted stock plan adjustment ................. (7,914) (9,310) (10,707) (12,312)
------------ ------------ ------------ ------------
Estimated investable net proceeds .................. $ 101,115 $ 119,187 $ 137,259 $ 158,042
============ ============ ============ ============
Net Income:
Historical ......................................... $ 12,897 $ 12,897 $ 12,897 $ 12,897
Pro forma income on net proceeds ................... 1,250 1,473 1,697 1,954
Pro forma ESOP adjustment(1) ....................... (573) (674) (775) (892)
Pro forma restricted stock plan adjustment(2) ...... (936) (1,101) (1,267) (1,457)
------------ ------------ ------------ ------------
Pro forma net income(1)(3)(4) ...................... $ 12,638 $ 12,595 $ 12,552 $ 12,502
============ ============ ============ ============
Per share net income:
Historical ......................................... $ 0.32 $ 0.27 $ 0.24 $ 0.20
Pro forma income on net proceeds ................... 0.03 0.03 0.03 0.03
Pro forma ESOP adjustment(1) ....................... (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan adjustment(2) ...... (0.02) (0.02) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma net income per share(1)(3)(4) ............ $ 0.32 $ 0.27 $ 0.24 $ 0.20
============ ============ ============ ============
Shares used in calculation of income per share (1) .... 39,454,450 46,417,000 53,379,550 61,386,483
Stockholders' equity:
Historical ......................................... $ 293,505 $ 293,505 $ 293,505 $ 293,505
Estimated net proceeds ............................. 118,719 139,897 161,076 185,431
Less: Common Stock acquired by the ESOP(1) ......... (9,690) (11,400) (13,110) (15,077)
Less: Common Stock acquired by the restricted
stock plan(2) ............................. (7,914) (9,310) (10,707) (12,312)
------------ ------------ ------------ ------------
Pro forma stockholders' equity(1)(3)(4) ............ 394,620 412,692 430,764 451,547
Intangible assets .................................. 84,463 84,463 84,463 84,463
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity(1)(3)(4) ... $ 310,157 $ 328,229 $ 346,301 $ 367,084
============ ============ ============ ============
Stockholders' equity per share:
Historical ......................................... $ 7.27 $ 6.18 $ 5.37 $ 4.67
Estimated net proceeds ............................. 2.94 2.95 2.95 2.95
Less: Common Stock acquired by the ESOP(1) ......... (0.24) (0.24) (0.24) (0.24)
Less: Common stock acquired by the restricted
stock plan(2) ............................. (0.20) (0.20) (0.20) (0.20)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per share(4) ........ 9.77 8.69 7.88 7.18
Intangible assets .................................. 2.09 1.78 1.55 1.34
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity per share(4) $ 7.68 $ 6.91 $ 6.33 $ 5.84
============ ============ ============ ============
Offering price as a percentage of pro forma
stockholders' equity per share ...................... 102.35% 115.07% 126.90% 139.28%
============ ============ ============ ============
Offering price as a percentage of pro forma tangible
stockholders' equity per share ...................... 130.21% 144.72% 157.98% 171.23%
============ ============ ============ ============
Offering price to pro forma net income per share ...... 31.25x 37.04x 41.67x 50.00x
Shares used in calculation of stockholders' equity
per share ........................................... 40,375,000 47,500,000 54,625,000 62,818,750
31
(1) Assumes that 8% of the shares sold in the offering will be purchased by
Kearny Federal Savings Bank's employee stock ownership plan and that the
plan will borrow the funds for the purchase from Kearny Financial Corp. The
stock acquired by the employee stock ownership plan is reflected as a
reduction of stockholders' equity. Kearny Federal Savings Bank intends to
make annual contributions to the plan in an amount at least equal to the
principal and interest requirement of the loan. This table assumes a
10-year amortization period. See Management - Potential Stock Benefit Plans
- Employee Stock Ownership Plan on page __. The pro forma net earnings
assumes: (i) that Kearny Federal Savings Bank's contribution to the
employee stock ownership plan for the principal portion of the debt service
requirement for the year ended June 30, 2004 was made at the end of the
period; (ii) that 96,900, 114,000, 131,100 and 150,765 shares at the
minimum, midpoint, maximum, and 15% above the maximum of the range,
respectively, were committed to be released during the year ended June 30,
2004, at an average fair value of $10.00 per share and were accounted for
as a charge to expense; and (iii) only the employee stock ownership plan
shares committed to be released were considered outstanding for purposes of
the net earnings per share calculations. All employee stock ownership plan
shares were considered outstanding for purposes of the stockholders' equity
per share calculations.
(2) Gives effect to the restricted stock plan that may be adopted by Kearny
Federal Savings Bank if approved by the stockholders of Kearny Financial
Corp. at a meeting to be held after completion of the stock offering. If
the restricted stock plan is approved by Kearny Financial Corp.'s
stockholders, the restricted stock plan would be expected to acquire an
amount of stock equal to 1.96% of the total number of shares outstanding
after the offering, including the shares held by Kearny MHC, or 791,350,
931,000, 1,070,650 and 1,231,248 shares of stock respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range, through
open market purchases. Funds used by the restricted stock plan to purchase
the shares will be contributed to the restricted stock plan by Kearny
Federal Savings Bank. In calculating the pro forma effect of the restricted
stock plan, it is assumed that the required stockholder approval has been
received, that the shares were acquired by the restricted stock plan at the
beginning of the year ended June 30, 2004 through open market purchases, at
$10.00 per share, and that 20% of the amount contributed was amortized to
expense during the year ended June 30, 2004. The restricted stock plan will
be amortized over 5 years. The issuance of authorized but unissued shares
of stock to the restricted stock plan instead of open market purchases
would dilute the voting interests of existing stockholders by approximately
1.92%, pro forma net income per share for the year ended June 30, 2004
would be $0.31, $0.27, $0.23 and $0.20 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, and pro forma
stockholders' equity per share at June 30, 2004 would be $9.78, $8.71,
$7.93 and $7.24 at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively. There can be no assurance that stockholder
approval of the restricted stock plan will be obtained or that the actual
purchase price of the shares will be equal to $10.00 per share. See
Management - Potential Stock Benefit Plans - Restricted Stock Plan on page
__.
(3) The retained earnings of Kearny Financial Corp. and Kearny Federal Savings
Bank will continue to be substantially restricted after the stock offering.
See Dividend Policy on page __ and Regulation - Regulation of Kearny
Federal Savings Bank - Dividends and Other Capital Distribution Limitations
on page __.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plan that may be adopted by Kearny Financial
Corp. if approved by the stockholders of Kearny Financial Corp. at a
meeting to be held after completion of the stock offering. If the stock
option plan is approved by Kearny Financial Corp.'s stockholders, an amount
equal to 4.9% of the total number of shares outstanding after the offering,
including the shares held by Kearny MHC, or 1,978,375, 2,327,500, 2,676,625
and 3,078,119 shares at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively, will be reserved for future issuance
upon the exercise of options to be granted under the stock option plan. The
issuance of authorized but unissued shares of stock to the stock option
plan instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 4.67%. Assuming stockholder approval
of the stock option plan and the exercise of all options at the beginning
of the period at an exercise price of $10.00 per share, the pro forma net
earnings per share would be $0.31, $0.26, $0.22 and $0.19, respectively, at
the minimum, midpoint, maximum and 15% above the maximum of the range for
the year ended June 30, 2004, and pro forma stockholders' equity per share
would be $9.78, $8.75, $7.98 and $7.32, respectively, at the minimum,
midpoint, maximum and 15% above the maximum of the range at June 30, 2004.
See Management - Potential Stock Benefit Plans - Stock Option Plan on page
__.
32
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents Kearny Federal Savings Bank's historical
and pro forma capital position relative to its capital requirements as of June
30, 2004. Pro forma capital levels assume receipt by Kearny Federal Savings Bank
of 50% of the net proceeds. For a discussion of the assumptions underlying the
pro forma capital calculations presented below, see Use of Proceeds,
Capitalization and Pro Forma Data on pages ____________. The definitions of the
terms used in the table are those provided in the capital regulations issued by
the Office of Thrift Supervision. For a discussion of the capital standards
applicable to Kearny Federal Savings Bank, see Regulation - Regulation of Kearny
Federal Savings Bank - Regulatory Capital Requirements on page __.
Pro Forma at June 30, 2004
----------------------------------------------------------------------------------------
Maximum, as adjusted
Minimum Midpoint Maximum 18,845,625 shares
Actual, at 12,112,500 shares sold 14,250,000 shares sold 16,387,500 shares sold shares sold at
June 30, 2004 at $10.00 per share at $10.00 per share at $10.00 per share $10.00 per share(1)
----------------------- ---------------------- -------------------- --------------------- ---------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
GAAP Capital(3)..... $291,985 15.09% $333,741 16.80% $341,224 17.09% $348,707 17.39% $357,312 17.72%
Tangible Capital.... $197,514 10.76% $239,270 12.68% $246,753 13.01% $254,236 13.34% $262,841 13.72%
Tangible Capital
Requirement....... 27,534 1.50 28,306 1.50 28,444 1.50 28,582 1.50 28,740 1.50
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess.............. $169,980 9.26% $210,964 11.18% $218,309 11.51% $225,654 11.84% $234,101 12.22%
======== ==== ======== ===== ======== ===== ======== ===== ======== =====
Core Capital........ $197,514 10.76% $239,270 12.68% $246,753 13.01% $254,236 13.34% $262,841 13.72%
Core Capital
Requirement(4).... 55,068 3.00 56,612 3.00 56,887 3.00 57,163 3.00 57,480 3.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess.............. $142,446 7.76% $182,658 9.68% $189,866 10.01% $197,073 10.34% $205,361 10.72%
======== ==== ======== ==== ======== ===== ======== ===== ======== =====
Total Risk-Based
Capital(5)(6)..... $209,569 32.56% $251,325 38.43% $258,808 39.47% $266,291 40.50% $274,896 41.67%
Risk-Based Capital
Requirement....... 51,490 8.00 52,313 8.00 52,460 8.00 52,607 8.00 52,776 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess.............. $158,079 24.56% $199,012 30.43% $206,348 31.47% $213,684 32.50% $222,120 33.67%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Reconciliation of
capital infused
into Kearny
Federal Savings
Bank:
Net proceeds
infused........... $59,360 $69,949 $80,538 $92,716
Less:
Common stock
acquired by
employee stock
ownership plan.. 9,690 11,400 13,110 15,077
Common stock
acquired by
restricted
stock plan...... 7,914 9,310 10,707 12,312
------- ------- ------- -------
Pro forma increase
in GAAP and
regulatory
capital.......... $41,756 $49,239 $56,721 $65,327
======= ======= ======= =======
33
(1) As adjusted to give effect to an increase in the number of shares issued
which could occur due to an increase in the offering range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
offerings.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
(3) Generally accepted accounting principles, referred to as "GAAP," capital
includes goodwill, intangible assets and unrealized gain (loss) on
available-for-sale securities, net, which are not included in regulatory
capital.
(4) The current Office of Thrift Supervision core capital requirement for
savings banks is 3% of total adjusted assets for thrifts that receive the
highest supervisory rating for safety and soundness and a 4% to 5% core
capital ratio requirement for all other thrifts. See Regulation -
Regulation of Kearny Federal Savings Bank - Regulatory Capital Requirements
on page __.
(5) Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
(6) The difference between equity under GAAP and regulatory risk-based capital
is attributable to the subtraction of accumulated other comprehensive
income of $7.0 million and the addition of general loan loss reserves of
$5.0 million.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Kearny Financial Corp.'s
consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of
operations. You should read the information in this section in conjunction with
Kearny Financial Corp.'s consolidated financial statements and accompanying
notes to consolidated financial statements beginning on page F-1 of this
document, and the other statistical data provided in this prospectus. Unless
otherwise indicated, the financial information presented in this section
reflects the consolidated financial condition and results of operations of
Kearny Financial Corp. and its direct and indirect subsidiaries.
Overview
Financial Condition and Results of Operations. Kearny Financial Corp.'s
results of operations depend primarily on its net interest income. Net interest
income is the difference between the interest income we earn on our
interest-earning assets and the interest we pay on our interest-bearing
liabilities. It is a function of the average balances of loans and investments
versus deposits and borrowed funds outstanding in any one period and the yields
earned on those loans and investments and the cost of those deposits and
borrowed funds.
Our interest-earning assets consist primarily of mortgage-backed
securities and investment securities, which comprised 64.5% of our total assets
while our loan portfolio comprised 26.1% of our total assets at June 30, 2004.
This was a change from 50.4% and 25.5%, respectively, at June 30, 2003. The
largest change in our interest-earning assets between June 30, 2003 and June 30,
2004 was a $286.2 million, or 87.9%, decrease in cash and cash equivalents and
corresponding increases in the investment securities held to maturity and the
mortgage-backed securities held to maturity portfolios of $148.5 million and
$89.7 million, respectively. The shift from cash and cash equivalents into
securities was the result of management's decision to move assets from
interest-bearing deposits and securities purchased under agreements to resell
into higher yielding mortgage-backed and investment securities.
Our interest-bearing liabilities consist primarily of retail deposits
and borrowings from the Federal Home Loan Bank of New York. At June 30, 2004,
our total deposits were $1.54 billion, compared to $1.61 billion at June 30,
2003, and our Federal Home Loan Bank of New York borrowings were $94.2 million
compared to $75.7 million a year earlier. The primary factor for the decrease in
deposits was the runoff of certificates of deposit due to lower interest rates
paid as well as a movement to alternative investment opportunities in the
marketplace. Federal Home Loan Bank advances increased in order to fund the
purchase of investment securities and mortgage-backed securities.
Our net interest income decreased by 10.0%, to $46.6 million for the
year ended June 30, 2004 from $51.8 million for the year ended June 30, 2003.
The net interest rate spread increased slightly to 2.37% for the year ended June
30, 2004 from 2.36% for 2003 as the decreases in the average cost of
interest-bearing liabilities and the average yield on interest-earning assets,
which resulted primarily from lower market interest rates prevailing during the
period, were nearly the same. Total interest income decreased 18.5% due to a
4.6% decrease in average balance of interest-earning assets and a 75 basis point
decrease in the average yield thereof, while total interest expense decreased
28.2%, primarily as a result of the 76 basis point decrease in the average cost
of interest-bearing liabilities.
35
Our results of operations also depend on our provision for loan losses,
non-interest income and non-interest expense. Non-interest income includes
service fees and charges, including income generated by Kearny Federal Savings
Bank's ATM network, and income on bank owned life insurance. Non-interest
expense includes salaries and employee benefits, occupancy expenses and other
general and administrative expenses. Non-interest expense decreased
significantly for 2004 compared to 2003, from $44.4 million for 2003 to $29.5
million for 2004, primarily as a result of a $14.3 million decrease in merger
related expenses in connection with our acquisitions of Pulaski Savings Bank and
West Essex Bank. These expenses consisted mainly of the payout of employment
contracts, unexercised stock options, supplemental benefit plans and incentive
stock awards.
Recent Acquisitions. During recent years, we have implemented an
expansion strategy fueled primarily by acquisitions, and have experienced
significant growth with total assets growing from $793.2 million at June 30,
1998 to $1.94 billion at June 30, 2004, securities growing from $596.9 million
at June 30, 1998 to $1.25 billion at June 30, 2004, loans receivable, net
growing from $152.1 million at June 30, 1998 to $505.8 million at June 30, 2004
and total deposits growing from $608.9 million at June 30, 1998 to $1.54 billion
at June 30, 2004. At June 30, 1998, we had five branch offices and 75 employees,
and at June 30, 2004 we had twenty-five branch offices and 245 employees.
We completed our first whole bank acquisition in March 1999 with the
acquisition of 1st Bergen Bancorp and the merger of South Bergen Savings Bank
into Kearny Federal Savings Bank, adding approximately $306.0 million in assets
and four branch offices, giving Kearny Federal Savings Bank a total of nine
branch offices following completion of this merger. In October 2002, Kearny
Financial Corp. acquired Pulaski Bancorp, Inc., and Pulaski Savings Bank was
merged into Kearny Federal Savings Bank. This transaction added approximately
$267.0 million in assets and seven branch offices. Additionally, we completed
one deposit assumption in 1999 and opened a de novo branch in 2002. Our third
whole bank acquisition was completed in July 2003 with Kearny Financial Corp.'s
acquisition of West Essex Bancorp, Inc. and the merger of West Essex Bank into
Kearny Federal Savings Bank, adding approximately $363.1 million in assets and
eight branch offices, bringing Kearny Federal Savings Bank's total offices to
twenty-five.
We intend to continue to grow. In addition to building our core banking
business through internal growth, we will also actively consider expansion
opportunities such as the acquisition of branches and other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. Furthermore, there can be no assurance that we will continue to
experience such rapid growth, or any growth, in the future. We may have
difficulty finding suitable sites for de novo branches and identifying and
successfully acquiring branches or other financial institutions.
Business Strategy. Our current business strategy is to seek to grow and
improve our profitability by:
o increasing the volume of our loan originations and the size of
our loan portfolio relative to our securities portfolio;
o increasing the origination of multi-family and commercial real
estate loans, construction loans and commercial business loans;
36
o building our core banking business through internal growth and de
novo branching, as well as actively considering expansion
opportunities such as the acquisition of branches and other
financial institutions;
o developing a sales culture by training and encouraging our branch
personnel to promote our existing products and services to our
customers; and
o maintaining high asset quality.
Our deposits have traditionally exceeded our loan originations, and we
have invested these deposits primarily in mortgage-backed securities and
investment securities. Following our acquisition of South Bergen Savings Bank in
1999, we began focusing on growing the size of our loan portfolio. Prior to that
time, our operations were more focused on obtaining deposits from the
communities in which we operated our five branch offices in Bergen and Hudson
counties and investing those funds in mortgage-backed and other securities. A
primary highlight of our current business strategy will be to increase our
volume of loan originations and the size of our loan portfolio.
In an effort to develop our commercial business, we have recently added
four experienced business development officers who will focus on commercial loan
originations, and we will soon offer internet banking and cash management
services to our commercial customers. Our residential loan originations have
traditionally been largely advertising driven, but we plan to add regional loan
originators throughout our branch network who will seek to build our residential
loan portfolio.
Critical Accounting Policies
Our accounting policies are integral to understanding the results
reported and are described in detail in Note 1 of our consolidated financial
statements beginning on page F-1 of this document. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the consolidated statements of financial condition and revenues and expenses for
the periods then ended. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
changes relate to the determination of the allowance for loan losses, the
assessment of prepayment risks associated with mortgage-backed securities, the
evaluation of securities impairment and the impairment testing of goodwill.
Allowance for Loan Losses. The allowance for loan losses represents our
best estimate of losses known and inherent in our loan portfolio that are both
probable and reasonable to estimate. In determining the amount of the provision
allowance for loan losses, we consider the losses inherent in our loan portfolio
and changes in the nature and volume of our loan activities, along with general
economic and real estate market conditions. We use a two tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of our loan portfolio. We maintain a loan review system which allows
for a periodic review of our loan portfolio and the early identification of
potential impaired loans. Such system takes into consideration, among other
things, delinquency status, size of loans, type of collateral and financial
condition of the borrowers. Specific loan loss allowances are established for
identified loans based on a review of such information and/or appraisals of the
underlying collateral. General loan loss allowances are based upon a combination
of factors including, but not limited to, actual loan loss experience,
composition of the loan portfolio, current economic conditions and management's
judgment.
37
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions for loan losses may be necessary
in order to increase the level of the allowance for loan losses. For example,
our evaluation of the allowance includes consideration of current economic
conditions, and a change in economic conditions could reduce the ability of our
borrowers to make timely repayments of their loans. This could result in
increased delinquencies and increased non-performing loans, and thus a need to
make increased provisions to the allowance for loan losses, which would be a
charge to income during the period the provision is made, resulting in a
reduction to our earnings. A change in economic conditions could also adversely
affect the value of the properties collateralizing our real estate loans,
resulting in increased charge-offs against the allowance and reduced recoveries,
and thus a need to make increased provisions to the allowance for loan losses.
Historically, we believe our estimates and assumptions in evaluating
the allowance for loan losses and setting the provision have been fairly
accurate. The increase in the ratio of the allowance for loan losses to
non-performing loans to 220.96% at June 30, 2004 from 177.64% at June 30, 2003
is a result of a $588,000 decrease in non-performing loans.
Prepayment Risks Associated with Mortgage-backed Securities. At June
30, 2004 and 2003, net premiums of approximately $3.6 million and $3.7 million
were included in the carrying amounts of our mortgage-backed securities. We
amortize the premium included in the carrying amount over the average life of
the security. The mortgage-backed securities we hold in our portfolio are
subject to prepayment risk because changes in interest rates can affect the
expected life of these mortgage-backed securities. This means the level of
prepayments must be estimated in order to estimate the average life of
mortgage-backed securities.
We evaluate the estimated average life of mortgage-backed securities on
a monthly basis and adjust the amortization speed to reflect any change in the
average life. Amortizing the premium faster results in a reduction of the yield
on the securities, whereas slowing the amortization increases the yield. A
reduction in the yield decreases our interest income on mortgage-backed
securities, while an increase in the yield increases our interest income on
mortgage-backed securities.
The assessment of the prepayment risks related to mortgage-backed
securities is highly dependent upon the prediction of trends in market interest
rates. A reduction in interest rates generally results in increased prepayments
of mortgage-backed securities, as borrowers refinance their debt in order to
reduce their borrowing cost. Correspondingly, an increase in interest rates
should result in decreased prepayments and fewer refinancings. Because changes
in interest rates can affect the average life of mortgage-backed securities,
this makes the estimation of the prepayment risk difficult. We address this
difficulty by adjusting the amortization speed monthly to reflect the current
average life.
Impairment Testing of Goodwill. Goodwill, representing the excess of
amounts paid over the fair value of net assets of the institutions acquired in
purchase transactions, is recorded at its fair value at the date of acquisition.
Through June 30, 2002, goodwill was amortized using the straight line method
over 15 years. Effective July 1, 2002, we adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets," under which we no longer amortize goodwill, but test it annually for
impairment. Impairment exists when the carrying value of goodwill exceeds its
implied fair value. We would also test goodwill for impairment between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount.
38
At June 30, 2004 and 2003, we reported goodwill of $82.3 million and
$31.7 million, respectively. The increase from 2003 to 2004 resulted from our
acquisition of West Essex Bank in which $50,517,000, the amount paid to minority
stockholders of West Essex Bancorp, Inc. in excess of their interest in West
Essex Bancorp, Inc., was recorded as goodwill.
We have tested such goodwill and concluded that no impairment charges
were required to be recorded in years ended June 30, 2004 and 2003. Although the
value of the goodwill was determined not to be impaired at the date of the
testing, the value of the goodwill can change in the future. The value of the
goodwill would be expected to decrease if there was a significant decrease in
the franchise value of Kearny Federal Savings Bank. If an impairment loss is
determined in the future, the loss will be reflected as an expense for the
period in which the impairment was determined, meaning that our net income for
that period would be reduced by the amount of the impairment loss. Since
beginning testing for impairment under SFAS 142 effective July 1, 2002, we have
not had any impairment loss, thus we believe that historically, our estimates
and assumptions in evaluating the value of the goodwill have been accurate.
Other-than-Temporary Impairment of Securities. Effective June 30, 2004,
we adopted Emerging Issues Tax Force ("EITF") Issuance No. 03-1, "The Meaning of
Other than Temporary Impairment and Its Application to Certain Investments,"
which requires quantitative and qualitative disclosures for investment
securities that are impaired at the balance sheet date, but for which
other-than-temporary impairment has not been recognized. Under EITF 03-1,
individual securities are considered impaired when fair value is less than
amortized cost. We evaluate on a monthly basis whether any securities are
other-than-temporarily impaired. In making this determination, we consider the
extent and duration for the impairment, the nature and financial health of the
issuer, other factors relevant to specific securities, and our ability and
intent to hold securities for a period of time sufficient to allow for any
anticipated recovery in market value. If a security is determined to be
other-than-temporarily impaired, an impairment loss is charged to income during
the period the impairment loss is found to exist, resulting in a reduction to
our earnings for that period.
As of June 30, 2004, we concluded that any unrealized losses in the
securities available for sale, mortgage-backed securities held to maturity and
investment securities held to maturity portfolios are temporary in nature
because they are primarily related to market interest rates and not related to
the underlying credit quality of the issuers of the securities. Additionally, we
have the intent and ability to hold these investments for the time necessary to
recover the amortized cost. Future events that would materially change this
conclusion and require an impairment loss to be charged to operations include a
change in the credit quality of the issuers. There is no basis to evaluate the
accuracy of our estimates and assumptions in evaluating whether any securities
are other-than-temporarily impaired as EITF 03-1 was first adopted effective
June 30, 2004.
Comparison of Financial Condition at June 30, 2004 and June 30, 2003
Our total assets decreased by $60.0 million, or 3.0%, to $1.94 billion
at June 30, 2004 from $2.0 billion at June 30, 2003, primarily due to a $286.2
million decrease in cash and cash equivalents, which was partly offset by growth
of $242.0 million in the securities portfolios. Total liabilities similarly
decreased as a $76.2 million net outflow of deposits was partially offset by an
$18.5 million increase in Federal Home Loan Bank advances.
The decrease in total assets was most pronounced in cash and cash
equivalents, which decreased $286.2 million, or 87.9%, to $39.5 million at June
30, 2004 from $325.7 million at June 30, 2003, in order to offset the
aforementioned deposit outflow and to fund increases in the securities
portfolios. The
39
securities portfolios, including both securities available for sale and
securities held to maturity, increased $242.0 million, or 24.0%, to $1.25
billion at June 30, 2004, from $1.01 billion at June 30, 2003. Investment
securities held to maturity increased $148.6 million, or 51.7%, to $435.9
million at June 30, 2004, from $287.3 million at June 30, 2003. Mortgage-backed
securities held to maturity increased $89.8 million, or 13.2%, to $771.4 million
at June 30, 2004, from $681.6 million at June 30, 2003. In both cases, the
increases were the result of investing funds previously held in cash equivalents
in order to increase overall yield. We would not expect further similarly large
investments of the funds currently held in cash equivalents into the securities
portfolio since a sufficient amount of cash equivalents is necessary to maintain
sufficient liquidity.
Loans receivable decreased marginally to $505.8 million at June 30,
2004, from $509.2 million at June 30, 2003. One-to -four family residential
mortgage loans decreased by $8.2 million to $358.2 million from $366.4 million,
reflecting repayments exceeding originations and purchases during the year ended
June 30, 2004. Multi-family and commercial real estate mortgage loans increased
by $12.3 million to $83.4 million, reflecting our strategy to build this part of
our loan portfolio.
The West Essex Bancorp, Inc. merger was consummated on July 1, 2003. As
a result, goodwill increased $50.6 million, or 159.6%, to $82.3 million at June
30, 2004, from $31.7 million at June 30, 2003. The $67.9 million deposit for
acquisition of West Essex Bancorp, Inc. at June 30, 2003 was paid to West Essex
stockholders for the buyout of the minority interest stockholders.
Premises and equipment increased by $6.8 million, or 34.0%, to $26.6
million from $19.9 million. This increase resulted mainly from a $5.9 million
increase in construction in progress, in connection with the construction of our
new 53,000 square feet administrative building in Fairfield, New Jersey. We
began moving management staff and administrative operations into parts of this
building in October 2004, with an anticipated final completion of the move-in
phase by December 2004.
Total deposits decreased by $76.2 million, or 4.7%, to $1.54 billion at
June 30, 2004, from $1.61 billion at June 30, 2003. The primary factor for this
decrease was the runoff of certificates of deposit due to lower interest rates
paid.
Federal Home Loan Bank advances increased $18.5 million, or 24.4%, to
$94.2 million at June 30, 2004 from $75.7 million at June 30, 2003. The increase
in Federal Home Loan Bank advances was used to fund the purchase of investment
securities and mortgage-backed securities held-to-maturity. New advances drawn
were fixed rate borrowings with maturities of less than one year.
Stockholders' equity increased $15.2 million, or 5.5%, to $293.5
million at June 30, 2004 from $278.3 million at June 30, 2003, primarily
reflecting income of $12.9 million for the twelve months ended June 30, 2004,
along with an increase in accumulated other comprehensive income of $2.3 million
reflecting an increase in the unrealized gain on available for sale securities.
Comparison of Operating Results for the Years Ended June 30, 2004 and June 30,
2003
General. Net income for the year ended June 30, 2004 was $12.9 million,
an increase of $4.0 million, or 44.9%, from $8.9 million for 2003. The increase
in net income resulted primarily from a decrease in non-interest expense
primarily due to significantly lower merger related expenses recorded in 2004 as
compared to 2003, partially offset by a decrease in net interest income.
40
Net Interest Income. Net interest income decreased by $5.2 million, or
10.0%, to $46.6 million for the year ended June 30, 2004 from $51.8 million for
the year ended June 30, 2003. The net interest rate spread increased slightly to
2.37% for the year ended June 30, 2004 from 2.36% for 2003. The net interest
margin decreased 16 basis points to 2.59% for the year ended June 30, 2004
compared with 2.75% for the year ended June 30, 2003. The net interest rate
spread changed little as the 76 basis point reduction in the cost of
interest-bearing liabilities was closely matched by the 75 basis point decline
in the average yield on interest-earning assets. The decrease in the net
interest margin is largely reflective of the decrease in the ratio of
interest-earning assets to interest-bearing liabilities to 112.46% for the year
ended June 30, 2004, from 116.54% for the year ended June 30, 2003.
Interest Income. Total interest income decreased $17.8 million, or
18.5%, to $78.7 million for the year ended June 30, 2004, from $96.5 million for
the year ended June 30, 2003, due to decreases in average interest-earning
assets, which declined $87.3 million, or 4.6%, to $1.79 billion from $1.88
billion, and average yield, which declined to 4.38% from 5.13%. Average assets
declined due to a decrease in average liabilities, such as certificates of
deposit and Federal Home Loan Bank advances. Average yield decreased due to
lower market interest rates prevailing during the period.
Interest income on loans receivable decreased $7.8 million, or 21.3%,
to $28.9 million for the year ended June 30, 2004, from $36.7 million for the
year ended June 30, 2003. The primary factor for the decrease in interest income
on loans was a $47.0 million decrease in the average balance of loans receivable
from $546.5 million for the year ended June 30, 2003, to $499.5 million for the
year ended June 30, 2004, which was accompanied by a decrease in the average
yield on loans to 5.79% for the year ended June 30, 2004, from 6.71% for the
year ended June 30, 2003. The decreased average balance reflects the high pace
of refinancing and prepayment activity which resulted from the low interest rate
environment and which exceeded origination volume. The lower yield reflects
generally lower interest rates on originations and downward rate adjustments on
adjustable rate and floating rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, increased $5.3 million, or 58.2%, to $14.4 million for the
year ended June 30, 2004 from $9.1 million for the year ended June 30, 2003. The
increase resulted from an increase of $171.6 million, or 67.6%, in the average
balance of investment securities to $425.3 million during the year ended June
30, 2004 from $253.7 million during the year ended June 30, 2003, partially
offset by a decrease in the average yield on investment securities to 3.39%
during the year ended June 30, 2004 from 3.60% during the year ended June 30,
2003. The lower yield reflects generally lower interest rates available on
securities purchased during the current year. The increased average balance
reflects the reinvestment of cash flows from repayments of loans and
mortgage-backed securities held to maturity, reflecting management's decision to
shift assets from those vulnerable to high prepayments, as well as the
redeployment of cash and cash equivalents, reflecting management's decision to
move assets from low yielding interest-bearing deposits and securities purchased
under agreements to resell into higher yielding securities.
Interest income on mortgage-backed securities decreased $13.8 million,
or 28.9%, to $34.0 million for the year ended June 30, 2004 from $47.8 million
for the year ended June 30, 2003. This was a result of a $162.9 million, or
18.6%, decrease in the average balance of mortgage-backed securities to $713.4
million during the year ended June 30, 2004 from $876.3 million during the year
ended June 30, 2003, along with a decrease in the average yield to 4.76% during
the year ended June 30, 2004 from 5.45% during the year ended June 30, 2003. The
decrease in the average balance of mortgage-backed securities was due to high
repayment levels due to accelerated prepayments and refinancing of the
underlying mortgage loans with a significant portion of the cash flows being
reinvested in investment securities. The
41
decline in yield resulted in principal repayments received on older higher
yielding securities while new purchases were made in a lower interest rate
environment.
Interest income on other interest-earning assets decreased $1.6
million, or 55.2%, to $1.3 million for the year ended June 30, 2004 from $2.9
million for the year ended June 30, 2003. This was a result of a $49.0 million,
or 23.9%, decrease in the average balance of other interest-earning assets to
$156.3 million during the year ended June 30, 2004 from $205.3 million during
the year ended June 30, 2003, along with a decrease in the average yield to
0.85% during the year ended June 30, 2004 from 1.42% during the year ended June
30, 2003. The decrease in the average balance was due to the use of assets in
this category to invest in higher yielding securities. The decline in yield
resulted from lower short-term market interest rates.
Interest Expense. Total interest expense decreased $12.6 million, or
28.2%, to $32.1 million for the year ended June 30, 2004 from $44.7 million for
the year ended June 30, 2003, primarily as a result of a decrease in the average
cost of interest-bearing liabilities to 2.01% during the year ended June 30,
2004 from 2.77% during the year ended June 30, 2003. The average balance of
interest-bearing liabilities declined slightly to $1.60 billion during the year
ended June 30, 2004 as compared to $1.61 billion during the year ended June 30,
2003. Average cost decreased due to lower market interest rates prevailing
during the period.
Interest expense on deposits decreased $11.8 million, or 29.6%, to
$28.1 million for the year ended June 30, 2004 from $39.9 million for the year
ended June 30, 2003, primarily due to a decrease in the average cost of
interest-bearing deposits to 1.85% during the year ended June 30, 2004 from
2.63% during the year ended June 30, 2003. The average cost of certificates of
deposit declined to 2.25% from 3.22%, the average cost of savings and club
accounts declined to 1.23% from 1.58%, and the average cost of interest-bearing
demand accounts declined to 0.80% from 1.09%. The average balance of
interest-bearing deposits remained relatively stable overall at $1.52 billion,
although a shift from certificates of deposit to savings and club and demand
accounts took place. Certificates of deposit declined to $963.1 million from
$1.0 billion, savings and club accounts increased to $448.5 million from $417.8
million, and interest-bearing demand accounts increased to $109.8 million from
$98.9 million. This shift in deposit composition reflects the impact of the
lower interest rate environment.
Interest expense on Federal Home Loan Bank advances decreased $769,000,
or 16.1%, to $4.0 million for the year ended June 30, 2004 from $4.8 million for
the year ended June 30, 2003, as a result of a decrease in the average balance
to $74.3 million during the year ended June 30, 2004 from $95.9 million during
the year ended June 30, 2003, which more than offset an increase in the average
cost to 5.40% during the year ended June 30, 2004 to 4.99% during the year ended
June 30, 2003. Both the decline in average balance and the increase in average
cost were the result of the repayment of lower cost short-term debt during 2003.
Provision for Loan Losses. Provisions for loan losses are charged to
operations at a level required to reflect credit losses in the loan portfolio
that are both probable and reasonable to estimate. Management, in determining
the allowance for loan losses, considers the losses inherent in the loan
portfolio and changes in the nature and volume of our loan activities, along
with the general economic and real estate market conditions. We utilize a two
tier approach: (1) identification of impaired loans and establishment of
specific loss allowances on such loans; and (2) establishment of general
valuation allowances on the remainder of our loan portfolio. A specific loan
loss allowance is established for an impaired loan based on delinquency status,
size of loan, type of collateral and/or appraisal of the underlying collateral
and financial condition of the borrower. General loan loss allowances are based
upon
42
a combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment.
There was no provision for loan losses made during the years ended June
30, 2004 and 2003. During the year ended June 30, 2004, total loans decreased
slightly to $510.2 million at June 30, 2004 from $512.4 million at June 30,
2003. Non-performing loans were $2.3 million, or 0.46%, of total loans at June
30, 2004, as compared to $2.9 million, or 0.57%, of total loans at June 30,
2003. The allowance for loan losses as a percentage of gross loans outstanding
was 1.01% at both June 30, 2004 and 2003, reflecting balances of $5.1 million
and $5.2 million, respectively. The increase in the ratio of the allowance for
loan losses to non-performing loans to 220.96% at June 30, 2004 from 177.64% at
June 30, 2003 is a result of a $588,000 decrease in non-performing loans from
$2.9 million at June 30, 2003 to $2.3 million at June 30, 2004.
Management assesses the allowance for loan losses monthly. While
management uses available information to recognize losses on loans, future loan
loss provisions may be necessary based on changes in economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. The allowance for loan losses as of
June 30, 2004 was maintained at a level that represented management's best
estimate of losses in the loan portfolio to the extent they were both probable
and reasonably estimable.
Non-Interest Income. Non-interest income decreased $287,000, or 15.5%,
to $1.6 million for the year ended June 30, 2004 compared to $1.8 million for
the year ended June 30, 2003. The decrease was primarily a result of a reduction
in fees and service charge income due to the deposit outflow experienced during
the year.
At June 30, 2004, we had a $3.8 million investment in bank owned life
insurance. The returns on the investment of the cash value of the policy
generate non-interest income. This investment was acquired in our acquisition of
West Essex Bank in 2003 and covers the former president and chief executive
officer and former chief lending officer of West Essex Bank.
Non-Interest Expense. Non-interest expense decreased $14.9 million, or
33.6%, to $29.5 million for the year ended June 30, 2004, from $44.4 million for
the year ended June 30, 2003. The decrease was primarily a result of decreases
of $14.3 million in merger related expenses and $440,000 in salaries and
employee benefits.
Merger related expenses decreased $14.3 million to $592,000 for the
year ended June 30, 2004, from $14.9 million for the year ended June 30, 2003.
Included in the amount recorded during the year ended June 30, 2003 are $12.3
million in expenses related to the payout of employment contracts, unexercised
stock options, supplemental benefit plans and incentive stock awards as a result
of both the Pulaski and West Essex mergers. The expenses recorded for the year
ended June 30, 2004, and the remaining expenses for the year ended June 30,
2003, consisted primarily of fees due to attorneys and financial advisors for
their work related to the mergers.
Salaries and employee benefits decreased $440,000, or 2.6%, to $16.5
million for the year ended June 30, 2004, compared to $17.0 million for the year
ended June 30, 2003. The decrease was the result of the elimination of several
management and non-management positions related to the merger with West Essex,
the impact of which more than offset normal increases in salary and benefit
levels.
43
All other elements of non-interest expense totaled $12.4 million for
the year ended June 30, 2004, a decrease of $111,000, or 0.9%, from the $12.5
million total for the year ended June 30, 2003. This decrease reflects costs
savings realized as a result of the West Essex merger, partially offset by
normal increases in these elements.
Management expects increased expenses in the future as a result of the
establishment of the employee stock ownership plan and the potential stock
benefit plans, as well as increased costs associated with being a public company
such as periodic reporting, annual meetings, retention of a transfer agent, and
professional fees.
Furthermore, non-interest expense for the year ended June 30, 2004 does
not reflect the impact of our new 53,000 square feet administrative building in
Fairfield, New Jersey. We began moving management staff and administrative
operations into parts of this building in October 2004, with an anticipated
final completion of the move-in phase by December 2004. The total cost of this
building is expected to be approximately $13.5 million, which cost will be
capitalized and amortized over a forty-year period. Additionally, it is
estimated that the annual operating expense of this new building, excluding
depreciation, will be approximately $400,000. We also expect to open a de novo
branch office in Lacey, New Jersey in the first quarter of 2005, with a total
cost of approximately $2.3 million. We plan during 2005 to replace three office
locations with new buildings, at an estimated cost of approximately $1.9 million
per branch. Expenses related to the planned expansion of our operations through
de novo branching and the acquisition of branches or other financial
institutions could also impact earnings in future periods.
Provision for Income Taxes. The provision for income taxes increased
$508,000 to $5.7 million for the year ended June 30, 2004 from $5.2 million for
the year ended June 30, 2003. The effective income tax rates were 38.8% for the
year ended June 30, 2004 as compared to 56.4% for the year ended June 30, 2003.
The income tax expense for the year ended June 30, 2003 was higher than usual
due to the presence of non-deductible merger related costs and excess
compensation expenses, partially offset by a tax benefit related to a former
employee benefit plan. The impact of these items was to increase income tax
expense for the year ended June 30, 2003 by approximately $1.9 million.
Excluding these items, the effective tax rate for the year ended June 30, 2003
would have been 36.2%.
Comparison of Financial Condition at June 30, 2003 and June 30, 2002
Our total assets increased by $90.8 million, or 4.8%, to $2.0 billion
at June 30, 2003 from $1.9 billion at June 30, 2002. The increase was reflected
in cash and cash equivalents, partially offset by an overall decrease in our
securities portfolios, and was funded by growth in deposits.
Cash and cash equivalents increased by $228.7 million, or 235.8%, to
$325.7 million at June 30, 2003 from $97.0 million at June 30, 2002, as heavy
prepayments of mortgage-backed securities and loans receivable were experienced
and a significant portion of these funds received were maintained in cash
equivalents pending reinvestment in the securities portfolios.
Our securities portfolios, including both available for sale securities
and held to maturity securities, decreased by $140.9 million, or 12.3%, to $1.01
billion at June 30, 2003 from $1.15 billion at June 30, 2002. Mortgage-backed
securities held to maturity decreased $286.9 million, or 29.6%, to $681.6
million from $968.5 million due to higher prepayments in the declining interest
rate environment. Investment securities held to maturity increased $147.9
million, or 106.1%, to $287.3 million from $139.4 million as the funds received
from mortgage-backed security repayments and prepayments were partially
44
reinvested in this portfolio as part of a strategy to shift assets away from
securities experiencing high prepayments. Securities available for sale
decreased marginally to $37.8 million at June 30, 2003, from $39.7 million at
June 30, 2002.
Loans decreased by $81.9 million, or 13.9%, to $509.2 million at June
30, 2003 from $591.1 million at June 30, 2002. The decrease in loans primarily
resulted from higher than normal loan repayments due to the low market interest
rate environment in 2002 and the first half of 2003. The decrease in the loan
portfolio was largely experienced in the one-to-four family mortgage loan area,
which decreased $92.6 million to $366.4 million at June 30, 2003, from $459.0
million at June 30, 2002, reflecting the high pace of refinancing and prepayment
activity which resulted from the low interest rate environment and which
exceeded origination volume. Other loan types changed as follows: multi-family
and commercial real estate loans increased by $11.7 million to $71.1 million as
part of our strategy to build this part of our loan portfolio, commercial
business loans decreased by $4.4 million to $2.4 million, consumer loans
increased by $1.3 million to $61.4 million and construction loans increased by
$2.2 million to $11.2 million.
At June 30, 2003, we had an outstanding $67.9 million deposit set aside
for the buyout of the minority interest stockholders of West Essex Bancorp,
Inc., which was utilized when the West Essex merger transaction was consummated
on July 1, 2003. No similar asset existed at June 30, 2002.
Total deposits increased by $134.0 million, or 9.1%, to $1.61 billion
at June 30, 2003 from $1.48 billion at June 30, 2002. The majority of this
growth was in certificates of deposit and savings accounts, which increased
$56.0 million, or 5.9%, and $67.5 million, or 17.2%, respectively, during the
fiscal year ended June 30, 2003. The increase was largely a result of the
opening of the Wyckoff branch in May 2002. The increased deposit growth was used
to purchase securities and repay Federal Home Loan Bank advances.
Federal Home Loan Bank advances decreased $36.4 million, or 32.5%, to
$75.7 million at June 30, 2003 from $112.1 million at June 30, 2002, as maturing
advances were repaid and not renewed using a portion of the funds provided by
deposit growth.
Equity increased $7.6 million, or 2.8%, to $278.3 million at June 30,
2003, from $270.7 million at June 30, 2002, as a result of net income of $8.9
million, partially offset by unrealized losses on available for sale securities
of $1.3 million.
Comparison of Operating Results for the Years Ended June 30, 2003 and June 30,
2002
General. Net income for the year ended June 30, 2003 was $8.9 million,
a decrease of $4.5 million, or 33.3%, from $13.4 million for the year ended June
30, 2002. The decrease in net income was due to a $15.3 million increase in
non-interest expense, primarily attributable to approximately $12.9 million of
expenses related to the West Essex merger and approximately $2.0 million of
expenses related to the Pulaski merger, partially offset by a $8.0 million
decrease in the portion of net income attributed to minority interests and a
$2.7 million decrease in income taxes.
Net Interest Income. Net interest income increased by $78,000, or 0.2
%, to $51.8 million for the year ended June 30, 2003, from $51.7 million for the
year ended June 30, 2002. The net interest rate spread increased slightly to
2.36% for the year ended June 30, 2003 from 2.35% for the year ended June 30,
2002, while the net interest margin decreased during the period to 2.75% from
2.95%. The net
45
interest rate spread changed little as the 94 basis point reduction in the cost
of interest-bearing liabilities was closely matched by the 93 basis point
decline in the average yield on interest-earning assets. The decrease in the net
interest margin is largely reflective of the decrease in the ratio of
interest-earning assets to interest-bearing liabilities to 116.54% for the year
ended June 30, 2003, from 119.58% for the year ended June 30, 2002.
Interest Income. Total interest income decreased by $9.7 million, or
9.1%, to $96.5 million for the year ended June 30, 2003 from $106.2 million for
the year ended June 30, 2002. The primary factor for the decrease in interest
income was a decrease in the average yield of interest-earning assets from 6.06%
for the year ended June 30, 2002 to 5.13% for the year ended June 30, 2003.
Partially offsetting the decreased yield was a $129.0 million, or 7.4%, increase
in the average balance of interest-earning assets. Average yield decreased due
to lower market interest rates prevailing during the period. The increase in
average assets was funded by an overall increase in average deposits.
Interest income on loans receivable decreased $6.6 million, or 15.2%,
to $36.7 million for the year ended June 30, 2003, from $43.3 million for the
year ended June 30, 2002. The primary factors for the decrease in loan interest
income were a decrease of $56.6 million in the average balance of loans
receivable along with a decrease in the average yield on loans receivable to
6.71% from 7.17%. The decrease in average loans was the result of the higher
than normal loan repayments which resulted from the low interest rate
environment and which exceeded origination volume. The decrease in the average
yield on loans receivable reflected decreased market rates of interest on
originations as well as downward interest rate adjustments on floating rate and
adjustable rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, decreased $794,000, or 8.0%, to $9.1 million for the year
ended June 30, 2003, from $9.9 million for the year ended June 30, 2002. The
decrease resulted from a decrease in the average yield on investment securities
to 3.60% during the year ended June 30, 2003, from 5.25% during the year ended
June 30, 2002, which was partially offset by an increase of $64.6 million, or
34.2%, in the average balance of investment securities to $253.7 million during
the year ended June 30, 2003, from $189.1 million during the year ended June 30,
2002. The lower yield reflects $108.7 million of maturities and calls of higher
yielding issues, as well as the generally lower interest rates available on the
securities purchased during the year ended June 30, 2003. The increased average
balance reflects the reinvestment of a portion of the cash flow from repayments
of loans and mortgage-backed securities held to maturity.
Interest income on mortgage-backed securities decreased $2.4 million,
or 4.8%, to $47.8 million for the year ended June 30, 2003 from $50.2 million
for the year ended June 30, 2002. This decrease was a result of a decrease in
the average yield to 5.45% during the year ended June 30, 2003, from 5.93%
during the year ended June 30, 2002, partially offset by an increase of $28.7
million, or 3.4%, in the average balance of mortgage-backed securities to $876.3
million during the year ended June 30, 2003, from $847.6 million during the year
ended June 30, 2002. The decline in yield resulted from principal repayments
received on older higher yielding securities while new purchases were made in a
lower interest rate environment. The change in average balance was not
considered significant.
Interest income on other interest-earning assets increased $170,000, or
6.2%, to $2.92 million for the year ended June 30, 2003, from $2.75 million for
the year ended June 30, 2003. This was a result of a $92.3 million, or 81.7%,
increase in the average balance of other interest-earning assets to $205.3
million during the year ended June 30, 2003, from $113.0 million during the year
ended June 30, 2002, partially offset by a decrease in the average yield to
1.42% during the year ended June 30, 2003, from 2.44% during the year ended June
30, 2002. The increase in the average balance was due to the
46
accumulation of assets in this category which resulted from heavy repayments on
the securities portfolios. The decline in yield resulted from lower short-term
market interest rates.
Interest Expense. Total interest expense decreased $9.7 million, or
17.8%, to $44.7 million for the year ended June 30, 2003 from $54.4 million for
the year ended June 30, 2002, primarily as a result of a decrease in the average
cost of interest-bearing liabilities to 2.77% during the year ended June 30,
2003, from 3.71% during the year ended June 30, 2002, partially offset by a
$149.0, or 10.2 %, increase in the average balance of interest-bearing
liabilities to $1.61 billion during the year ended June 30, 2003, as compared to
$1.47 billion during the year ended June 30, 2002. Average cost decreased due to
lower market interest rates prevailing during the period. The growth in average
interest-bearing liabilities is attributed to the growth of the deposit base.
Interest expense on deposits decreased $9.2 million, or 18.7%, to $39.9
million for the year ended June 30, 2003, from $49.1 million for the year ended
June 30, 2002. The decrease in interest expense on deposits primarily resulted
from a decrease in the average cost to 2.63% for the year ended June 30, 2003,
from 3.61% for the year ended June 30, 2002, partially offset by a $160.6
million, or 11.8 %, increase in the average balance of interest-bearing deposits
to $1.52 billion during the year ended June 30, 2003, as compared to $1.36
billion during the year ended June 30, 2002. The decreased average cost was a
result of the decline in market interest rates from 2002 to 2003. The increase
in the average balance of interest-bearing deposits was the result of both
interest credited to accounts and growth of the deposit base. Certificates of
deposit increased to $1.0 billion from $924.0 million, savings and club accounts
increased to $417.8 million from $340.7 million, and interest-bearing demand
accounts increased to $98.9 million from $93.6 million.
Interest expense on Federal Home Loan Bank advances decreased $587,000,
or 10.9%, to $4.8 million for the year ended June 30, 2003, from $5.4 million
for the year ended June 30, 2002, primarily as a result of a decrease in the
average balance of outstanding advances to $95.9 million for the year ended June
30, 2003, from $107.5 million for the year ended June 30, 2002. The average cost
remained relatively unchanged at 4.99% and 5.00%, respectively.
Provision for Loan Losses. Provisions for loan losses are charged to
operations at a level required to reflect credit losses in the loan portfolio
that are both probable and reasonable to estimate. Management, in determining
the allowance for loan losses, considers the losses inherent in the loan
portfolio and changes in the nature and volume of our loan activities, along
with the general economic and real estate market conditions. We utilize a two
tier approach: (1) identification of impaired loans and establishment of
specific loss allowances on such loans; and (2) establishment of general
valuation allowances on the remainder of our loan portfolio. A specific loan
loss allowance is established for an impaired loan based on delinquency status,
size of loan, type of collateral and/or appraisal of the underlying collateral
and financial condition of the borrower. General loan loss allowances are based
upon a combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment.
There was no provision for losses for the year ended June 30, 2003, as
compared to $3,000 for the year ended June 30, 2002. The overall loan portfolio
reflected an $81.8 million, or 13.8%, decrease in total loans. The allowance for
loan losses as a percentage of gross loans outstanding increased to 1.01% at
June 30, 2003, from 0.87% at June 30, 2002, reflecting balances of $5.2 million
and $5.2 million, respectively. Non-performing loans as a percentage of gross
loans increased only slightly to 0.57% at June 30, 2003, as compared to 0.55% at
June 30, 2002.
47
Non-Interest Income. Non-interest income increased $82,000, or 4.6%, to
$1.85 million for the year ended June 30, 2003, as compared to $1.77 million for
the year ended June 30, 2002. This minimal increase in non-interest income for
2003, as compared to 2002, was consistent with management's expectations.
Non-Interest Expense. Non-interest expense increased $15.3 million, or
52.6%, to $44.4 million for the year ended June 30, 2003, from $29.1 million for
the year ended June 30, 2002. The increase was primarily a result of a $14.3
million increase in merger related expenses, partially offset by a $2.3 million
decrease in goodwill and intangible asset amortization.
Merger related expenses increased $14.3 million to $14.9 million for
the year ended June 30, 2003, from $619,000 for the year ended June 30, 2002.
Included in the amount recorded during the year ended June 30, 2003, are $12.3
million in expenses related to the payout of employment contracts, unexercised
stock options, supplemental benefit plans and incentive stock awards as a result
of both the Pulaski and West Essex mergers. The remaining expenses recorded for
the year ended June 30, 2003, and for the year ended June 30, 2002, consisted
primarily of fees due attorneys and financial advisors for their work related to
the mergers.
Goodwill and intangible asset amortization decreased to $636,000 for
the year ended June 30, 2003, from $2.9 million for the year ended June 30,
2002, due to the adoption, effective July 1, 2003, of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Statement
No. 142 eliminated the amortization of goodwill and, accordingly, no goodwill
related amortization expense was recognized during the year ended June 30, 2003.
Goodwill amortization totaled $2.3 million during the year ended June 30, 2002.
All other elements of non-interest expense totaled $28.8 million for
the year ended June 30, 2003, an increase of $3.3 million, or 12.9%, over the
$25.5 million amount for the year ended June 30, 2002. The increases in these
elements are attributable to the growth of the institution and were reflected in
salary and employee benefits, net occupancy expenses, equipment, advertising,
and miscellaneous expenses.
Provision for Income Taxes. The provision for income taxes decreased
$2.7 million to $5.2 million for the year ended June 30, 2003, from $7.9 million
for the year ended June 30, 2002. The effective income tax rates were 56.4% for
the year ended June 30, 2003, as compared to 32.5% for the year ended June 30,
2002. The income tax expense for the year ended June 30, 2003, was higher than
usual due to the presence of non-deductible merger related costs and excess
compensation expenses, partially offset by a tax benefit related to a former
employee benefit plan. The impact of these items was to increase income tax
expense for the year ended June 30, 2003, by approximately $1.9 million.
Excluding these items, the effective tax rate for the year ended June 30, 2003,
would have been 36.2%. The effective tax rate for the year ended June 30, 2003,
was expected to be higher than in the preceding year due to the effect of a
change in the New Jersey statutory tax rate whereby the statutory tax rate was
increased from 3% to 9% effective January 1, 2002.
48
Average Balance Sheet. The following table sets forth certain
information relating to Kearny Financial Corp. at and for the periods indicated.
The average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily, weekly and monthly balances.
Management does not believe that the use of other than daily balances has caused
any material differences in the information presented in the table.
At June 30, For the Year Ended June 30,
-------------------------- --------------------------------------
2004 2004
-------------------------- --------------------------------------
Actual Actual Average Average
Balance Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)............ $ 505,794 5.60% $ 499,510 $28,919 5.79%
Mortgage-backed securities
held to maturity................. 771,353 4.86 713,422 33,980 4.76
Investment securities:(2)
Tax-exempt........................ 161,469 3.89 141,630 5,702 4.03
Taxable........................... 315,965 3.03 283,708 8,724 3.07
Securities purchased under
agreements to resell............. -- -- 95,385 982 1.03
Other interest-earning assets(3).... 29,872 1.13 60,885 347 0.57
---------- ---------- --------
Total interest-earning assets...... 1,784,453 4.60 1,794,540 78,654 4.38
Non-interest-earning assets.......... 152,065 144,698 --------
---------- ----------
Total assets....................... $1,936,518 $1,939,238
========== ==========
Interest-bearing liabilities:
Interest-bearing demand............. $ 103,648 0.75 $ 109,830 882 0.80
Savings and club.................... 481,466 1.00 448,509 5,508 1.23
Certificates of deposit............. 897,019 1.92 963,089 21,692 2.25
Federal Home Loan Bank advances..... 94,234 4.21 74,340 4,018 5.40
---------- ---------- -------
Total interest-bearing liabilities 1,576,367 1.70 1,595,768 32,100 2.01
Non-interest-bearing liabilities..... 66,646 57,846 -------
---------- ----------
Total liabilities................... 1,643,013 1,653,614
Retained earnings.................... 293,505 285,624
---------- ----------
Total liabilities and
retained earnings................. $1,936,518 $1,939,238
========== ==========
Net interest income.................. $46,554
=======
Interest rate spread(4).............. 2.90% 2.37%
==== ====
Net yield on interest-
earning assets(5)................. 2.59%
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities....... 1.13x 1.12x
==== ====
For the Year Ended June 30,
---------------------------------------------------------------------------------
2003 2002
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)............ $ 546,521 $36,673 6.71% $ 603,131 $ 43,258 7.17%
Mortgage-backed securities
held to maturity................. 876,348 47,764 5.45 847,646 50,225 5.93
Investment securities:(2)
Tax-exempt........................ 98,626 4,346 4.41 64,767 3,066 4.73
Taxable........................... 155,051 4,787 3.09 124,323 6,861 5.52
Securities purchased under
agreements to resell............. 118,077 1,577 1.34 36,538 938 2.57
Other interest-earning assets(3).... 87,238 1,345 1.54 76,415 1,814 2.37
---------- ------- ---------- --------
Total interest-earning assets...... 1,881,861 96,492 5.13 1,752,820 106,162 6.06
Non-interest-earning assets.......... 83,357 ------- 61,711 --------
---------- ----------
Total assets....................... $1,965,218 $1,814,531
========== ==========
Interest-bearing liabilities:
Interest-bearing demand............. $ 98,926 1,074 1.09 $ 93,638 1,289 1.38
Savings and club.................... 417,780 6,604 1.58 340,655 7,873 2.31
Certificates of deposit............. 1,002,229 32,230 3.22 924,011 39,907 4.32
Federal Home Loan Bank advances..... 95,853 4,787 4.99 107,459 5,374 5.00
---------- ------- ---------- --------
Total interest-bearing liabilities 1,614,788 44,695 2.77 1,465,763 54,443 3.71
Non-interest-bearing liabilities..... 79,149 ------- 83,254 --------
---------- ----------
Total liabilities................... 1,693,937 1,549,017
Retained earnings.................... 271,281 265,514
---------- ----------
Total liabilities and
retained earnings................. $1,965,218 $1,814,531
========== ==========
Net interest income.................. $51,797 $51,719
======= =======
Interest rate spread(4).............. 2.36% 2.35%
==== ====
Net yield on interest-
earning assets(5)................. 2.75% 2.95%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities....... 1.17x 1.20x
==== ====
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes both available for sale and held to maturity securities.
(3) Includes interest-bearing deposits at other banks, federal funds purchased
and Federal Home Loan Bank of New York capital stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
49
Rate/Volume Analysis. The following table reflects the sensitivity of
Kearny Financial Corp.'s interest income and interest expense to changes in
volume and in prevailing interest rates during the periods indicated. Each
category reflects the: (1) changes in volume (changes in volume multiplied by
old rate); (2) changes in rate (changes in rate multiplied by old volume); and
(3) net change. The net change attributable to the combined impact of volume and
rate has been allocated proportionally to the absolute dollar amounts of change
in each.
Year Ended June 30, Year Ended June 30,
-------------------------------- --------------------------------
2004 vs. 2003 2003 vs. 2002
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In thousands)
Interest and dividend income:
Loans receivable .............................. $ (2,989) $ (4,765) $ (7,754) $ (3,911) $ (2,674) $ (6,585)
Mortgage-backed securities held to maturity ... (8,201) (5,583) (13,784) 1,674 (4,135) (2,461)
Investment securities:
Tax-exempt .................................. 1,758 (402) 1,356 1,500 (220) 1,280
Taxable ..................................... 3,968 (31) 3,937 1,427 (3,501) (2,074)
Securities purchased under agreements to resell (270) (325) (595) 1,266 (627) 639
Other interest-earning assets ................. (323) (675) (998) 230 (699) (469)
-------- -------- -------- -------- -------- --------
Total interest-earning assets ................ $ (6,057) $(11,781) $(17,838) $ 2,186 $(11,856) $ (9,670)
======== ======== ======== ======== ======== ========
Interest expense:
Interest-bearing demand ....................... $ 112 $ (304) $ (192) $ 69 $ (284) $ (215)
Savings and club .............................. 456 (1,552) (1,096) 1,546 (2,815) (1,269)
Certificates of deposit ....................... (1,210) (9,328) (10,538) 3,157 (10,834) (7,677)
Advances from Federal Home Loan Bank .......... (1,138) 369 (769) (576) (11) (587)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .......... $ (1,780) $(10,815) $(12,595) $ 4,196 $(13,944) $ (9,748)
======== ======== ======== ======== ======== ========
Change in net interest income .................. $ (4,277) $ (966) $ (5,243) $ (2,010) $ 2,088 $ 78
======== ======== ======== ======== ======== ========
50
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and
liabilities are sensitive to changes in interest rates, a significant form of
market risk for us is interest rate risk, or changes in interest rates.
Notwithstanding the unpredictability of future interest rates, management
expects that changes in interest rates may have a significant, adverse impact on
our net interest income.
Our ability to make a profit largely depends on our net interest
income, which could be negatively affected by changes in interest rates. Net
interest income is the difference between:
o the interest income we earn on our interest-earning assets, such as loans
and securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
The rates we earn on our assets are generally fixed for a contractual
period of time. We, like many savings institutions, have liabilities that
generally have shorter contractual maturities than our assets, such as
certificates of deposit, or have no stated maturity, such as savings and money
market deposits. This imbalance can create significant earnings volatility
because market interest rates change over time. In a period of rising interest
rates, the interest income earned on our assets, which consist primarily of
long-term, fixed-rate securities, may not increase as rapidly as the interest
paid on our liabilities.
We are vulnerable to volatility in our earnings as a result of an
increase in interest rates because the majority of our loan portfolio consists
of long-term, fixed rate loans. At June 30, 2004, 80.7% of our loans with
maturities of greater than one year had fixed rates of interest, and 81.1% of
our total loans had maturities of ten or more years. At June 30, 2004, we held
$771.4 million of mortgage-backed securities, representing 39.8% of our assets.
We invest generally in fixed-rate securities and substantially all of our
mortgage-backed securities at June 30, 2004 had maturities of ten or more years.
In an increasing rate environment, our cost of funds is expected to increase
more rapidly than the interest earned on our loan portfolio and securities
portfolio because our primary source of funds is deposits with generally shorter
maturities than the maturities on our loans and investment securities. Having
interest-bearing liabilities that reprice more frequently than interest-earning
assets will be detrimental during periods of rising interest rates and could
cause our net interest rate spread to shrink because the increase in the rates
we would earn on our securities and loan portfolios may be less than the
increase in the rates we would pay on deposits and borrowings.
In a period of falling interest rates, prepayments of loans and
mortgage-backed securities generally will increase as borrowers refinance their
debt in order to reduce their borrowing cost. This causes reinvestment risk,
because in a falling rate environment we are generally not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. A falling rate environment would result in a decrease in
rates we pay on deposits and borrowings, but the decrease in the cost of our
funds may not be as great as the decrease in the yields on our mortgage-backed
securities and loan portfolios. This could cause a narrowing of our net interest
rate spread and could cause a decrease in our earnings.
The Board of Directors has established an Interest Rate Risk Management
Committee, comprised of Directors Hopkins, Regan, Aanensen, Mazza and Parow,
which is responsible for monitoring interest rate risk. Our Chief Financial
Officer also participates in this committee as a management liaison. The
committee meets quarterly to address management of our assets and liabilities,
including review of our
51
short term liquidity position; loan and deposit pricing and production volumes
and alternative funding sources; current investments; average lives, durations
and repricing frequencies of loans and securities; and a variety of other asset
and liability management topics. The results of the committee's quarterly review
are reported to the full Board, which makes adjustments to our interest rate
risk policy and strategies as it considers necessary and appropriate.
Quantitative Analysis. The following table presents Kearny Federal
Savings Bank's net portfolio value as of June 30, 2004. The net portfolio value
was calculated by the Office of Thrift Supervision, based on information
provided by Kearny Federal Savings Bank.
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
------------------------------ -------------------------------
Changes in Net Portfolio Basis Point
Rates(1) $ Amount $ Change % Change Value Ratio Change
-------- -------- -------- -------- ----------- ------
(Dollars in thousands)
+300 bp 135,922 -145,263 -52% 7.70% -687 bp
+200 bp 184,947 -96,238 -34% 10.16% -441 bp
+100 bp 232,894 -48,291 -17% 12.42% -215 bp
0 bp 281,185 14.57%
-100 bp 315,088 33,903 +12% 15.98% +141 bp
---------------
(1) The -200 bp and -300bp scenarios are not shown due to the low prevailing
interest rate environment.
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rate on certain types of assets and liabilities, such as
demand deposits and savings accounts, may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets such as adjustable
rate mortgages, generally have features which restrict changes in interest rates
on a short-term basis and over the life of the asset. In the event of a change
in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Notwithstanding the discussion above, the qualitative interest rate
analysis findings presented herein indicates that a rapid increase in interest
rates would adversely affect our net interest margin and earnings.
Liquidity and Commitments
We are required to have enough investments that qualify as liquid
assets in order to maintain sufficient liquidity to ensure a safe and sound
operation. Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans.
Historically, we have maintained liquid assets above levels believed to be
adequate to meet the
52
requirements of normal operations, including potential deposit outflows. Cash
flow projections are regularly reviewed and updated to assure that adequate
liquidity is maintained.
Our liquidity, represented by cash and cash equivalents, is a product
of our operating, investing and financing activities. Our primary sources of
funds are deposits, amortization, prepayments and maturities of mortgage-backed
securities and outstanding loans, maturities of investment securities and other
short-term investments and funds provided from operations. While scheduled
payments from the amortization of loans and mortgage-backed securities and
maturing investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan and mortgage-backed
securities prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, we invest excess funds in
short-term interest-earning assets, which provide liquidity to meet lending
requirements. We also generate cash through borrowings.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. agency securities. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, to fund loan commitments and to maintain our
portfolio of mortgage-backed securities and investment securities. At June 30,
2004, the total approved loan origination commitments outstanding amounted to
$33.4 million and commitments to purchase participation interests in loans
totaled $607,000. At the same date, unused lines of credit were $23.8 million
and construction loans in process were $5.3 million. Certificates of deposit
scheduled to mature in one year or less at June 30, 2004, totaled $709.9
million. Although the average cost of deposits decreased throughout 2004,
management's policy is to maintain deposit rates at levels that are competitive
with other local financial institutions. Based on the competitive rates and on
historical experience, management believes that a significant portion of
maturing deposits will remain with Kearny Federal Savings Bank. At June 30,
2004, the total collateralized borrowing limit was $101.4 million, of which we
had $94.2 million outstanding, giving us the ability at June 30, 2004, to borrow
an additional $7.2 million from the Federal Home Loan Bank of New York as a
funding source to meet commitments and for liquidity purposes.
If the need for additional borrowing arises, we have the option of
pledging additional collateral to significantly increase our collateralized
borrowing limit and enable us to obtain advances up to a total borrowing limit
of 25% of our assets. For example, in the event that we are unable or unwilling
to pay market rates on the significant amount of certificates of deposit
maturing in one year or less, we could obtain replacement funding by pledging
additional collateral, thus securing a greater borrowing limit and generating
the ability to borrow additional funds from the Federal Home Loan Bank. At June
30, 2004, our total Federal Home Loan Bank borrowing limit was $484.1 million
and we had the ability to pledge additional collateral to increase our
collateralized borrowing limit from $101.4 million to the full $484.1 million
limit. At June 30, 2004, we had $1.25 billion of securities we could pledge as
collateral in order to obtain secured borrowings, of which $101.4 million was
pledged.
As noted above, loan prepayments are greatly influenced by general
interest rates. At June 30, 2004, approximately 80.7% of our loan portfolio
consisted of fixed rate loans with maturities of greater than one year. If a
rising interest rate environment were to occur, our liquidity would be affected
because we would expect that the rate of prepayments on fixed rate loans would
decrease, thus decreasing the amount of funds coming from prepayments and
reducing our liquidity.
53
The following table discloses our contractual obligations and
commitments as of June 30, 2004.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
------------ -------- --------- --------- --------
(In thousands)
Federal Home Loan Bank advances........ $94,234 $32,547 $6,199 $45,488 $10,000
------- ------- ------ ------- -------
Total.............................. $94,234 $32,547 $6,199 $45,488 $10,000
======= ======= ====== ======= =======
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 Years
--------- -------- --------- --------- --------
(In thousands)
Lines of credit(1)..................... $ 1,214 $ - $ 265 $ - $ 949
Construction loans in process.......... 4,483 - 4,483 - -
Other commitments to extend credit(1).. 52,121 - - 296 51,825
------- -------- ------ ---- -------
Total.............................. $57,818 $ - $4,748 $296 $52,774
======= ======== ====== ==== =======
(1) Represents amounts committed to customers.
Our material capital expenditure plans include the completion of our
new administrative building in Fairfield, New Jersey with anticipated post-June
30, 2004 expenditures of $5.0 million. The total cost of this building is
expected to be approximately $13.5 million, which cost will be capitalized and
amortized over a forty-year period. Our capital expenditure plans also include
the Lacey, New Jersey de novo branch office, expected to open in the first
quarter of 2005. The total cost of the Lacey office is estimated to be
approximately $2.3 million. Additional capital expenditure plans relate to
renovations and significant improvements to seven branch offices, which includes
the replacement of three office locations with new buildings. We expect to
complete such renovations, improvements and construction by the end of calendar
year 2005, and we anticipate approximately $7.1 million in funds will be
required for the plans related to these seven offices.
The general business purpose of these expenditures is to maintain and
improve Kearny Federal Savings Bank's facilities. We anticipate that cash flows
from our normal operations will be a sufficient source of funds for these
expenditure plans.
Capital
Consistent with its goals to operate a sound and profitable financial
organization, Kearny Federal Savings Bank actively seeks to maintain a well
capitalized institution in accordance with regulatory standards. As of June 30,
2004, Kearny Federal Savings Bank exceeded all capital requirements of the
Office of Thrift Supervision. Kearny Federal Savings Bank's regulatory capital
ratios at June 30, 2004 were as follows: core capital 10.76%; Tier I risk-based
capital 30.69%; and total risk-based capital 32.56%. The regulatory capital
requirements to be considered well capitalized are 5.0%, 6.0% and 10.0%,
respectively.
Impact of Inflation
The financial statements included in this document have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the
54
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels
of interest rates, is in the area of non-interest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation -Transition and Disclosure - an amendment of FASB
Statement No. 123." This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effects of the method used on reported
results.
On March 31, 2004, the FASB published an Exposure Draft, "Share-Based
Payment," an Amendment of FASB Statements No. 123 and 95 (the "Exposure Draft").
The FASB is proposing, among other things, amendments to SFAS No. 123,
"Accounting for Stock-Based Compensation," and thus, the manner in which
share-based compensation, such as stock options, will be accounted for by both
public and non-public companies. For public companies, the cost of employee
services received in exchange for equity instruments including options and
restricted stock awards generally would be measured at fair value at the grant
date. The grant-date fair value would be estimated using option-pricing models
adjusted for the unique characteristics of those options and instruments, unless
observable market prices for the same or similar options are available. The cost
would be recognized over the requisite service period, often the vesting period.
The cost of employee services received in exchange for liabilities would be
measured initially at the fair value of the liabilities, rather than the
presently allowed intrinsic value under APB Opinion No. 25, Accounting for Stock
Issued to Employees, and would be remeasured subsequently at each reporting date
through settlement date.
The proposed changes in accounting would replace existing requirements
under SFAS No. 123 and would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, which does not require
companies to expense options. Under the terms of the Exposure Draft, the
accounting for similar transactions involving parties other than employees or
the accounting for employee stock ownership plans that are subject to American
Institute of Certified Public Accountants ("AICPA") Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," would remain
unchanged.
55
The Exposure Draft provides that the proposed statement would be
applied to public entities prospectively for fiscal years beginning after
December 15, 2004, as if all share-based compensation awards vesting, granted,
modified, or settled after December 15, 1994, had been accounted for using the
fair value-based method of accounting. The FASB is soliciting comments on the
Exposure Draft and is expected to issue the final statement in the fourth
quarter of 2004.
The aforementioned pronouncements related to stock-based compensation
have no effect on Kearny Financial Corp.'s historical consolidated financial
statements as we have not issued any stock-based compensation. We have not
completed an analysis of the potential effects of this statement on our future
financial statements. However, we intend to account for future stock-based
compensation using the intrinsic value method under APB Opinion No. 25,
providing such method is permitted at the time stock-based compensation is
granted.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after September 30, 2003, and for hedging relationships designated
after September 30, 2003. The guidance should be applied prospectively. The
provisions of this statement that relate to SFAS No. 133, "Implementation
Issues," that have been effective for fiscal quarters that began prior to
September 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist should be applied to existing contracts as well as new contracts entered
into after September 30, 2003. The adoption of this statement did not have a
material effect on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Such
instruments may have been previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after September 15, 2003. The adoption of this statement did not have
a material effect on our reported equity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
This interpretation clarifies that a guarantor is required to disclose: the
nature of the guarantee, including the approximate term of the guarantee, how
the guarantee arose, and the events or circumstances that would require the
guarantor to perform under the guarantee; the maximum potential amount of future
payments under the guarantee; the carrying amount of the liability, if any, for
the guarantor's obligations under the guarantee; and the nature
56
and extent of any recourse provisions or available collateral that would enable
the guarantor to recover the amounts paid under the guarantee. This
interpretation also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the obligations it has undertaken in
issuing the guarantee, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. The objective of the initial measurement
of that liability is the fair value of the guarantee at its inception. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this interpretation did not have a material effect on our financial
position or results of operations.
In December 2003, the FASB issued a revision to Interpretation 46,
"Consolidation of Variable Interest Entities," which established standards for
identifying a variable interest entity ("VIE") and for determining under what
circumstances a VIE should be consolidated with its primary beneficiary.
Application of this Interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers must
apply this Interpretation to all other types of VIEs at the end of the first
reporting period ending after December 15, 2004. The adoption of this
Interpretation has not had and is not expected to have a material effect on our
financial position or results of operations.
BUSINESS OF KEARNY MHC
Kearny MHC is a federal mutual holding company and is subject to
regulation by the Office of Thrift Supervision. Kearny MHC currently owns 100%
of the outstanding common stock of Kearny Financial Corp. So long as Kearny MHC
is in existence, it will at all times own a majority of the outstanding common
stock of Kearny Financial Corp.
The primary business activity of Kearny MHC going forward will continue
to be owning a majority of Kearny Financial Corp.'s common stock. Kearny MHC,
however, is authorized to engage in any other business activities that are
permissible for mutual holding companies under federal law, including investing
in loans and securities. Kearny MHC does not maintain offices separate from
those of Kearny Federal Savings Bank or employ any persons other than certain of
Kearny Federal Savings Bank's officers. Officers of Kearny MHC are not
separately compensated for their service.
BUSINESS OF KEARNY FINANCIAL CORP.
Kearny Financial Corp. is a federal mutual holding company subsidiary
and is subject to regulation by the Office of Thrift Supervision. It was
organized for the purpose of being a holding company for Kearny Federal Savings
Bank.
Kearny Financial Corp.'s primary activity is and will continue to be
holding all of the stock of Kearny Federal Savings Bank. Kearny Financial Corp.
intends to invest the proceeds of the offering as discussed under Use of
Proceeds on page __. Kearny Financial Corp. does not maintain offices separate
from those of Kearny Federal Savings Bank or employ any persons other than
certain of Kearny Federal Savings Bank's officers. Officers of Kearny Financial
Corp. are not separately compensated for their service.
57
BUSINESS OF KEARNY FEDERAL SAVINGS BANK
General
Kearny Federal Savings Bank is a federally-chartered stock savings
bank. We were originally founded in 1884 as a New Jersey mutual building and
loan association under the name "Kearny Building and Loan Association." We
obtained federal insurance of accounts in 1939 and received our federal charter
in 1941. We changed our name from Kearny Federal Savings and Loan Association to
Kearny Federal Savings Bank in 1995. Kearny Federal Savings Bank's deposits are
federally insured by the Savings Association Insurance Fund as administered by
the Federal Deposit Insurance Corporation. Kearny Federal Savings Bank is
regulated by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation.
Our primary business is attracting retail deposits from the general
public and using those deposits, together with funds generated from operations,
principal repayments on securities and loans and borrowed funds, for our
investing and lending activities. We invest in mortgage-backed securities, U.S.
government obligations, obligations of state and political subdivisions and
other securities. Our loan portfolio consists of one- to four-family residential
mortgage loans, multi-family and commercial mortgage loans, construction loans,
commercial business loans, home equity loans and lines of credit, and other
consumer loans. Our interest-earning assets consist primarily of mortgage-backed
securities and investment securities, which comprised 64.5% of our total assets
while our loan portfolio comprised 26.1% of our total assets at June 30, 2004.
We intend to increase the balance of our loan portfolio relative to the size of
our securities portfolio, however, such a change will take time and, in the near
future, our assets will continue to consist primarily of securities.
Market Area. We currently operate from our main office in Kearny, New
Jersey, and twenty-four branch offices located in Bergen, Hudson, Passaic,
Morris, Middlesex, Essex, Union and Ocean Counties, New Jersey. We also consider
Monmouth County, New Jersey to be part of our market area.
Our lending is concentrated in the nine New Jersey counties named
above, and our predominant sources of deposits are the communities in which our
offices are located as well as the neighboring communities.
Our primary market area is largely urban and suburban with a broad
economic base as is typical with counties in the New York metropolitan area.
Service jobs represent the largest employment sector followed by
wholesale/retail trade. Unemployment rates in our primary market area counties,
as of June 2004, ranged from a low of 3.4% to a high of 6.8% compared to the New
Jersey statewide average of 4.7%. Essex, Hudson, Passaic and Union counties had
unemployment rates above the statewide measure and Bergen, Middlesex, Morris and
Ocean counties had unemployment rates below the statewide measure. Morris,
Bergen, Middlesex and Union counties had median household incomes of
approximately $87,000, $74,000, $68,000 and $62,000, respectively, compared to
the New Jersey median of $61,000, while Essex, Hudson, Ocean and Passaic
counties had median household incomes ranging from $44,000 to $54,000.
Our business of attracting deposits and making loans is primarily
conducted within our market area. A downturn in the local economy could reduce
the amount of funds available for deposit and the ability of borrowers to repay
their loans. As a result, our profitability could decrease.
58
Competition. We operate in a market area with a high concentration of
banking and financial institutions, and we face substantial competition in
attracting deposits and in originating loans. A number of our competitors are
significantly larger institutions with greater financial and managerial
resources and lending limits. Our ability to compete successfully is a
significant factor affecting our growth potential and profitability.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions, and credit unions located in our primary market area. We
also compete with mortgage banking and finance companies for real estate loans
and with commercial banks and savings institutions for consumer loans, and we
face competition for funds from investment products such as mutual funds,
short-term money funds and corporate and government securities. Based on Federal
Deposit Insurance Corporation data as of June 30, 2003 (the most current
available information), the largest deposit market share we had in any county in
which we have branches was 2.8% in Bergen County, which placed us 12th in such
county. There are large competitors operating throughout our total market area,
including Bank of America, Commerce Bank, Wachovia Bank and PNC Bank, and we
also face strong competition from other community-based financial institutions.
Lending Activities
General. We have traditionally focused on the origination of one- to
four-family loans, which comprise a significant majority of the total loan
portfolio. We also provide financing on multi-family dwellings, mixed-use
properties and other commercial real estate. Consumer lending is our next
largest category of lending, primarily composed of home equity loans and lines
of credit. We also originate construction loans and commercial business loans,
generally secured by real estate.
59
Loan Portfolio Composition. The following table analyzes the
composition of our loan portfolio by loan category at the dates indicated.
Loan Maturity Schedule. The following table sets forth the maturity of
our loan portfolio at June 30, 2004. Demand loans, loans having no stated
maturity, and overdrafts are shown as due in one year or less. Loans are stated
in the following table at contractual maturity and actual maturities could
differ due to prepayments.
Real estate Real estate Home
mortgage - mortgage - Home equity Passbook
one-to-four multi-family Commercial equity lines of or
family and commercial business loans credit certificate Other Construction Total
------ -------------- -------- ----- ------ ----------- ----- ------------ -----
(In thousands)
Amounts Due:
Within 1 Year.............. $ 256 $ 1,156 $5,041 $ 67 $ 358 $2,486 $ 133 $7,212 $ 16,709
-------- ------- ------ ------- ------- ------ ---- ------ --------
After 1 year:
1 to 3 years............. 1,242 842 75 1,064 158 124 67 - 3,572
3 to 5 years............. 6,280 999 - 5,566 155 94 38 - 13,132
5 to 10 years............ 40,770 11,002 45 10,328 972 - - - 63,117
10 to 15 years........... 129,883 24,663 - 16,912 5,708 42 - - 177,208
Over 15 years............ 179,810 44,764 - 3,444 8,326 - 98 - 236,442
-------- ------- ------ ------- ------- ------ ---- ------ --------
Total due after one year... 357,985 82,270 120 37,314 15,319 260 203 - 493,471
-------- ------- ------ ------- ------- ------ ---- ------ --------
Total amount due........... $358,241 $83,426 $5,161 $37,381 $15,677 $2,746 $336 $7,212 $510,180
======== ======= ====== ======= ======= ====== ==== ====== ========
61
The following table sets forth the dollar amount of all loans at June
30, 2004 that are due after June 30, 2005.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Real estate mortgage -
one-to-four family ........ $313,757 $ 44,228 $357,985
Real estate mortgage -
multi-family and commercial 45,667 36,603 82,270
Commercial business .......... 105 15 120
Consumer:
Home equity loans ......... 37,314 - 37,314
Home equity lines of credit 1,093 14,226 15,319
Passbook or certificate ... - 260 260
Other ..................... 190 13 203
Construction .............. - - -
-------- -------- --------
Total ................. $398,126 $ 95,345 $493,471
======== ======== ========
One- to Four-Family Mortgage Loans. Our primary lending activity
consists of the origination of one- to four-family first mortgage loans, nearly
all of which are secured by property located in New Jersey.
We will originate a one- to four-family mortgage loan on an owner
occupied property with principal amounts up to 95% of the lesser of the
appraised value or the purchase price of the property, with private mortgage
insurance required for loans with a loan to value ratio exceeding 80%. The loan
to value limit on a non-owner occupied property is 75%. Loans in excess of
$750,000 are handled on a case by case basis and are subject to lower loan to
value limits, generally no more than 50%.
Our fixed rate and adjustable rate residential mortgage loans on owner
occupied properties have terms of ten to thirty years. Residential mortgage
loans on non-owner occupied properties have terms up to fifteen years for fixed
rate loans and terms up to twenty years for adjustable rate loans. We also offer
ten-year balloon mortgages with a thirty year amortization schedule on owner
occupied properties and a twenty year amortization schedule on non-owner
occupied properties.
Our adjustable rate loan products provide for an interest rate that is
tied to the one-year Constant Maturity U.S. Treasury index and have terms of up
to thirty years with initial fixed rate periods of one, three, five, seven, or
ten years according to the terms of the loan and annual rate adjustment
thereafter. We also offer an adjustable rate loan with a term up to thirty years
with a rate that adjusts every five years to the five-year Constant Maturity
U.S. Treasury index. There is a 200 basis point limit on the rate adjustment in
any adjustment period, and the rate adjustment limit over the life of the loan
is 600 basis points. We emphasize the origination of adjustable rate loans,
however, as a result of the low interest rate environment of the last several
years, customer demand has recently been primarily for fixed rate loans.
We offer a first time home buyer program for persons who have not
previously owned real estate and are purchasing a one- to four-family property
in Bergen, Passaic, Morris, Essex, Hudson, Middlesex, Monmouth, Ocean and Union
Counties, New Jersey for use as a primary residence. This program is also
available outside these areas only to persons who are existing deposit or loan
customers of Kearny Federal Savings Bank and/or members of their immediate
families. The financial incentives offered under this
62
program are a one-quarter of one percent rate reduction on all first mortgage
loan types and the refund of the application fee at closing.
The fixed rate mortgage loans that we originate generally meet the
secondary mortgage market standards of the Federal Home Loan Mortgage
Corporation. However, as our focus is on growing the size of the loan portfolio,
we generally do not sell loans in the secondary market and do not currently
anticipate that we will commence doing so in any large capacity. There were no
residential mortgage loan sales during the last three fiscal years.
Substantially all of our residential mortgages include "due on sale"
clauses, which are provisions giving us the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party. Property appraisals on real estate securing our one- to
four-family residential loans are made by state certified or licensed
independent appraisers approved by the Board of Directors. Appraisals are
performed in accordance with applicable regulations and policies. We require
title insurance policies on all first mortgage real estate loans originated.
Homeowners, liability, fire and, if applicable, flood insurance policies are
also required.
Multi-family and Commercial Real Estate Mortgage Loans. We also
originate mortgage loans on multi-family and commercial real estate properties,
including loans on apartment buildings, retail/service properties, and other
income-producing properties, including mixed-use properties combining
residential and commercial space. Going forward, we intend to increase the size
of this portfolio.
We generally require no less than a 30% down payment or equity position
for mortgage loans on multi-family and commercial real estate properties, and we
require personal guarantees on all such loans. Currently, these loans are made
with a maturity of up to 15 years. We also offer a five year balloon loan with a
twenty year amortization schedule. All of our multi-family and commercial real
estate mortgage loans are on properties within New Jersey.
Multi-family and commercial real estate mortgage loans generally are
considered to entail significantly greater risk than that which is involved with
one- to four-family real estate lending. The repayment of these loans typically
is dependent on the successful operations and income stream of the borrower and
the real estate securing the loan as collateral. These risks can be
significantly affected by economic conditions. In addition, multi-family and
commercial real estate mortgage loans generally carry larger balances to single
borrowers or related groups of borrowers than one- to four-family loans.
Multi-family and commercial real estate lending also generally requires
substantially greater evaluation and oversight efforts compared to residential
real estate lending.
Commercial Business Loans. We also originate commercial term loans and
lines of credit to a variety of professionals, sole proprietorships and small
businesses in our market area. These loans are generally secured by real estate,
and we require personal guarantees on all commercial loans. Marketable
securities are also accepted as collateral on lines of credit, but with a loan
to value limit of 50%. The loan to value limit on secured commercial lines of
credit and term loans is otherwise generally limited to 70%. We also make
unsecured commercial loans in the form of overdraft checking authorization up to
$25,000 and unsecured lines of credit up to $25,000.
Our commercial term loans generally have terms up to fifteen years and
are mostly fixed rate loans. Our commercial lines of credit have terms up to two
years and are mostly adjustable rate loans. We also offer a one-year interest
only commercial line of credit with balloon payment.
63
Unlike single-family residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income and which are secured by real property whose value
tends to be more easily ascertainable, commercial business loans typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself and the general economic environment. Commercial
business loans, therefore, have greater credit risk than residential mortgage
loans. In addition, commercial loans generally carry larger balances to single
borrowers or related groups of borrowers than one- to four-family loans.
Commercial lending also generally requires substantially greater evaluation and
oversight efforts compared to residential or non-residential real estate
lending.
Home Equity Loans and Lines of Credit. Our home equity loans are fixed
rate loans for terms of generally up to fifteen years. We also offer fixed and
adjustable rate home equity lines of credit with terms up to fifteen years. We
still have in this portfolio a substantial amount of twenty-year home equity
loans originated by Pulaski Savings Bank, which we acquired in 2002. Collateral
value is determined through a property value analysis report (FHLMC Form 704) by
a state certified or licensed independent appraiser, and in some cases, by a
full appraisal performed by a state certified or licensed independent appraiser.
Home equity loans and lines of credit do not require title insurance but do
require homeowner, liability, fire and, if applicable, flood insurance policies.
Home equity loans and fixed rate home equity lines of credit are
primarily originated in our market area and are generally made in amounts of up
to 80% of value on term loans and up to 75% of value on home equity adjustable
rate lines of credit. We originate home equity loans secured by either a first
lien or a second lien on the property.
Other Consumer Loans. In addition to home equity loans and lines of
credit, our consumer loan portfolio at June 30, 2004 also included savings
secured (passbook) loans. We will generally lend up to 90% of the account
balance on a savings secured loan.
Consumer loans entail greater risks than residential mortgage loans,
particularly consumer loans that are unsecured. Consumer loan repayment is
dependent on the borrower's continuing financial stability and is more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy. The
application of various federal laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on consumer loans
in the event of a default.
Our underwriting standards for consumer loans include a determination
of the applicant's credit history and an assessment of the applicant's ability
to meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment and any additional verifiable secondary
income.
We previously made student education loans. We sold this portfolio to
Sallie Mae during the year ended June 30, 2003. Additionally, in our
acquisitions of Pulaski Savings Bank and West Essex Bank, we acquired small
portfolios of automobile loans and personal overdraft accounts. The balance of
automobile loans and unsecured personal loans remaining at June 30, 2004 was
$50,000 and $124,000, respectively. Kearny Federal Savings Bank began offering
unsecured personal overdraft loans of up to $2,500 to its customers in September
2004.
Construction Lending. Our construction lending includes loans to
individuals for construction of one- to four-family residences or for major
renovations or improvements to an existing dwelling. Our
64
construction lending also includes loans to builders and developers for
multi-unit buildings or multi-house projects. All of our construction lending is
in New Jersey.
Construction borrowers must hold title to the land free and clear of
any liens. Financing for construction loans is limited to 80% of the anticipated
appraised value of the completed property. Disbursements are made in accordance
with inspection reports by our approved appraisal firms. Terms of financing are
limited to one year with an interest rate tied to the prime rate and may include
a premium of one or more points. In some cases, we convert a construction loan
to a permanent mortgage loan upon completion of construction.
We have no formal limits as to the number of projects a builder has
under construction or development, and make a case by case determination on
loans to builders and developers who have multiple projects under development.
Loans to builders and developers must be approved by the Board of Directors
before the borrower's application can be accepted. We generally do not make
construction loans to builders on a speculative basis, without a contract in
place. Financing is only provided for up to two houses at a time in a
multi-house project, requiring a contract on one of the two houses before
financing for the next house may be obtained.
Construction lending is generally considered to involve a higher degree
of credit risk than mortgage lending. If the estimate of construction cost
proves to be inaccurate, we may be compelled to advance additional funds to
complete the construction with repayment dependent, in part, on the success of
the ultimate project rather than the ability of a borrower or guarantor to repay
the loan. If we are forced to foreclose on a project prior to completion, there
is no assurance that we will be able to recover all of the unpaid portion of the
loan. In addition, we may be required to fund additional amounts to complete a
project and may have to hold the property for an indeterminate period of time.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. Accordingly, as of June 30, 2004, our loans to one borrower limit was
approximately $31.4 million.
At June 30, 2004, our largest single borrower had an aggregate loan
balance of approximately $9.9 million, representing two mortgage loans secured
by commercial real estate, one commercial line of credit secured by real estate,
and one residential mortgage loan. Our second largest single borrower had an
aggregate loan balance of approximately $6.3 million, representing three loans
secured by commercial real estate and one commercial line of credit secured by
real estate. Our third largest borrower had an aggregate loan balance of
approximately $4.1 million, representing two loans secured by commercial real
estate. At June 30, 2004, all of these lending relationships were current and
performing in accordance with the terms of their loan agreements.
Loan Originations, Purchases, Sales, Solicitation and Processing. The
following table shows total loans originated, purchased and repaid during the
periods indicated. During the three years ended June 30, 2004, we did not sell
any loans other than the sale of the student loan portfolio to Sallie Mae during
the year ended June 30, 2003.
65
For the Year Ended June 30,
-----------------------------------
2004 2003 2002
--------- --------- ---------
(In thousands)
Loan originations and purchases:
Loan originations:
Real estate mortgage - one-to-four family ........ $ 69,550 $ 87,545 $ 119,373
Real estate mortgage - multi-family and commercial 26,052 17,227 14,564
Commercial business .............................. 5,631 1,714 3,700
Construction ..................................... 6,864 7,662 11,631
Consumer:
Home equity loans and lines of credit ............ 31,656 45,328 35,165
Passbook or certificate .......................... 1,830 2,693 3,186
Other ............................................ 266 101 89
--------- --------- ---------
Total loan originations ............................ 141,849 162,270 187,708
--------- --------- ---------
Loan purchases:
Real estate mortgage - one-to-four family ........ 14,262 - 5,328
Real estate mortgage - multi-family and commercial 762 5,687 4,256
--------- --------- ---------
Total loan purchases ............................... 15,024 5,687 9,584
--------- --------- ---------
Loans sold (student loan portfolio) ................ - (338) -
Loan principal repayments .......................... (159,071) (249,414) (208,643)
--------- --------- ---------
Total loans sold and principal repayments .......... (159,071) (249,752) (208,643)
--------- --------- ---------
Increase (decrease) due to other items ............... (1,169) (186) 311
--------- --------- ---------
Net (decrease) in loan portfolio ..................... $ (3,367) $ (81,981) $ (11,040)
========= ========= =========
Our customary sources of loan applications include repeat customers,
referrals from realtors and other professionals and "walk-in" customers. Our
residential loan originations are largely advertising driven. On the commercial
lending side, we have recently hired four experienced business development
officers who focus on commercial loan originations and we expect to further
increase staffing in this area.
We primarily originate our own loans and retain them in our portfolio.
As part of our loan growth strategy, we generally do not sell loans in the
secondary market and do not currently anticipate that we will commence doing so
in any large capacity. There were no whole loan sales during the three years
ended June 30, 2004 other than the sale of the student loan portfolio. Gross
loan originations totaled $141.8 million for the year ended June 30, 2004.
Principal repayments exceeded loan originations by approximately $17.2 million
for the fiscal year ended June 30, 2004.
During the years ended June 30, 2004, 2003 and 2002, we purchased $14.3
million, $0 and $5.3 million of one- to four-family mortgage loans, consisting
mostly of fifteen and twenty year fixed rate loans with servicing retained by
the seller. These loans were purchased with recourse for a limited period of
time. In accordance with the terms of the loan purchase agreement, any loan
purchased by Kearny Federal Savings Bank that becomes delinquent for a period of
60 days within six months from the date of the purchase of the loan may be
returned to and repurchased by the selling bank with a refund to Kearny Federal
Savings Bank of the unamortized portion of the premium paid for that loan.
We will continue to actively consider the purchase of loans as
opportunities present themselves. Additionally, we have in the past purchased
first mortgage loans on a forward commitment basis from a New Jersey located
mortgage broker and may in the future enter into such arrangements with such
broker or with other parties on a forward commitment basis.
66
In addition to purchasing one- to four-family loans, we also
occasionally purchase participations in loans originated by other banks and also
through the Thrift Institutions Community Investment Corporation of New Jersey
("TICIC"). At June 30, 2004, our TICIC participations included multi-family and
commercial real estate properties. The aggregate balance of TICIC participations
at June 30, 2004 was $9.9 million and the average balance on a single
participation was approximately $259,000. At June 30, 2004, we had a total of
five non-TICIC participations with an aggregate balance of $8.9 million,
consisting of loans on commercial real estate properties, including a medical
center, a self storage facility, a shopping plaza and commercial buildings with
a combination of retail and office space.
Loan Approval Procedures and Authority. Our lending policies and loan
approval limits are recommended by senior management and approved by the Board
of Directors. Our Senior Vice President/Chief Lending Officer may approve loans
up to $500,000. Assistant vice presidents of Kearny Federal Savings Bank in the
following positions may approve loans as follows: mortgage loan managers,
mortgage loans up to $250,000; consumer loan managers, consumer loans up to
$100,000; and consumer loan underwriters, consumer loans up to $50,000. In
addition to these principal amount limits, there are established limits for the
different levels of approval authority as to minimum credit scores and maximum
loan to value ratios and debt ratios. Members of the Loan Committee, comprised
of four senior officers: our President and Chief Executive Officer, Senior Vice
President/Chief Financial Officer, Senior Vice President/Treasurer and Senior
Vice President/Chief Lending Officer, each have individual authorization to
approve loans up to $500,000. Loans between $500,000 and $750,000 must be
approved by at least two members of the Loan Committee. Non-conforming mortgage
loans and loans over $750,000 require the approval of the Board of Directors.
Asset Quality
Loan Delinquencies and Collection Procedures. The borrower is notified
by both mail and telephone when a loan is thirty days past due. If the
delinquency continues, subsequent efforts are made to contact the delinquent
borrower and additional collection notices and letters are sent. When a loan is
ninety days delinquent, it is our general practice to refer it to an attorney
for repossession or foreclosure. All reasonable attempts are made to collect
from borrowers prior to referral to an attorney for collection. In certain
instances, we may modify the loan or grant a limited moratorium on loan payments
to enable the borrower to reorganize his or her financial affairs, and we
attempt to work with the borrower to establish a repayment schedule to cure the
delinquency.
As to mortgage loans, if a foreclosure action is taken and the loan is
not reinstated, paid in full or refinanced, the property is sold at judicial
sale at which we may be the buyer if there are no adequate offers to satisfy the
debt. Any property acquired as the result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until it is sold or otherwise
disposed of. When real estate owned is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value less
estimated selling costs. The initial writedown of the property is charged to the
allowance for loan losses. Adjustments to the carrying value of the properties
that result from subsequent declines in value are charged to operations in the
period in which the declines occur. At June 30, 2004, we held real estate owned
totaling $209,000, consisting of two parcels of vacant land.
Loans are reviewed on a regular basis and are placed on non-accrual
status when they are more than ninety days delinquent, with the exception of a
passbook loan, the outstanding balance of which is collected from the related
passbook account along with accrued interest and a penalty when the loan is 120
days delinquent. Loans may be placed on a non-accrual status at any time if, in
the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan
67
is placed on non-accrual status is charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan. At June 30, 2004, we had approximately $2.3 million of loans that were
held on a non-accrual basis.
Non-Performing Assets. The following table provides information
regarding our non-performing loans and other non-performing assets. As of each
of the dates indicated, we did not have any troubled debt restructurings. At
June 30, 2004, the ratio of allowance for loan losses to non-performing loans
was 220.96%.
At June 30,
---------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate mortgage - one-to-four family................. $ 771 $1,571 $1,152 $1,957 $2,255
Real estate mortgage - multi-family and commercial......... 1,414 621 897 454 627
Commercial business........................................ 39 - - - -
Consumer:
Home equity loans....................................... 65 178 91 92 119
Home equity lines of credit............................. - - - 13 158
Other................................................... - - 21 - -
Construction............................................... - - - - -
------ ------ ------ ------ ------
Total.................................................. 2,289 2,370 2,161 2,516 3,159
------ ------ ------ ------ ------
Accruing loans which are contractually past due 90 days or more:
Real estate mortgage - one-to-four family................. - 423 427 - -
Real estate mortgage - multi-family and commercial......... - - 168 381 -
Commercial business........................................ - 23 23 - -
Consumer:
Home equity loans and lines of credit................... - - 1 - 1
Passbook or certificate................................. 39 98 - 49 68
Other................................................... - 2 39 55 46
Construction............................................... - - 469 218 -
------ ------ ------ ------ ------
Total.................................................. 39 546 1,127 703 115
------ ------ ------ ------ ------
Total non-performing loans................................... $2,328 $2,916 $3,288 $3,219 $3,274
====== ====== ====== ====== ======
Real estate owned............................................ $ 209 $ 209 $ 209 $ 361 $ 185
====== ====== ====== ====== ======
Other non-performing assets.................................. $ - $ - $ - $ - $ -
====== ====== ====== ====== ======
Total non-performing assets.................................. $2,537 $3,125 $3,497 $3,580 $3,459
====== ====== ====== ====== ======
Total non-performing loans to total loans.................... 0.46% 0.57% 0.55% 0.53% 0.55%
====== ====== ====== ====== ======
Total non-performing loans to total assets................... 0.12% 0.15% 0.17% 0.18% 0.19%
====== ====== ====== ====== ======
Total non-performing assets to total assets.................. 0.13% 0.16% 0.18% 0.20% 0.21%
====== ====== ====== ====== ======
During the year ended June 30, 2004, gross interest income of $177,000
would have been recorded on loans accounted for on a non-accrual basis if those
loans had been current, and $118,000 of interest on such loans was included in
income for the year ended June 30, 2004.
68
Classified Assets. Management, in compliance with Office of Thrift
Supervision guidelines, has instituted an internal loan review program, whereby
non-performing loans are classified as substandard, doubtful or loss. It is our
policy to review the loan portfolio, in accordance with regulatory
classification procedures, on at least a quarterly basis. When a loan is
classified as substandard or doubtful, management is required to evaluate the
loan for impairment. When management classifies a portion of a loan as loss, a
reserve equal to 100% of the loss amount is required to be established or the
loan is to be charged-off.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full highly questionable
and improbable, on the basis of currently existing facts, conditions, and
values. Assets, or portions thereof, classified as "loss" are considered
uncollectible and of so little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Assets which do
not currently expose the insured institution to a sufficient degree of risk to
warrant classification in one of the aforementioned categories but which have
credit deficiencies or potential weaknesses are required to be designated
"special mention" by management.
Management's classification of assets is reviewed by the Board on a
regular basis and by the regulatory agencies as part of their examination
process. An independent loan review firm performs a review of our residential
and commercial loan portfolios, and we downgrade our classifications to match
those of this reviewing firm if there is disagreement between our assessment and
the independent assessment. The following table discloses our classification of
assets and designation of certain loans as special mention as of June 30, 2004.
At June 30, 2004, all of the classified assets and special mention designated
assets were loans.
At June 30,
----------------------------------
2004 2003 2002
------ ------ ------
(In thousands)
Special Mention.......... $ 734 $1,011 $1,688
Substandard ............. 6,264 5,129 6,159
Doubtful ................ 1,149 590 586
Loss .................... - - -
------ ------ ------
Total ................. $8,147 $6,730 $8,433
====== ====== ======
At June 30, 2004, none of the loans classified as "special mention" and
approximately $2.3 million of loans classified as "substandard" are included
under non-performing assets, as shown in the table on page __. At June 30, 2004,
$5,000 of the loans classified as "doubtful" are included under non-performing
assets, as shown in the table on page __.
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses in our loan portfolio to the
extent they are both probable and reasonable to estimate. The allowance is
maintained through provisions for loan losses that are charged to income in the
period they are established. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely.
Recoveries on loans previously charged-off are added back to the allowance.
69
Management, in determining the allowance for loan losses, considers the
losses inherent in the loan portfolio and changes in the nature and volume of
our loan activities, along with general economic and real estate market
conditions. We utilize a two tier approach: (1) identification of impaired loans
and establishment of specific loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of our loan
portfolio by type of loan.
A loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. All
loans identified as impaired are evaluated independently. We do not aggregate
such loans for evaluation purposes. Payments received on impaired loans are
applied first to interest receivable and then to principal.
We maintain a loan review system which allows for a periodic review of
our loan portfolio and the early identification of potential impaired loans.
Such system takes into consideration, among other things, delinquency status,
size of loan, type of collateral and financial condition of the borrower. Large
groups of smaller balance homogeneous loans, such as residential real estate and
home equity and consumer loans, are evaluated in the aggregate using historical
loss factors and current economic conditions. Large balance and/or more complex
loans, such as multi-family and commercial real estate loans, are evaluated
individually for impairment.
Specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of the
loan portfolio, current economic conditions and management's judgment.
The estimation of the allowance for loan losses is inherently
subjective as it requires estimates and assumptions that are susceptible to
significant revisions as more information becomes available or as future events
change. Future additions to the allowance for loan losses may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment. In addition, the Office of Thrift Supervision, as
an integral part of its examination process, periodically reviews our loan and
foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. The Office of Thrift Supervision
may require the allowance for loan losses or the valuation allowance for
foreclosed real estate to be increased based on its review of information
available at the time of the examination, which would negatively affect our
earnings.
70
The following table sets forth information with respect to our
allowance for loan losses at the dates indicated.
For the Year Ended June 30,
--------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- -------- --------- ---------
(In thousands)
Allowance balance (at beginning of period) ............. $ 5,180 $ 5,170 $ 5,167 $ 5,093 $ 5,353
--------- --------- -------- --------- ---------
Provision for loan losses .............................. - - 3 162 102
--------- --------- -------- --------- ---------
Charge-offs:
Real estate mortgage - one-to-four family ............ 12 - - 96 273
Commercial business .................................. 24 - - - 89
--------- --------- -------- --------- ---------
Total charge-offs ................................ 36 - - 96 362
--------- --------- -------- --------- ---------
Recoveries:
Real estate mortgage - one-to-four family ............ - 10 - 8 -
--------- --------- -------- --------- ---------
Total recoveries ................................. - 10 - 8 -
--------- --------- -------- --------- ---------
Net (charge-offs) recoveries ........................... (36) 10 - (88) (362)
--------- --------- -------- --------- ---------
Allowance balance (at end of period) ................... $ 5,144 $ 5,180 $ 5,170 $ 5,167 $ 5,093
========= ========= ======== ========= =========
Total loans outstanding ................................ $ 510,180 $ 512,414 $594,209 $ 605,560 $ 595,620
========= ========= ======== ========= =========
Average loans outstanding .............................. $ 499,510 $ 546,521 $603,131 $ 612,474 $ 568,212
========= ========= ======== ========= =========
Allowance for loan losses as a percent of total loans
outstanding ......................................... 1.01% 1.01% 0.87% 0.85% 0.86%
========= ========= ======== ========= =========
Net loans charged off as a percent of average loans
outstanding ......................................... 0.01% 0.00% 0.00% 0.01% 0.06%
========= ========= ======== ========= =========
Allowance for loan losses to non-performing loans ...... 220.96% 177.64% 157.24% 160.52% 155.56%
========= ========= ======== ========= =========
71
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of our allowance for loan losses by loan category and the percent
of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
At June 30,
---------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------ ------------------- ----------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
At end of period
allocated to:
Real estate mortgage -
one-to-four family........... $1,422 70.22% $1,980 71.50% $2,966 77.24% $2,944 77.42% $3,042 78.07%
Real estate mortgage -
multi-family and
commercial.................... 3,358 16.35 2,198 13.88 1,184 10.00 725 9.42 871 8.48
Commercial business.............. 57 1.01 59 0.46 70 1.13 78 0.71 60 0.09
Consumer:
Home equity loans.............. 131 7.33 214 7.28 188 6.19 207 6.52 295 5.85
Home equity lines of credit.... 52 3.07 218 3.89 261 3.23 169 2.09 142 1.74
Passbook or certificate........ - 0.54 - 0.56 - 0.51 - 0.59 - 0.58
Other.......................... 4 0.07 10 0.25 17 0.18 11 0.23 65 0.30
Construction..................... 120 1.41 501 2.18 484 1.52 1,033 3.02 618 4.89
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance............. $5,144 100.00% $5,180 100.00% $5,170 100.00% $5,167 100.00% $5,093 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
72
Securities Portfolio
General. Our deposits have traditionally exceeded our loan
originations, and we have invested these deposits primarily in mortgage-backed
securities and investment securities. Our mortgage-backed securities and
investment securities comprised 64.5% of our total assets at June 30, 2004. We
intend to increase the balance of our loan portfolio relative to the size of our
securities portfolio, however, such a change will take time and in the near
future, our assets will continue to be primarily in securities.
Our investment policy, which is approved by the Board of Directors, is
designed to foster earnings and manage cash flows within prudent interest rate
risk and credit risk guidelines. Generally, our investment policy is to invest
funds in various categories of securities and maturities based upon our
liquidity needs, asset/liability management policies, investment quality,
marketability and performance objectives. Our President and Chief Executive
Officer, Senior Vice President and Chief Financial Officer and Senior Vice
President, Treasurer and Chief Accounting Officer are designated by the Board of
Directors as the officers responsible for securities investment transactions and
all transactions require the approval of at least two of these designated
officers. The Interest Rate Risk Management Committee, currently composed of
Directors Hopkins, Regan, Aanensen, Mazza and Parow, with our Senior Vice
President and Chief Financial Officer participating as a management liaison, is
responsible for the administration of the securities portfolio. This committee
meets quarterly to review the securities portfolio. The results of the
committee's quarterly review are reported to the full Board, which makes
adjustments to the investment policy and strategies as it considers necessary
and appropriate.
All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Investments in
securities are made based on certain considerations, which include the interest
rate, tax considerations, volatility, yield, settlement date and maturity of the
security, our liquidity position, and anticipated cash needs and sources. The
effect that the proposed security would have on our credit and interest rate
risk and risk-based capital is also considered.
Federally chartered savings banks have the authority to invest in
various types of liquid assets. The investments authorized under the investment
policy approved by our Board of Directors include U.S. government and government
agency obligations, municipal securities (consisting of bank qualified municipal
bond obligations of state and local governments) and mortgage-backed securities
of various U.S. government agencies or government-sponsored entities. On a
short-term basis, our investment policy authorizes investment in securities
purchased under agreements to resell, federal funds, certificates of deposits of
insured banks and savings institutions and Federal Home Loan Bank term deposits.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that securities be
categorized as "held to maturity," "trading securities" or "available-for-sale,"
based on management's intent as to the ultimate disposition of each security.
Statement No. 115 allows debt securities to be classified as "held to maturity"
and reported in financial statements at amortized cost only if the reporting
entity has the positive intent and ability to hold these securities to maturity.
Securities that might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, or other
similar factors cannot be classified as "held to maturity."
We do not currently use or maintain a trading account. Securities not
classified as "held to maturity" are classified as "available-for-sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and reported, net of deferred taxes, as a
separate component of equity.
73
At June 30, 2004, our mortgage-backed securities portfolio included
securities issued by the Government National Mortgage Association, the Federal
Home Loan Mortgage Corporation and the Federal National Mortgage Association,
and our investment securities portfolio included U.S. government obligations and
obligations of states and political subdivisions.
At June 30, 2004, we also held the following securities: shares of
common stock of the Federal Home Loan Mortgage Corporation with a carrying value
of $15.9 million; mutual fund shares issued by Dryden Government Income Fund,
Inc. and AMF Adjustable Mortgage Rate Fund with an aggregate carrying value of
$13.9 million; and trust preferred securities with an aggregate carrying value
of $11.8 million. Currently, our policy does not permit new investments in
corporate equity securities beyond what we currently hold, and we do not invest
in mortgage-related securities of private corporate issuers that are not issued
by U.S. government agencies or government-sponsored entities.
Excluding securities issued by the U.S. government or its agencies, at
June 30, 2004 our securities portfolio contained mortgage-backed securities
issued by the Federal Home Loan Mortgage Corporation with an aggregate book
value in excess of 10% of our equity. The aggregate book value at June 30, 2004
of mortgage-backed securities in our portfolio issued by the Federal National
Mortgage Association also exceeded 10% of our equity. The aggregate book value
and aggregate market value for mortgage-backed securities issued by the Federal
Home Loan Mortgage Corporation that we held at June 30, 2004 totaled $314.2
million and $313.2 million, respectively. The aggregate book value and aggregate
market value for mortgage-backed securities issued by the Federal National
Mortgage Association that we held at June 30, 2004 totaled $362.6 million and
$364.0 million, respectively. At June 30, 2004, all of the securities we hold
issued by the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association were classified as held to maturity.
We do not currently participate in hedging programs, interest rate
caps, floors or swaps, or other activities involving the use of off-balance
sheet derivative financial instruments. Further, we do not purchase securities
which are not rated investment grade.
Actual maturities of the securities held by us may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties. At June 30, 2004, we had
$373.5 million of callable securities in our portfolio.
Mortgage-backed Securities. We invest in mortgage-backed securities
issued by U.S. government agencies or government-sponsored entities, such as
Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association. Mortgage-backed
securities are pass-through securities typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a specific range and have varying
maturities. The life of a mortgage-backed security thus approximates the life of
the underlying mortgages. We focus primarily on mortgage-backed securities
secured by one- to four-family mortgages. The mortgage originators use
intermediaries (generally government agencies and government-sponsored
enterprises, but also a variety of private corporate issuers) to pool and
repackage the participation interests in the form of securities, with investors
such as us receiving the principal and interest payments on the mortgages. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates.
74
We do not currently invest in mortgage-backed securities of private
issuers or collateralized mortgage obligations. Securities issued or sponsored
by U.S. government agencies and government-sponsored entities are guaranteed as
to the payment of principal and interest to investors. Mortgage-backed
securities generally yield less than the mortgage loans underlying such
securities as a result of their payment guarantees or credit enhancements which
offer nominal credit risk to the security holder.
The following table sets forth the carrying value of our securities
portfolio at the dates indicated.
At June 30,
----------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- -------- --------
(In thousands)
Securities Available for Sale:
-----------------------------
Mutual funds........................................... $ 13,899 $ 14,196 $ 13,682 $ 13,203 $ 12,577
Common stock........................................... 15,894 12,748 15,367 17,576 10,169
U.S. government obligations............................ - - - 980 2,917
Trust preferred securities due after ten years......... 11,771 10,896 10,630 10,608 10,503
---------- ---------- ---------- -------- --------
Total securities available for sale.............. 41,564 37,840 39,679 42,367 36,166
---------- ---------- ---------- -------- --------
Investment Securities Held to Maturity:
--------------------------------------
U.S. government obligations............................ 274,401 169,968 60,225 145,080 420,826
Obligations of states and political subdivisions....... 161,469 117,353 79,221 48,875 49,400
---------- ---------- ---------- -------- --------
Total investment securities held to maturity..... 435,870 287,321 139,446 193,955 470,226
---------- ---------- ---------- -------- --------
Mortgage-Backed Securities Held to Maturity:
-------------------------------------------
Government National Mortgage Association............... 94,499 150,699 178,220 198,528 231,389
Federal Home Loan Mortgage Corporation................. 314,221 197,962 302,246 218,116 101,006
Federal National Mortgage Association.................. 362,633 331,061 454,552 215,330 95,489
Collateralized mortgage obligations issued by
U.S. government agencies............................ - 1,894 33,494 56,999 56,679
Other.................................................. - 3 4 231 408
---------- ---------- ---------- -------- --------
Total mortgage-backed securities
held to maturity............................. 771,353 681,619 968,516 689,204 484,971
---------- ---------- ---------- -------- --------
Total................................................. $1,248,787 $1,006,780 $1,147,641 $925,526 $991,363
========== ========== ========== ======== ========
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The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of our securities
portfolio at June 30, 2004. This table shows contractual maturities and does not
reflect repricing or the effect of prepayments. Actual maturities may differ.
At June 30, 2004
----------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
----------------- ------------------- ------------------ -------------------- ----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
Mutual funds......... $13,899 3.18% $ - -% $ - -% $ - -% $ 13,899 3.18% $ $13,899
Common stock......... 15,894 1.90 - - - - - - 15,894 1.90 15,894
Trust preferred
securities due
after ten years.... - - - - - - 11,771 3.94 11,771 3.94 11,771
U.S. government
obligations........ - - 246,259 3.09 10,493 4.62 17,649 1.58 274,401 3.05 269,140
Obligations of
states and
political
subdivisions....... 5,386 4.75 13,606 3.87 65,990 3.73 76,487 3.96 161,469 3.89 159,635
Government
National
Mortgage
Association........ 4 7.52 1,072 7.43 1,006 10.84 92,417 4.51 94,499 4.61 95,519
Federal Home Loan
Mortgage
Corporation........ 2 9.00 4,451 5.51 2,768 5.37 307,000 4.79 314,221 4.80 313,188
Federal National
Mortgage
Association........ 1,299 6.50 2,079 6.24 19,391 5.58 339,864 4.94 362,633 4.98 364,004
------- -------- ------ ------- --------- ---------
Total.............. $36,484 2.97% $267,467 3.21% $99,648 4.30% $845,188 4.66% $1,248,787 4.27% $1,243,050
====== ==== ======= ==== ====== ==== ======= ==== ========= ==== =========
76
Sources of Funds
General. Deposits are our major source of funds for lending and other
investment purposes. In addition, we derive funds from loan and mortgage-backed
securities principal repayments, and proceeds from the maturity and call of
investment securities. Loan and securities payments are a relatively stable
source of funds, while deposit inflows are significantly influenced by general
interest rates and money market conditions. Borrowings (principally from the
Federal Home Loan Bank) are also used to supplement the amount of funds for
lending and investment.
Deposits. Our current deposit products include checking and savings
accounts, certificates of deposit accounts ranging in terms from thirty days to
five years, and individual retirement accounts. Deposit account terms vary,
primarily as to the required minimum balance amount, the amount of time that the
funds must remain on deposit and the applicable interest rate.
Deposits are obtained primarily from within New Jersey. Traditional
methods of advertising are used to attract new customers and deposits, including
radio, print media, direct mail and inserts included with customer statements.
We do not utilize the services of deposit brokers. Premiums or incentives for
opening accounts are sometimes offered. We periodically select particular
certificate of deposit maturities for promotion. We also offer a twenty-five
basis point premium on certificate accounts with a term of at least one year to
certificate of deposit account holders that have $200,000 or more on deposit
with Kearny Federal Savings Bank. We also offer the opportunity one time during
the term of the certificate to "bump up" the rate paid on all 17-month and
29-month certificates of deposit from the rate set on such certificate to the
current rate being offering by Kearny Federal Savings Bank on certificates of
that particular maturity.
The determination of interest rates is based upon a number of factors,
including: (1) our need for funds based on loan demand, current maturities of
deposits and other cash flow needs; (2) a current survey of a selected group of
competitors' rates for similar products; (3) our current cost of funds, yield on
assets and asset/liability position; and (4) the alternate cost of funds on a
wholesale basis, in particular the cost of advances from the Federal Home Loan
Bank. Interest rates are reviewed by senior management on a weekly basis and
rates are set generally with the intent to be in the top five to ten percent of
the competition.
A large percentage of our deposits are in certificates of deposit,
which totaled 58.3% of total deposits at June 30, 2004. Our liquidity could be
reduced if a significant amount of certificates of deposit maturing within a
short period of time were not renewed. Historically, a significant portion of
the certificates of deposit remain with us after they mature and we believe that
this will continue. At June 30, 2004, $188.0 million, or 21%, of our
certificates of deposit were "jumbo" certificates of $100,000 or more. Deposit
inflows are significantly influenced by general interest rates and money market
conditions. The inflow of jumbo certificates of deposit and the retention of
such deposits upon maturity are particularly sensitive to general interest rates
and money market conditions, making jumbo certificates of deposit traditionally
a more volatile source of funding than core deposits. In order to retain jumbo
certificates of deposit, we may have to pay a premium rate, resulting in an
increase in our cost of funds. In a rising rate environment, we may be unwilling
or unable to pay a competitive rate. To the extent that such deposits do not
remain with us, they may need to be replaced with borrowings which could
increase our cost of funds and negatively impact our interest rate spread and
our financial condition.
77
The following table sets forth the distribution of average deposits for
the periods indicated and the weighted average nominal interest rates for each
period on each category of deposits presented.
For the Year Ended June 30,
--------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------- ------------------------------- ---------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
Non-interest-bearing demand... $ 49,797 3.17% -% $ 45,431 2.90% -% $ 38,972 2.79% -%
Interest-bearing demand....... 109,830 6.99 0.80 98,926 6.32 1.09 93,638 6.70 1.38
Savings and club.............. 448,509 28.55 1.23 417,780 26.71 1.58 340,655 24.38 2.31
Certificates of deposit....... 963,089 61.29 2.25 1,002,229 64.07 3.22 924,011 66.13 4.32
---------- ------ ---------- ------ ---------- ------
Total deposits............. $1,571,225 100.00% 1.79% $1,564,366 100.00% 2.55% $1,397,276 100.00% 3.51%
========== ====== ==== ========== ====== ==== ========== ====== ====
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The following table sets forth certificates of deposit classified by
interest rate as of the dates indicated.
The following table shows the amount of certificates of deposit of
$100,000 or more by time remaining until maturity as of June 30, 2004.
Certificates of Deposit
-----------------------
Maturity Period (In thousands)
---------------
Within three months........................ $ 64,969
Three through six months................... 34,881
Six through twelve months.................. 44,084
Over twelve months......................... 44,075
--------
$188,009
========
Borrowings. To supplement our deposits as a source of funds for lending
or investment, we borrow funds in the form of advances from the Federal Home
Loan Bank. We make use of Federal Home Loan Bank advances as part of our
interest rate risk management, primarily to extend the duration of funding to
match the longer term fixed rate loans held in the loan portfolio as part of our
growth strategy.
Advances from the Federal Home Loan Bank are typically secured by the
Federal Home Loan Bank stock we own and a portion of our residential mortgage
loans and may be secured by other assets, mainly securities which are
obligations of or guaranteed by the U.S. government. Additional information
regarding our Federal Home Loan Bank advances is included under Note 12 to the
consolidated financial statements beginning on page F-1.
Short-term Federal Home Loan Bank advances generally have original
maturities of less than one year. The details of these short-term advances are
presented below:
At or For the
Year Ended June 30,
-----------------------------
2004 2003 2002
------- ------- ------
(Dollars in thousands)
Federal Home Loan Bank Advances:
Average balance outstanding.................. $ 1,151 $ 274 $3,364
Maximum amount outstanding
at any month-end during the period......... $30,000 $10,000 $8,500
Balance outstanding at end of period......... $30,000 $ - $ -
Weighted average interest rate during the
period.................................... 1.43% 1.37% 3.56%
Weighted average interest rate at end of
period.................................... 1.43% -% -%
At June 30, 2004, long-term Federal Home Loan Bank advances totaled
$64.2 million. Advances consist of fixed-rate advances that will mature within
one to seven years. The advances are collateralized by Federal Home Loan Bank
stock and certain first mortgage loans and mortgage-backed securities. These
advances had a weighted average interest rate of 5.50% at June 30, 2004. Unused
overnight lines of credit at the Federal Home Loan Bank at June 30, 2004 were
$100.0 million.
80
As of June 30, 2004, long-term advances mature as follows:
Year Ending June 30, (In thousands)
--------------------
2005............................. $ 2,547
2006............................. 581
2007............................. 5,618
2008............................. 37,488
2009............................. 8,000
Thereafter....................... 10,000
-------
Total..................... $64,234
=======
Subsidiary Activity
Kearny Financial Corp. has no subsidiaries other than Kearny Federal
Savings Bank. Kearny Federal Savings Bank has two subsidiaries: KFS Financial
Services, Inc. and Kearny Federal Investment Corp.
KFS Financial Services, Inc. was incorporated as a New Jersey
corporation in 1994 under the name of South Bergen Financial Services, Inc., was
acquired in Kearny's merger with South Bergen Savings Bank in 1999 and was
renamed KFS Financial Services, Inc. in 2000. It is a service corporation
subsidiary organized for the purpose of selling insurance products, including
annuities, to bank customers and the general public through a third party
networking arrangement. KFS Financial Services, Inc. is not a licensed insurance
agency, and it may only offer insurance products through an agreement with a
licensed insurance agency. KFS Financial Services, Inc. has entered into an
agreement with Savings Bank Life Insurance of Massachusetts, a licensed
insurance agency, through which it offers insurance products.
Kearny Federal Investment Corp. was organized in June 2004 under New
Jersey law as a New Jersey investment company primarily to hold investment
securities. At June 30, 2004, it did not yet hold any assets.
At June 30, 2004, West Essex Insurance Agency, which was acquired in
the West Essex Bank merger, also existed as a subsidiary of Kearny Federal
Savings Bank. There was limited activity in this subsidiary following the merger
of West Essex Bank into Kearny, and this subsidiary was dissolved in late 2004.
Personnel
As of June 30, 2004, we had 245 full-time employees and 19 part-time
employees. The employees are not represented by a collective bargaining unit. We
believe our relationship with our employees is good.
Properties and Equipment
At June 30, 2004, our net investment in property and equipment totaled
$26.6 million. We use Financial Services, Inc. ("FSI"), an outside service
company headquartered in Glen Rock, New Jersey, for data processing.
81
The following table sets forth the location of our main office and
branch offices, the year each office was opened and the net book value of each
office. The following table does not include our new
53,000 square feet administrative building in Fairfield, New Jersey. The total
cost of this building is expected to be approximately $13.5 million, which cost
will be capitalized and amortized over a forty-year period. The following table
also does not include the Lacey, New Jersey de novo branch office, which is
expected to open in the first quarter of 2005. The total cost of the Lacey
office is estimated to be approximately $2.3 million. We plan during 2005 to
replace three office locations with new buildings at or near their current
locations, at an estimated cost of approximately $1.9 million per branch.
Year Facility Leased or Net Book Value at
Office Location Opened Owned June 30, 2004
--------------- ------ ----- -------------
Main Office 1928(1) Owned $ 582,168
614 Kearny Avenue
Kearny, New Jersey
Branch Offices:
Bayville(2) 1973 Leased $ 45,561
425 Route 9 & Ocean Gate Drive
Bayville, New Jersey
Caldwell(3) 1968 Owned $ 165,190
417 Bloomfield Avenue
Caldwell, New Jersey
East Rutherford(4) 1969 Owned $ 43,498
20 Willow Street
East Rutherford, New Jersey
Franklin Lakes(3) 1978 Leased $ 5,758
574 Franklin Avenue
Franklin Lakes, New Jersey
Harrison 1995 Owned $ 320,670
534 Harrison Avenue
Harrison, New Jersey
Irvington(2) 1962 Owned $ 39,561
860 18th Avenue
Irvington, New Jersey
Lyndhurst 1970 Owned $ 116,701
307 Stuyvesant Avenue
Lyndhurst, New Jersey
Milltown(2) 1989 Leased $ 15,792
270 Ryders Lane
Milltown, New Jersey
Montville(4) 1996 Leased $ 36,517
339 Main Road
Montville, New Jersey
82
Year Facility Leased or Net Book Value at
Office Location Opened Owned June 30, 2004
--------------- ------ ----- -------------
Northvale(3) 1965 Owned $ 160,530
119 Paris Avenue
Northvale, New Jersey
North Arlington 1952 Owned $ 57,925
80 Ridge Road
North Arlington, New Jersey
Old Bridge(2) 2002 Owned $ 985,605
510 State Highway 34
Old Bridge Township, New Jersey
Old Tappan(3) 1973 Owned $ 228,592
207 Old Tappan Road
Old Tappan, New Jersey
Pine Brook(3) 1974 Owned $ 134,035
267 Changebridge Road
Pine Brook, New Jersey
Pleasantdale(3) 1971 Owned $ 79,683
West Orange (Pleasantdale)
487 Pleasant Valley Way
West Orange, New Jersey
River Vale(3) 1965 Owned $ 208,459
653 Westwood Avenue
River Vale, New Jersey
Rutherford 1974 Owned $ 82,457
252 Park Avenue
Rutherford, New Jersey
Spotswood(2) 1979 Owned $ 219,913
520 Main Street
Spotswood, New Jersey
Springfield(2) 1991 Owned $1,296,092
130 Mountain Avenue
Springfield, New Jersey
Toms River(2) 1996 Owned $ 656,662
827 Fischer Boulevard
Toms River, New Jersey
Tory Corner(3) 1975 Owned $ 72,112
West Orange (Tory Corner)
216 Main Street
West Orange, New Jersey
Wanaque(4) 1996 Leased $ 23,149
4 Union Avenue
Haskell, New Jersey
83
Office Location Year Facility Leased or Net Book Value at
---------------
Opened Owned June 30, 2004
------ ----- -------------
Wood-Ridge(4) 1957 Owned $1,677,397
250 Valley Boulevard
Wood-Ridge, New Jersey
Wyckoff 2002 Owned $2,182,742
661 Wyckoff Avenue
Wyckoff, New Jersey
------------
(1) The main office opened at this site in 1928 and was rebuilt on the same
site in 1968.
(2) This branch was acquired in acquisition of Pulaski Savings Bank in October
2002.
(3) This branch was acquired in acquisition of West Essex Savings Bank in July
2003.
(4) This branch was acquired in acquisition of South Bergen Savings Bank in
April 1999.
Legal Proceedings
Kearny Federal Savings Bank, from time to time, is a party to routine
litigation which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans, and
other issues incident to our business. There were no lawsuits pending or known
to be contemplated against Kearny Financial Corp. or Kearny Federal Savings Bank
at June 30, 2004 that would have a material effect on our operations or income.
REGULATION
Kearny Federal Savings Bank and Kearny Financial Corp. operate in a
highly regulated industry. This regulation establishes a comprehensive framework
of activities in which a savings and loan holding company and federal savings
bank may engage and is intended primarily for the protection of the deposit
insurance fund and depositors. Set forth below is a brief description of certain
laws that relate to the regulation of Kearny Federal Savings Bank and Kearny
Financial Corp. The description does not purport to be complete and is qualified
in its entirety by reference to applicable laws and regulations.
Regulatory authorities have extensive discretion in connection with
their supervisory and enforcement activities, including the imposition of
restrictions on the operation of an institution and its holding company, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, or legislation, including changes
in the regulations governing mutual holding companies, could have a material
adverse impact on Kearny Financial Corp., Kearny Federal Savings Bank, and their
operations. The adoption of regulations or the enactment of laws that restrict
the operations of Kearny Federal Savings Bank and/or Kearny Financial Corp. or
impose burdensome requirements upon one or both of them could reduce their
profitability and could impair the value of Kearny Federal Savings Bank's
franchise, resulting in negative effects on the trading price of Kearny
Financial Corp. common stock.
Regulation of Kearny Federal Savings Bank
General. As a federally chartered, Federal Deposit Insurance
Corporation-insured savings bank, Kearny Federal Savings Bank is subject to
extensive regulation by the Office of Thrift Supervision and the
84
Federal Deposit Insurance Corporation. This regulatory structure gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies
regarding the classification of assets and the level of the allowance for loan
losses. The activities of federal savings banks are subject to extensive
regulation including restrictions or requirements with respect to loans to one
borrower, the percentage of non-mortgage loans or investments to total assets,
capital distributions, permissible investments and lending activities,
liquidity, transactions with affiliates and community reinvestment. Federal
savings banks are also subject to reserve requirements imposed by the Federal
Reserve System. A federal savings bank's relationship with its depositors and
borrowers is regulated by both state and federal law, especially in such matters
as the ownership of savings accounts and the form and content of the bank's
mortgage documents.
Kearny Federal Savings Bank must file reports with the Office of Thrift
Supervision concerning its activities and financial condition, and must obtain
regulatory approvals prior to entering into certain transactions such as mergers
with or acquisitions of other financial institutions. The Office of Thrift
Supervision regularly examines Kearny Federal Savings Bank and prepares reports
to Kearny Federal Savings Bank's Board of Directors on deficiencies, if any,
found in its operations. The Office of Thrift Supervision has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the Federal Deposit Insurance Corporation has
the authority to recommend to the Director of the Office of Thrift Supervision
that enforcement action be taken with respect to a particular federally
chartered savings bank and, if action is not taken by the Director, the Federal
Deposit Insurance Corporation has authority to take such action under certain
circumstances.
Insurance of Deposit Accounts. The Federal Deposit Insurance
Corporation administers two separate deposit insurance funds. Generally, the
Bank Insurance Fund insures the deposits of commercial banks and the Savings
Association Insurance Fund insures the deposits of savings institutions. Kearny
Federal Savings Bank's deposits are insured by the Savings Association Insurance
Fund. The Federal Deposit Insurance Corporation is authorized to increase
deposit insurance premiums if it determines such increases are appropriate to
maintain the reserves of either the Bank Insurance Fund or the Savings
Association Insurance Fund or to fund the administration of the Federal Deposit
Insurance Corporation.
In addition, the Federal Deposit Insurance Corporation is authorized to levy
emergency special assessments on Bank Insurance Fund and Savings Association
Insurance Fund members. The Federal Deposit Insurance Corporation maintains a
risk-based assessment system by which institutions are assigned to one of three
categories based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates are determined semi-annually by the Federal Deposit Insurance Corporation
and currently range from zero basis points of assessable deposits for the
healthiest institutions to 27 basis points of assessable deposits for the
riskiest. The assessment rate for Kearny Federal Savings Bank is currently 0%.
The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A material increase in Savings Association Insurance Fund
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of Kearny Federal Savings Bank. Management cannot
predict what insurance assessment rates will be in the future.
The Federal Deposit Insurance Corporation may terminate an
institution's deposit insurance upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the Federal Deposit Insurance Corporation or the Office of
Thrift Supervision. The
85
management of Kearny Federal Savings Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
In addition, all Federal Deposit Insurance Corporation-insured
institutions are required to pay assessments to the Federal Deposit Insurance
Corporation to fund interest payments on bonds issued by the Financing
Corporation, an agency of the federal government established to recapitalize the
predecessor to the Savings Association Insurance Fund. These assessments will
continue until the Financing Corporation bonds mature in 2017.
Regulatory Capital Requirements. Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2)
"Tier 1" or "core" capital equal to at least 4% (3% if the institution has
received the highest possible rating on its most recent examination) of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. At June 30, 2004, Kearny Federal Savings Bank was in compliance with the
minimum capital standards and qualified as "well capitalized." For Kearny
Federal
Savings Bank's compliance with these regulatory capital standards, see
Historical and Pro Forma Capital Compliance on page __ as well as Note 14 to .
In assessing an institution's capital adequacy, the Office of Thrift Supervision
takes into consideration not only these numeric factors but also qualitative
factors as well, and has the authority to establish higher capital requirements
for individual institutions where necessary.
In addition, the Office of Thrift Supervision may require that a
savings institution that has a risk- based capital ratio of less than 8%, a
ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of
Tier 1 capital to total adjusted assets of less than 4% (3% if the institution
has received the highest rating on its most recent examination) take certain
action to increase its capital ratios. If the savings institution's capital is
significantly below the minimum required levels of capital or if it is
unsuccessful in increasing its capital ratios, the Office of Thrift Supervision
may restrict its activities.
For purposes of the Office of Thrift Supervision capital regulations,
tangible capital is defined as core capital less all intangible assets except
for certain mortgage servicing rights. Tier 1 or core capital is defined as
common stockholders' equity, non-cumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of consolidated
subsidiaries, and certain non-withdrawable accounts and pledged deposits of
mutual savings banks. Kearny Federal Savings Bank does not have any
non-withdrawable accounts or pledged deposits. Tier 1 and core capital are
reduced by an institution's intangible assets, with limited exceptions for
certain mortgage and non-mortgage servicing rights and purchased credit card
relationships. Both core and tangible capital are further reduced by an amount
equal to the savings institution's debt and equity investments in
"non-includable" subsidiaries engaged in activities not permissible for national
banks other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The components of supplementary
capital include, among other items, cumulative perpetual preferred stock,
perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, the portion of the allowance for loan losses
not designated for specific loan losses and up to 45% of unrealized gains on
equity securities. The portion of the allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100% of core
capital. For purposes of determining total capital, a
86
savings institution's assets are reduced by the amount of capital instruments
held by other depository institutions pursuant to reciprocal arrangements and by
the amount of the institution's equity investments (other than those deducted
from core and tangible capital) and its high loan-to-value ratio land loans and
non-residential construction loans.
A savings institution's risk-based capital requirement is measured
against risk-weighted assets, which equal the sum of each on-balance-sheet asset
and the credit-equivalent amount of each off-balance- sheet item after being
multiplied by an assigned risk weight. These risk weights range from 0% for cash
to 100% for delinquent loans, property acquired through foreclosure, commercial
loans, and certain other assets.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA,
requires that the Office of Thrift Supervision and other federal banking
agencies revise their risk-based capital standards, with appropriate transition
rules, to ensure that they take into account interest rate risk, or IRR,
concentration of risk and the risks of non-traditional activities. The Office of
Thrift Supervision adopted regulations, effective January 1, 1994, that set
forth the methodology for calculating an IRR component to be incorporated into
the Office of Thrift Supervision risk-based capital regulations. On May 10,
2002, the Office of Thrift Supervision adopted an amendment to its capital
regulations which eliminated the IRR component of the risk-based capital
requirement. Pursuant to the amendment, the Office of Thrift Supervision will
continue to monitor the IRR of individual institutions through the Office of
Thrift Supervision requirements for IRR management, the ability of the Office of
Thrift Supervision to impose individual minimum capital requirements on
institutions that exhibit a high degree of IRR, and the requirements of Thrift
Bulletin 13a, which provides guidance on the management of IRR and the
responsibility of boards of directors in that area.
The Office of Thrift Supervision continues to monitor the IRR of
individual institutions through analysis of the change in net portfolio value,
or NPV. NPV is defined as the net present value of the expected future cash
flows of an entity's assets and liabilities and, therefore, hypothetically
represents the value of an institution's net worth. The Office of Thrift
Supervision has also used this NPV analysis as part of its evaluation of certain
applications or notices submitted by thrift institutions. The Office of Thrift
Supervision, through its general oversight of the safety and soundness of
savings associations, retains the right to impose minimum capital requirements
on individual institutions to the extent the institution is not in compliance
with certain written guidelines established by the Office of Thrift Supervision
regarding NPV analysis. The Office of Thrift Supervision has not imposed any
such requirements on Kearny Federal Savings Bank.
Prompt Corrective Regulatory Action. Under the Office of Thrift
Supervision Prompt Corrective Action regulations, the Office of Thrift
Supervision is required to take supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's level of
capital. Generally, a savings institution that has a ratio of total capital to
risk-weighted assets of less than 8.0%, a ratio of Tier 1 (core) capital to risk
weighted assets of less than 4.0% or a ratio of Tier 1 capital to total assets
that is less than 4.0% (3.0% or less for institutions with the highest
examination rating) is considered to be undercapitalized. A savings institution
that has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is
considered to be "significantly undercapitalized." A savings institution that
has a tangible capital to assets ratio equal to or less than 2.0% is deemed to
be "critically undercapitalized." Generally, the Office of Thrift Supervision is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulations also provide that a capital
restoration plan must be filed with the Office of Thrift Supervision within
forty-five days of the date an institution receives notice that it is
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"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," and compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors. At June 30, 2004, Kearny Federal
Savings Bank ratio of total capital to risk-weighted assets was 32.56%, its
ratio of Tier 1 (core) capital to risk weighted assets was 30.69% and its ratio
of Tier 1 capital to adjusted total assets was 10.76%, and it qualified as "well
capitalized."
Dividend and Other Capital Distribution Limitations. The Office of
Thrift Supervision imposes various restrictions or requirements on the ability
of savings institutions to make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan
holding company, such as Kearny Federal Savings Bank, must file an application
or a notice with the Office of Thrift Supervision at least thirty days before
making a capital distribution, such as paying a dividend to Kearny Financial
Corp. A savings institution must file an application for prior approval of a
capital distribution if: (i) it is not eligible for expedited treatment under
the applications processing rules of the Office of Thrift Supervision; (ii) the
total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings institution's net income for that year to date plus the
institution's retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the Office of Thrift Supervision or
applicable regulations.
The Office of Thrift Supervision may disapprove a notice or deny an
application for a capital distribution if: (i) the savings institution would be
undercapitalized following the capital distribution; (ii) the proposed capital
distribution raises safety and soundness concerns; or (iii) the capital
distribution would violate a prohibition contained in any statute, regulation or
agreement. As a result of the cash paid in connection with the acquisition of
West Essex Bank, it is likely that Kearny Federal Savings Bank will be required
to file an application, rather than a notice, for any capital distributions for
a period of time following the offering.
Capital distributions by Kearny Financial Corp., as a savings and loan
holding company, will not be subject to the Office of Thrift Supervision capital
distribution rules. Because Kearny Financial Corp. will retain 50% of the net
proceeds of the stock offering, the likelihood that Kearny Federal Savings Bank
must file an application rather than a notice for capital distributions is not
expected to affect the payment of cash dividends by Kearny Financial Corp. to
its stockholders or the amount of such dividends.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA,
as amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the Office of Thrift Supervision,
has adopted guidelines establishing general standards relating to internal
controls, information and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings and
compensation, fees and benefits. In general, the guidelines require, among other
things, appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
stockholder.
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In addition, the Office of Thrift Supervision adopted regulations to
require a savings bank that is given notice by the Office of Thrift Supervision
that it is not satisfying any of such safety and soundness standards to submit a
compliance plan to the Office of Thrift Supervision. If, after being so
notified, a savings bank fails to submit an acceptable compliance plan or fails
in any material respect to implement an accepted compliance plan, the Office of
Thrift Supervision may issue an order directing corrective and other actions of
the types to which a significantly undercapitalized institution is subject under
the "prompt corrective action" provisions of FDICIA. If a savings bank fails to
comply with such an order, the Office of Thrift Supervision may seek to enforce
such an order in judicial proceedings and to impose civil monetary penalties.
Kearny Federal Savings Bank has not received any notice from the Office of
Thrift Supervision that it has failed to meet any standard prescribed by the
guidelines.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender test or they become subject to the business activity
restrictions and branching rules applicable to national banks. To qualify as a
qualified thrift lender, a savings institution must either (i) be deemed a
"domestic building
and loan association" under the Internal Revenue Code by maintaining at least
60% of its total assets in specified types of assets, including cash, certain
government securities, loans secured by and other assets related to residential
real property, educational loans and investments in premises of the institution
or (ii) satisfy the statutory qualified thrift lender test set forth in the Home
Owners' Loan Act by maintaining at least 65% of its portfolio assets in
qualified thrift investments (defined to include residential mortgages and
related equity investments, certain mortgage-related securities, small business
loans, student loans and credit card loans). For purposes of the statutory
qualified thrift lender test, portfolio assets are defined as total assets minus
goodwill and other intangible assets, the value of property used by the
institution in conducting its business, and specified liquid assets up to 20% of
total assets. A savings institution must maintain its status as a qualified
thrift lender on a monthly basis in at least nine out of every twelve months.
Kearny Federal Savings Bank met the qualified thrift lender test as of June 30,
2004 and in each of the last twelve months and, therefore, qualifies as a
qualified thrift lender.
A savings bank that fails the qualified thrift lender test and does not
convert to a bank charter generally will be prohibited from: (1) engaging in any
new activity not permissible for a national bank, (2) paying dividends not
permissible under national bank regulations, and (3) establishing any new branch
office in a location not permissible for a national bank in the institution's
home state. In addition, if the institution does not requalify under the
qualified thrift lender test within three years after failing the test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from the
Federal Home Loan Bank as promptly as possible.
Transactions with Related Parties. Federal law limits Kearny Federal
Savings Bank's authority to lend to, and engage in certain other transactions
with (collectively, "covered transactions"), "affiliates" (e.g., any company
that controls or is under common control with an institution, including Kearny
Financial Corp., Kearny MHC and their non-savings institution subsidiaries). The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution's capital and surplus. Loans and other specified
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in federal law. The purchase of low quality
assets from affiliates is generally prohibited. Transactions with affiliates
must be on terms and under circumstances that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
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The Sarbanes-Oxley Act of 2002 generally prohibits a company from
making loans to its executive officers and directors. However, that act contains
a specific exception for loans by a depository institution to its executive
officers and directors in compliance with federal banking laws. Under such laws,
Kearny Federal Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders ("insiders"), as well as entities such persons
control, is limited. The law restricts both the individual and aggregate amount
of loans Kearny Federal Savings Bank may make to insiders based, in part, on
Kearny Federal Savings Bank's capital position and requires certain board
approval procedures to be followed. Such loans must be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees.
Other than through a loan with Kearny Federal Savings Bank, no
directors, executive officers or their immediate family members were engaged,
directly or indirectly, in transactions with Kearny Financial Corp. or any
subsidiary exceeding $60,000 during the three years ended June 30, 2004.
Kearny Federal Savings Bank makes loans to its officers, directors and
employees in the ordinary course of business. Such loans are on substantially
the same terms and conditions, including interest rates and collateral, as those
of comparable transactions prevailing at the time with other persons. Such loans
also do not include more than the normal risk of collectibility or present other
unfavorable features. As of June 30, 2004 and 2003, such loans totaled
approximately $1.6 million and $2.5 million, respectively. During the year ended
June 30, 2004, new loans to related parties totaled $0, repayments totaled
approximately $100,000 and loans to individuals no longer associated with the
Kearny Federal Savings Bank totaled approximately $774,000.
Community Reinvestment Act. Under the Community Reinvestment Act, every
insured depository institution, including Kearny Federal Savings Bank, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community. The
Community Reinvestment Act requires the Office of Thrift Supervision to assess
the depository institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution, such as a merger or the establishment of a branch office by
Kearny Federal Savings Bank. An unsatisfactory Community Reinvestment Act
examination rating may be used by the Office of Thrift Supervision as the basis
for the denial of an application. Kearny Federal Savings Bank received a
satisfactory Community Reinvestment Act rating in its most recent Community
Reinvestment Act examination by the Office of Thrift Supervision.
Federal Home Loan Bank System. Kearny Federal Savings Bank is a member
of the Federal Home Loan Bank of New York, which is one of twelve regional
Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by financial institutions and proceeds derived from the
sale of consolidated obligations of the Federal Home Loan Bank System. It makes
loans to members pursuant to policies and procedures established by the board of
directors of the Federal Home Loan Bank.
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As a member, Kearny Federal Savings Bank is required to purchase and
maintain stock in the Federal Home Loan Bank of New York in an amount equal to
the greater of 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of our outstanding Federal Home Loan Bank
advances. We are in compliance with this requirement with an investment in
Federal Home Loan Bank of New York stock at June 30, 2004 of $11.4 million. The
Federal Home Loan Bank imposes various limitations on advances such as limiting
the amount of certain types of real estate related collateral to 30% of a
member's capital and limiting total advances to a member.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid and could continue to do so in the future. In addition, these
requirements could result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their checking accounts and non-personal certificate accounts. At
June 30, 2004, Kearny Federal Savings Bank was in compliance with such
requirements.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
The USA Patriot Act. Kearny Federal Savings Bank is subject to Office
of Thrift Supervision regulations implementing the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA Patriot Act. The USA Patriot Act gives the
federal government powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA Patriot Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act. As of June 30, 2004, management of Kearny Federal
Savings Bank believes all required actions to be taken by Kearny Federal Savings
Bank under the USA Patriot Act have been completed.
Among other requirements, Title III of the USA Patriot Act and the
related regulations of the Office of Thrift Supervision impose the following
requirements with respect to financial institutions:
o Establishment of anti-money laundering programs that include, at minimum:
(i) internal policies, procedures, and controls; (ii) specific designation
of an anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Establishment of a program specifying procedures for obtaining identifying
information from customers seeking to open new accounts, including
verifying the identity of customers within a reasonable period of time.
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o Establishment of appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect and report
money laundering.
o Prohibitions on establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do not
have a physical presence in any country), and compliance with certain
record keeping obligations with respect to correspondent accounts of
foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Regulation of Kearny Financial Corp.
General. Kearny Financial Corp. is a savings and loan holding company
within the meaning of Section 10 of the Home Owners' Loan Act. It is required to
file reports with the Office of Thrift Supervision and is subject to regulation
and examination by the Office of Thrift Supervision. Kearny Financial Corp. must
also obtain regulatory approval from the Office of Thrift Supervision before
engaging in certain transactions, such as mergers with or acquisitions of other
financial institutions. In addition, the Office of Thrift Supervision has
enforcement authority over Kearny Financial Corp. and any non-savings
institution subsidiaries. This permits the Office of Thrift Supervision to
restrict or prohibit activities that it determines to be a serious risk to
Kearny Federal Savings Bank. This regulation is intended primarily for the
protection of the depositors and not for the benefit of stockholders of Kearny
Financial Corp.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into
law the Sarbanes-Oxley Act of 2002, or the Act, which implemented legislative
reforms intended to address corporate and accounting fraud. In addition to the
establishment of a new accounting oversight board that will enforce auditing,
quality control and independence standards and will be funded by fees from all
publicly traded companies, the Act places certain restrictions on the scope of
services that may be provided by accounting firms to their public company audit
clients. Any non-audit services being provided to a public company audit client
will require preapproval by the company's audit committee. In addition, the Act
makes certain changes to the requirements for partner rotation after a period of
time. The Act requires chief executive officers and chief financial officers, or
their equivalent, to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission, subject to civil and criminal penalties if
they knowingly or willingly violate this certification requirement. In addition,
under the Act, counsel will be required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives
who violate federal securities laws; the period during which certain types of
suits can be brought against a company or its officers is extended; and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives (other than
loans by financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision of the Act directs that civil penalties
levied by the Securities and Exchange Commission as a result of any judicial or
administrative action under the Act be deposited to a fund for the benefit of
harmed investors. The Federal Accounts for Investor Restitution provision also
requires the Securities and Exchange Commission to develop methods of improving
collection rates. The legislation
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accelerates the time frame for disclosures by public companies, as they must
immediately disclose any material changes in their financial condition or
operations. Directors and executive officers must also provide information for
most changes in ownership in a company's securities within two business days of
the change.
The Act also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under the Act, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements
materially misleading. The Act also requires the Securities and Exchange
Commission to prescribe rules requiring inclusion of any internal control report
and assessment by management in the annual report to stockholders. The Act
requires the company's registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls.
Activities Restrictions. As a savings and loan holding company and as a
subsidiary holding company of a mutual holding company, Kearny Financial Corp.
is subject to statutory and regulatory restrictions on its business activities.
The non-banking activities of Kearny Financial Corp. and its non- savings
institution subsidiaries are restricted to certain activities specified by
Office of Thrift Supervision regulation, which include performing services and
holding properties used by a savings institution subsidiary, activities
authorized for savings and loan holding companies as of March 5, 1987, and non-
banking activities permissible for bank holding companies pursuant to the Bank
Holding Company Act of 1956 or authorized for financial holding companies
pursuant to the Gramm-Leach-Bliley Act. Before engaging in any non-banking
activity or acquiring a company engaged in any such activities, Kearny Financial
Corp. must file with the Office of Thrift Supervision either a prior notice or
(in the case of non- banking activities permissible for bank holding companies)
an application regarding its planned activity or acquisition.
Mergers and Acquisitions. Kearny Financial Corp. must obtain approval
from the Office of Thrift Supervision before acquiring, directly or indirectly,
more than 5% of the voting stock of another savings institution or savings and
loan holding company or acquiring such an institution or holding company by
merger, consolidation or purchase of its assets. Federal law also prohibits a
savings and loan holding company from acquiring more than 5% of a company
engaged in activities other than those authorized for savings and loan holding
companies by federal law; or acquiring or retaining control of a depository
institution that is not insured by the Federal Deposit Insurance Corporation. In
evaluating an application for Kearny Financial Corp. to acquire control of a
savings institution, the Office of Thrift Supervision would consider the
financial and managerial resources and future prospects of Kearny Financial
Corp. and the target institution, the effect of the acquisition on the risk to
the insurance funds, the convenience and the needs of the community and
competitive factors.
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Stock Holding Company Subsidiary Regulation. The Office of Thrift
Supervision has adopted regulations governing the two-tier mutual holding
company form of organization and subsidiary stock holding companies that are
controlled by mutual holding companies. We have adopted this form of
organization and it will continue in place after the proposed offering. Kearny
Financial Corp. is the stock holding company subsidiary of Kearny, MHC. Kearny
Financial Corp. is permitted to engage in activities that are permitted for
Kearny, MHC subject to the same restrictions and conditions.
Waivers of Dividends by Kearny MHC. Office of Thrift Supervision
regulations require Kearny MHC to notify the Office of Thrift Supervision of any
proposed waiver of its receipt of dividends from Kearny Financial Corp. The
Office of Thrift Supervision reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is consistent
with such directors' fiduciary duties to the mutual holding company's members;
(ii) for as long as the savings association subsidiary is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company is considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with Statement of Financial Accounting Standards No.
5, where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under Office of Thrift Supervision capital distribution regulations. We
anticipate that Kearny MHC will waive dividends paid by Kearny Financial Corp.,
if any.
Conversion of Kearny MHC to Stock Form. Office of Thrift Supervision
regulations permit Kearny MHC to convert from the mutual form of organization to
the capital stock form of organization, commonly referred to as a second step
conversion. In a second step conversion a new holding company would be formed as
the successor to Kearny Financial Corp., Kearny MHC's corporate existence would
end, and certain depositors of Kearny Federal Savings Bank would receive the
right to subscribe for shares of the new holding company. In a second step
conversion, each share of common stock held by stockholders other than Kearny
MHC would be automatically converted into a number of shares of common stock of
the new holding company determined pursuant to an exchange ratio that ensures
that Kearny Financial Corp. stockholders own the same percentage of common stock
in the new holding company as they owned in Kearny Financial Corp. immediately
prior to the second step conversion. Under Office of Thrift Supervision
regulations, Kearny Financial Corp. stockholders would not be diluted because of
any dividends waived by Kearny MHC (and waived dividends would not be considered
in determining an appropriate exchange ratio), in the event Kearny MHC converts
to stock form. The total number of shares held by Kearny Financial Corp.
stockholders after a second step conversion also would be increased by any
purchases by Kearny Financial Corp. stockholders in the stock offering of the
new holding company conducted as part of the second step conversion.
Acquisition of Control. Under the federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire "control" of
a savings and loan holding company or savings association. An acquisition of
"control" can occur upon the acquisition of 10% or more of the voting stock of a
savings and loan holding company or savings institution or as otherwise defined
by the Office of Thrift Supervision. Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice to
act, taking into consideration certain factors, including the financial and
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managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
Federal Securities Laws
Kearny Financial Corp. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 for the
registration of the common stock to be issued pursuant to the offering. Upon
completion of the offering, Kearny Financial Corp. common stock will continue to
be registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. Kearny Financial Corp. will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934.
TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations.
All thrift institutions are now subject to the same provisions as banks
with respect to deductions for bad debts. Thrift institutions that are treated
as "small banks" (the average adjusted bases for all assets of such institution
equals $500 million or less) under the Internal Revenue Code may account for bad
debts by using the experience method for determining additions to their bad debt
reserve. Thrift institutions that are not treated as small banks must now use
the specific charge-off method.
Kearny Financial Corp. may exclude from its income 100% of dividends
received from Kearny Federal Savings Bank as a member of the same affiliated
group of corporations. A 70% dividends received deduction generally applies with
respect to dividends received from corporations that are not members of such
affiliated group.
Kearny Financial Corp. and Kearny Federal Savings Bank have previously
filed a consolidated federal tax return with Kearny MHC. Kearny MHC's
consolidated federal income tax returns have not been audited by the IRS during
the past five years. Following the stock offering, Kearny Financial Corp. and
Kearny Federal Savings Bank will file a consolidated return and Kearny MHC will
file a separate return.
State Taxation
Kearny Financial Corp. and its subsidiaries file New Jersey income tax
returns and are subject to a state income tax that is calculated based on
federal taxable income, subject to certain adjustments. In July 2002, New Jersey
eliminated the 3% tax rate formerly applicable to thrift institutions located in
New Jersey, and such institutions are now subject to the 9% tax rate applicable
to New Jersey corporations.
Such change was retroactive to January 1, 2002.
The state income tax returns of Kearny Federal Savings Bank have not
been audited during the past five years. For additional information, see Note 15
of the Notes to the Consolidated Financial Statements beginning on page F-1.
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MANAGEMENT
Directors and Executive Officers of Kearny Financial Corp. and Kearny Federal
Savings Bank
Kearny Financial Corp.'s and Kearny Federal Savings Bank's Boards of
Directors are both composed of nine members, with each director serving for a
term of three years. Kearny Financial Corp.'s and Kearny Federal Savings Bank's
bylaws require that directors be divided into three classes, as nearly equal in
number as possible, with approximately one-third of the directors elected each
year.
Kearny Financial Corp.'s and Kearny Federal Savings Bank's executive
officers are appointed annually by the respective Boards of Directors and serve
at the Board's discretion. However, several of Kearny Federal Savings Bank's
officers do have employment agreements, as further described on page ___.
The following table sets forth information with respect to the
directors and executive officers of Kearny Financial Corp. and Kearny Federal
Savings Bank.
Age at Current
June 30, Director Term
Name 2004 Position Since(1) Expires
---- ------ -------- -------- -------
Directors
John J. Mazur, Jr. 50 Chairman 1996 2004
John N. Hopkins 57 Director, President and Chief 2001 2006
Executive Officer
Theodore J. Aanensen 59 Director 1986 2005
Matthew T. McClane 67 Director 1994 2004
John F. McGovern 43 Director 1999 2004
Joseph P. Mazza 60 Director 1993 2005
Leopold W. Montanaro(2) 64 Director 2003 2006
Henry S. Parow 81 Director 1976 2006
John F. Regan 59 Director 1999 2005
Edward T. Rushforth(3) 87 Director 1975 2006
Executive Officers(4)
Albert E. Gossweiler 56 Senior Vice President and N/A N/A
Chief Financial Officer
William C. Ledgerwood 51 Senior Vice President, Treasurer and N/A N/A
Chief Accounting Officer
Sharon Jones 50 Senior Vice President and Corporate N/A N/A
Secretary
Patrick M. Joyce 39 Senior Vice President and Chief N/A N/A
Lending Officer
Allan Beardslee 52 Senior Vice President of Information N/A N/A
Technology
Erika Sacher 39 Senior Vice President and Branch N/A N/A
Administrator
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(1) Indicates the year the individual first became a director of Kearny Federal
Savings Bank. Upon the formation of Kearny Financial Corp. in March 2001,
each person serving as a director at that time of Kearny Federal Savings
Bank became a director of Kearny Financial Corp.
(2) Mr. Montanaro serves as a director of Kearny Federal Savings Bank only.
(3) Mr. Rushforth serves as a director of Kearny Financial Corp. and Kearny MHC
only.
(4) Mr. Hopkins, Mr. Gossweiler, Mr. Ledgerwood and Ms. Jones also serve as
officers of Kearny Financial Corp. The other officers listed herein are
officers of Kearny Federal Savings Bank only.
The business experience of each of Kearny Financial Corp.'s and Kearny
Federal Savings Bank's directors and executive officers is set forth below. Each
has held his present position for at least the past five years, except as
otherwise indicated.
Directors
John J. Mazur, Jr. is the sole owner and president/chief executive
officer of Elegant Desserts, a wholesale bakery located in Lyndhurst, New
Jersey, that sells gourmet cakes nationally and on QVC. He opened this business
in 1994. From 1976 to 2003, he was also a partner and general manager of Mazur's
Bakery, a retail bakery in Lyndhurst, New Jersey, that operated from 1936 until
it was sold in 2003. He became chairman of the Board of Directors of Kearny in
January 2004.
John N. Hopkins became president and chief executive officer of Kearny
MHC, Kearny Financial Corp. and Kearny Federal Savings Bank in 2002 and served
the Bank previously as executive vice president from 1994 to 2002 and as chief
financial officer from 1994 to 1999. He has been employed by Kearny Federal
Savings Bank since 1975. He is a graduate of Fairleigh Dickinson University.
Active in professional and charitable organizations, he serves on several
committees of the New Jersey League of Community Bankers; the board of directors
of the Thrift Institutions Community Investment Corp. of NJ (TICIC), the board
of trustees of Clara Maass Medical Center, the board of trustees of the Saint
Barnabas Health Care System and the Rutherford Senior Citizens Center (55 Kip
Center).
Theodore J. Aanensen is an owner and president of Aanensen's, a luxury
home remodeling and custom cabinetry company established in Kearny in 1951. A
graduate of Upsala College in 1966, he has been president of Aanensen's since
1982.
Joseph P. Mazza is a graduate of Seton Hall University and The
University of Pennsylvania. He is a self-employed dentist practicing in
Rutherford, New Jersey, since 1971. He also serves on the Board of the
Rutherford Senior Citizens Center.
Matthew T. McClane retired in 2002. He was appointed to president and
chief executive officer of Kearny Federal Savings Bank in 1994 and president and
chief executive officer of Kearny MHC and Kearny Financial Corp. in 2001. He was
employed by Kearny Federal Savings Bank from 1967 to 2002.
John F. McGovern is the owner of McGovern Monuments, a monument sales
and lettering company located in North Arlington, New Jersey that has been in
business since 1924. He has also worked as a self-employed certified public
accountant and certified financial planner since 1984 and as a registered
investment advisor since 2001.
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Leopold W. Montanaro is retired and was the chairman, president and
chief executive officer of West Essex Bancorp, Inc. and West Essex Bank, located
in Caldwell, New Jersey, until such bank was acquired by Kearny Financial Corp.
on July 1, 2003. He was employed by West Essex Bank from 1972 until the
completion of the merger with Kearny Federal Savings Bank. He serves as a
director of Kearny Federal Savings Bank but not as a director of Kearny
Financial Corp. or Kearny MHC.
Henry S. Parow is a graduate of Seton Hall College. He is a licensed
funeral director in the state of New Jersey since 1950. He is the original
owner, director and manager of the Parow Funeral Home, North Arlington, New
Jersey, since 1957. He currently is on the Board of Directors of Kearny Federal
Savings Bank, Kearny MHC and Kearny Financial Corp.
John F. Regan has been the majority stockholder and president of two
automobile sales and service companies, DeMassi Pontiac, Buick and GMC, located
in Riverdale, New Jersey and Regan Pontiac, Buick and GMC, located in Long
Island City, New York since 1995.
Edward T. Rushforth is retired. He was a florist and the owner of a
retail floral business that he sold in 1977. He served as a director of Kearny
Federal Savings Bank until 2003 and now serves only as a director of Kearny
Financial Corp. and Kearny MHC.
Executive Officers
Albert E. Gossweiler became senior vice president and chief financial
officer of Kearny Federal Savings Bank in 1999 and of Kearny Financial Corp.
upon its formation in 2001. He was previously employed by South Bergen Savings
Bank and joined Kearny when such bank was acquired by Kearny Federal Savings
Bank in 1999. He was employed by South Bergen Savings Bank from 1981 until the
completion of the merger with Kearny Federal Savings Bank.
William C. Ledgerwood became the senior vice president, treasurer and
chief accounting officer of Kearny Federal Savings Bank and Kearny Financial
Corp. in 2002 and has been employed by Kearny Federal Savings Bank since 1998.
He was previously the chief financial officer for The Jersey Bank for Savings,
which opened as a de novo stock bank in 1989 and was acquired by Interchange
Bank in 1998.
Sharon Jones is the corporate secretary of Kearny MHC, Kearny Financial
Corp. and Kearny Federal Savings Bank. She was appointed to the office of
corporate secretary in 1997 and became a senior vice president in 2002. She has
been employed by Kearny Federal Savings Bank since 1972.
Patrick M. Joyce became the senior vice president and chief lending
officer of Kearny Federal Savings Bank in 2002 and was previously vice president
of loan originations from 1999 to 2002. He was formerly employed by South Bergen
Savings Bank as an assistant corporate secretary and as a loan originator
starting in 1989. He joined Kearny when South Bergen Savings Bank was acquired
by Kearny Federal Savings Bank in 1999 and was employed by such bank from 1985
until the completion of the merger with Kearny Federal Savings Bank.
Allan Beardslee became senior vice president of information technology
for Kearny Federal Savings Bank in 2002 and prior to that was senior vice
president of operations beginning in 1982. He has been employed by Kearny
Federal Savings Bank since 1975.
Erika Sacher has been the senior vice president and branch
administrator of Kearny Federal Savings Bank since 2002 and was previously a
vice president and branch administrator from 1999 to 2002.
98
She was formerly employed by South Bergen Savings Bank as a vice president and
branch administrator and joined Kearny when such bank was acquired by Kearny
Federal Savings Bank in 1999. She was employed by South Bergen Savings Bank from
1991 until the completion of the merger with Kearny Federal Savings Bank.
Meetings and Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the
Board and through activities of its committees. During the fiscal year ended
June 30, 2004, the Board of Directors met twelve times. No director attended
fewer than 75% of the total meetings of the Board of Directors and committees on
which he served during the year ended June 30, 2004. The Board maintains an
Audit & Compliance Committee, a Budget Committee, an Executive Committee, an
Interest Rate Risk Management Committee, an Asset Quality Committee, a
Nominating Committee and a Compensation Committee, as well as a Building &
Grounds Committee, a Governance Committee, a Planning & Marketing Committee, an
Electronic Data Processing Committee and a Benefits Equalization Plan
Administrative Committee.
The Audit & Compliance Committee consists of Directors McGovern
(Chair), Mazur, Mazza and Regan. Each member of the Audit Committee is
independent in accordance with the listing standards of the Nasdaq Stock Market.
The Board of Directors has designated John F. McGovern as an audit committee
financial expert under the rules of the Securities and Exchange Commission. This
committee meets monthly and also periodically with the internal auditor, the
compliance officer and the external auditors. This committee's responsibilities
include oversight of the internal audit and regulatory compliance activities and
monitoring management and employee compliance with the Board's audit policies
and applicable laws and regulations. This committee is directly responsible for
the appointment, compensation, retention and oversight of the work of the
external auditors. This committees operates under a written charter, which
governs its composition, responsibilities and operations.
The Compensation Committee consists of Directors Aanensen (Chair),
Mazur, Mazza and Parow. This committee meets as needed. The responsibilities of
this committee include appraisal of the performance of officers, administration
of management incentive compensation plans and review of directors'
compensation. This committee reviews industry compensation surveys and reviews
the recommendations of management on employee compensation matters. This
committees operates under a written charter, which governs its composition,
responsibilities and operations.
The Nominating Committee, consisting of Directors Mazza (Chair),
Aanensen, Parow, Regan and Rushforth, is responsible for the annual selection of
management's nominees for election as directors. Each member of the Nominating
Committee is independent in accordance with the listing standards of the Nasdaq
Stock Market. This committees operates under a written charter, which governs
its composition, responsibilities and operations.
Kearny Financial Corp. and Kearny Federal Savings Bank have adopted a
code of ethics, which applies to all employees and directors and addresses
compliance with applicable laws, rules and regulations. The code of ethics is
designed to deter wrongdoing and to promote honest and ethical conduct, full and
accurate disclosure and compliance with all applicable laws, rules and
regulations.
Director Compensation
Board Fees. Directors are currently paid a fee of $1,250 per Kearny
Federal Savings Bank board meeting attended, $600 per Kearny Financial Corp.
meeting attended and $600 per Kearny MHC
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meeting attended. The chairman of the board receives a higher fee of $1,500,
$720 and $720, for bank, holding company and mutual holding company meetings,
respectively.
Members of the Kearny Federal Savings Bank Executive Committee are
currently paid $1,200 per committee meeting attended; the chairman of the board
receives a higher fee of $1,440 for Executive Committee meetings. Each member of
the Kearny Federal Savings Bank Board of Directors is also a member of the
Executive Committee. Members of the Audit & Compliance Committee and the
chairman of this committee are paid $250 and $350, respectively, for each
meeting attended. Members of the Compensation Committee and the chairman of this
committee are paid $250 and $300, respectively, for each meeting attended. The
Administrative Building Construction Committee and the Branch Renovation &
Construction Committee are ad hoc committees, and members of these committees
are paid $250 per meeting attended.
Directors also receive an annual retainer as follows: $30,000 for
service on Kearny Federal Savings Bank's board, $6,000 for service on Kearny
Financial Corp.'s board and $6,000 for service on Kearny MHC's board. The
aggregate fees paid to the directors for the year ended June 30, 2004 were
$594,850. Directors who also serve as employees do not receive compensation as
directors.
Directors Consultation and Retirement Plan. Kearny Federal Savings Bank
maintains a Directors Consultation and Retirement Plan (the "DCRP"). The DCRP
provides retirement benefits to the directors of the Bank based upon the number
of years of service to the Bank's board. To be eligible to receive benefits
under the DCRP, a director generally must have completed at least 5 years of
service and must not retire from the board prior to reaching 60 years of age. If
a director agrees to become a consulting director to the Bank's board upon
retirement, he will receive a monthly payment equal to 2.5% of the Bank's Board
fee in effect during the 12-month period prior to the date of retirement
multiplied by the number of years of service as a director, not to exceed 80% of
Board fee compensation. Benefits under the DCRP begin upon a director's
retirement and are paid for life; provided, however, that in the event of a
director's death prior to the receipt of 120 monthly payments, payments shall
continue to the director's surviving spouse or estate until 120 payments have
been made. In the event there is a change in control (as defined in the DCRP),
all directors will be presumed to be eligible to receive benefits under the DCRP
and each director will receive a lump sum payment equal to the present value of
future benefits payable.
Benefits under the DCRP are unvested and forfeitable until retirement at or
after age 60 with at least 5 years of service, termination of service following
a change in control, disability following at least 5 years of service or death.
For the year ended June 30, 2004, payments made by the Bank under the DCRP
totaled $89,314.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by Kearny Financial Corp.'s Chief
Executive Officer and certain other officers of Kearny Financial Corp. or Kearny
Federal Savings Bank for the year ended December 31, 2003. All compensation was
paid by Kearny Federal Savings Bank.
Annual Compensation(1)
----------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ------ ------ ----- ------------
John N. Hopkins, President and 2003 $335,000 $103,450 $6,381(2)
Chief Executive Officer
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Annual Compensation(1)
----------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ------ ------ ----- ------------
Allan Beardslee, Senior Vice President 2003 173,000 61,610 6,007(3)
and EDP Officer
Albert E. Gossweiler, Senior Vice 2003 173,000 57,110 6,042(4)
President and Chief Financial Officer
Sharon Jones, Senior Vice President 2003 147,500 55,825 4,785(5)
and Corporate Secretary
William C. Ledgerwood, Senior Vice 2003 135,000 59,950 4,247(6)
President, Treasurer and Chief
Accounting Officer
--------------
(1) Compensation information for the years ended December 31, 2002 and 2001 is
omitted because Kearny Financial Corp. was not a reporting company under
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 during those
periods. Kearny provides certain of its executive officers with non-cash
benefits and perquisites, such as the use of company- owned or leased
vehicles. The aggregate value of such non-cash benefits for the year ended
December 31, 2003 did not exceed the lesser of $50,000 or 10% of the
aggregate salary and bonus for any officer.
(2) Consists of an employer contribution to the 401(k) Plan for Mr. Hopkins of
$4,059 and $2,322 for payment of life insurance premium.
(3) Consists of an employer contribution to the 401(k) Plan for Mr. Beardslee
of $5,190 and $817 for payment of life insurance premium.
(4) Consists of an employer contribution to the 401(k) Plan for Mr. Gossweiler
of $4,515 and $1,527 for payment of life insurance premium.
(5) Consists of an employer contribution to the 401(k) Plan for Ms. Jones of
$4,342 and $443 for payment of life insurance premium.
(6) Consists of an employer contribution to the 401(k) Plan for Mr. Ledgerwood
of $3,640 and $607 for payment of life insurance premium.
Employment Agreements. Kearny Federal Savings Bank has entered into an
employment agreement with Mr. Hopkins, pursuant to which his minimum base salary
is $450,000. Mr. Hopkins' employment agreement has a term of three years, which
commenced on July 1, 2004, and may be extended on or before each anniversary of
the effective date upon determination of the Board of Directors of Kearny
Federal Savings Bank that his performance has met the requirements and standards
of the Board. Pursuant to the terms of Mr. Hopkins' employment agreement, he is
generally entitled to participate in all discretionary bonuses, pension and
other retirement benefit plans, welfare benefit plans and other equity,
incentive and benefit plans and privileges applicable to senior management of
Kearny Federal Savings Bank. Upon his termination of employment at any time on
or after attainment of age 62 and until he becomes eligible for Medicare
coverage, Mr. Hopkins is permitted to continue to participate, at Kearny Federal
Savings Bank's expense, in the group medical plan sponsored by the Bank.
If Kearny Federal Savings Bank terminates Mr. Hopkins without "cause"
as defined in the agreement, he will be entitled to (i) a continuation of his
salary from the date of termination through the remaining term of the agreement,
and (ii) during the same period, the cost of obtaining health, life, disability
and other benefits at levels substantially equal to those provided on the date
of termination of employment. If Mr. Hopkins' employment is terminated
involuntarily during the term of the agreement following a "change in control,"
as defined in the agreement, of Kearny Federal Savings Bank or Kearny Financial
Corp. or without cause within twenty-four months following a change in control,
he will be paid an amount equal to 2.999 times his five-year average annual
taxable cash compensation in a lump sum and be entitled to continued medical and
dental coverage for the remainder of the term. Mr. Hopkins will also
101
be entitled to the foregoing change in control severance payment and benefits if
he voluntarily terminates his employment within 120 days following certain
events during the term of the agreement following a change in control of Kearny
Federal Savings Bank or Kearny Financial Corp. or within twenty-four months
following a change in control. All amounts payable as severance in respect of a
change in control will be reduced to the extent necessary such that neither the
payments under the employment agreement, nor any other payments, constitute
"excess parachute payments" under Section 280G of the Internal Revenue Code of
1986, as amended. If a change in control payment had been made under Mr. Hopkins
agreement as of June 30, 2004, the payment would have equaled approximately
$818,240.
Kearny Federal Savings Bank has also entered into employment agreements
with Senior Vice Presidents Beardslee, Gossweiler, Jones, Joyce, Ledgerwood and
Sacher providing for a minimum base salary of $183,000, $183,000, $156,500,
$165,000, $170,000 and $170,000, respectively. These agreements each have a term
of two years, which commenced on July 1, 2004, and each provides for extension
of the term on or before each anniversary of the effective date upon
determination of the Board of Directors of Kearny Federal Savings Bank that the
officer's performance has met its requirements and standards. Pursuant to the
terms of the employment agreements, each officer is generally entitled to
participate in all discretionary bonuses, pension and other retirement benefit
plans, welfare benefit plans and other equity, incentive and benefit plans and
privileges applicable to senior management of Kearny Federal Savings Bank. Upon
termination of employment at any time on or after attainment of age 62 and until
eligibility for Medicare coverage, each of the officers is also permitted to
continue to participate, at Kearny Federal Savings Bank's expense, in the group
medical plan sponsored by the Bank.
If terminated without cause, each of these officers will be entitled to
(i) a continuation of his or her salary through the remaining term of the
agreement, and (ii) during the same period, the cost of obtaining health, life,
disability and other benefits at levels substantially equal to those provided on
the date of termination of employment. If terminated involuntarily during the
term of the agreement following a "change in control," as defined in the
agreement, of Kearny Federal Savings Bank or Kearny Financial Corp. or without
cause within twenty-four months following a change in control, each of these
officers will be paid an amount equal to 2.0 times his or her most recent total
annual compensation (including the value of deferred compensation and retirement
plans) in a lump sum and be entitled to continued medical and dental coverage
for the remainder of the term. Each of the officers will also be entitled to the
foregoing change in control severance payment and benefits upon a voluntary
termination of employment within 120 days following certain events during the
term of the agreement following a change in control of Kearny Federal Savings
Bank or Kearny Financial Corp. or within twenty-four months following a change
in control. All amounts payable to any of the officers as severance in respect
of a change in control will be reduced to the extent necessary such that neither
the payments under the employment agreement, nor any other payments, constitute
"excess parachute payments" under Section 280G of the Internal Revenue Code of
1986, as amended. If change in control payments had been made under these
agreements as of June 30, 2004, the payments would have equaled approximately
$366,000, $366,000, $340,000, $313,000, $340,000 and $330,000 for Senior Vice
Presidents Beardslee, Gossweiler, Jones, Joyce, Ledgerwood and Sacher,
respectively.
Additionally, at June 30, 2004, Kearny Federal Savings Bank had change
in control severance arrangements with forty-one other officers of the Bank
providing for payment of one times their most recent total annual compensation
(including the value of deferred compensation and retirement plans) if
terminated within twenty-four months following a change in control. Such
agreements are currently effective through May 2006.
102
As of June 30, 2004, Kearny Federal Savings Bank also sponsored a
change in control severance pay plan, which provides for payments in the event
of involuntary termination without cause within 12
months of consummation of a merger or change of control. The amount of such
payments is equal to two and one-half weeks salary for every year or partial
year of service with Kearny Federal Savings Bank, with a minimum benefit equal
to two and one-half weeks of salary and a maximum benefit equal to 100 weeks of
salary. If the other party to the transaction sponsors a more generous severance
pay plan, the employee is entitled to receive the amount of payments payable
under such party's plan. Employees who are subject to employment, change in
control or severance agreements are not entitled to benefits under his plan.
Benefit Plans
401(k) Savings and Profit Sharing Plan. Kearny Federal Savings Bank
sponsors a tax-qualified defined contribution savings plan for the benefit of
its employees. Employees become eligible to participate under the 401(k) Plan on
the first day of the month coincident with or immediately following the
completion of twelve months of service and the attainment of age 21. Under the
401(k) Plan, employees may voluntarily elect to defer between 1% and 75% of
compensation, not to exceed applicable limits under the Internal Revenue Code.
Employees age 50 and over may make catch-up contributions, which for calendar
year 2003 were limited to $2,000. In addition, the 401(k) Plan provides for
dollar-for- dollar employer matching contributions up to a maximum of 3% of such
person's salary for each participant under the 401(k) Plan. Employee and
employer matching contributions are immediately 100% vested. The 401(k) Plan
will be amended for participants under the 401(k) Plan to be able to direct
401(k) Plan assets to be invested in the stock of Kearny Financial Corp. in the
offering. Such directed investment of 401(k) Plan assets will be determined
based upon each individual's subscription rights as eligible depositors of
Kearny Federal Savings Bank at the eligibility record date and supplemental
eligibility record date set for the offering.
It is intended that the 401(k) Plan will operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and the requirements of Section 401(a) of the Internal Revenue Code.
Contributions to the 401(k) Plan for employees may be reduced in the future or
eliminated as a result of contributions made to the Employee Stock Ownership
Plan. See Management -Potential Stock Benefit Plans - Employee Stock Ownership
Plan on page __.
Pension Plan. Kearny Federal Savings Bank is a participating employer
in a multiple-employer pension plan sponsored by the Financial Institutions
Retirement Fund (the "Pension Plan"). All full-time employees of the Bank are
eligible to participate after one year of service and attainment of age 21. A
qualifying employee becomes fully vested in the Pension Plan upon the earlier of
completion of five years service or attainment of normal retirement age of 65.
The Pension Plan is intended to comply with the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age. A participant who is vested in the Pension
Plan may take an early retirement and elect to receive a reduced monthly benefit
beginning as early as age 45. The Pension Plan also provides for payments in the
event of disability or death.
The annual benefit amount upon retirement at age 65 equals 2% times
years of service times a participant's highest five year average salary.
Benefits are payable in the form of a monthly retirement benefit and a death
benefit or an alternative form that is actuarially equivalent. At June 30, 2004,
Officers Hopkins, Gossweiler, Ledgerwood, Sacher, Joyce, Beardslee and Jones had
28 years, 21 years, 5 years, 12 years, 18 years, 28 years and 31 years,
respectively, of credited service under the Pension Plan.
103
Benefit Equalization Plan. Kearny Federal Savings Bank has adopted a
Benefit Equalization Plan (the "BEP"). The purpose of the BEP is to provided a
pension benefit based upon the actual earnings of senior officers of the Bank
(President, Executive Vice Presidents, Vice Presidents and Corporate
Secretaries) in the event that their average annual earnings exceeds the
permissible pensionable earnings level under the Pension Plan as required by the
limitations of Sections 401(a)(17) and 415 of the Internal Revenue Code. The
supplemental pension for President and Chief Executive Officer John N. Hopkins
and other senior officer whose highest five year annual earnings prior to
retirement will include years in which such earnings exceed the limits of
Sections 401(a)(17) and 415 of the Internal Revenue Code will receive a
supplemental benefit based upon the difference between their average earnings
taking into effect this maximum pensionable earnings limitation and their
average earnings without regard to such limitation, multiplied by 2% times their
years of service at retirement. The benefits payment under the BEP will be in
the form of an annual benefit payable for life and a death benefit, unless the
committee administering the BEP authorizes an alternative form of benefit.
During the year ended June 30, 2004, there was approximately $59,000 contributed
to and benefit paid under the BEP. For the year ended June 30, 2004, financial
reporting expense accrued under the BEP totaled $207,000.
The following table sets forth the estimated annual benefits payable
under the Pension Plan and the Benefit Equalization Plan described above, upon
retirement at age 65 as of June 30, 2004, expressed in the form of a life
annuity, for the average annual earnings described above and years of service
specified. Such amounts are in addition to any benefits payable under Social
Security.
Group Term Life Insurance Plan. Kearny Federal Savings Bank has a
postretirement group term life insurance plan covering all eligible employees.
Benefits are based on age and years of service. During the year ended June 30,
2004, there was approximately $6,000 contributed to and benefit paid under this
plan.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee during the year ended June 30, 2004, consisted of
Directors Aanensen (Chair), Mazur, Mazza and Parow. During the year ended June
30, 2004, Kearny Financial Corp. had no "interlocking" relationships in which
(i) an executive officer of Kearny Financial Corp. served as a member of the
compensation committee of another entity, one of whose executive officers served
on the compensation committee of Kearny Financial Corp.; (ii) an executive
officer of Kearny Financial Corp. served as a director of another entity, one of
whose executive officers served on the compensation committee of Kearny
Financial Corp.; and (iii) an executive officer of Kearny Financial Corp. served
as a member of the compensation committee of another entity, one of whose
executive officers served as a director of Kearny Financial Corp.
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Potential Stock Benefit Plans
Employee Stock Ownership Plan. We intend to establish an employee stock
ownership plan for the exclusive benefit of participating employees of Kearny
Federal Savings Bank, to be implemented prior to the completion of the offering.
Participating employees are employees who have completed at least one year of
service and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the employee stock ownership
plan will be submitted to the IRS. Although no assurances can be given, we
expect that the employee stock ownership plan will receive a favorable letter of
determination from the IRS.
The employee stock ownership plan is to be funded by contributions made
by Kearny Federal Savings Bank in cash or common stock. Benefits may be paid
either in shares of the common stock or in cash. The plan will borrow funds with
which to acquire up to 8% of the shares sold in the offering. The employee stock
ownership plan may elect, in whole or in part, to fill its order through open
market purchases subsequent to the closing of the offering, subject to any
required regulatory approval. The employee stock ownership plan intends to
borrow funds from Kearny Financial Corp. The loan is expected
to be for a term of ten years at an annual interest rate equal to the prime rate
as published in The Wall Street Journal. Presently it is anticipated that the
employee stock ownership plan will purchase up to 8% of the shares sold in the
offering. The loan will be secured by the shares purchased and earnings of
employee stock ownership plan assets. Shares purchased with loan proceeds will
be held in a suspense account for allocation among participants as the loan is
repaid. It is anticipated that all contributions will be tax-deductible.
Contributions to the employee stock ownership plan and shares released
from the suspense account will be allocated among participants on the basis of
base compensation. All participants must be employed at least 1,000 hours in a
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Participant benefits become fully
vested in plan allocations following five years of service. Employment service
before the adoption of the employee stock ownership plan shall be credited for
the purposes of vesting. Contributions to the employee stock ownership plan by
Kearny Federal Savings Bank are discretionary and as a result benefits payable
under this plan cannot be estimated.
The Board of Directors has appointed the non-employee directors to a
committee that will administer the plan and serve as the plan's trustees. The
trustees must vote all allocated shares held in the plan as directed by plan
participants. Unallocated shares and allocated shares for which no timely
direction is received will be voted as directed by the Board of Directors or the
plan's committee, subject to the trustees' fiduciary duties.
Benefits Equalization Plan for Employee Stock Ownership Plan. Along
with the implementation of the employee stock ownership plan, Kearny Federal
Savings Bank will implement a benefits equalization plan related to this plan
for its senior officers. The participants under this plan will be the same as
the participants under the benefits equalization plan related to the Kearny
Federal Savings Bank's Pension Plan. This plan will provide participating
executives with benefits otherwise limited under the employee stock ownership
plan by certain provisions of the Internal Revenue Code. Specifically, the plan
will provide benefits to officers that cannot be provided under the employee
stock ownership plan as a result of limitations imposed by the Internal Revenue
Code, but that would have been provided under the employee stock ownership plan,
but for these Internal Revenue Code limitations. For example, this plan will
provide participants with a benefit for any compensation that they may earn in
excess of $205,000 (as indexed) comparable to the benefits earned by all
participants under the employee stock ownership plan
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for compensation earned below that level. Kearny Federal Savings Bank may
utilize a grantor trust in connection with this plan in order to set aside funds
that ultimately may be used to pay benefits under the plan. The assets of the
grantor trust will remain subject to the claims of Kearny Federal Savings Bank's
general creditors in the event of insolvency, until paid to a participant
following termination of employment according to the terms of the plan. Benefits
under the plan will be paid in the form of common stock of Kearny Financial
Corp. to the extent permissible under applicable regulations, or in the
alternative, benefits will be paid in cash based upon the value of such common
stock at the time that such benefit payments are made. The actual value of
benefits under this plan and the annual financial reporting expense associated
with this plan will be calculated annually based upon a variety of factors,
including the actual value of benefits for participants determined under the
employee stock ownership plan each year, the applicable limitations under the
Internal Revenue Code that are subject to adjustment annually and the salary of
each participant at such time. Generally, benefits under the plan will be
taxable to each participant at the time of receipt of such payment, and Kearny
Federal Savings Bank will recognize a tax-deductible compensation expense at
such time.
Stock Option Plan. We intend to adopt a stock option plan for the
benefit of directors and officers after the passage of at least one year
following the completion of the offering. We may, however, decide to adopt the
stock option plan sooner than one year following the offering, but in no event
will the plan be adopted sooner than six months subsequent to the completion of
the offering. If the stock option plan is implemented within one year following
the completion of the offering, it will comply with the Office of Thrift
Supervision regulations related to such plans, including limitations on vesting
and allocation of awards. Up to 4.9% of the total number of shares of common
stock to be issued in the offering to public stockholders and Kearny MHC will be
reserved for issuance under the stock option plan. No determinations have been
made as to any specific grants to be made under the stock option plan or the
terms thereof. In accordance with the requirements of our charter, any stock
option plan adopted will be subject to approval of the holders of a majority of
the shares eligible to be voted at a stockholder meeting.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers and directors with a
proprietary interest in Kearny Financial Corp. as an incentive to contribute to
our success and reward directors and officers for outstanding performance.
Although the terms of the stock option plan have not yet been determined, it is
expected that the stock option plan will provide for the grant of: (1) options
to purchase the common stock intended to qualify as incentive stock options
under the Internal Revenue Code (incentive stock options); and (2) options that
do not so qualify (non-incentive stock options). The exercise price of any
options will be not less than the fair market value of the common stock on the
date of grant. Any stock option plan would be in effect for up to 10 years
following the earlier of adoption by the Board of Directors or approval by the
stockholders. Options would expire no later than 10 years following the date
granted and would expire earlier if the option committee so determines or in the
event of termination of employment. Options would be granted based upon several
factors, including seniority, job duties and responsibilities and job
performance.
Restricted Stock Plan. We also intend to establish a restricted stock
plan to provide our officers and directors with a proprietary interest in Kearny
Financial Corp. The restricted stock plan is expected to provide for the award
of common stock, subject to vesting restrictions, to eligible officers and
directors. We intend to adopt the restricted stock plan after the passage of at
least one year following the completion of the offering. We may, however, decide
to adopt the restricted stock plan sooner than one year following the offering,
but in no event will the plan be adopted sooner than six months subsequent to
the completion of the offering. If the restricted stock plan is implemented
within one year following the completion of the offering, it will comply with
the Office of Thrift Supervision regulations related to such plans, including
limitations on vesting and allocation of awards. In accordance with the
requirements of
106
our charter, any restricted stock plan adopted will be subject to approval of
the holders of a majority of the shares eligible to be voted at a stockholder
meeting.
We expect to contribute funds to the restricted stock plan to acquire,
in the aggregate, up to 1.96% of the total number of shares of common stock
issued in the offering to public stockholders and Kearny MHC. Shares used to
fund the restricted stock plan may be acquired through open market purchases or
provided from authorized but unissued shares. No determinations have been made
as to the specific terms of the restricted stock plan.
Dilution. While our intention is to fund the stock option plan and
restricted stock plan through open market purchases, stockholders will
experience a reduction or dilution in ownership interest if the plans are
instead funded with newly-issued shares.
The issuance of authorized but unissued shares of stock to the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.92%.
The issuance of authorized but unissued shares of stock to the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.67%.
Transactions with Management and Others
Other than through a loan with Kearny Federal Savings Bank, no
directors, executive officers or their immediate family members were engaged,
directly or indirectly, in transactions with Kearny Financial Corp. or any
subsidiary exceeding $60,000 during the three years ended June 30, 2004.
Kearny Federal Savings Bank makes loans to its officers, directors and
employees in the ordinary course of business. Such loans are on substantially
the same terms and conditions as those of comparable transactions prevailing at
the time with other persons. Such loans also do not include more than the normal
risk of collectibility or present other unfavorable features.
Proposed Stock Purchase by Charitable Foundation
Kearny Financial Corp.'s charitable foundation intends to purchase
stock in the offering. The foundation is an account holder of Kearny Federal
Savings Bank and had a qualifying deposit at the March 31, 2003 eligibility
record date. It may purchase up to 50,000 shares, the maximum number of shares
which may be purchased in the offering by any individual. No contribution is
being made to the foundation to fund this purchase; the foundation currently has
assets sufficient to fund its proposed purchase.
Proposed Stock Purchases by Management
While no formal decisions have been made, preliminary indications are
that Kearny Financial Corp.'s directors and executive officers and their
associates will purchase approximately 580,500 shares of common stock in the
offering, which represents 1.4%, 1.2% and 1.1% of the total shares to be
outstanding after the offering at the minimum, midpoint and maximum of the
offering range, respectively.
The following table sets forth for each of the directors and executive
officers of Kearny Financial Corp. (including in each case all "associates" of
the directors and executive officers) the number of shares of common stock which
each director and officer have preliminarily indicated they intend to purchase.
The table does not include purchases by the employee stock ownership plan and
does not take into account
107
any stock benefit plans to be adopted following the stock offering. See
Management - Potential Stock Benefit Plans on page __.
Total Percentage of Percentage of Percentage of
Number of Total Dollar Total Outstanding Total Outstanding Total Outstanding
Shares Amount of Shares at Shares at Shares at
to be Shares to be Minimum of the Midponit of the Maximum of the
Name Purchased Purchased Offering Range(1) Offering Range(2) Offering Range(3)
--------------------- --------- --------- ----------------- ----------------- -----------------
John J. Mazur, Jr. 75,000 $ 750,000 0.186% 0.158% 0.137%
John N. Hopkins 50,000 500,000 0.124% 0.105% 0.092%
Theodore J. Aanensen 45,000 450,000 0.111% 0.095% 0.082%
Matthew T. McClane 20,000 200,000 0.050% 0.042% 0.037%
John F. McGovern 50,000 500,000 0.124% 0.105% 0.092%
Joseph P. Mazza 50,000 500,000 0.124% 0.105% 0.092%
Leopold Montanaro 75,000 750,000 0.186% 0.158% 0.137%
Henry S. Parow 75,000 750,000 0.186% 0.158% 0.137%
John F. Regan 55,000 550,000 0.136% 0.116% 0.101%
Edward T. Rushforth 5,000 50,000 0.012% 0.011% 0.009%
Albert E. Gossweiler 42,500 425,000 0.105% 0.089% 0.078%
William C. Ledgerwood 20,000 200,000 0.050% 0.042% 0.037%
Sharon Jones 10,000 100,000 0.025% 0.021% 0.018%
Patrick M. Joyce 2,000 20,000 0.005% 0.004% 0.004%
Allan Beardslee 1,000 10,000 0.002% 0.002% 0.002%
Erika Sacher 5,000 50,000 0.012% 0.011% 0.009%
------- --------- ----- ----- -----
Total 580,500 $5,805,000 1.4% 1.2% 1.1%
======= ========= === === ===
(1) Assumes the issuance of 40,375,000 shares in the offering, including shares
to be issued to Kearny MHC.
(2) Assumes the issuance of 47,500,000 shares in the offering, including shares
to be issued to Kearny MHC.
(3) Assumes the issuance of 54,625,000 shares in the offering, including shares
to be issued to Kearny MHC.
If the stockholders of Kearny Financial Corp. approve the stock benefit
plans as discussed in this prospectus (including 1.96% of the total number of
shares of common stock issued in the offering to public stockholders and Kearny
MHC for the restricted stock plan and 4.9% of the total number of shares of
common stock issued in the offering to public stockholders and Kearny MHC for
the stock option plan), and assuming that the plans are funded with newly issued
shares instead of shares acquired in open market purchases, the aggregate
ownership of directors and executive officers would increase. See Management
-Potential Stock Benefit Plans on page __.
Purchases of common stock in the offering by directors and executive
officers will be counted toward the minimum of 12,112,500 shares required to be
sold to public stockholders to complete the offering. Management may, but is not
required to, purchase additional shares in the offering to satisfy the
12,112,500 share minimum, subject to the limitation on the individual maximum
share purchase limitations and the requirement that directors, executive
officers and their associates may not purchase, in the aggregate, more than 25%
of the shares sold in the offering.
Shares of common stock purchased by directors and executive officers
cannot be sold for a period of one year following the offering, and stock
certificates issued to directors and executive officers will bear
108
a legend restricting their sale. See The Stock Offering - Restrictions on
Transferability by Directors and Executive Officers on page __.
Security Ownership of Certain Beneficial Owners and Management
Currently, all of the outstanding common stock of Kearny Financial
Corp. is held by Kearny MHC, the federal mutual holding company parent of Kearny
Financial Corp. After the stock offering, Kearny MHC will hold 70% of the
outstanding common stock of Kearny Financial Corp. Information regarding the
planned purchases of common stock in the stock offering by directors and
executive officers of Kearny Financial Corp. (including in each case all
"associates" of the directors and executive officers) is set forth above under
Proposed Stock Purchases by Management.
The following table sets forth information regarding Kearny MHC's
ownership of Kearny Financial Corp. common stock.
Number of Shares
of Common Stock Percent of Shares of
Name and Address Beneficially Owned Common Stock Outstanding
------------------ ------------------------
of Beneficial Owner
Kearny MHC
614 Kearny Avenue, Kearny, NJ 07032 10,000 100%
THE STOCK OFFERING
The Board of Directors adopted the plan authorizing the stock offering
on June 7, 2004, subject to the approval of the Office of Thrift Supervision. We
received authorization from the Office of Thrift Supervision to conduct the
stock offering on __________, 2004. Office of Thrift Supervision authorization
does not constitute a recommendation or endorsement of an investment in our
stock by the Office of Thrift Supervision.
General
On June 7, 2004, the Board of Directors adopted the plan of stock
issuance, pursuant to which Kearny Financial Corp. will sell its common stock to
eligible depositors of Kearny Federal Savings Bank in a subscription offering
and, if shares are available, to the general public in a community offering
and/or a syndicated community offering. The Board of Directors unanimously
adopted the plan after consideration of the advantages and the disadvantages of
the stock offering. The stock offering will be accomplished in accordance with
the procedures set forth in the plan, the requirements of applicable laws and
regulations, and the policies of the Office of Thrift Supervision.
We are offering for sale between a minimum of 12,112,500 shares and an
anticipated maximum of 16,387,500 shares of common stock in the offering
(subject to adjustment to up to 18,845,625 shares). The minimum purchase is 25
shares of common stock (minimum investment of $250). Our common stock is being
offered at a fixed price of $10.00 per share in the offering. Interest will be
paid on subscription funds from the date the payment is received until the
offering is either completed or terminated.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
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In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
pending completion or termination of the offering, subscription funds received
by us will be invested only in investments permissible under Rule 15c2-4.
Purposes of the Stock Offering
Kearny Financial Corp. has grown significantly in recent years. The
proceeds from the sale of common stock of Kearny Financial Corp. will provide
Kearny Federal Savings Bank with new equity capital, which will support
additional future deposit growth and expanded operations. While Kearny Federal
Savings Bank currently exceeds all regulatory capital requirements to be
considered well capitalized, the sale of stock, coupled with the accumulation of
earnings, less dividends or other reductions in capital, from year to year,
provides a means for the orderly preservation and expansion of Kearny Federal
Savings Bank's capital base. If we expand our business as we currently plan, we
will need the additional capital to remain well capitalized under regulatory
capital requirements.
The offering will afford our directors, officers and employees the
opportunity to become stockholders, which we believe to be an effective
performance incentive and an effective means of attracting and retaining
qualified personnel. The offering also will provide our customers and local
community members with an opportunity to acquire our stock.
Conduct of the Offering
Subject to the limitations of the plan of stock issuance adopted by our
Board of Directors, shares of common stock are being offered in descending order
of priority in the subscription offering to:
o Eligible Account Holders (depositors at the close of business on March 31,
2003 with deposits of at least $50.00);
o the tax qualified employee stock benefit plans of Kearny Federal Savings
Bank; and
o Supplemental Eligible Account Holders (depositors at the close of business
on September 30, 2004 with deposits of at least $50.00).
Former depositors of West Essex Bank, which was acquired by Kearny
Federal Savings Bank in July 2003, will be treated as Eligible Account Holders
if they had deposits with West Essex at the close of business on March 31, 2003
of at least $50.00.
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering. The
community offering, if any, may commence at any time during or subsequent to the
completion of the subscription offering. A syndicated community offering, if we
conduct one, would commence just prior to, or as soon as practicable after, the
termination of the subscription offering. In any community offering or
syndicated community offering, we will fill orders for our common stock in an
equitable manner as determined by the Board of Directors in order to achieve a
wide distribution of the stock.
Any shares sold above the maximum of the offering range may be sold to
the employee stock ownership plan before satisfying remaining unfilled orders of
Eligible Account Holders to fill the plan's
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subscription, or the plan may purchase some or all of the shares covered by its
subscription after the offering in the open market, subject to any required
regulatory approval.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of stock
issuance to the following persons in the following order of priority:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase, subject to the overall limitations
described under The Stock Offering - Limitations on Purchases of Common Stock,
up to the greater of (i) the maximum purchase limitation in the community
offering (i.e., 50,000 shares), (ii) one-tenth of 1% of the total shares of
common stock offered in the subscription and community offering, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock offered in the
subscription and community offering by a fraction, of which the numerator is the
total amount of the qualifying deposits of the Eligible Account Holder and the
denominator is the total amount of all qualifying deposits of all Eligible
Account Holders. If there are insufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares will be allocated to Eligible
Account Holders so as to permit each subscribing Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of 100 shares or the number of shares ordered. Thereafter, unallocated
shares will be allocated to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each subscriber's
qualifying deposit bears to the total amount of qualifying deposits of all
subscribing Eligible Account Holders, in each case measured as of March 31,
2003, whose subscriptions remain unfilled. Subscription rights received by
officers and directors of Kearny Financial Corp. or Kearny Federal Savings Bank,
and such persons' associates, based on their increased deposits in Kearny
Federal Savings Bank in the one year preceding March 31, 2003 will be
subordinated to the subscription rights of all other Eligible Account Holders.
To ensure proper allocation of stock, each Eligible Account Holder must list on
his order form all accounts in which he had an ownership interest as of the
Eligibility Record Date. Failure to list an account, or providing incorrect
information, could result in the loss of all or a part of the subscriber's
allocation.
Priority 2: The Employee Plans. If there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
tax qualified employee stock benefit plans may be given the opportunity to
purchase in the aggregate up to but less than 5% of the total number of shares
of common stock issued in the offering to public stockholders and to Kearny MHC.
It is expected that Kearny Federal Savings Bank's employee stock ownership plan
will purchase up to 8% of the shares issued in the offering to persons other
than Kearny MHC. To the extent the employee stock ownership plan does not
purchase shares in the offering, the employee stock ownership plan intends to
purchase shares in the open market purchases subsequent to the closing of the
offering, subject to any required regulatory approval.
Priority 3: Supplemental Eligible Account Holders. If there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the tax qualified employee stock benefit plans, each
Supplemental Eligible Account Holder shall be given the opportunity to purchase,
subject to the overall limitations described under The Stock Offering -
Limitations on Purchases of Common Stock, up to the greater of (i) the maximum
purchase limitation in the community offering (i.e., 50,000 shares), (ii)
one-tenth of 1% of the total shares of common stock offered in the subscription
and community offering, and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying
111
the total number of shares of common stock offered in the subscription and
community offering by a fraction, of which the numerator is the amount of the
qualifying deposits of the Supplemental Eligible Account Holder and the
denominator is the total amount of all qualifying deposits of all Supplemental
Eligible Account Holders. If Supplemental Eligible Account Holders subscribe for
a number of shares which, when added to the shares subscribed for by Eligible
Account Holders and the employee stock ownership plan and other tax-qualified
employee stock benefit plans, if any, is in excess of the total number of shares
offered in the offering, the shares of common stock will be allocated among
subscribing Supplemental Eligible Account Holders first so as to permit each
subscribing Supplemental Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares ordered. Thereafter, unallocated shares will be allocated to
each subscribing Supplemental Eligible Account Holder whose subscription remains
unfilled in the same proportion that each subscriber's qualifying deposit bear
to the total amount of qualifying deposits of all subscribing Supplemental
Eligible Account Holders, in each case measured as of September 30, 2004, whose
subscriptions remain unfilled. To ensure proper allocation of stock, each
Supplemental Eligible Account Holder must list on his order form all accounts in
which he had an ownership interest as of the Supplemental Eligibility Record
Date. Failure to list an account, or providing incorrect information, could
result in the loss of all or a part of the subscriber's allocation.
Restrictions on Transfer of Subscription Rights and Shares. Applicable
regulations and the plan of stock issuance prohibits any person with
subscription rights, including Eligible Account Holders and Supplemental
Eligible Account Holders, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights or the shares of common stock to be issued when subscription rights are
exercised. Subscription rights may be exercised only by the person to whom they
are granted and only for his account. With the exception of IRA stock purchases,
the subscription rights of a qualifying account may not be transferred to an
account that is in a different form of ownership. Adding or deleting a name or
otherwise altering the form of beneficial ownership of a qualifying account will
result in the loss of your subscription rights. Each person subscribing for
shares will be required to certify that such person is purchasing shares solely
for his own account and that he has no agreement or understanding regarding the
sale or transfer of the shares. The regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase subscription rights or shares of common stock before the completion of
the offering.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
which we determine involve the transfer of subscription rights.
Deadlines for Purchasing Stock
The subscription offering will terminate at 12:00 noon, Eastern time,
on __________, 2004. We may extend this expiration date without notice to you
for up to 45 days, until __________, 2005. Once submitted, your order is
irrevocable unless the offering is extended beyond __________, 2005. We may
request permission from the Office of Thrift Supervision to extend the offering
beyond ________ __, 2004, and the Office of Thrift Supervision may grant one or
more extensions of the offering of up to 90 days per extension, but in no event
may the offering be extended beyond ________ __, 2006. If the offering is
extended beyond __________, 2005, we will notify each subscriber and subscribers
will have the right to confirm, modify or rescind their subscriptions. If an
affirmative response is not received prior to the expiration of the
resolicitation period, a subscriber's subscription will be canceled and funds
will be returned with interest.
112
A community offering and a syndicated community offering, if such
offerings are conducted, may terminate at any time without notice but no later
than __________, 2004.
Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering then,
depending on market conditions at or near the completion of the subscription
offering, shares remaining unsubscribed may be made available for purchase in
the community offering to certain members of the general public. The maximum
amount of common stock that any person may purchase in the community offering is
50,000 shares, or $500,000. In the community offering, if any, shares will be
available for purchase by the general public, and preference shall be given
first to natural persons residing in Bergen, Hudson, Passaic, Morris, Monmouth,
Middlesex, Essex, Union and Ocean Counties, New Jersey and second to other
natural persons residing in New Jersey. We intend to issue the shares in a
manner that would promote a wide distribution of common stock.
We will consider persons residing in one of the specified counties if
they occupy a dwelling in the county and establish an ongoing physical presence
in the county that is not merely transitory in nature. We may utilize depositor
or loan records or other evidence provided to us to make a determination as to
whether a person is a resident in one of the specified counties. In all cases,
the determination of residence status will be made by us in our sole discretion.
If purchasers in the community offering, whose orders would otherwise
be accepted, subscribe for more shares than are available for purchase, the
shares available to them will be allocated among persons submitting orders in
the community offering in an equitable manner we determine.
As stated above, preference in the community shall be given first to
natural persons residing in Bergen, Hudson, Passaic, Morris, Monmouth,
Middlesex, Essex, Union and Ocean Counties, New Jersey and second to other
natural persons residing in New Jersey. If shares are available for these
"preferred purchasers" in the community offering but there are insufficient
shares to satisfy all orders, the available shares will be allocated first to
each preferred purchasers whose order we accept in an amount equal to the lesser
of 100 shares or the number of shares ordered by each such subscriber, if
possible. After that, unallocated shares will be allocated among the remaining
preferred purchasers whose orders remain unsatisfied in the same proportion that
the unfilled order of each such subscriber bears to the total unfilled orders of
all such subscribers. If, after filling the orders of the first group of
preferred purchasers (natural persons residing in Bergen, Hudson, Passaic,
Morris, Monmouth, Middlesex, Essex, Union and Ocean Counties, New Jersey) and
then the orders of the second group of preferred purchasers (natural persons
residing in New Jersey), shares are available for other subscribers in the
community offering but there are insufficient shares to satisfy all orders,
shares will be allocated in the same manner as for preferred purchasers.
The community offering, if any, may commence at any time during or
subsequent to the completion of the subscription offering. The community
offering, if any, must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the Office of Thrift
Supervision.
If we receive regulatory approval for an extension, all subscribers
will be notified of the extension and of the duration of any extension that has
been granted, and will have the right to confirm, increase, decrease or rescind
their orders. If we do not receive an affirmative response from a subscriber to
any
113
resolicitation, the subscriber's order will be rescinded and all funds received
will be promptly returned with interest.
The opportunity to subscribe for shares of common stock in the
community offering is subject to our right to reject orders, in whole or part,
either at the time of receipt of an order or as soon as practicable following
the expiration date of the offering. If your order is rejected in part, you will
not have the right to cancel the remainder of your order.
Syndicated Community Offering
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Sandler O'Neill, acting as our agent. In such capacity, Sandler
O'Neill may form a syndicate of other broker-dealers. Alternatively, we may sell
any remaining shares in an underwritten public offering. Neither Sandler O'Neill
nor any registered broker-dealer will have any obligation to take or purchase
any shares of the common stock in the syndicated community offering; however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in any
syndicated community offering. The syndicated community offering would terminate
no later than 45 days after the expiration of the subscription offering, unless
extended by us, with approval of the Office of Thrift Supervision. See -
Community Offering above for a discussion of rights of subscribers in the event
an extension is granted.
The opportunity to subscribe for shares of common stock in the
syndicated community offering is subject to our right to reject orders, in whole
or part, either at the time of receipt of an order or as soon as practicable
following the expiration date of the offering. If your order is rejected in
part, you will not have the right to cancel the remainder of your order.
Purchasers in the syndicated community offering are eligible to
purchase up to $500,000 of common stock (which equals 50,000 shares). We may
begin the syndicated community offering or underwritten public offering at any
time following the commencement of the subscription offering.
If we are unable to find purchasers from the general public for all
unsubscribed shares, we will make other purchase arrangements, if feasible.
Other purchase arrangements must be approved by the Office of Thrift Supervision
and may provide for purchases by directors, officers, their associates and other
persons in excess of the limitations provided in the plan of stock issuance and
in excess of the proposed director purchases discussed earlier, although no
purchases are currently intended. If other purchase arrangements cannot be made,
we may do any of the following: terminate the stock offering and promptly return
all funds; set a new offering range, notify all subscribers and give them the
opportunity to confirm, cancel or change their orders; or take such other
actions as may be permitted by the Office of Thrift Supervision.
Limitations on Purchases of Common Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum number of shares which may be purchased in the
offering by any individual (or individuals through a single
account) shall not exceed 50,000 shares, or $500,000. This limit
applies to stock purchases in total in the subscription,
community and syndicated community offerings.
114
2. The maximum number of shares that may be purchased by any
individual together with any associate or group of persons acting
in concert is 75,000 shares, or $750,000. This limit applies to
stock purchases in total in the subscription, community and
syndicated community offerings. This limit does not apply to our
tax-qualified employee stock benefit plans, which in the
aggregate may subscribe for up to but less than 5% of the total
number of shares of common stock issued in the offering to public
stockholders and to Kearny MHC.
3. The maximum number of shares which may be purchased in all
categories in the offering by our officers and directors and
their associates in the aggregate shall not exceed 25% of the
total number of shares sold in the offering.
4. The minimum order is 25 shares, or $250.
5. If the number of shares otherwise allocable to any person or that
person's associates would be in excess of the maximum number of
shares permitted as set forth above, the number of shares
allocated to that person shall be reduced to the lowest
limitation applicable to that person, and then the number of
shares allocated to each group consisting of a person and that
person's associates shall be reduced so that the aggregate
allocation to that person and his associates complies with the
above maximums, and the maximum number of shares shall be
reallocated among that person and his associates in proportion to
the shares subscribed by each (after first applying the maximums
applicable to each person, separately).
6. Depending on market or financial conditions, we may decrease or
increase the purchase limitations, provided that the maximum
purchase limitations may not be increased to a percentage in
excess of 5% of the offering. If we increase the maximum purchase
limitations, we are only required to resolicit persons who
subscribed for the maximum purchase amount and may, in our sole
discretion, resolicit certain other large subscribers.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range of up to 15% (the adjusted maximum) the additional shares
will generally be issued in the following order of priority: (a)
to fill the employee stock ownership plan's subscription; (b) if
there is an oversubscription at the Eligible Account Holder
level, to fill unfilled subscriptions of Eligible Account
Holders; (c) if there is an oversubscription at the Supplemental
Eligible Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders; (d) to fill orders
received in a community offering; with preference given to
persons who live in the local community; and (e) to fill orders
received in the syndicated community offering. The employee stock
ownership plan may, however, elect to fill part or all of its
stock order in the open market, after completion of the stock
offering.
8. No person will be allowed to purchase any stock if that purchase
would be illegal under any federal or state law or regulation or
would violate regulations or policies of the National Association
of Securities Dealers. We and/or our representatives may ask for
an acceptable legal opinion from any purchaser regarding the
legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
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9. We have the right to reject any order submitted by a person whose
representations we believe are untrue or who we believe is
violating, circumventing or intends to violate, evade or
circumvent the terms and conditions of the plan of stock
issuance, either alone or acting in concert with others.
10. The above restrictions also apply to purchases by persons acting
in concert under applicable regulations of the Office of Thrift
Supervision. Under regulations of the Office of Thrift
Supervision, our directors are not considered to be affiliates or
a group acting in concert with other directors solely as a result
of membership on our Board of Directors.
11. In addition, in any community offering or syndicated community
offering, we must first fill orders for our common stock up to a
maximum of 2% of the total shares issued in the offering in a
manner that will achieve a wide distribution of the stock, and
thereafter any remaining shares will be allocated on an equal
number of shares per order basis, until all orders have been
filled or the shares have been exhausted.
The term "associate" of a person is defined in the plan of stock
issuance to mean:
(1) any corporation or organization of which a person is a senior
officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities;
(2) any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or
in a similar fiduciary capacity; or
(3) any relative or spouse of a person or any relative of a spouse,
who has the same home as that person.
For example, a corporation for which a person serves as an officer
would be an associate of that person and all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that any tax-qualified employee stock benefit plan will not be deemed to be
acting in concert with its trustee or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the trustee and
stock held by the plan will be aggregated. We will presume that certain persons
are acting in concert based upon various facts, including the fact that persons
have joint account relationships or the fact that such persons have filed joint
Schedules 13D with the Securities and Exchange Commission with respect to other
companies. We reserve the right to make an independent
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investigation of any facts or circumstances brought to our attention that
indicate that one or more persons acting independently or as a group acting in
concert may be attempting to violate or circumvent the regulatory prohibition on
the transferability of subscription rights.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." These
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant, including joint account relationships or shared
addresses on the records of Kearny Federal Savings Bank.
Each person purchasing shares of the common stock in the offering will
be considered to have confirmed that his purchase does not conflict with the
maximum purchase limitation. If the purchase limitation is violated by any
person or any associate or group of persons affiliated or otherwise acting in
concert with that person, we will have the right to purchase from that person at
the $10.00 purchase price per share all shares acquired by that person in excess
of that purchase limitation or, if the excess shares have been sold by that
person, to receive the difference between the purchase price per share paid for
the excess shares and the price at which the excess shares were sold by that
person. Our right to purchase the excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by our directors and executive
officers. For certain restrictions on the common stock purchased by our
directors and executive officers, see The Stock Offering - Restrictions on
Transferability by Directors and Executive Officers on page __. In addition,
under guidelines of the National Association of Securities Dealers, members of
the National Association of Securities Dealers and their associates are subject
to certain restrictions on the transfer of securities purchased in accordance
with subscription rights and to certain reporting requirements after the
purchase.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering by mail or in person a properly executed and
completed order form, together with full payment of the purchase price for all
shares for which subscription is made or include appropriate authorization in
the space provided on the order form for withdrawal of full payment from a
deposit account at Kearny Federal Savings Bank; provided, however, that if the
employee plans subscribe for shares during the subscription offering, the
employee plans will not be required to pay for the shares at the time they
subscribe but rather may pay for the shares upon completion of the offering.
All subscription rights will expire on the expiration date, whether or not we
have been able to locate each person entitled to subscription rights. To place
an order in the community offering, an investor must complete an order form and
return it prior to the applicable expiration date. Once submitted, subscription
orders cannot be revoked without our consent.
We may, in our sole discretion, permit institutional investors to
submit irrevocable orders together with the legally binding commitment for
payment and to thereafter pay for such shares of common stock for which they
subscribe in the community offering at any time before the 48 hours prior to the
completion of the offering. This payment may be made by wire transfer. Our
interpretation of the terms and conditions of the plan of stock issuance and of
the acceptability of the order forms will be final.
To ensure that your stock purchase eligibility and priority are
properly identified, you must list all accounts on the order form, giving all
names in each account, the account number and the approximate
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account balance as of the appropriate eligibility date. We will strive to
identify your ownership in all accounts, but cannot guarantee we will identify
all accounts in which you have an ownership interest.
If a stock order form:
o is not delivered to a subscriber and is returned to us by the United States
Postal Service or we are unable to locate the addressee;
o is not received by us or is received after the applicable expiration date;
o is not completed correctly or executed; or
o is not accompanied by the full required payment for the shares subscribed
for, including instances where a savings account or certificate balance
from which withdrawal is authorized is unavailable, uncollected or
insufficient to fund the required payment, but excluding subscriptions by
the employee plans;
then the subscription rights for that person will lapse as though that
person failed to return the completed order form within the time period
specified.
However, we may, but will not be required to, waive any irregularity on
any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by a date that we may specify.
The waiver of an irregularity on an order form in no way obligates us to waive
any other irregularity on any other order form. Waivers will be considered on a
case by case basis. We will not accept orders received on photocopies or
facsimile order forms, or for which payment is to be made by wire transfer or
payment from private third parties. Our interpretation of the terms and
conditions of the plan of stock issuance and of the acceptability of the order
forms will be final, subject to the authority of the Office of Thrift
Supervision.
The reverse side of the order form contains a certification form
mandated by regulation. We will not accept order forms where the certification
form is not executed. By executing and returning the certification form, you
will be certifying that you received this prospectus and acknowledging that the
common stock is not a deposit account and is not insured or guaranteed by the
federal government. You also will be acknowledging that you received disclosure
concerning the risks involved in this offering. The certification form could be
used as support to show that you understand the nature of this investment.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to the expiration date or hand delivered any later than two days
prior to the expiration date. Execution of the order form will confirm receipt
or delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Employee plans subscribing for shares during the subscription
offering may pay for those shares upon completion of the offering. Payment for
shares of common stock may be made:
o in cash, if delivered in person;
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o by check or money order made payable to Kearny Financial Corp.; or
o for shares subscribed for in the subscription offering, by authorization of
withdrawal from deposit accounts maintained with Kearny Federal Savings
Bank.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
subscribers' checks must be made payable to Kearny Financial Corp., and checks
received by the stock information center will be transmitted by noon of the
following business day directly to the segregated deposit account at Kearny
Federal Savings Bank established to hold funds received as payment for shares.
We may, at our discretion, determine during the offering period that it is in
the best interest of Kearny Federal Savings Bank to hold subscription funds in
an escrow account at another insured financial institution instead of at Kearny
Federal Savings Bank.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for upon the completion of the offering; provided
that there is in force from the time of its subscription until the completion of
the offering a loan commitment from an unrelated financial institution or from
us to lend to the employee stock ownership plan, at that time, the aggregate
purchase price of the shares for which it subscribed.
Appropriate means by which account withdrawals may be authorized are
provided on the order form. If a subscriber authorizes us to withdraw the amount
of the purchase price from his or her deposit account, we will do so as of the
completion of the offering, though the account must contain the full amount
necessary for payment at the time the subscription is received. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase the common stock for
which a subscription has been made until the offering has been completed or
terminated. In the case of payments authorized to be made through withdrawal
from savings accounts, all sums authorized for withdrawal will continue to earn
interest at the contract rate until the offering has been completed or
terminated. Interest penalties for early withdrawal applicable to certificate
accounts will not apply to withdrawals authorized for the purchase of shares.
However, if a partial withdrawal results in a certificate account with a balance
less than the applicable minimum balance requirement, the certificate shall be
canceled at the time of withdrawal, without penalty, and the remaining balance
will be converted into a savings account and will earn interest at the regular
passbook savings rate subsequent to the withdrawal. In the case of payments made
in cash or by check or money order, funds will be placed in a segregated account
and interest will be paid by Kearny Federal Savings Bank at the regular passbook
savings rate from the date payment is received until the offering is completed
or terminated. An executed order form, once we receive it, may not be modified,
amended, or rescinded without our consent, unless the offering is not completed
within 45 days after the conclusion of the subscription offering, in which event
subscribers may be given the opportunity to increase, decrease, or rescind their
subscription for a specified period of time. If the offering is not completed
for any reason, all funds submitted pursuant to the offerings will be promptly
refunded with interest as described above.
Kearny Federal Savings Bank's individual retirement accounts (IRAs) and
Keogh accounts do not permit investment in our common stock. A depositor
interested in using his or her IRA or Keogh funds to purchase common stock must
do so through a self-directed IRA or Keogh account. Since we do not offer those
accounts, we will allow a depositor to make a trustee-to-trustee transfer of the
IRA or Keogh funds to a trustee offering a self-directed IRA or Keogh program
with the agreement that the funds will be used to purchase our common stock in
the offering. There will be no early withdrawal or Internal Revenue Service
interest penalties for transfers. The new trustee would hold the common stock in
a self-directed account in the same manner as we now hold the depositor's IRA of
Keogh funds. An annual
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administrative fee may be payable to the new trustee. Depositors interested in
using funds in an IRA or Keogh with us to purchase common stock should contact
the stock information center as soon as possible so that the necessary forms may
be forwarded for execution and returned before the subscription offering ends.
In addition, federal laws and regulations require that officers, directors and
10% stockholders who use self-directed IRA or Keogh funds to purchase shares of
common stock in the subscription offering, make purchases for the exclusive
benefit of IRA or Keogh accounts.
Federal regulations prohibit Kearny Federal Savings Bank from lending
funds or extending credit to any person to purchase the common stock in the
offering.
Stock Information Center. Our stock information center is located at
120 Passaic Avenue, Fairfield, New Jersey 07004. The phone number is (___)
________. The stock information center's hours of operation are generally 10:00
a.m. to 4:00 p.m., Eastern time, Monday through Friday.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed by our transfer agent to the persons
entitled thereto at the address noted on the order form, as soon as practicable
following completion of the offering. Any certificates returned as undeliverable
will be held until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for the common
stock are available and delivered to subscribers, subscribers may not be able to
sell the shares of stock for which they subscribed, even though trading of our
common stock may have commenced.
Restrictions on Repurchase of Shares
Under Office of Thrift Supervision regulations, we may not, for a
period of one year from the date of the completion of the offering, repurchase
any of our common stock from any person, except (1) in an offer made to all
stockholders to repurchase the common stock on a pro rata basis, approved by the
Office of Thrift Supervision, (2) the repurchase of qualifying shares of a
director, or (3) repurchases to fund restricted stock plans or tax-qualified
employee stock benefit plans. Where extraordinary circumstances exist, the
Office of Thrift Supervision may approve the open market repurchase of up to 5%
of our common stock during the first year following the offering. To receive
such approval, we must establish compelling and valid business purposes for the
repurchase to the satisfaction of the Office of Thrift Supervision. Furthermore,
repurchases of any common stock are prohibited if they would cause Kearny
Federal Savings Bank's regulatory capital to be reduced below the amount
required under the regulatory capital requirements imposed by the Office of
Thrift Supervision. If, in the future, the rules and regulations regarding the
repurchase of stock are liberalized, we may utilize the rules and regulations
then in effect.
How We Determined the $10.00 Per Share Price and the Number of Shares to Be
Issued in the Stock Offering
The plan of stock issuance requires that the purchase price of the
common stock must be based on the appraised pro forma market value of Kearny
Financial Corp. and Kearny Federal Savings Bank, as determined on the basis of
an independent valuation. RP Financial, LC, a financial services industry
consulting firm whose members collectively have over 100 years of experience in
valuing financial institutions for mutual holding company reorganizations and
stock offerings, has been retained to make this valuation. Kearny selected RP
Financial based upon its experience and reputation in valuing stock offerings by
issuers such as Kearny Financial Corp. Kearny has no prior relationship with RP
Financial. For its services in making this appraisal, RP Financial's fees and
out-of-pocket expenses are estimated to
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be $75,000. Kearny has agreed to indemnify RP Financial and any employees of RP
Financial who act for or on behalf of RP Financial in connection with the
appraisal against any and all loss, cost, damage, claim, liability or expense of
any kind, including claims under federal and state securities laws, arising out
of any misstatement, untrue statement of a material fact or omission to state a
material fact in the information supplied by Kearny to RP Financial, unless RP
Financial is determined to be negligent or otherwise at fault.
RP Financial made its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
o the present and projected operating results and financial condition of
Kearny Financial Corp. and Kearny Federal Savings Bank, which were prepared
by Kearny Federal Savings Bank and then adjusted by RP Financial to reflect
the net proceeds of this offering and the economic and demographic
conditions in Kearny Federal Savings Bank's existing marketing area as
prepared by RP Financial;
o certain historical, financial and other information relating to Kearny
Federal Savings Bank prepared by Kearny Federal Savings Bank; and
o the impact of the stock offering on Kearny's net worth and earnings
potential as calculated by RP Financial.
The appraisal also incorporated an analysis of a peer group of
publicly-traded mutual holding companies that RP Financial considered to be
comparable to Kearny. The peer group analysis conducted by RP Financial included
a total of ten publicly-traded mutual holding companies with total assets of
more than $250 million and less than $10 billion. RP Financial excluded three
mutual holding companies which otherwise met the foregoing criteria due to the
lack of seasoned trading history and reported financial statements as a
publicly-traded company. The analysis of comparable publicly-traded institutions
included an evaluation of the average and median price-to-earnings and
price-to-book value ratios indicated by the market prices of the peer companies.
RP Financial applied the peer group's pricing ratios as adjusted for certain
qualitative valuation factors to account for differences between Kearny and the
peer group, to Kearny's pro forma earnings and book value to derive the
estimated pro forma market value of Kearny.
The Board of Directors reviewed the methodologies and the
appropriateness of the assumptions used by RP Financial in addition to the
factors listed above, and the Board of Directors believes that these assumptions
were reasonable. On the basis of the foregoing, RP Financial has advised Kearny
Financial Corp. and Kearny in its opinion, dated August 20, 2004, that the
estimated pro forma market value of Kearny Financial Corp. on a fully-converted
basis ranged from a minimum of $403.8 million to a maximum of $546.2 million
with a midpoint of $475.0 million. The Board of Directors of Kearny determined
that the common stock should be sold at $10.00 per share. Based on the estimated
valuation and the $10.00 per share price, the number of shares of common stock
that Kearny Financial Corp. will issue will range from a minimum of 40,375,000
shares to a maximum of 54,625,000 shares, with a midpoint of 47,500,000 shares.
The Board determined to offer for sale 30% of these shares, or between
12,112,500 shares and 16,387,500 shares, with a midpoint of 14,250,000 shares,
to depositors of Kearny, to the Kearny Federal Savings Bank Employee Stock
Ownership Plan and, if a community offering is held, to the public. The 70% of
the shares of Kearny Financial Corp. stock that are not offered for sale in the
offering will be issued to Kearny MHC.
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The estimated valuation range may be amended with the approval of the
Office of Thrift Supervision or if necessitated by subsequent developments in
the financial condition of Kearny Financial Corp. and Kearny or market
conditions generally. In the event the estimated valuation range is updated to
amend the value of Kearny Financial Corp. on a fully-converted basis below
$403.8 million, which is the minimum of the estimated valuation range, or above
$546.2 million, which is the maximum of the estimated valuation range, as
adjusted by 15%, a new appraisal will be filed with the Office of Thrift
Supervision.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, if Kearny Financial Corp.
receives orders for common stock in excess of $163.9 million (the maximum of the
estimated valuation range of shares to be sold to the public) and up to $188.5
million (the maximum of the estimated valuation range of shares to be sold to
the public, as adjusted by 15%), the Office of Thrift Supervision may require it
to accept all such orders. We cannot guarantee, however, that Kearny Financial
Corp. will receive orders for common stock in excess of the maximum of the
estimated valuation range of shares to be sold to the public or that, if such
orders are received, that all such orders will be accepted because Kearny
Financial Corp.'s final valuation and the number of shares to be issued are
subject to the receipt of an updated appraisal from RP Financial which reflects
such an increase in the valuation and the approval of an increase by the Office
of Thrift Supervision. In addition, an increase in the number of shares to be
sold to the public above 16,387,500 shares will first be used, if necessary, to
fill the order of the employee stock ownership plan. There is no obligation or
understanding on the part of management to take and/or pay for any shares in
order to complete the stock offering.
The following table presents a summary of selected pricing ratios for
the peer group companies on a fully-converted basis and the resulting
fully-converted pricing ratios for Kearny Financial Corp. reflecting the pro
forma impact of the stock offering. Compared to the median pricing ratios of the
peer group, Kearny Financial Corp.'s pro forma pricing ratios at the midpoint of
the offering range indicated a premium of 60.6% on a price-to-earnings basis, a
discount of 21.4% on a price-to-tangible book value basis. The estimated
appraised value and the resulting premiums or discounts took into consideration
the potential financial impact of the stock offering.
Pro Forma Price
------------------------------------
Reported Tangible
Earnings Book Value Book Value
Multiple Ratio Ratio
-------- ----- -----
Kearny Financial Corp.
Minimum............................. 30.5x 64.0% 73.8%
Midpoint............................ 35.3x 67.6% 76.8%
Maximum............................. 40.3x 71.5% 80.4%
Maximum, as adjusted................ 46.7x 76.7% 85.6%
All fully-converted publicly-traded
thrifts as of August 20, 2004:
Average............................. 17.4x 156.4% 170.2%
Median.............................. 16.2x 145.7% 161.2%
Valuation of peer group as of
August 20, 2004:
Average............................. 25.1x 96.7% 102.3%
Median.............................. 23.5x 96.0% 101.5%
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RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing Kearny
Financial Corp.'s shares. RP Financial did not independently verify the
consolidated financial statements and other information provided by Kearny, nor
did RP Financial value independently the assets or liabilities of Kearny. The
valuation considers Kearny as a going concern and should not be considered as an
indication of the liquidation value of Kearny. Moreover, because this valuation
is necessarily based upon estimates and projections of a number of matters, all
of which are subject to change from time to time, no assurance can be given that
persons purchasing common stock in the offerings will thereafter be able to sell
such shares at prices at or above the purchase price or in the range of the
valuation described above.
No sale of shares of common stock in the stock offering may be
completed unless RP Financial confirms that nothing of a material nature has
occurred which would cause it to conclude that the aggregate value of the common
stock to be issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of Kearny Financial Corp. and Kearny. If
this confirmation is not received, we may cancel the stock offering, extend the
offering period and establish a new estimated valuation and offering range
and/or estimated price range, extend, reopen or hold a new offering or take any
other action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock to be
issued may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares issued times the
purchase price is not below the minimum or more than 15% above the maximum of
the estimated valuation range. If market or financial conditions change so as to
cause the aggregate value of the common stock to be issued to be below the
minimum of the estimated valuation range or more than 15% above the maximum of
this range, purchasers will be resolicited and be permitted to continue their
orders, in which case they will need to reconfirm their subscriptions prior to
the expiration of the resolicitation offering or their subscription funds will
be promptly refunded with interest, or be permitted to modify or rescind their
subscriptions. Any change in the estimated valuation range must be approved by
the Office of Thrift Supervision.
An increase in the number of shares of common stock to be issued as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and Kearny Financial Corp.'s pro forma
net income and stockholders' equity on a per share basis while increasing pro
forma net income and stockholders' equity on an aggregate basis. A decrease in
the number of shares of common stock to be issued would increase both a
subscriber's ownership interest and Kearny Financial Corp.'s pro forma net
income and stockholders' equity on a per share basis while decreasing pro forma
net income and stockholders' equity on an aggregate basis.
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at
the main office of Kearny and the other locations specified under Where You Can
Find More Information. In addition, the appraisal report is an exhibit to the
registration statement of which this prospectus is a part. The registration
statement is available on the SEC's website (http://www.sec.gov).
Plan of Distribution/Marketing Arrangements
Offering materials have been initially distributed to certain persons
by mail, with additional copies made available through the stock information
center and Sandler O'Neill. All prospective purchasers are to send payment to
the stock information center and such funds will be deposited with Kearny
Federal Savings Bank and held in a separate account earning interest and not
released until the offering is
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completed or terminated. We may, at our discretion, determine during the
offering period that it is in the best interest of Kearny Federal Savings Bank
to hold subscription funds in an escrow account at another insured financial
institution instead of at Kearny Federal Savings Bank.
We have engaged Sandler O'Neill, a broker-dealer registered with the
National Association of Securities Dealers, as a financial and marketing advisor
in connection with the offering of our common stock. In its role as financial
and marketing advisor, Sandler O'Neill will assist us in the offering as
follows:
o consulting as to the securities marketing implications of any aspect of the
plan of stock issuance;
o reviewing with our Board of Directors the securities marketing implications
of the independent appraiser's appraisal of the common stock;
o reviewing all offering documents, including the prospectus, stock order
forms and related offering materials (we are responsible for the
preparation and filing of such documents);
o assisting in the design and implementation of a marketing strategy for the
offering;
o assisting us in scheduling and preparing for meetings with potential
investors and broker-dealers; and
o providing such other general advice and assistance we may request to
promote the successful completion of the offering.
For these services, Sandler O'Neill will receive a fee of 1.0% of the
aggregate dollar amount of the common stock sold in the subscription and
community offerings if the stock issuance is consummated, excluding in each case
shares purchased by our tax qualified employee benefit plans and shares
purchased by our directors, officers and employees and their immediate families.
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Sandler O'Neill. In such capacity, Sandler O'Neill may form a
syndicate of other broker-dealers. Neither Sandler O'Neill nor any registered
broker-dealer will have any obligation to take or purchase any shares of the
common stock in the syndicated community offering; however, Sandler O'Neill has
agreed to use its best efforts in the sale of shares in any syndicated community
offering. If there is a syndicated community offering, Sandler O'Neill will
receive a management fee of 1.0% of the aggregate dollar amount of the common
stock sold in the syndicated community offering. The total fees payable to
Sandler O'Neill and other National Association of Securities Dealers member
firms in the syndicated community offering shall not exceed 5.5% of the
aggregate dollar amount of the common stock sold in the syndicated community
offering.
We also will reimburse Sandler O'Neill for its reasonable out-of-pocket
expenses (including legal fees and expenses) associated with its marketing
effort, up to a maximum of $80,000 for which we have made an advance payment of
$25,000 to Sandler O'Neill. If the plan of stock issuance is terminated or if
Sandler O'Neill terminates its agreement with us in accordance with the
provisions of the agreement, Sandler O'Neill will only receive reimbursement of
its reasonable out-of-pocket expenses. We will indemnify Sandler O'Neill against
liabilities and expenses (including legal fees) incurred in connection with
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certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the common stock, including
liabilities under the Securities Act of 1933.
In addition, we have engaged Sandler O'Neill to act as stock offering
agent in connection with the offering. In its role as stock offering agent,
Sandler O'Neill will assist us in the offering as follows: (i) consolidation of
accounts and development of a central file; (ii) preparation of order and/or
request forms; (iii) organization and supervision of the stock information
center; and (iv) subscription services. For these services, Sandler O'Neill will
receive a fee of $60,000 and reimbursement for its reasonable out-of-pocket
expenses up to a maximum of $20,000. For these services, we have made an advance
payment of $10,000 to Sandler O'Neill.
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock. Other trained employees may
participate in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or answering questions of a ministerial nature.
Other questions of prospective purchasers will be directed to executive officers
or registered representatives of Sandler O'Neill. We will rely on Rule 3a4-1 of
the Securities Exchange Act of 1934 so as to permit officers, directors and
employees to participate in the sale of our common stock. No officer, director
or employee will be compensated for his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
The offering will comply with the requirements of Rule 10b-9
promulgated under the Securities Exchange Act of 1934.
Restrictions on Transferability by Directors and Executive Officers
Shares of the common stock purchased by our directors or executive
officers cannot be sold for a period of one year following completion of the
offering, except for a disposition of shares after death. To ensure this
restriction is upheld, shares of the common stock issued to directors and
executive officers will bear a legend restricting their sale. Appropriate
instructions will be issued to the transfer agent with respect to applicable
restrictions on transfer of such stock. Any shares issued to directors and
executive officers as a stock dividend, stock split or otherwise with respect to
restricted stock will be subject to the same restriction.
For a period of three years following the offering, our directors and
executive officers and their associates may not, without the prior approval of
the Office of Thrift Supervision, purchase our common stock except from a broker
or dealer registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made by tax
qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual directors or executive officers.
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in the offering. This registration does not cover
the resale of the shares. Shares of common stock purchased by persons who are
not affiliates of us may be resold without registration. Shares purchased by an
affiliate of us will have resale restrictions under Rule 144 of the Securities
Act. If we meet the current public information requirements of Rule 144, each
affiliate of ours who complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of certain
other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of 1%
of our outstanding shares or the average weekly volume of trading
125
in the shares during the preceding four calendar weeks. We may make future
provisions to permit affiliates to have their shares registered for sale under
the Securities Act under certain circumstances.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the offering, no depositor may transfer or
enter into an agreement or understanding to transfer any subscription rights or
the legal or beneficial ownership of the shares of common stock to be purchased
in the offering. Depositors who submit an order form will be required to certify
that their purchase of common stock is solely for their own account and there is
no agreement or understanding regarding the sale or transfer of their shares. We
intend to pursue any and all legal and equitable remedies after we become aware
of any agreement or understanding, and will not honor orders we reasonably
believe to involve an agreement or understanding regarding the sale or transfer
of shares.
Effects of the Stock Offering
General. The stock offering will not have any effect on Kearny Federal
Savings Bank's present business of accepting deposits and investing its funds in
loans and other investments permitted by law. The stock offering will not result
in any change in the existing services provided to depositors and borrowers, or
in existing offices, management, and staff. After the stock offering, Kearny
Federal Savings Bank will continue to be subject to regulation, supervision, and
examination by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation.
Deposits and Loans. Each holder of a deposit account in Kearny Federal
Savings Bank at the time of the stock offering will continue as an account
holder in Kearny Federal Savings Bank after the stock offering, and the stock
offering will not affect the deposit balance, interest rate or other terms. Each
deposit account will be insured by the Federal Deposit Insurance Corporation to
the same extent as before the stock offering. Depositors will continue to hold
their existing certificates, savings records, checkbooks and other evidence of
their accounts. The stock offering will not affect the loans of any borrower
from Kearny Federal Savings Bank. The amount, interest rate, maturity, security
for, and obligations under each loan will remain contractually fixed as they
existed prior to the stock offering.
Voting Rights. As a federally chartered stock savings bank, all voting
rights of Kearny Federal Savings Bank are held solely by its sole stockholder,
Kearny Financial Corp. All voting rights of Kearny Financial Corp. are held
solely by its sole stockholder, Kearny MHC. All voting rights of Kearny MHC are
held by the depositors and certain borrowers of Kearny Federal Savings Bank at
the applicable record date. After the stock offering, the voting rights of
Kearny Financial Corp. will be held by its stockholders.
Kearny MHC will own a majority of the outstanding common stock of Kearny
Financial Corp., and thus the Board of Directors of Kearny MHC, which is
comprised of the same individuals who are directors of Kearny Financial Corp.,
will control the affairs of Kearny Financial Corp., including the election of
directors of Kearny Financial Corp.
Material Federal and State Tax Consequences. We have received an
opinion from Malizia Spidi & Fisch, PC on the material federal tax consequences
of the stock offering to Kearny Financial Corp., the purchasers of its common
stock and the recipients of subscription rights to purchase such common stock.
The opinion has been filed as an exhibit to the registration statement of which
this prospectus is a part and covers those federal tax matters that are material
to the transaction. Such opinion is made in reliance upon various statements,
representations and declarations as to matters of fact made by us, as detailed
in the opinion. The opinion provides that:
126
o we will recognize no gain or loss upon the receipt of money in
exchange for shares of common stock; and
o no gain or loss will be recognized by Eligible Account Holders
and Supplemental Eligible Account Holders upon the distribution
to them of the nontransferable subscription rights to purchase
shares of common stock.
The opinion in the second bullet above is predicated on representations
from Kearny Federal Savings Bank, Kearny Financial Corp. and Kearny MHC that no
person shall receive any payment, whether in money or property, in lieu of the
issuance of subscription rights. The opinion in the second bullet above is also
based on the position that the subscription rights to purchase shares of common
stock received by Eligible Account Holders and Supplemental Eligible Account
Holders have a fair market value of zero. In reaching their opinion stated in
the second bullet above, Malizia Spidi & Fisch, PC has noted that the
subscription rights will be granted at no cost to the recipients, will be
legally non-transferable and of short duration, and will provide the recipients
with the right only to purchase shares of common stock at the same price to be
paid by members of the general public in any community offering. Malizia Spidi &
Fisch, PC believes that it is more likely than not that the fair market value of
the subscription rights to purchase common stock is zero. Malizia Spidi & Fisch,
PC has noted in its opinion that they are not aware of the Internal Revenue
Service claiming in any similar transaction that subscription rights have any
market value. In that there are no judicial opinions or official Internal
Revenue Service positions on this issue, however, such position related to
subscription rights comes to a reasoned conclusion instead of an absolute
conclusion on these issues. Such conclusion of counsel is supported by a letter
from RP Financial furnished to us which states that the subscription rights do
not have any value when they are distributed or exercised. If the Internal
Revenue Service disagrees with this valuation of subscription rights and
determines that such subscription rights have value, income may be recognized by
recipients of these rights, in certain cases whether or not the rights are
exercised. This income may be capital gain or ordinary income, and Kearny
Financial Corp. could recognize gain on the distribution of these rights. Based
on the foregoing, Malizia Spidi & Fisch, PC believes that it is more likely than
not that the nontransferable subscription rights to purchase our common stock
have no value.
We are also subject to New Jersey income taxes and have received an
opinion from Radics & Co., LLC that the stock offering will be treated for New
Jersey state tax purposes similar to the treatment of the stock offering for
federal tax purposes.
Unlike a private letter ruling from the IRS, the federal and state tax
opinions have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the New Jersey tax authorities. Eligible
Account Holders and Supplemental Eligible Account Holders are encouraged to
consult with their own tax advisers as to the tax consequences in the event the
subscription rights are determined to have any market value.
Interpretation, Amendment or Termination of the Plan of Stock Offering
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. To the extent permitted by law,
all interpretations by us of the plan of stock issuance will be final; however,
such interpretations have no binding effect on the Office of Thrift Supervision.
The plan of stock issuance provides that, if deemed necessary or desirable, we
may substantively amend the plan of stock issuance as a result of comments from
regulatory authorities or otherwise.
127
Completion of the offering requires the sale of all shares of the
common stock within ninety days following approval of the plan of stock issuance
by the Office of Thrift Supervision, unless an extension is granted by the
Office of Thrift Supervision. If this condition is not satisfied, the plan of
stock issuance will be terminated and we will continue our business. We may
terminate the plan of stock issuance at any time.
Conditions to the Offering
Completion of the offering is subject to several factors, including:
1. the receipt of all the required approvals of the Office of Thrift
Supervision for the issuance of common stock in the offering, and
2. the sale of a minimum of 12,112,500 shares of common stock.
If such conditions are not met before we complete the offering, all
funds received will be promptly returned with interest and all withdrawal
authorizations will be canceled. The stock purchases of our officers and
directors will be counted for purposes of meeting the minimum number of shares.
RESTRICTIONS ON ACQUISITION OF KEARNY FINANCIAL CORP.
General
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Kearny Financial Corp., Kearny Federal
Savings Bank or their respective capital stock are described below. Also
discussed are certain provisions in Kearny Financial Corp.'s charter and bylaws
which may be deemed to affect the ability of a person, firm or entity to acquire
Kearny Financial Corp.
Statutory and Regulatory Restrictions on Acquisition
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
128
o the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or of the public to
permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Kearny Financial Corp. or Kearny Federal Savings Bank without
Office of Thrift Supervision approval.
Charter and Bylaws of Kearny Financial Corp.
The following discussion is a summary of certain provisions of the
charter and bylaws of Kearny Financial Corp. that relate to corporate
governance. The description is necessarily general and qualified by reference to
the charter and bylaws.
Classified Board of Directors. The Board of Directors of Kearny
Financial Corp. is required by the bylaws to be divided into three staggered
classes as equal in size as is possible, with one class elected annually by
stockholders for three-year terms. A classified board promotes continuity and
stability of management of Kearny Financial Corp., but makes it more difficult
for stockholders to change a majority of the directors because it generally
takes at least two annual elections of directors for this to occur.
Directors are elected by a plurality of votes cast, and because Kearny MHC will
own a majority of the common stock, it will control the election of directors.
Authorized but Unissued Shares of Capital Stock. Following the stock
offering, Kearny Financial Corp. will have authorized but unissued shares of
preferred stock and common stock. See Description of Capital Stock on page __.
Although these shares could be used by the Board of Directors of Kearny
Financial Corp. to make it more difficult or to discourage an attempt to obtain
control of Kearny Financial Corp. through a merger, tender offer, proxy contest
or otherwise, it is unlikely that we would use or need to use shares for these
purposes because Kearny MHC will own a majority of the common stock.
Special Meetings of Stockholders. Kearny Financial Corp.'s bylaws
provide that special meetings of stockholders may be called only by the chairman
of the board, the president, or a majority of the Board of Directors, or upon
the written request of the holders of not less than one-tenth of all of the
outstanding stock of Kearny Financial Corp.
How Shares are Voted. Kearny Financial Corp.'s bylaws provide that
there will not be cumulative voting by stockholders for the election of Kearny
Financial Corp.'s directors. No cumulative voting rights means that Kearny MHC,
as the holder of a majority of the shares eligible to be voted at a meeting of
stockholders, may elect all directors of Kearny Financial Corp. to be elected at
that meeting. This could prevent minority stockholder representation on Kearny
Financial Corp.'s Board of Directors.
Procedures for Stockholder Nominations. Kearny Financial Corp.'s bylaws
provide that any stockholder wanting to make a nomination for the election of
directors or a proposal for new business at a meeting of stockholders must send
written notice to the Secretary of Kearny Financial Corp. at least five days
before the date of the annual meeting. The bylaws further provide that if a
stockholder wanting to make a nomination or a proposal for new business does not
follow the prescribed procedures, the proposal
129
will not be considered until an adjourned, special, or annual meeting of the
stockholders taking place thirty days or more thereafter. Management believes
that it is in the best interests of Kearny Financial Corp. and its stockholders
to provide enough time for management to disclose to stockholders information
about a dissident slate of nominations for directors. This advance notice
requirement may also give management time to solicit its own proxies in an
attempt to defeat any dissident slate of nominations if management thinks it is
in the best interest of stockholders generally. Similarly, adequate advance
notice of stockholder proposals will give management time to study such
proposals and to determine whether to recommend to the stockholders that such
proposals be adopted.
Indemnification. Kearny Financial Corp.'s bylaws provide for
indemnification of its officers, directors and employees to the fullest extent
authorized by the regulations of the Office of Thrift Supervision.
DESCRIPTION OF CAPITAL STOCK
General
Kearny Financial Corp. is authorized to issue 75,000,000 shares of
common stock, par value $0.10 per share and 25,000,000 shares of serial
preferred stock, par value $0.10 per share. We currently expect to have between
40,375,000 and 54,625,000 shares of common stock, subject to an increase to
62,818,750 shares, outstanding after the stock offering, including shares that
will be held by Kearny MHC. Upon payment of the purchase price shares of common
stock issued in the offering will be fully paid and non- assessable. Each share
of common stock will have the same relative rights as, and will be identical in
all respects with, each other share of common stock. The common stock will
represent non-withdrawable capital, will not be an account of insurable type and
will not be insured by the Federal Deposit Insurance Corporation or any other
governmental agency. The Board of Directors can, without stockholder approval,
issue additional shares of common stock, although Kearny MHC, so long as it is
in existence, must own a majority of Kearny Financial Corp.'s outstanding shares
of common stock.
Common Stock
Distributions. Kearny Financial Corp. can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations which
are imposed by law. See Dividend Policy on page __. The holders of common stock
of Kearny Financial Corp. will be entitled to receive and share equally in such
dividends as may be declared by the Board of Directors of Kearny Financial Corp.
out of funds legally available therefor. If Kearny Financial Corp. issues
preferred stock, the holders thereof may have a priority over the holders of the
common stock with respect to dividends.
Voting Rights. The holders of common stock will possess exclusive
voting rights in Kearny Financial Corp. The holder of shares of common stock
will be entitled to one vote for each share held on all matters subject to
stockholder vote and will not have any right to cumulate votes in the election
of directors.
Liquidation Rights. In the event of any liquidation, dissolution, or
winding-up of Kearny Financial Corp., the holders of the common stock generally
would be entitled to receive, after payment of all debts and liabilities of
Kearny Financial Corp. (including all debts and liabilities of Kearny Federal
Savings Bank), all assets of Kearny Financial Corp. available for distribution.
If preferred stock is issued, the holders thereof may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
130
Preemptive Rights; Redemption. Because the holders of the common stock
do not have any preemptive rights with respect to any shares Kearny Financial
Corp. may issue, the Board of Directors may sell shares of capital stock of
Kearny Financial Corp. without first offering such shares to existing
stockholders. The common stock will not be subject to any redemption provisions.
Preferred Stock
We are authorized to issue up to 25,000,000 shares of serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of preferred stock and the qualifications, limitations and
restrictions of those shares as the Board of Directors may determine in its
discretion. Preferred stock may be issued in distinctly designated series, may
be convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have full or limited
voting rights. The issuance of preferred stock could adversely affect the voting
and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the stock offering and federal taxation will be
passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. Matters
relating to state taxation will be passed upon for us by Radics & Co., LLC, Pine
Brook, New Jersey. Certain legal matters will be passed upon for Sandler O'Neill
& Partners, L.P. by Thacher Proffitt & Wood LLP, New York.
EXPERTS
The Consolidated Financial Statements of Kearny Financial Corp. at June
30, 2004 and 2003 and for each of the years in the three year period ended June
30, 2004 have been included in this prospectus in reliance upon the report of
Radics & Co., LLC, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
RP Financial, LC has consented to the publication in this document of a
summary of its letter to Kearny Financial Corp. setting forth its conclusion as
to the estimated pro forma market value of the common stock and has also
consented to the use of its name and statements with respect to it appearing in
this document.
REGISTRATION REQUIREMENTS
Prior to completion of the offering, we will register our common stock
with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. We will be subject to the information, proxy solicitation, insider
trading restrictions, tender offer rules, periodic reporting and other
requirements of the SEC under the Securities Exchange Act of 1934. We will not
deregister the common stock under the Securities Exchange Act of 1934 for a
period of at least three years following the stock offering.
131
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and
regulations of the SEC, this document does not contain all the information set
forth in the registration statement. The statements contained in this document
as to the contents of any contract or other document filed as an exhibit to the
Form S-1 are, of necessity, brief descriptions. The registration statement and
exhibits can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
the registration materials can be obtained from the SEC at prescribed rates. You
may obtain information on the operation of the Public Reference Room by calling
1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy
and information statements and other information regarding registrants,
including Kearny Financial Corp., that file electronically with the SEC. The
address for this web site is http://www.sec.gov.
We have filed an application for approval of the stock issuance with
the Office of Thrift Supervision. This prospectus omits certain information
contained in that application. That information can be examined without charge
at the public reference facilities of the Office of Thrift Supervision located
at 1700 G Street, N.W., Washington, D.C. 20552.
A copy of our charter and bylaws, filed as exhibits to the registration
statement as well as those of Kearny Federal Savings Bank and Kearny MHC, are
available without charge from Kearny Financial Corp. Copies of the plan of stock
issuance are also available without charge.
132
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm......................F-1
Consolidated Statements of Financial Condition
as of June 30, 2004 and 2003 ...................................... F-2
Consolidated Statements of Income
for the Years Ended June 30, 2004, 2003 and 2002....................F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 2004, 2003 and 2002....................F-4
Consolidated Statements of Cash Flows
for the Years Ended June 30, 2004, 2003 and 2002................... F-5
Notes to Consolidated Financial Statements.................................. F-7
All schedules are omitted as the required information either is not
applicable or is included in the consolidated financial statements or related
notes.
133
[LOGO] R RADICS & CO., LLC
--------------------------------------------------------------------------------
Established Certified Public Accountants & Consultants
1993
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors
Kearny Financial Corp. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Kearny Financial Corp. (the "Company") and Subsidiaries as of June 30, 2004
and 2003, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the years in the three-year
period ended June 30, 2004. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of the Company and Subsidiaries as of June 30, 2004 and 2003,
and the consolidated results of their operations and cash flows for each of the
years in the three- year period ended June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/Radics & CO., LLC
Pine Brook, New Jersey
August 9, 2004
55 US Highway 46 East, Post Office Box 676, Pine Brook, NJ 07058-0676
Voice: 973-575-9696 Fax: 973-575-9695
Internet: www.radics.com
F-1
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
-----------------------------------
Notes 2004 2003
------------------ ---------------- -----------------
(In Thousands)
Assets
------
Cash and amounts due from depository institutions $ 21,008 $ 25,291
Interest-bearing deposits in other banks 18,480 89,366
Federal funds sold - 11,000
Securities purchased under agreements to resell - 200,000
----------- -----------
Cash and cash equivalents 1, 3 and 17 39,488 325,657
Securities available for sale 1, 4 and 17 41,564 37,840
Investment securities held to maturity 1, 5 12 and 17 435,870 287,321
Loans receivable, including net deferred loan costs of $758 and $1,927 1, 6 and 17 510,938 514,341
Less: Allowance for loan losses 1 and 6 (5,144) (5,180)
----------- -----------
Net loans receivable 505,794 509,161
----------- -----------
Mortgage-backed securities held to maturity 1, 7 and 17 771,353 681,619
Premises and equipment 1 and 8 26,649 19,884
Federal Home Loan Bank of New York stock ("FHLB") 12 11,392 13,787
Interest receivable 1, 9 and 17 9,861 8,479
Goodwill and other intangible assets 1, 2 and 10 82,263 31,746
Deposit for acquisition of West Essex Bancorp, Inc. 2 - 67,853
Other assets 15 and 19 12,284 13,135
----------- -----------
Total assets $ 1,936,518 $ 1,996,482
=========== ===========
Liabilities and stockholder's equity
------------------------------------
Liabilities
-----------
Deposits: 1, 11 and 17
Non-interest bearing 55,377 48,229
Interest bearing 1,482,133 1,565,455
----------- -----------
Total deposits 1,537,510 1,613,684
Advances from FHLB 12 and 17 94,234 75,749
Advance payments by borrowers for taxes 4,224 4,213
Other liabilities 1, 13 and 15 7,045 7,167
----------- -----------
Total liabilities 1,643,013 1,700,813
----------- -----------
Minority interest in consolidated subsidiaries - 17,336
----------- -----------
Commitments and contingencies 1, 16 and 17
Stockholder's equity 1, 2, 14, 15 and 18
--------------------
Preferred stock $0.10 par value, 25,000,000 shares authorized;
non-issued and outstanding - -
Common stock $0.10 par value, 75,000,000 shares authorized;
10,000 shares issued and outstanding 1 1
Paid in capital 499 499
Retained earnings - substantially restricted 282,959 270,062
Accumulated other comprehensive income 10,046 7,771
----------- -----------
Total stockholder's equity 293,505 278,333
----------- -----------
Total liabilities, minority interest in consolidated subsidiaries
and stockholder's equity $ 1,936,518 $ 1,996,482
=========== ===========
See notes to consolidated financial statements.
F-2
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
-----------------------------------------------------
Notes 2004 2003 2002
--------------- -----------------------------------------------------
(In Thousands, Except Share and Per Share Data)
Interest income:
Loans 1 and 5 $ 28,919 $ 36,673 $ 43,258
Mortgage-backed securities 1 33,980 47,764 50,225
Investment and available for sale securities 1 14,426 9,133 9,927
Other interest earning assets 1,329 2,922 2,752
---------- --------- ----------
Total interest income 78,654 96,492 106,162
---------- --------- ----------
Interest expense:
Deposits 11 28,082 39,908 49,069
Borrowings 4,018 4,787 5,374
---------- --------- ----------
Total interest expense 32,100 44,695 54,443
---------- --------- ----------
Net interest income 46,554 51,797 51,719
Provision for loan losses 1 and 5 - - 3
---------- --------- ----------
Net interest income after provision for loan losses 46,554 51,797 51,716
---------- --------- ----------
Non-interest income:
Fees and service charges 681 1,002 1,057
Trading account income - - 62
Miscellaneous 879 845 646
---------- --------- ----------
Total non-interest income 1,560 1,847 1,765
---------- --------- ----------
Non-interest expenses:
Salaries and employee benefits 1 and 13 16,522 16,962 15,468
Net occupancy expense of premises 1 and 8 2,523 2,376 1,968
Equipment 1 3,453 3,142 2,945
Advertising 861 861 642
Federal insurance premium 587 620 542
Amortization of goodwill and intangible assets 1, 2 and 10 636 636 2,947
Directors' fees 827 818 383
Merger related expenses 2 592 14,921 619
Miscellaneous 3,471 4,016 3,551
---------- --------- ----------
Total non-interest expenses 29,472 44,352 29,065
---------- --------- ----------
Income before minority interest and income taxes 18,642 9,292 24,416
Minority interest in consolidated subsidiaries,
net of income taxes - (4,844) 3,140
Income taxes 1 and 15 5,745 5,237 7,926
---------- --------- ----------
Net income $ 12,897 $ 8,899 $ 13,350
========== ========= ==========
Net income per common share - basic/diluted $ 1,289.70 $ 889.90 $ 1,335.00
========== ========= ==========
Weighted average number of common shares outstanding 10,000 10,000 10,000
========== ========= ==========
See notes to consolidated financial statements.
F-3
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Retained Accumulated
Earnings - Other
Common Paid in Substantially Comprehensive
Stock Capital Restricted Income Total
----- ------- ---------- ------ -----
(In Thousands)
Balance - June 30, 2001 $ 1 $ 499 $ 247,813 $ 10,304 $ 258,617
Net income for the year
ended June 30, 2002 - - 13,350 - 13,350
Unrealized loss on securities
available for sale, net of deferred income
tax benefit of $693 - - - (1,261) (1,261)
---------
Comprehensive income - - - - 12,089
--- ----- --------- -------- ---------
Balance - June 30, 2002 1 499 261,163 9,043 270,706
Net income for the year
ended June 30, 2003 - - 8,899 - 8,899
Unrealized loss on securities
available for sale, net of deferred income
tax benefit of $743 - - - (1,272) (1,272)
---------
Comprehensive income - - - - 7,627
--- ----- --------- -------- ---------
Balance - June 30, 2003 1 499 270,062 7,771 278,333
Net income for the year
ended June 30, 2004 - - 12,897 - 12,897
Unrealized gain on securities
available for sale, net of deferred income
tax expense of $1,296 - - - 2,275 2,275
---------
Comprehensive income - - - - 15,172
--- ----- --------- -------- ---------
Balance - June 30, 2004 $ 1 $ 499 $ 282,959 $ 10,046 $ 293,505
=== ===== ========= ======== =========
See notes to consolidated financial statements.
F-4
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
------------------------------------
2004 2003 2002
--------- --------- ---------
(In Thousands)
Cash flows from operating activities:
Net income $ 12,897 $ 8,899 $ 13,350
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 1,314 1,279 1,172
Net amortization of premiums, discounts and loan
fees and costs 2,679 2,260 512
Deferred income taxes 556 (734) (28)
Amortization of goodwill and intangible assets 636 636 2,947
Provision for loan losses - - 3
Purchase of trading securities - - (23,906)
Proceeds from sale of trading securities - - 24,733
Realized gains on trading securities - - (31)
Unrealized gain on trading securities - - (31)
(Increase) decrease in interest receivable (1,381) 977 648
(Increase) decrease in other assets (17) (1,461) (1,406)
(Decrease) in interest payable (376) (375) (718)
(Decrease) increase in other liabilities (1,705) 1,944 191
Minority interest and ESOP expenses - (4,764) 298
--------- --------- ---------
Net cash provided by operating activities 14,603 8,661 17,734
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of term deposit - - 399
Purchases of securities available for sale (152) (180) (254)
Proceeds from calls of securities available for sale - - 1,000
Purchases of investment securities held to maturity (263,187) (261,813) (56,013)
Proceeds from calls and maturities
of investment securities held to maturity 111,189 108,705 107,082
Proceeds from repayments of investment securities held to maturity 3,612 73,154 4,776
Purchase of loans (15,024) (5,687) (9,584)
Proceeds on sale of student loans - 338 -
Net decrease in loans receivable 16,922 86,934 20,718
Purchases of mortgage-backed securities held to maturity (425,124) (154,799) (571,751)
Principal repayments on mortgage-backed securities held to maturity 334,016 371,915 290,490
Additions to premises and equipment (8,079) (3,714) (4,426)
Redemption (purchase) of FHLB Stock 2,395 1,954 (1,021)
Cash paid for acquisition of minority interest in Pulaski Bancorp, Inc. - (26,433) -
Cash paid for acquisition of minority interest in West Essex Bancorp, Inc. - (67,853) -
--------- --------- ---------
Net cash (used in) provided by investing activities (243,432) 122,521 (218,584)
--------- --------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits (75,836) 134,221 138,328
FHLB advances - - 34,000
Repayment of FHLB advances (11,515) (36,331) (9,529)
Net change in short-term borrowings from FHLB 30,000 - (24,500)
Increase (decrease) in advance payments by borrowers for taxes 11 (445) (320)
--------- --------- ---------
Net cash (used in) provided by financing activities (57,340) 97,445 137,979
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (286,169) 228,627 (62,871)
Cash and cash equivalents - beginning 325,657 97,030 159,901
--------- --------- ---------
Cash and cash equivalents - ending $ 39,488 $ 325,657 $ 97,030
========= ========= =========
See notes to consolidated financial statements.
F-5
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
-------------------------------
2004 2003 2002
-------- -------- --------
(In Thousands)
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes, net of refunds $ 5,956 $ 6,931 $ 8,154
======== ======== ========
Interest $ 32,476 $ 45,061 $ 55,160
======== ======== ========
Supplemental disclosure of non-cash transactions:
Minority interest in consolidated subsidiaries $ 17,336 $ - $ -
======== ======== ========
Goodwill - West Essex acquisition $ 50,517 $ - $ -
======== ======== ========
Deposit for acquisition of West Essex Bancorp, Inc. $(67,853) $ - $ -
======== ======== ========
See notes to consolidated financial statements.
F-6
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of financial statement presentation
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Kearny Federal Savings Bank (the
"Bank"), and the Bank's wholly owned subsidiaries, KFS Financial
Services, Inc. and West Essex Insurance Agency, and have been prepared
in conformity with accounting principles generally accepted in the
United States of America. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the dates of the consolidated
statements of financial condition and revenues and expenses for the
periods then ended. Actual results could differ significantly from
those estimates. A material estimate that is particularly susceptible
to significant change relates to the determination of the allowance for
loan losses. Management believes that the allowance for loan losses
represents its best estimate of losses known and inherent in the loan
portfolio that are both probable and reasonable to estimate. While
management uses available information to recognize losses on loans,
future additions to the allowance for loan losses may be necessary
based on changes in economic conditions in the market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the recognition of additions to the
allowance based on their judgments about information available to them
at the time of their examination.
Cash and cash equivalents
Cash and cash equivalents include cash and amounts due from depository
institution, interest-bearing deposits in other banks, securities
purchased under agreements to resell, and federal funds sold, all with
original maturities of three months or less.
Securities purchased under agreements to resell
Securities purchased under agreements to resell are accounted for as
collateralized financial transactions and are carried at the amounts at
which the securities will be subsequently reacquired. Securities
purchased under agreements to resell are required to be held by a third
party custodian. The market values of securities to be resold are
monitored on a daily basis and additional collateral may be obtained
where considered necessary to protect against credit exposure.
Securities
Investments in debt securities that the Company/Bank has the positive
intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized holding gains and losses
included in earnings. Debt and equity securities not classified as
trading securities nor as held-to-maturity securities are classified as
available for sale securities and reported at fair value, with
unrealized holding gains or losses, net of deferred income taxes,
reported in the accumulated other comprehensive income component of
stockholder's equity.
F - 7
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Securities (Cont'd.)
The Company adopted Emerging Issues Tax Force ("EITF") Issuance No.
03-1, The Meaning of Other than Temporary Impairment and Its
Application to Certain Investments, as of June 30, 2004. EITF 03-1
includes certain disclosures regarding quantitative and qualitative
disclosures for securities accounted for under the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, that are impaired at the balance sheet date, but for which
other-than-temporary impairment has not been recognized. The
disclosures under EITF 03-1 are required for consolidated financial
statements for years ending after December 15, 2003 and are included in
these consolidated financial statements.
Under EITF 03-1, individual securities are considered impaired when
fair value is less than amortized cost. Management evaluates on a
monthly basis whether any securities are other-than-temporarily
impaired. In making this determination, we consider the extent and
duration for the impairment, the nature and financial health of the
issuer, other factors relevant to specific securities, and the
Company's ability and intent to hold securities for a period of time
sufficient to allow for any anticipated recovery in market value. If a
security is determined to be other-than-temporarily impaired, an
impairment loss is charged to operations.
Premiums and discounts on all securities are amortized/accreted to
maturity by use of the level-yield method. Gain or loss on sales of
securities is based on the specific identification method.
Concentration of risk
The Bank's lending activity is concentrated in loans secured by real
estate located primarily in the State of New Jersey.
Loans receivable
Loans receivable are stated at unpaid principal balances plus net
deferred loan origination costs and discounts less the allowance for
loan losses. Loan origination fees and certain direct loan origination
costs are deferred and amortized, using the level-yield method, as an
adjustment of yield over the contractual lives of the related loans.
Unearned discounts are accreted by use of the level-yield method over
the contractual lives of the related loans.
Recognition of interest by the accrual method is generally discontinued
when interest or principal payments are ninety days or more in arrears
on a contractual basis, or when other factors indicate that the
collection of such amounts is doubtful. At the time a loan is placed on
nonaccrual status, an allowance for uncollected interest is recorded in
the current period for previously accrued and uncollected interest.
Interest on such loans, if appropriate, is recognized as income when
payments are received. A loan is returned to accrual status when
interest or principal payments are no longer ninety days or more in
arrears on a contractual basis and factors indicating doubtful
collectibilty no longer exist.
F - 8
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Allowance for loan losses
An allowance for loan losses is maintained at a level that represents
management's best estimate of losses known and inherent in the loan
portfolio that are both probable and reasonable to estimate. The
allowance is decreased by loan charge-offs, increased by subsequent
recoveries of loans previously charged off, and then adjusted, via
either a charge or credit to operations, to an amount determined by
management to be necessary. Loans or portions thereof, are charged off
when, after collection efforts are exhausted, they are determined to be
uncollectible. Management of the Bank, in determining the allowance for
loan losses, considers the losses inherent in its loan portfolio and
changes in the nature and volume inherent in its loan activities, along
with the general economic and real estate market conditions. The Bank
utilizes a two tier approach: (1) identification of impaired loans and
establishment of specific loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of its
loan portfolio. The Bank maintains a loan review system which allows
for a periodic review of its loan portfolio and the early
identification of potential impaired loans. Such system takes into
consideration, among other things, delinquency status, size of loans,
type of collateral and financial condition of the borrowers. Specific
loan loss allowances are established for identified loans based on a
review of such information and/or appraisals of the underlying
collateral. General loan losses are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition
of the loan portfolio, current economic conditions and management's
judgment. Although management believes that specific and general loan
losses are established in accordance with management's best estimate,
actual losses are dependent upon future events and, as such, further
additions to the level of loan loss allowances may be necessary.
A loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. All loans identified as impaired are evaluated
independently. The Bank does not aggregate such loans for evaluation
purposes. Payments received on impaired loans are applied first to
interest receivable and then to principal.
Premises and equipment
Land is carried at cost. Buildings and improvements, furnishings and
equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed on the straight-line
method over the following estimated useful lives:
Buildings and improvements 10 to 50 years
Furnishings and equipment 4 to 20 years
Leasehold improvements Shorter of useful lives or 10 years
Construction in progress primarily represents facilities under
construction for future use in the Company's business and includes all
costs to acquire land and construct buildings, as well as capitalized
interest during the construction period. Interest is capitalized at the
Bank's average cost of interest-bearing liabilities.
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to operations in
the year incurred. Rental income is netted against occupancy costs in
the consolidated statements of income.
F - 9
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Goodwill and other intangible assets
Goodwill and other intangible assets principally represent the excess
cost over the fair value of the net assets of the institutions acquired
in purchase transactions. Through June 30, 2002, goodwill was amortized
using the straight line method over 15 years. The Company adopted,
effective July 1, 2002, SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets", under which goodwill
is no longer amortized, but subject to an impairment test. Goodwill is
evaluated annually by reporting unit and an impairment loss recorded if
indicated. Separate intangible assets, including core deposit
intangibles that are not deemed to have indefinite lives, continue to
be amortized over their useful lives, which is estimated to be ten
years. No impairment charges were required to be recorded in the years
ended June 30, 2004, 2003 or 2002. If an impairment loss is determined
to exist in the future, such loss will be reflected as an expense in
the consolidated statements of income in the period in which the
impairment loss is determined.
Income taxes
The Company and its subsidiaries file consolidated federal income tax
returns. Income taxes are allocated based on the contribution of income
to the consolidated income tax returns. Separate state income tax
returns are filed.
Federal and state income taxes have been provided on the basis of the
reported income. The amounts reflected on the Company's tax returns
differ from these provisions due principally to temporary differences
in the reporting of certain items for financial reporting and income
tax reporting purposes. Deferred income taxes are recorded to recognize
such temporary differences.
Fair value of financial instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents and interest receivable
The carrying amounts for cash and cash equivalents and interest
receivable approximate fair value because they mature in three
months or less.
Securities
The fair values for securities available for sale and
mortgage-backed and investment securities held to maturity are
based on quoted market prices, if available. If quoted market
prices are not available, fair value is estimated using quoted
market prices for similar securities.
Loans receivable
The fair value of loans receivable is estimated by discounting the
future cash flows, using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities, of such loans.
F - 10
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Fair value of financial instruments (Cont'd.)
Deposits
The fair value of demand, savings and club accounts is equal to
the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated using rates currently
offered for deposits of similar remaining maturities. The fair
value estimates do not include the benefit that results from the
low-cost funding provided by deposit liabilities compared to the
cost of borrowing funds in the market.
Advances from FHLB
Fair value is estimated using rates currently offered for advances
of similar remaining maturities.
Commitments
The fair value of commitments to fund credit lines and originate
or participate in loans is estimated using fees currently charged
to enter into similar agreements taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loans commitments, fair value also
considers the difference between current levels of interest and
the committed rates.
Interest rate risk
The Bank is principally engaged in the business of attracting deposits
from the general public and using these deposits, together with other
funds, to purchase securities and to make loans secured by real estate.
The potential for interest-rate risk exists as a result of the
generally shorter duration of interest-sensitive liabilities compared
to the generally longer duration of interest-sensitive assets. In a
rising rate environment, liabilities will reprice faster than assets,
thereby reducing net interest income. For this reason, management
regularly monitors the maturity structure of the Bank's assets and
liabilities in order to measure its level of interest-rate risk and to
plan for future volatility.
Net income per common share
Net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
net income per common share did not differ from basic net income per
common share as there were no contracts or securities exercisable or
which could be converted into common stock.
Reclassification
Certain amounts as of and for the years ended June 30, 2003 and 2002,
have been reclassified to conform to the current year's presentation.
F - 11
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS
On January 10, 2002, the Company and the Bank, entered into a merger agreement
with Pulaski Bancorp, Inc. ("Pulaski") and its subsidiary, Pulaski Savings Bank
(PSB). On October 18, 2002, the Company purchased Pulaski's common stock held by
public stockholders for $32.90 per share, in cash. The purchase of minority
interest shares was recorded as the acquisition of the noncontrolling interests
of a subsidiary utilizing the purchase method of accounting and the immediately
following merger of the Company's subsidiary, the Bank, and Pulaski's
subsidiary, PSB, was recorded as a combination of entities under common control.
The amount paid to minority shareholders of Pulaski in excess of their interest
in Pulaski amounted to $16,146,000, which was recorded as goodwill.
On September 11, 2002, the Company and the Bank entered into a merger agreement
with West Essex Bancorp, Inc. (West Essex), West Essex Savings Bank (WESB) and
its 100% owned subsidiaries. On July 1, 2003, the Company purchased West Essex's
common stock held by public stockholders for $35.10 per share, in cash. (The
purchase price was transferred to a third party escrow agent as of June 30,
2003.) The purchase of minority interest shares was recorded as the acquisition
of the noncontrolling interests of a subsidiary utilizing the purchase method of
accounting and the immediately following merger of the Company's subsidiary, the
Bank, and West Essex's subsidiary, WESB, was recorded as a combination of
entities under common control. The amount paid to minority shareholders of West
Essex in excess of their interest in West Essex amounted to $50,517,000, which
was recorded as goodwill.
Merger related expenses include the following (in thousands):
Year Ended June 30,
---------------------------------------
2004 2003 2002
-------------- ----------- -----------
Legal, professional, filing fees and other expenses $ 592 $ 2,670 $ 619
Payments for terminated employment contracts and
stock based compensation plans for officers - 10,657 -
Stock option payout to directors - 1,594 -
----- ------- -----
$ 592 $14,921 $ 619
===== ======= =====
3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
June 30,
Interest --------------------------------
Purchased From Maturity Rate 2004 2003
-------------------------- --------------- ------------- ----------------- -------------
(In Thousands)
Paine Webber, Inc. July 2, 2003 1.375% $ - $ 200,000
======= =========
At June 30, 2003, the Bank purchased Federal National Mortgage Association
mortgage-backed securities, under agreements to resell, having a market value of
approximately $204,000,000.
F - 12
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SECURITIES AVAILABLE FOR SALE
June 30, 2004
---------------------------------------------------
Gross Unrealized
Amortized ----------------------- Carrying
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Common stock $ 246 $15,648 $ - $15,894
Mutual funds 13,933 63 97 13,899
Trust preferred securities
due after ten years 11,929 69 227 11,771
------- ------- ------- -------
$26,108 $15,780 $ 324 $41,564
======= ======= ======= =======
June 30, 2003
---------------------------------------------------
Gross Unrealized
Amortized ----------------------- Carrying
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Common stock $ 246 $12,502 $ -- $12,748
Mutual funds 13,781 427 12 14,196
Trust preferred securities
due after ten years 11,927 245 1,276 10,896
------- ------- ------- -------
$25,954 $13,174 $ 1,288 $37,840
======= ======= ======= =======
The age of unrealized losses and fair value of related securities available for
sale at June 30, 2004 were as follows (in thousands):
Less Than 12 Months 12 Months or More Total
-------------------------- -------------------------- ------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ------ ---------- ------ ---------- ------
Common stock $ - $ - $ - $ - $ - $ -
Mutual funds - - 7,057 97 7,057 97
Trust preferred stock - - 7,577 227 7,577 227
---------- ---------- ---------- -------- -------- -------
Total $ - $ - $ 14,634 $ 4324 $314,634 $ 324
========== ========== ========== ======== ======== =======
As of June 30, 2004, management has concluded that the unrealized losses are
temporary in nature since they are primarily related to market interest rates
and not related to the underlying credit quality of the issuer of the
securities. Additionally, the Company has the intent and ability to hold these
investments for a time necessary to recover the amortized cost.
There were no sales of securities available for sale during the years ended June
30, 2004, 2003 and 2002.
F - 13
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT SECURITIES HELD TO MATURITY
June 30, 2004
-------------------------------------------------
Gross Unrealized
Amortized --------------------- Carrying
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Government agencies:
After one year but within five years $246,259 $ - $ 5,223 $241,036
After five years but within ten years 10,493 117 62 10,548
After ten years 17,649 11 104 17,556
-------- -------- -------- --------
274,401 128 5,389 269,140
-------- -------- -------- --------
Obligations of states and political subdivisions:
Within one year 5,386 33 - 5,419
After one year but within five years 13,606 369 54 13,921
After five years but within ten years 65,990 922 991 65,921
After ten years 76,487 394 2,507 74,374
-------- -------- -------- --------
161,469 1,718 3,552 159,635
-------- -------- -------- --------
$435,870 $ 1,846 $ 8,941 $428,775
======== ======== ======== ========
June 30, 2003
-------------------------------------------------
Gross Unrealized
Amortized --------------------- Carrying
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Government agencies:
After one year but within five years $120,369 $ 1,276 $ - $121,645
After five years but within ten years 25,493 257 - 25,750
After ten years 24,106 142 130 24,118
-------- -------- -------- --------
169,968 1,675 130 171,513
-------- -------- -------- --------
Obligations of states and political subdivisions:
Within one year 8,217 109 - 8,326
After one year but within five years 21,807 834 - 22,641
After five years but within ten years 24,074 1,271 - 25,345
After ten years 63,255 2,639 141 65,753
-------- -------- -------- --------
117,353 4,853 141 122,065
-------- -------- -------- --------
$287,321 $ 6,528 $ 271 $293,578
======== ======== ======== ========
There were no sales of investment securities held to maturity during the years
ended June 30, 2004, 2003 and 2002. During the years ended June 30, 2004, 2003
and 2002, proceeds from calls of securities totalled $111,189,000, $108,705,000
and $107,082,000, respectively, resulting in no gains or losses. At June 30,
2004, investment securities held to maturity with a carrying value of
$256,752,000 are callable within one year.
At June 30, 2004, all obligations of states and political subdivisions were
guaranteed by insurance policies issued by various insurance companies.
F - 14
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT SECURITIES HELD TO MATURITY (Cont'd)
The age of unrealized losses and fair value of related investment securities
held to maturity at June 30, 2004 were as follows (in thousands):
Less Than 12 Months 12 Months or More Total
-------------------------- -------------------------- ------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ------ ---------- ------ ---------- ------
Government agencies: $250,973 $ 5,285 $ 16,386 $6104 $267,359 $ 5,389
Obligations of states and
political subdivisions: 85,620 3,026 7,365 526 92,985 3,552
-------- -------- -------- ----- -------- --------
Total $336,593 $ 8,311 $ 23,751 $ 630 $360,344 $ 8,941
======== ======== ======== ===== ======== ========
As of June 30, 2004, management has concluded that the unrealized losses are
temporary in nature since they are primarily related to market interest rates
and not related to the underlying credit quality of the issuers of the
securities. Additionally, the Company has the intent and ability to hold these
investments for the time necessary to recover the amortized cost.
6. LOANS RECEIVABLE
June 30,
-------------------------
2004 2003
-------- --------
(In Thousands)
Real estate mortgage $441,667 $437,490
-------- --------
Commercial business 5,161 2,353
-------- --------
Consumer:
Home equity loans 37,381 37,315
Home equity lines of credit 15,677 19,905
Passbook or certificate 2,746 2,895
Other 336 1,273
-------- --------
56,140 61,388
-------- --------
Construction 7,212 11,183
-------- --------
Total loans 510,180 512,414
Deferred loan (costs) and fees, net 758 1,927
-------- --------
$510,938 $514,341
======== ========
At June 30, 2004 and 2003, real estate mortgage loans included $358,241,000 and
$366,391,000, respectively, of loans secured by one-to-four-family residential
properties.
F - 15
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS RECEIVABLE (Cont'd)
The Bank has granted loans to its officers and directors and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. As of June 30, 2004 and 2003, such loans totalled
approximately $1,633,000 and $2,507,000, respectively. During the year ended
June 30, 2004, new loans to related parties totalled $-0-, repayments totalled
approximately $100,000 and loans to individuals no longer associated with the
Bank totalled approximately $774,000.
The activity in the allowance for loan losses is as follows (in thousands):
At June 30, 2004 and 2003, nonaccrual loans for which the accrual of interest
had been discontinued totalled approximately $2,289,000 and $2,370,000,
respectively. Had these loans been performing in accordance with their original
terms, the interest income recognized for the years ended June 30, 2004, 2003
and 2002, would have been $177,000, $178,000 and $197,000, respectively.
Interest income recognized on such loans was $118,000, $102,000 and $170,000,
respectively.
Impaired loans and related amounts recorded in allowance for loan losses are
summarized as follows (in thousands):
June 30,
--------------------
2004 2003
---- ----
Recorded investment in impaired loans
with recorded allowance $256 $229
Without recorded allowance - -
---- ----
Total impaired loans 256 229
Related allowance for loan losses 115 115
---- ----
Net impaired loans $141 $114
==== ====
F-16
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS RECEIVABLE (Cont'd)
No interest income was received and recognized for these loans during the years
ended June 30, 2004, 2003 and 2002. The average balance of impaired loans during
the years ended June 30, 2004, 2003 and 2002 approximated $243,000, $229,000 and
$115,000, respectively.
7. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
June 30, 2004
-------------------------------------------------
Gross Unrealized
Amortized --------------------- Carrying
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Government National Mortgage Association $ 94,499 $ 2,507 $ 1,487 $ 95,519
Federal Home Loan Mortgage Corporation 314,221 2,472 3,505 313,188
Federal National Mortgage Association 362,633 4,670 3,300 364,003
-------- -------- -------- --------
$771,353 $ 9,649 $ 8,292 $772,710
======== ======== ======== ========
June 30, 2003
-------------------------------------------------
Gross Unrealized
Amortized --------------------- Carrying
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Government National Mortgage Association $150,699 $ 6,433 $ 62 $157,070
Federal Home Loan Mortgage Corporation 197,962 6,337 125 204,174
Federal National Mortgage Association 331,061 10,828 195 341,694
Collateral mortgage obligations - corporations 1,894 39 - 1,933
Other - mortgage-backed security 3 - - 3
-------- -------- -------- --------
$681,619 $ 23,637 $ 382 $704,874
======== ======== ======== ========
Net premiums of approximately $3,565,000 and $3,705,000 at June 30, 2004 and
2003, respectively, are included in the carrying amounts of mortgage-backed
securities held to maturity.
There were no sales of mortgage-backed securities held to maturity during the
years ended June 30, 2004, 2003 and 2002. At June 30, 2004 and 2003, securities
with carrying value of approximately $906,000 and $430,000, respectively, was
pledged to secure public funds on deposit.
The age of unrealized losses and fair value of related mortgage-backed
securities held to maturity at June 30, 2004 were as follows (in thousands):
Less Than 12 Months 12 Months or More Total
-------------------------- -------------------------- ------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ------ ---------- ------ ---------- ------
Mortgage-backed
Securities $ 376,245 $ 7,977 $ 4,126 $1315 $ 380,371 $ 8,292
========= ======= ======= ===== ========= =======
F-17
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. MORTGAGE-BACKED SECURITIES HELD TO MATURITY (Cont'd)
As of June 30, 2004, management has concluded that the unrealized losses are
temporary in nature since they are primarily related to market interest rates
and not related to the underlying credit quality of the issuers of the
securities. Additionally, the Company has the intent and ability to hold these
investments for the time necessary to recover the amortized cost.
8. PREMISES AND EQUIPMENT
June 30,
-----------------
2004 2003
------- -------
(In Thousands)
Land $ 5,689 $ 5,127
Buildings and improvements 15,800 15,672
Leasehold improvements 422 399
Furnishings and equipment 7,203 5,788
Construction in progress 7,902 1,999
------- -------
37,016 28,985
------- -------
Less accumulated depreciation and amortization 10,367 9,101
------- -------
$26,649 $19,884
======= =======
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Net assets of an institution acquired in a purchase transaction prior to July 1,
2001, were recorded at fair value at the date of acquisition. The Bank also has
finite-lived intangible assets, which are included in other assets, in the form
of core deposit intangibles. These intangibles are being amortized on the
straight line basis over their estimated useful lives of ten years.
Core Deposit
Goodwill Intangibles
-------- -----------
(In Thousands)
Balance at July 1, 2001 $ 17,911 $ 4,108
Amortization (2,311) (636)
-------- --------
Balance at June 30, 2002 15,600 3,472
Pulaski Savings Bank acquisition (see note 2) 16,146 -
Amortization - (636)
-------- --------
Balance at June 30, 2003 31,746 2,836
Amortization - (636)
West Essex Savings Bank acquisition (see note 2) 50,517 -
-------- --------
Balance at June 30, 2004 $ 82,263 $ 2,200
======== ========
The gross carrying amount of core deposit intangibles was $5,987,000 at both
June 30, 2004 and 2003, while accumulated amortization totalled $3,151,000 and
$3,787,000 at June 30, 2004 and 2003, respectively. Amortization is expected to
total $636,000 in each of the years ending June 30, 2005, 2006 and 2007, and
$292,000 in the year ending June 30, 2008.
11. DEPOSITS
June 30,
----------------------------------------------
2004 2003
--------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- ---- ---------- ----
(In Thousands)
Non-interest-bearing demand $ 55,377 0.00% $ 48,229 0.00%
Interest-bearing demand 103,648 0.75% 93,698 0.92%
Savings and club 481,466 1.00% 460,739 1.29%
Certificates of deposit 897,019 1.92% 1,011,018 2.72%
---------- ----------
Total deposits $1,537,510 1.48% $1,613,684 2.13%
========== ==========
Certificates of deposit with balances of $100,000 or more at June 30, 2004 and
2003, totalled approximately $188,009,000 and $203,822,000, respectively.
Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance
Corporation.
F - 19
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEPOSITS (Cont'd.)
A summary of certificates of deposit by maturity follows (in thousands):
June 30,
-----------------------
2004 2003
---------- ----------
One year or less $ 709,940 $ 814,875
After one to two years 128,837 125,671
After two to three years 31,624 46,376
After three years 26,618 24,096
---------- ----------
$ 897,019 $1,011,018
========== ==========
Interest expense on deposits consist of the following (in thousands):
Year Ended June 30,
-------------------------------------
2004 2003 2002
------- ------- -------
Demand $ 882 $ 1,074 $ 1,289
Savings and clubs 5,508 6,604 7,873
Certificates of deposits 21,692 32,230 39,907
------- ------- -------
$28,082 $39,908 $49,069
======= ======= =======
12. ADVANCES FROM FHLB
June 30,
----------------------------------------------
2004 2003
--------------------- -----------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
(In Thousands)
Due in less than one year 1.75% $32,000 6.55% $11,000
After one to five years 5.46% 50,000 5.51% 44,000
After five to ten years 5.40% 10,000 5.43% 18,000
Other borrowings, payable in
monthly installments through
February 25, 2008 6.03% 2,234 6.03% 2,749
------- -------
4.21% $94,234 5.66% $75,749
======= =======
Of the $60,000,000 in advances due after one through ten years, $57,000,000 are
callable, including $47,000,000 which are callable within one year.
FHLB advances at June 30, 2004 and 2003, are collateralized by the FHLB capital
stock owned by the Bank and investment securities held to maturity with fair
values totalling approximately $126,810,000 and $90,779,000, respectively.
F - 20
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS
Thrift Plan
The Bank sponsors the Financial Institutions Thrift Plan (the "Plan"),
pursuant to Section 401(k) of the Internal Revenue Code, for all
eligible employees. Employees may elect to save up to 20% of their
compensation. The Bank will contribute a matching contribution up to 3%
of the employee annual compensation. The Plan expense amounted to
approximately $264,000, $183,000 and $163,000 for the years ended June
30, 2004, 2003 and 2002, respectively.
Retirement Plan
The Bank has a non-contributory multiple-employer pension plan covering
all eligible employees. Significant actuarial assumptions include the
projected unit credit cost valuation method and an annual investment
rate of 8.25%, 8.25% and 8.00% for the years ended June 30, 2004, 2003
and 2002, respectively. At the date of latest plan review, the net
assets available for plan benefits exceeded the actuarial present value
of accumulated plan benefits. Data for the actuarial present value of
accumulated vested and non-vested benefits is not determinable for this
multiple-employer retirement plan. During the years ended June 30,
2004, 2003 and 2002, total pension plan expense and contributions to
the plan were approximately $1,193,000, $685,000 and $573,000,
respectively.
PSB, a subsidiary of Pulaski, had a non-contributory employer pension
plan covering all eligible employees. The plan assets, in the amount of
$3,010,355, were transferred to the multi-employer pension plan
covering employees of the PSB on the date of merger. During the year
ended June 30, 2002, PSB contributed $398,000 to the plan and recorded
expenses of $180,000. No contributions were made to this plan and
expenses of $63,000 were recorded during the year ended June 30, 2003.
WESB, a subsidiary of West Essex had a non-contributory employer
pension plan ("the Plan") covering all eligible employees. The Plan was
terminated effective as of the last business day prior to the
acquisition of WESB by the Company.
F - 21
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
The following table sets forth the Plan's funded status and components of net
periodic cost (in thousands):
June 30,
------------------------
2004 2003
------- -------
Change in benefit obligation
Benefit obligation - beginning $ 5,294 $ 4,805
Service cost - 152
Interest cost 284 241
Actuarial loss - 640
Annuity payments (100) (75)
Curtailments - (469)
------- -------
Benefit obligation - ending $ 5,478 $ 5,294
======= =======
Change in plan assets
Fair value of assets - beginning $ 4,122 $ 3,310
Actual return on plan assets 411 260
Employer contribution 80 627
Annuity payments (100) (75)
------- -------
Fair value of assets - ending $ 4,513 $ 4,122
======= =======
Reconciliation of funded status
Accumulation benefit obligation $ 5,478 $ 5,294
======= =======
Projected benefit obligation (5,478) (5,294)
Fair value of assets 4,513 4,122
Unrecognized gain/loss (96) -
------- -------
Accrued pension cost included in
other liabilities $(1,061) $(1,172)
======= =======
F-22
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
Year Ended June 30,
--------------------------
2004 2003
-------- -------
Net periodic pension expenses
Service cost $ - $ 152
Interest cost 284 241
Expected return on plan assets (315) (216)
Amortization of transition obligation - 24
Unrecognized (gain)/loss - 12
Unrecognized past service liability - 40
Curtailment and purchase credit - 1,211
-------- -------
Total pension expense $ (31) $ 1,464
======== =======
Valuation assumptions
Amortization period 10.49 10.82
Discount rate 5.42% 6.75%
Long-term rate 8.50% 8.50%
Salary increases N/A 4.00%
The Plan assets are invested in six diversified investment funds of the
RSI Retirement Trust (the "Trust"), a no-load series of open-ended
mutual fund. The Trust has been given discretion by the West Essex
Bank, F.S.B., to determine the appropriate strategic asset allocation
versus plan liabilities. The percentage of total fair value by asset
category follows:
The expected long-term rate of return on assets was based on historical
returns earned by equities and fixed income securities, adjusted to
reflect expectations of future returns as applied to the Plan's target
allocation of asset classes. The target allocation of asset classes was
65% in equity securities and 35% in debt securities.
During the fiscal year ending June 30, 2005, the Bank is expected to
contribute in cash approximately $1,061,000. The total benefit payments
expected to be paid are $5,478,000.
F - 23
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
Benefit Equalization Plan ("BEP")
The Bank has an unfunded non-qualified plan to compensate senior
officers of the Bank who participate in the Bank's qualified benefit
plans for certain benefits lost under such plans by reason of benefit
limitations imposed by Sections 415 and 401 of the Internal Revenue
Code. There were approximately $59,000 contributions made to and
benefits paid under the BEP during both the year ended June 30, 2004
and 2003. There were no contributions made or benefits paid during the
year ended June 30, 2002.
The following table sets forth the BEP's funded status and components
of net periodic pension cost (in thousands):
June 30,
--------------------
2004 2003
------- -------
Change in benefit obligation
Benefit obligation - beginning $ 1,328 $ 993
Service cost 24 12
Interest cost 98 72
Actuarial loss - 310
Benefit payments (59) (59)
------- -------
Benefit obligation - ending $ 1,391 $ 1,328
======= =======
Change in plan assets
Fair value of assets - beginning $ - $ -
Actual return on plan assets - -
Settlements 59 59
Contributions (59) (59)
------- -------
Fair value of assets - ending $ - $ -
======= =======
Reconciliation of funded status
Accumulated benefit obligation $ (954) $ (841)
------- -------
Projected benefit obligation (1,391) (1,328)
Fair value of assets - -
------- -------
Funded status (1,391) (1,328)
Unrecognized prior service cost (50) (42)
Unrecognized net actuarial loss 595 672
------- -------
Accrued pension cost included in other liabilities $ (846) $ (698)
======= =======
F-24
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS
June 30,
-------------------
2004 2003
------- -------
Value assumptions
Discount rate 7.50% 7.50%
Salary increase rate 5.50% 5.50%
Year Ended June 30,
----------------------
2004 2003 2002
---- ---- ----
Net periodic pension expense
Service cost $ 24 $ 12 $ 30
Interest cost 98 72 68
Amortization of unrecognized past service cost 8 8 20
Amortization of unrecognized net actuarial loss 77 38 42
---- ---- ----
$207 $130 $160
==== ==== ====
Valuation Assumptions
Discount rate 7.50% 7.50% 7.50%
Salary increase rate 5.50% 5.50% 5.50%
It is estimated that contributions of approximately $59,000 will be
made during the year ending June 30, 2005.
Stock based compensation plans
Pulaski Savings Bank and West Essex Savings Bank each had both an
Employee Stock Ownership Plan and a Stock Incentive Plan. These plans
were fully funded and expenses were recorded through the date of
merger. Expenses related to these plans aggregated $789,000 and
$585,000 for the years ended June 30, 2003 and 2002, respectively.
Small amounts representing unallotted shares on the dates of the
mergers were cancelled.
The Stock Incentive Plan included both stock awards and stock options.
Stock awards were expensed over the vesting period based upon the fair
value of awards at the grant dates. Stock options were accounted for
using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees"; accordingly, no expense was recognized as the exercise
prices of all option grants were equal to the market value of the
underlying stock on the grant dates.
F - 25
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
Postretirement Welfare Plan
The Bank has a postretirement group term life insurance plan covering
all eligible employees. The benefits are based on age and years of
service. The plan is unfunded. The following table sets forth the
accrued accumulated postretirement benefit obligation and the net
periodic postretirement benefit cost (in thousands):
June 30,
------------------
2004 2003
----- -----
Change in benefit obligation
Benefit obligation - beginning $ 378 $ 248
Service cost 18 12
Interest cost 22 19
Actuarial loss (3) 17
Premiums/claims paid (6) (5)
Plan amendment - 87
----- -----
Benefit obligation - ending $ 409 $ 378
===== =====
Change in plan assets
Fair value of assets - beginning $ - $ -
Actual return on plan assets - -
Premiums/claims paid 6 5
Contributions (6) (5)
----- -----
Fair value of assets - ending $ - $ -
===== =====
Reconciliation of funded status
Accumulation benefit obligation (409) (378)
Fair value of assets - -
----- -----
Funded status (409) (378)
Unrecognized net actuarial loss (9) (6)
Unrecognized prior service cost 74 83
----- -----
Accrued postretirement benefit cost included in
other liabilities $(344) $(301)
===== =====
F-26
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
Year Ended June 30,
--------------------
2004 2003 2002
---- ---- ----
Net periodic postretirement benefit cost:
Service cost $ 18 $ 12 $ 11
Interest cost 22 19 16
Amortization of unrecognized net actuarial gain - - (1)
Amortization of unrecognized past service liability 9 4 -
---- ---- ----
$ 49 $ 35 $ 26
==== ==== ====
The discount rate and projected salary increase rate used in computing
the accumulated postretirement benefit obligation were 6.63% and 4.00%,
respectively, at June 30, 2004 and 5.75% and 3.25%, respectively, at
June 30, 2003; and 7.00% and 4.25%, respectively, at June 30, 2002.
On December 8, 2003, the President signed the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act) into law. The
Act introduces a voluntary prescription drug benefit under Medicare as
well as a federal subsidy to sponsors of retiree health care plans that
provide at least an actuarially equivalent benefit. FASB Staff Position
(FSP) No. FAS 106-1 "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization act of
2003" (FSP 106-1), permits deferring the recognizing of the effects of
the Act on its Postretirement Health and Life Plans.
Since the Bank does not provide medical coverage for retirees, the
health care cost trend has no impact on the Bank's liability and FSB
No. FAS 106-1 is not applicable.
It is estimated that contributions of approximately $6,000 will be
made during the year ending June 30, 2005.
Directors' Consultation and Retirement Plan ("DCRP")
The Bank has an unfunded retirement plan for non-employee directors.
The benefits are payable based on term of service as a director. The
discount rate used in computing the actuarial present value of the
projected benefit obligation was 6.63% (2004), 5.75% (2003) and 7.00%
(2002). The increase in future compensation levels used was 4.00%
(2004), 3.25% (2003) and 4.25% (2002).
F - 27
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
The following table sets forth the DCRP's funded status and components
of net periodic cost (in thousands):
June 30,
-------------------
2004 2003
------- -------
Change in benefit obligation
Projected benefit obligations - beginning $ 1,487 $ 1,019
Service cost 78 56
Interest cost 83 78
Actuarial loss 2 143
Annuity payments (89) (51)
Plan amendments - 242
------- -------
Projected benefit obligation - ending $ 1,561 $ 1,487
======= =======
Change in plan assets
Fair value of assets - beginning $ - $ -
Actual return on plan assets - -
Settlements 89 51
Contributions (89) (51)
------- -------
Fair value of assets - ending $ - $ -
======= =======
Reconciliation of funded status
Accumulated benefit obligation $(1,361) $(1,335)
------- -------
Projected benefit obligation (1,561) (1,487)
Fair value of assets - -
------- -------
Funded status (1,561) (1,487)
Unrecognized transition obligation 219 263
Unrecognized net actuarial loss (7) (10)
Unrecognized prior service cost 341 375
------- -------
Accrued cost included in other liabilities $(1,008) $ (859)
======= =======
F-28
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
Year Ended June 30,
----------------------
2004 2003 2002
----- ----- -----
Net periodic plan cost
Service cost $ 78 $ 56 $ 39
Interest cost 83 78 52
Amortization of unrecognized transition obligation 44 44 44
Amortization of unrecognized net actuarial gain - (2) (28)
Amortization of unrecognized past service liability 33 24 15
----- ----- -----
$ 238 $ 200 $ 122
===== ===== =====
Effective January 1, 2003, the plan was amended to reflect that, upon a
change of control, all benefits payable shall be immediately paid to
the participants in the form of a lump sum payment. It is estimated
that contributions of approximately $129,000 will be made during the
year ended June 30, 2005.
During the years ended June 30, 2004, 2003 and 2002, contributions and
benefits paid totalling $89,000, $51,000 and $32,000, respectively,
were made to the Plan.
Pulaski Savings Bank had an unfunded retirement plan for its
non-employee directors with benefits payable based on term of service
as a director. As a result of the merger, all directors became fully
vested. The amount vested is to be paid, either in ten annual
installments, or lump sum if elected by the director or in full to the
surviving beneficiary in case of deceased director. During the year
ended June 30, 2004 two deceased directors surviving beneficiaries were
paid $284,000 and during the year ended June 30, 2003 one director, who
elected for lump sum was paid $120,000. The two remaining director's
elected annual payments in the aggregate amount of approximately
$32,000. The present value of future remaining annual payments, in the
amount of $254,000 and $594,000, is included in other liabilities at
June 30, 2004 and 2003, respectively. The Bank recorded expenses with
respect to this plan during the years ended June 30, 2004, 2003 and
2002 of $ -0- , $81,000 and $141,000, respectively.
14. STOCKHOLDER'S EQUITY AND REGULATORY CAPITAL
The Office of Thrift Supervision (the "OTS") imposes various restrictions or
requirements on the ability of savings institutions to make capital
distributions, including cash dividends. A savings institution that is a
subsidiary of a savings and loan holding company, such as the Bank, must file an
application or a notice with the OTS at least thirty days before making a
capital distribution. A savings institution must file an application for prior
approval of a capital distribution if: (i) it is not eligible for expedited
treatment under the applications processing rules of the OTS; (ii) the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings institution's net income for that year to date plus the
institution's retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the OTS or applicable regulations.
As a result of the dividend paid by the Bank to the Company in connection with
the acquisition of West Essex and its subsidiaries, it is likely that the Bank
will be required to file an application, rather than a notice, for any planned
capital distributions.
F - 29
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCKHOLDER'S EQUITY AND REGULATORY CAPITAL (Cont'd.)
The Bank is subject to various regulatory capital requirements administered by
Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain of-balance-sheet items as accumulated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting, and other factors.
The OTS may disapprove a notice or deny an application for a capital
distribution if: (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement. The capital
distributions by Kearny Financial Corp., as a savings and loan holding company,
will not be subject to the OTS capital distribution rules.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to adjusted total assets (as defined). The following
tables present a reconciliation of capital per accepted principles generally
accepted in the United States of America ("GAAP") and regulatory capital and
information as to the Bank's capital levels at the dates presented:
June 30,
----------------------
2004 2003
--------- ---------
(In Thousands)
GAAP capital:
Consolidated capital $ 293,505 $ 278,333
Less: Unconsolidated capital of the Company (1,520) (52,543)
--------- ---------
Bank capital 291,985 225,790
Less: Unrealized gain on securities (10,008) (7,771)
Goodwill (82,263) (31,746)
Intangible assets (2,200) (2,836)
--------- ---------
Core and tangible capital 197,514 183,437
Add: General valuation allowance 5,029 5,065
Unrealized gain on equity securities 7,026 5,486
--------- ---------
Total regulatory capital $ 209,569 $ 193,988
========= =========
F-30
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCKHOLDER'S EQUITY AND REGULATORY CAPITAL (Cont'd.)
June 30, 2004
----------------------------------------------------------------------------
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------------- --------- ----------- ------------ ---------- -----------
(Dollars in Thousands)
Total Capital (to risk-weighted assets) $ 209,569 32.56 % $ 51,490 8.00 % $ 64,362 10.00 %
Tier 1 Capital (to risk-weighted assets) 197,514 30.69 - - 38,617 6.00
Core (Tier 1) Capital (to adjusted total assets) 197,514 10.76 55,068 3.00 91,780 5.00
Tangible Capital (to adjusted total assets) 197,514 10.76 27,534 1.50 - -
June 30, 2003
----------------------------------------------------------------------------
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
----------------------- ------------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- ----------- ------------ ---------- -----------
(Dollars in Thousands)
Total Capital (to risk-weighted assets) $ 193,988 30.84 % $ 50,317 8.00 % $ 62,896 10.00 %
Tier 1 Capital (to risk-weighted assets) 183,437 29.17 - - 37,738 6.00
Core (Tier 1) Capital (to adjusted total assets) 183,437 9.70 56,712 3.00 94,519 5.00
Tangible Capital (to adjusted total assets) 183,437 9.70 28,356 1.50 - -
On November 3, 2003, the most recent notification from the OTS, the Bank was
categorized as well capitalized as of September 30, 2003, under the regulatory
framework for prompt corrective action. There are no conditions existing or
events which have occurred since notification that management believes have
changed the Bank's category.
15. INCOME TAXES
The Bank qualifies as a savings institution under the provisions of the Internal
Revenue Code (the "IRC"). Retained earnings at June 30, 2004, includes
approximately $30.5 million of bad debt allowance, pursuant to the IRC, for
which income taxes have not been provided. If such amount is used for purposes
other than or to absorb bad debts, including distributions in liquidation, it
will be subject to income tax at the then current rate.
F - 31
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (Cont'd.)
The components of income taxes are as follows:
Year Ended June 30,
------------------------------
2004 2003 2002
------- ------- -------
(In Thousands)
Current tax expense:
Federal income $ 3,600 $ 3,319 $ 7,240
State income 1,589 2,652 714
------- ------- -------
5,189 5,971 7,954
------- ------- -------
Deferred tax (benefit):
Federal income 470 (72) (25)
State income 86 (662) (3)
------- ------- -------
556 (734) (28)
------- ------- -------
$ 5,745 $ 5,237 $ 7,926
======= ======= =======
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 35% to income before income taxes:
Year Ended June 30,
-------------------------------
2004 2003 2002
------- ------- -------
(In Thousands)
Federal income tax expense $ 6,525 $ 3,252 $ 8,545
Increases (reductions) in income taxes resulting from:
Tax exempt interest (1,780) (1,301) (894)
New Jersey state tax,
net of federal income tax effect 1,106 1,314 469
Compensation in excess of limit - 1,548 -
Non deductible merger expenses 207 934 210
Tax benefit on disqualified distribution - (610) -
Other items, net (313) 100 (404)
------- ------- -------
Total income tax expense $ 5,745 $ 5,237 $ 7,926
======= ======= =======
Effective income tax rate 30.82% 56.36% 32.46%
======= ======= =======
The effective income tax rate represents total income tax expense divided by
income before minority interest and income taxes.
F - 32
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (Cont'd.)
The tax effects of existing temporary differences that give rise to deferred
income tax assets and liabilities are as follows (in thousands):
June 30,
------------------
Deferred income tax assets 2004 2003
-------------------------- ------- -------
Allowance for loan losses $ 2,108 $ 2,031
Goodwill 998 1,503
Deferred directors' fees - 16
Benefit plans 1,069 1,048
Compensation - 168
Other 71 89
------- -------
4,246 4,855
------- -------
Deferred income tax liabilities
-------------------------------
Unrealized gain on available for sale securities 5,410 4,114
Depreciation 377 337
Other 79 172
------- -------
5,866 4,623
------- -------
Net deferred income tax (liabilities) assets $(1,620) $ 232
======= =======
16. COMMITMENTS
The Bank has non-cancellable operating leases for branch offices. Rental
expenses paid during the years ended June 30, 2004, 2003 and 2002, were
approximately $343,000, $352,000 and $362,000, respectively. Future minimum
rental commitments are as follows:
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS (Cont'd.)
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. The Bank's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The outstanding loan commitments are as follows (in thousands):
June 30,
------------------------
2004 2003
------- -------
Mortgage loans $24,678 $26,511
Home equity loans 3,968 3,351
Commercial lines of credit 265 175
Construction loans 4,483 1,992
Purchase of participations 607 1,100
Construction loans in process 5,278 5,666
Undisbursed funds from approved
lines of credit 23,817 20,474
------- -------
$63,096 $59,269
======= =======
At June 30, 2004, the outstanding mortgage loan commitments include $22,980,000
for fixed rate loans with interest rates ranging from 4.38% to 6.50% and
$1,698,000 for adjustable rate loans with an initial rate ranging from 3.88% to
6.38%. Home equity loan commitments include $3,019,000 for fixed rate loans with
interest rates ranging from 4.63% to 6.25% and $949,000 for adjustable rate
loans with an initial rate of 4.00%. Commercial lines of credit commitments are
for loans with interest rates ranging from 0.50% to 1.00% above the prime rate
published in the Wall Street Journal. Construction loan commitments are for
loans with interest rates ranging from 1.00% to 1.50% above the prime rate
published in the Wall Street Journal. Commitments to purchase participations are
for loans at a fixed rate, set at the funding date, ranging from 1.35% to 1.36%
above the Federal Home Loan Bank of New York CIP advance rate for ten year or 15
year advances. Undisbursed funds from approved lines of credit are adjustable
rate loans with interest rates ranging from 1.00% below to 2.00% above the prime
rate published in the Wall Street Journal.
At June 30, 2003, the outstanding mortgage loan commitments include $20,334,000
for fixed rate loans with interest rates ranging from 4.50% to 6.75% and
$6,177,000 for adjustable rate loans with an initial rate ranging from 4.25% to
7.00%. Home equity loan commitments include $2,664,000 for fixed rate loans with
interest rates ranging from 4.25% to 6.50% and $687,000 for adjustable rate
loans with an initial rate of 4.25%. Commercial lines of credit commitments are
for loans with interest rates ranging from 1.00% to 1.50% above the prime rate
published in the Wall Street Journal. Construction loan commitments are for
loans with interest rates ranging from 1.00% to 1.50% above the prime rate
published in the Wall Street Journal. Commitments to purchase participations are
for loans at a fixed rate, set at the funding date, ranging from 1.35% to 1.60%
above the Federal Home Loan Bank of New York CIP advance rate for ten year
advances, or the prime rate published in the Wall Street Journal on the
fifteenth day of the month. Undisbursed funds from approved lines of credit are
adjustable rate loans with interest rates ranging from 1.00% to 1.50% above the
prime rate published in the Wall Street Journal.
F - 34
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS (Cont'd.)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counterparty.
The Bank has established an overnight line of credit and companion (DRA)
commitment, each in the amount of $50,000,000, with the Federal Home Loan Bank
of New York, which expire on December 15, 2004. As of June 30, 2004, no funds
were drawn against these credit lines.
At June 30, 2004, the Bank has commitments for building improvements in the
amount of $1,477,000. In addition, the Bank also has, in the normal course of
business, commitments for servicers and supplies. Management does not anticipate
losses on any of these transactions.
The Company and subsidiaries are also party to litigation which arises primarily
in the ordinary course of business. In the opinion of management, the ultimate
disposition of such litigation should not have a material adverse effect on the
consolidated financial position of the Company.
F-35
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair value of financial instruments are as
follows:
June 30,
---------------------------------------------------------------
2004 2003
----------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets (In Thousands)
----------------
Cash and cash equivalents $ 39,488 $ 39,488 $ 325,657 $ 325,657
Securities available for sale 41,564 41,564 37,840 37,840
Investment securities held to maturity 435,870 428,775 287,321 293,578
Loans receivable 505,794 510,437 509,161 522,115
Mortgage-backed securities held to maturity 771,353 772,710 681,619 704,874
Interest receivable 9,861 9,861 8,479 8,479
Financial liabilities
---------------------
Deposits 1,537,510 1,540,029 1,613,684 1,621,335
Advances from FHLB 94,234 95,217 75,749 81,932
Stated Stated
Contract Estimated Contract Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Commitments (In Thousands)
-----------
To originate loans $ 33,394 $ 33,394 $ 32,029 $ 32,029
To participate in loans 607 607 1,100 1,100
Unused lines of credit 23,817 23,817 20,474 20,474
Loans in process 5,278 5,278 5,666 5,666
Limitations
Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value
exists for a significant portion of the financial instrument, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instrument and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
F-36
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
The fair value estimates are based on existing on-and-of balance sheet
financial instruments without attempting the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Other significant assets and
liabilities that are not considered financial assets and liabilities
include premises and equipment, and advances from borrowers for taxes
and insurance. In addition, the ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of
the estimates.
Finally, reasonable comparability between financial institutions may
not be likely due to the wide range of permitted valuation techniques
and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of
uniform valuation methodologies introduces a greater degree of
subjectivity to these estimated fair values.
F-37
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PARENT ONLY FINANCIAL INFORMATION
Kearny Financial Corp. operates its wholly owned subsidiary, Kearny Federal
Savings Bank and its wholly owned subsidiaries. The consolidated earnings of the
subsidiaries are recognized by the Company using equity method of accounting.
Accordingly, the consolidated earnings of the subsidiaries are recorded as
increase in the Company's investment in the subsidiaries. The following are the
condensed financial statements for Kearny Financial Corp. (Parent Company only)
as June 30, 2004 and 2003, and for each of the years in the three-year period
ended June 30, 2004.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
June 30,
-------------------
2004 2003
-------- --------
(In Thousands)
Assets
------
Cash and amounts due from depository
institutions $ 1,234 $ 1,367
Securities available for sale 1,104 1,046
Accrued interest receivable 3 3
Investment in subsidiaries 291,985 225,790
Deposit for acquisition of West Essex Bancorp, Inc. - 67,853
Other assets 283 677
-------- --------
$294,609 $296,736
======== ========
Liabilities
-----------
Due to subsidiaries $ 1,104 $ 953
Other liabilities - 114
Minority interest in consolidated subsidiaries - 17,336
Stockholders' equity (A) 293,505 278,333
-------- --------
$294,609 $296,736
======== ========
(A) At June 30, 2004 and 2003, the Company was wholly owned by Kearny
MHC, a Mutual Holding Company.
F-38
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
CONDENSED STATEMENTS OF INCOME
Year Ended June 30,
--------------------------------
2004 2003 2002
-------- -------- --------
(In Thousands)
Interest income $ 110 $ 86 $ 103
Equity in undistributed earnings of
the subsidiaries 13,442 5,256 16,804
-------- -------- --------
13,552 5,342 16,907
-------- -------- --------
Directors' fees 67 32 -
Merger expenses 592 1,176 179
Other expenses - 74 288
-------- -------- --------
659 1,282 467
-------- -------- --------
Income before minority interest and
income taxes 12,893 4,060 16,440
Minority interest, net of income taxes - (4,844) 3,140
Income taxes (benefit) expense (4) 5 (50)
-------- -------- --------
Net income $ 12,897 $ 8,899 $ 13,350
======== ======== ========
F-39
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended June 30,
--------------------------------
2004 2003 2002
-------- -------- --------
(In Thousands)
Cash flows from operating activities:
Net income $ 12,897 $ 8,899 $ 13,350
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Equity in undistributed earnings
of the subsidiaries (13,442) 89,030 (16,804)
Amortization of premiums 2 4 5
Decrease in accrued interest receivable - 40 5
Decrease in loan receivable - 961 2,224
Other assets 394 (79) 152
Other liabilities 16 953 114
Minority interest in consolidated subsidiaries - (4,764) 298
-------- -------- --------
Net cash (used in) provided by operating activities (133) 95,044 (656)
-------- -------- --------
Cash flows from investing activities:
Purchase of Pulaski minority interest - (26,433) -
Deposit for acquisition of West Essex minority interest - (67,853) -
-------- -------- --------
Net cash used in investment activities - (94,286) (2,530)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (133) 758 (656)
Cash and cash equivalents - beginning 1,367 609 1,265
-------- -------- --------
Cash and cash equivalents - ending $ 1,234 $ 1,367 $ 609
======== ======== ========
Supplemental disclosure:
Minority interest in consolidated subsidiaries $ 17,336 $ - $ -
======== ======== ========
Goodwill - West Essex acquisition $ 50,517 $ - $ -
======== ======== ========
Deposit for acquisition of West Essex $(67,853) $ - $ -
======== ======== ========
F-40
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. STOCK OFFERING
On June 7, 2004, the Board of Directors of the Company and the Bank adopted a
plan of stock issuance pursuant to which the Company will sell common stock
representing a minority ownership of the estimated pro forma market value of the
Company which will be determined by an independent appraisal, to eligible
depositors of the Bank in a subscription offering and, if necessary, to the
general public of the community and/or in a syndicated offering. The majority of
the common stock will be owned by Kearny MHC, (a mutual holding company). The
plan is subject to approval of the Office of Thrift Supervision.
Following the sale of commons tock, all depositors who had membership or
liquidation rights with respect to the Bank as of the effective date of the
transaction will continue to have such rights solely with respect to the Mutual
Holding Company as along as they continue to hold deposit accounts with the
Bank. In addition, all persons who become depositors of the Bank subsequent to
the date of the transaction will have such membership and liquidation rights
with respect to the holding company. Borrowers of the Bank as of the date of the
transaction will have the same membership rights in the holding company that
they had in the Bank immediately prior to the date of the transaction as long as
their existing borrowings remain outstanding.
Cost incurred in connection with the offering will be recorded as reduction of
the proceeds from offering. If the transaction is not consummated, all cost
incurred in connection with the transaction will be expensed. At June 30, 2004,
approximately $88,000 in conversion costs have been incurred and are included in
other assets.
20. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effects of the method used on reported
results.
On March 31, 2004, the FASB published an Exposure Draft, "Share-Based Payment",
an Amendment of FASB Statements No. 123 and 95 (the "Exposure Draft"). The FASB
is proposing, among other things, amendments to SFAS No. 123 and thus, the
manner in which share-based compensation, such as stock options, will be
accounted for by both public and non-public companies. For public companies, the
cost of employee services received in exchange for equity instruments including
options and restricted stock awards generally would be measured at fair value at
the grant date. The grant-date fair value would be estimated using
option-pricing models adjusted for the unique characteristics of those options
and instruments, unless observable market prices for the same or similar options
are available. The cost would be recognized over the requisite service period,
often the vesting period. The cost of employee services received in exchange for
liabilities would be measured initially at the fair value, rather than the
previously allowed intrinsic value under APB Opinion No. 25, Accounting for
Stock Issued to Employees, of the liabilities and would be remeasured
subsequently at each reporting date through settlement date.
F - 41
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. RECENT ACCOUNTING PRONOUNCEMENTS (Cont'd.)
The proposed changes in accounting would replace existing requirements under
SFAS No. 123, "Accounting for Stock-Based Compensation", and would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25, which did not require companies to expense options. Under the terms of
the Exposure Draft, the accounting for similar transactions involving parties
other than employees or the accounting for employee stock ownership plans that
are subject to American Institute of Certified Public Accountants ("AICPA")
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans", would remain unchanged.
The Exposure Draft provides that the proposed statement would be applied to
public entities prospectively for fiscal years beginning after December 15,
2004, as if all share-based compensation awards vesting, granted, modified, or
settled after December 15, 1994 had been accounted for using the fair
value-based method of accounting. The FASB is soliciting comments on the
Exposure Draft and is expected to issue the final statement in the fourth
quarter of 2004.
The aforementioned pronouncements related to stock-based compensation have no
effect on the Company's historical financial statements as the Company has not
issued any stock-based compensation. The management has not completed an
analysis of the potential effects of this statement on our future financial
statements. However, the Company intends to account for future stock-based
compensation using the intrinsic value method under APB Opinion No. 25,
providing such method is permitted at the time stock-based compensation is
granted.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after September 30, 2003, and for hedging relationships designated
after September 30, 2003. The guidance should be applied prospectively. The
provisions of this statement that relate to SFAS No. 133, "Implementation
Issues," that have been effective for fiscal quarters that began prior to
September 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist should be applied to existing contracts as well as new contracts entered
into after September 30, 2003. The adoption of this statement did not have a
material effect on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Such instruments may have
been previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after September
15, 2003. The adoption of this statement did not have a material effect on the
Company's financial position.
F - 42
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. RECENT ACCOUNTING PRONOUNCEMENTS (Cont'd.)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose: the nature of the guarantee,
including the approximate term of the guarantee, how the guarantee arose, and
the events or circumstances that would require the guarantor to perform under
the guarantee; the maximum potential amount of future payments under the
guarantee; the carrying amount of the liability, if any, for the guarantor's
obligations under the guarantee; and the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to recover
the amounts paid under the guarantee. This interpretation also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the obligations it has undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
objective of the initial measurement of that liability is the fair value of the
guarantee at its inception. The initial recognition and initial measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this interpretation did not have a material
effect on Company's financial position or results of operations.
In December 2003, the FASB issued a revision to Interpretation 46,
"Consolidation of Variable Interest Entities," which established standards for
identifying a variable interest entity ("VIE") and for determining under what
circumstances a VIE should be consolidated with its primary beneficiary.
Application of this Interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers must
apply this Interpretation to all other types of VIEs at the end of the first
reporting period ending after December 15, 2004. The adoption of this
Interpretation has not and is not expected to have a material effect on
Company's financial position or results of operations.
F - 43
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which the offer or solicitation would be unlawful. The affairs of Kearny
Financial Corp. and its subsidiaries may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
KEARNY FINANCIAL CORP.
Holding Company for Kearny Federal Savings Bank
Up to 16,387,500 Shares of Common Stock
(Subject to Increase to up to 18,845,625 Shares)
PROSPECTUS
Sandler O'Neill & Partners, L.P.
______________________, 2004
Until the later of _____________, 2004, or 25 days after commencement of the
offering, all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as part of this
Registration Statement are as follows:
(a) Exhibits:
1.1 Form of Sales Agency Agreement with Sandler O'Neill & Partners, L.P.*
1.2 Agreement for Records Management Services with Sandler O'Neill & Partners, L.P.*
2 Plan of Stock Issuance
3(i) Charter of Kearny Financial Corp.*
3(ii) Bylaws of Kearny Financial Corp.*
4 Specimen Stock Certificate of Kearny Financial Corp.*
5 Opinion of Malizia Spidi & Fisch, PC regarding legality of securities registered
8.1 Federal Tax Opinion of Malizia Spidi & Fisch, PC*
8.2 State Tax Opinion of Radics & Co., LLC*
10.1 Employment Agreement between Kearny Federal Savings Bank and John N. Hopkins*
10.2 Employment Agreement between Kearny Federal Savings Bank and Allan Beardslee*
10.3 Employment Agreement between Kearny Federal Savings Bank and Albert E.
Gossweiler*
10.4 Employment Agreement between Kearny Federal Savings Bank and Sharon Jones*
10.5 Employment Agreement between Kearny Federal Savings Bank and William C.
Ledgerwood*
10.6 Employment Agreement between Kearny Federal Savings Bank and Erika Sacher*
10.7 Employment Agreement between Kearny Federal Savings Bank and Patrick M. Joyce*
10.8 Directors Consultation and Retirement Plan*
10.9 Benefit Equalization Plan*
10.10 Benefit Equalization Plan for Employee Stock Ownership Plan
23.1 Consent of Radics & Co., LLC
23.2 Consent of RP Financial, LC*
23.3 Consent of Malizia Spidi & Fisch, PC (contained in its opinions filed as Exhibits 5 and
8.1)
24 Power of Attorney (set forth on the signature page)
99.1 Letter of RP Financial, LC as to the value of subscription rights*
99.2 Conversion Valuation Appraisal Report prepared by RP Financial, LC
99.3 Marketing Materials
99.4 Stock Order Form
99.5 Prospectus Supplement for participants in the Kearny Federal Savings Bank Employees'
Savings and Profit Sharing Plan
* Previously filed.
(b) Financial Statement Schedules:
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or the notes thereto.
II-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Kearny, New Jersey on
October 27, 2004.
KEARNY FINANCIAL CORP.
By: /s/ John N. Hopkins
-------------------------------------
John N. Hopkins
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on October 27, 2004.
/s/ John N. Hopkins /s/ John J. Mazur, Jr. *
------------------------------------------------ ------------------------------------------------
John N. Hopkins John J. Mazur, Jr.
President, Chief Executive Officer and Director Chairman of the Board
(Principal Executive Officer)
/s/ Theodore J. Aanensen * /s/ Joseph P. Mazza *
------------------------------------------------ ------------------------------------------------
Theodore J. Aanensen Joseph P. Mazza
Director Director
/s/ Matthew T. McClane * /s/ John F. McGovern *
------------------------------------------------ ------------------------------------------------
Matthew T. McClane John F. McGovern
Director Director
/s/ Henry S. Parow * /s/ John F. Regan *
------------------------------------------------ ------------------------------------------------
Henry S. Parow John F. Regan
Director Director
/s/ Edward T. Rushforth * /s/ William C. Ledgerwood *
------------------------------------------------ ------------------------------------------------
Edward T. Rushforth William C. Ledgerwood
Director Senior Vice President, Treasurer and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ Albert E. Gossweiler *
------------------------------------------------
Albert E. Gossweiler
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
* Signed pursuant to power of attorney
II-2
KEARNY MHC
KEARNY FINANCIAL CORP.
KEARNY FEDERAL SAVINGS BANK
Kearny, New Jersey
PLAN OF STOCK ISSUANCE
Adopted by the Board of Directors
on
June 7, 2004
and subsequently amended
PLAN OF STOCK ISSUANCE
KEARNY MHC
KEARNY FINANCIAL CORP.
KEARNY FEDERAL SAVINGS BANK
TABLE OF CONTENTS
PAGE
1. Introduction.................................................... 1
2. Definitions..................................................... 1
3. Conditions to Implementation of Stock Offering.................. 4
4. Stock Offering Documents........................................ 5
5. Stock Offering.................................................. 5
6. Subscription Rights of Eligible Account Holders
(First Priority).............................................. 6
7. Subscription Rights of Employee Plans (Second Priority)......... 7
8. Supplemental Eligible Account Holders (Third Priority).......... 7
9. Community Offering.............................................. 8
10. Syndicated Community Offering................................... 9
11. Limitation on Purchases......................................... 9
12. Payment for Common Stock........................................ 11
13. Manner of Exercising Subscription Rights Through Order Forms.... 12
14. Undelivered, Defective or Late Order Forms:
Insufficient Payment.......................................... 13
15. Restrictions on Resale or Subsequent Disposition................ 13
16. Charter and Bylaws of the Mutual Holding Company,
the Stock Holding Company and the Bank........................ 14
17. Conversion of Mutual Holding Company to Stock Form.............. 14
18. Payment of Dividends and Repurchase of Stock.................... 15
19. Residents of Foreign Countries and Certain States............... 15
20. Registration and Market Making.................................. 15
21. Expenses of Offering............................................ 15
22. Amendment or Termination of the Plan............................ 15
23. Miscellaneous................................................... 16
PLAN OF STOCK ISSUANCE
1. INTRODUCTION
Pursuant to a Plan of Reorganization from a Federal Mutual Savings Bank
to a Federal Mutual Holding Company, Kearny Federal Savings Bank (the "Bank")
converted to the mutual holding company form of organization in 2001 with no
stock offering. Pursuant to the Mutual Holding Company Plan of Reorganization,
the Bank became a federal stock savings bank, which had all of its stock owned
by Kearny Financial Corp. (the "Stock Holding Company") a federal stock holding
company, which had all of its stock owned by Kearny MHC (the "Mutual Holding
Company"), a federal mutual holding company. On June 7, 2004, the Board of
Directors of the Bank, the Stock Holding Company and the Mutual Holding Company,
by at least a two-thirds vote, resolved to adopt (and subsequently amended) this
Plan of Stock Issuance (the "Plan"), pursuant to which the Stock Holding Company
proposes, pursuant to the laws of the United States of America and the Rules and
Regulations of the Office of Thrift Supervision ("OTS"), to conduct a stock
offering of up to but less than 50% of the aggregate of the total voting stock
of the Stock Holding Company.
In adopting the Plan, the Board of Directors has determined that the
Stock Offering is advisable and in the best interest of the Bank, the Stock
Holding Company, the Mutual Company and its members. The Stock Offering will
enable the Stock Holding Company and the Bank to increase capital through the
issuance of capital stock without undertaking a full conversion from the mutual
to the stock form of organization. The Stock Offering will not foreclose the
opportunity to effect a conversion of the Mutual Holding Company from the mutual
to the stock form of organization in the future. The Stock Offering will
significantly increase capital and enable the Bank to further grow through
internal expansion, the possible acquisition of other assets, branch offices,
financial institutions, possible diversification into other related financial
service activities and other purposes and will further enhance the Bank's
ability to render services to the public. The mutual holding company structure
also will allow the Bank to minimize over-capitalization by providing the
flexibility to raise capital through the issuance of stock in a manner designed
to meet the Bank's growth needs, rather than in a single stock offering as
required in a standard mutual-to-stock conversion.
Pursuant to Section 10(o) of the Home Owners' Loan Act, as amended 12
U.S.C. 1467(a)(0), ("HOLA"), the Stock Offering will be accomplished in
accordance with the procedures contained in this Plan, the Rules and Regulations
of the OTS, and as otherwise may be required by the OTS.
2. DEFINITIONS
As used in this Plan, the terms set forth below have the following
meanings:
Account Holder: The term Account Holder means any Person holding a
Savings Account in the Bank.
Acting in Concert: The Term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel
action towards a common goal whether or not pursuant to an express
agreement; (ii) a combination or pooling of voting or other interests
in the securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise; or (iii)
a person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert
with any person or company who is also acting in concert with that
other party, except that any tax-qualified employee stock benefit plan
will not be deemed to be acting in concert with its trustee or a person
who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the plan will be
aggregated.
Associate: The term Associate when used to indicate a relationship with
any person, means[(i) any]: (1) A corporation or organization (other
than the [Bank or a majority-owned subsidiary or a majority-owning
parent corporation of the Bank) of which such person is an officer or
partner or is] Stock Holding Company or any of its majority-owned
subsidiaries) if the person is a senior officer or partner, or
beneficially owns, directly or indirectly, [the beneficial owner of] 10
percent or more of any class of equity securities[, (ii) any] of the
corporation or organization. (2) A trust or other estate [in which
such] if the person has a substantial beneficial interest [or as to
which such person serves as] in the trust or estate or is a trustee or
[in a similar] fiduciary [capacity except that for the ]of the trust or
estate. For purposes of Sections 7 and 11 hereof, [the term "Associate"
does not include any Tax-Qualified Employee Stock Benefit Plan or any
Tax-Qualified Employee Stock Benefit Plan in which a person ]a person
who has a substantial beneficial interest [or serves as a trustee or in
a similar fiduciary capacity, and except that, for] in a tax-qualified
or non-tax-qualified employee stock benefit plan, or who is a trustee
or a fiduciary of the plan, is not an associate of the plan. For
purposes of aggregating total shares [that may be held by Officers and
Directors the term "Associate" does not include any Tax-Qualified
Employee Stock Benefit Plan, and (iii) any relative or spouse of such
person, or any relative of such spouse, who has the same home as such
person or who is a Director or Officer of the Bank or], the Bank's
tax-qualified employee stock benefit plan is not an associate of a
person. (3) Any person who is related by blood or marriage to such
person and (i) who lives in the same home as the person; or (ii) who is
a director or senior officer of the Stock Holding Company, or any of
its [parents or] subsidiaries.
Bank: Kearny Federal Savings Bank, a federal stock savings bank.
Capital Stock: Any and all authorized stock of the Stock Holding
Company.
Common Stock: Common stock, par value $0.10, to be issued by the Stock
Holding Company in the Minority Stock Offering.
Community Offering: The term Community Offering, if applicable, means
the offering for sale to certain members of the general public directly
by the Stock Holding Company, of any shares not subscribed for in the
Subscription Offering.
Director: A member of the Board of Directors of the Stock Holding
Company.
Effective Date: The date of completion of the Offering in accordance
with this Plan and the Rules and Regulations of the OTS.
Eligible Account Holder: The term Eligible Account Holder means any
Person holding a Qualifying Deposit in a Savings Account at the Bank
on the Eligibility Record Date. Only the name(s) of the Person(s)
listed on the account as of the Eligibility Record Date (or a
successor
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entity or estate) is an Eligible Account Holder. Any Person(s) added
to a Savings Account after the Eligibility Record Date is not an
Eligible Account Holder.
Eligibility Record Date: The term Eligibility Record Date means the
date for determining Eligible Account Holders in the Bank as of the
close of business on March 31, 2003.
Employee: A person who is an Employee of the Bank at the date of the
Offering.
Employee Plans: The term Employee Plans means the Tax-Qualified
Employee Stock Benefit Plans, including the Employee Stock Ownership
Plan, approved by the Board of Directors of the Bank or Stock Holding
Company.
FDIC: Federal Deposit Insurance Corporation.
Independent Appraiser: The term Independent Appraiser means an
appraiser retained to prepare an appraisal of the pro forma market
value of the Common Stock.
Independent Valuation: The term Independent Valuation means the
estimated pro forma market value of the Common Stock as determined by
the Independent Appraiser prior to the Subscription Offering and as it
may be amended from time to time thereafter.
Local Community: The term Local Community means the counties in which
the Bank has an office and the counties in the Bank's Community
Reinvestment Act assessment area.
Majority Interest: Greater than fifty percent (50%) of the combined
voting power or value of all classes of stock of the Stock Holding
Company.
Members: All persons or entities who qualify as members of the Mutual
Holding Company pursuant to its Charter and Bylaws.
Minority Stock Offering or Offering: Any offering of Capital Stock of
the Stock Holding Company to persons other than the Mutual Holding
Company of up to but less than 50% in the aggregate of the total
common stock of the Stock Holding Company.
Mutual Holding Company: Kearny MHC, a federal mutual holding company,
which currently owns 100% of the stock of the Stock Holding Company.
Officer: An executive officer of the Mutual Holding Company, Stock
Holding Company or Bank, which includes the President, Chief Executive
Officer, Senior Vice Presidents in charge of principal business
functions, and any other person participating in major policy making
functions.
Order Form: The term Order Form means any form together with attached
cover letter, sent by the Bank to any Person containing among other
things a description of the alternatives available to such Person
under the Plan and by which any such Person may make elections
regarding subscriptions for Common Stock in the Subscription and
Community Offerings.
OTS: Office of Thrift Supervision or any successor agency.
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Participants: The term Participants means the Eligible Account
Holders, Employee Plans and Supplemental Eligible Account Holders.
Person: An individual, a corporation, a partnership, an association, a
joint-stock company, a limited liability company, a trust, an
unincorporated organization, or a government or political subdivision
of a government.
Plan: This Plan of Stock Issuance as it exists on the date hereof and
as it may hereafter be amended in accordance with its terms.
Preferred Stock: Preferred Stock authorized pursuant to the Stock
Holding Company's stock charter.
Purchase Price: The term Purchase Price means the per share price at
which the Common Stock will be sold in accordance with the terms
hereof.
Qualifying Deposit: The term Qualifying Deposit means the balance of
each Savings Account of $50 or more in the Bank at the close of
business on the Eligibility Record Date or Supplemental Eligibility
Record Date. Savings Accounts with total deposit balances of less than
$50 shall not constitute a Qualifying Deposit.
SAIF: The Savings Association Insurance Fund, which is administered by
the FDIC.
Savings Account: The term Savings Account includes any withdrawable
account as defined in the Rules and Regulations of the OTS, including
certificates of deposit and demand accounts as defined in the Rules
and Regulations of the OTS.
SEC: The Securities and Exchange Commission.
Stock Holding Company: Kearny Financial Corp., federal capital stock
corporation that owns all of the Bank's common stock and which will be
majority owned by the Mutual Holding Company so long as the Mutual
Holding Company is in existence.
Subscription Offering: The term Subscription Offering means the
offering of Common Stock of the Stock Holding Company for purchase
through Order Forms to Participants.
Supplemental Eligibility Record Date: The term Supplemental
Eligibility Record Date means the close of business on the last day of
the calendar quarter preceding the approval of the Plan by the OTS.
Supplemental Eligible Account Holder: The term Supplemental Eligible
Account Holder means a holder of a Qualifying Deposit in the Bank
(other than an officer or director or their Associates) at the close
of business on the Supplemental Eligibility Record Date.
Tax-Qualified Employee Stock Benefit Plan: The term Tax-Qualified
Employee Stock Benefit Plan means any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock
bonus plan, profit-sharing plan or other plan, which, with its related
trust, meets the requirements to be "qualified" under Section 401 of
the Internal Revenue Code.
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Voting Stock: Common or preferred stock, or any other type of equity
security, including (without limitation) other securities that are
convertible into common or preferred stock, having voting power for the
election of directors or management of the Stock Holding Company.
3. CONDITIONS TO COMPLETION OF STOCK OFFERING
Completion of the Stock Offering is expressly conditioned upon the
following:
1. The Bank meets with the OTS to disclose the intent to adopt
the Plan.
2. The Plan is approved by at least two-thirds of the Boards of
Directors;
3. A Notice of the Stock Offering is filed with and approved by
the OTS;
4. Receipt of a favorable ruling of the Internal Revenue Service
("IRS") or an opinion of the Bank's tax advisor with respect
to federal taxation to the effect that the Stock Offering will
not be a taxable event to the Mutual Holding Company, the
Stock Holding Company, the Bank or the Bank's depositors; and
5. Receipt of either a private letter ruling of the New Jersey
Department of Revenue or an opinion of the Bank's tax advisor
with respect to state taxation to the effect that completion
of the Stock Offering will not be a taxable event to the
Mutual Holding Company, the Stock Holding Company, the Bank or
to the Bank's depositors.
6. The stock offering prospectus of the Stock Holding Company is
declared effective by the SEC.
4. STOCK OFFERING DOCUMENTS
The Stock Holding Company and the Bank intend to commence a Minority
Stock Offering within ten (10) days of the satisfaction of all of the conditions
of Section 3 of this Plan. The Stock Holding Company and the Bank shall not
distribute the final prospectus until such prospectus has been approved for use
by the OTS and declared effective by the SEC.
5. STOCK OFFERING
A. Number of Shares. The number of shares and price per share of Common
Stock to be offered pursuant to the Plan shall be initially determined by the
Boards of Directors of the Stock Holding Company and the Bank in conjunction
with the determination of the Independent Appraiser. The number of shares to be
issued will be on a minimum-maximum basis within a range determined by the Board
of Directors (the "Offering Range") and may be adjusted at or immediately
subsequent to the completion of the Minority Stock Offering without notifying
Participants and without a resolicitation of subscriptions. The number of shares
to be offered or Offering Range may be subsequently adjusted at or immediately
subsequent to the completion of the Minority Stock Offering for any reason,
including a change in the appraisal. The total number of shares of Common Stock
that may be issued to persons other than the Mutual Holding Company at the close
of the Minority Stock Offering must be less than 50% of the issued and
outstanding shares of the Stock Holding Company.
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B. Independent Evaluation and Purchase Price of Shares. All shares of
Common Stock sold in the Minority Stock Offering shall be sold at a uniform
price per share, referred to in this Plan as the "Purchase Price". The Purchase
Price and number of shares shall be determined by the Board of Directors of the
Stock Holding Company and the Bank immediately prior to the simultaneous
completion of all such sales contemplated by this Plan on the basis of the
estimated pro forma market value of the Stock Holding Company and the Bank and
the fact that the shares offered represent a minority interest in the Stock
Holding Company (the "Independent Evaluation"). Therefore, the Independent
Evaluation and the resulting Purchase Price may reflect a discount to the
valuation applied to a standard mutual-to-stock conversion. The aggregate
Purchase Price for the Common Stock will not be inconsistent with such market
value of the Stock Holding Company and the Bank. The Independent Evaluation of
the Stock Holding Company and the Bank shall be determined for such purpose by
an Independent Appraiser on the basis of such appropriate factors as are not
inconsistent with OTS regulations. The total amount of Common Stock that may be
issued to persons other than the Mutual Holding Company must be less than 50% of
the outstanding stock of the Stock Holding Company. The Common Stock to be
issued in the Minority Stock Offering shall be fully paid and nonassessable.
C. Minority Ownership Percentage. Based upon the Independent
Appraiser's valuation of the Stock Holding Company and the Bank as updated prior
to the commencement of the Minority Stock Offering, the Board of Directors will
establish the minimum and maximum ownership percentage applicable to the
Minority Stock Offering ("Minority Ownership Range"). The final minority
ownership percentages or interest will be determined by the Stock Holding
Company and the Bank as follows: (a) the product of (x) the total number of
shares of Common Stock to be issued and sold and (y) the Purchase Price shall be
by divided by (b) the estimated aggregate pro forma market value of the Stock
Holding Company and the Bank immediately after the Minority Stock Offering as
determined by the Independent Appraiser, expressed in terms of a specific
aggregate dollar amount upon the closing of the Minority Stock Offering or sale
of all the Common Stock.
D. Method of Offering Shares. Subject to the discretion of the Stock
Holding Company and the Bank and the limitations set forth in Section 11, the
opportunity to purchase Common Stock will be given, at no cost, in accordance
with Sections 6, 7, 8, 9 and 10 of the Plan and pursuant to priorities
established by the Board of Directors in accordance with the Plan. The Minority
Stock Offering shall be conducted on a minimum-maximum basis, setting forth the
minimum and maximum amount of stock that must be offered and sold before
closing. The Stock Holding Company and the Bank may elect to pay fees on either
a fixed fee or commission basis or combination thereof to an investment bank
firm which assists it in the sale of the Common Stock in the Minority Stock
Offering.
The Stock Holding Company and the Bank may also elect to offer to pay
fees on a per share basis to brokers who assist Persons in determining to
purchase shares in the Syndicated Public Offering and whose broker's name
appears on the purchaser's Order Form.
6. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable subscription rights to subscribe for shares of Common Stock
equal to the greater of: (i) the maximum established for the Community Offering;
(ii) one-tenth of one percent of the Conversion Stock offered; or (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock offered by a fraction of which the
numerator is the amount of the Qualifying Deposit of such Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders but in no event greater than the maximum purchase
limitation specified in Section
6
11 hereof. All such purchases are subject to the maximum and minimum purchase
limitations specified in Section 11 and are exclusive of an increase in the
total number of shares issued due to an increase in the maximum of the Offering
Range of up to 15%. Only a Person(s) with a Qualifying Deposit as of the
Eligibility Record Date (or a successor entity or estate) shall receive
subscription rights. Any Person(s) added to a Savings Account after the
Eligibility Record Date is not an Eligible Account Holder.
B. In the event that Eligible Account Holders exercise Subscription
Rights for a number of shares of Common Stock in excess of the total number of
such shares eligible for subscription, the shares of Common Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Common Stock
equal to the lesser of 100 shares or the number of shares subscribed for by the
Eligible Account Holder. Any shares remaining after that allocation will be
allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
C. Subscription rights as Eligible Account Holders received by
Directors and Officers and their Associates which are based on deposits made by
such persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
D. Kearny Federal Savings Charitable Foundation (the "Charitable
Foundation"), as a Person with a Qualifying Deposit as of the Eligibility Record
Date and thus an Eligible Account Holder, shall receive without payment
nontransferable subscription rights to subscribe for shares of Common Stock and
may elect to subscribe for shares in Tier 1 as an Eligible Account Holder. The
Charitable Foundation shall not be deemed to be an Associate of or a person
Acting in Concert with any Director or Officer of the Mutual Holding Company,
the Stock Holding Company or the Bank.
7. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
Subject to the availability of sufficient shares after filling
subscription orders of Eligible Account Holders under Section 6, the Employee
Plans shall receive without payment nontransferable subscription rights to
purchase in the Subscription Offering the number of shares of Common Stock
requested by such Plans, subject to the purchase limitations set forth in
Section 11. The Employee Plans may, in whole or in part, fill their orders
through open market purchases subsequent to the closing of the offering.
The Employee Plans shall not be deemed to be Associates of or persons
Acting in Concert with any Director or Officer of the Mutual Holding Company,
the Stock Holding Company or the Bank.
A. In the event that the Eligibility Record Date is more than 15 months
prior to the date of the latest amendment to the application filed prior to OTS
approval, then, and only in that event, each Supplemental Eligible Account
Holder shall receive, without payment, nontransferable subscription rights
entitling such Supplemental Eligible Account Holder to purchase that number of
shares of Common Stock
7
which is equal to the greater of: (i) the maximum purchase limitation
established for the Community Offering; (ii) one-tenth of 1% of the Common Stock
Offered; and (iii) or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Supplemental Eligible Account Holder and the denominator is the
total amount of the Qualifying Deposits of all Supplemental Eligible Account
Holders. All such purchases are subject to the maximum and minimum purchase
limitations in Section 11 and are exclusive of an increase in the total number
of shares issued due to an increase in the maximum of the Offering Range of up
to 15%. Any Person(s) added to a Savings Account after the Supplemental
Eligibility Record Date is not a Supplemental Account Holder.
B. Subscription rights received pursuant to this Category shall be
subordinated to the subscription rights received by Eligible Account Holders and
by the Employee Plans.
C. Any subscription rights to purchase shares of Common Stock received
by an Eligible Account Holder in accordance with Section 6 shall reduce to the
extent thereof the subscription rights to be distributed pursuant to this
Section.
D. In the event of an oversubscription for shares of Common Stock
pursuant to this Section, shares of Common Stock shall be allocated among the
subscribing Supplemental Eligible Account Holders as follows:
(1) Shares of Common Stock shall be allocated so as to permit
each such Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares of Common Stock sufficient to make his
total allocation (including the number of shares of Common Stock, if
any, allocated in accordance with Section 6) equal to 100 shares of
Common Stock or the total amount of his subscription, whichever is
less.
(2) Any shares of Common Stock not allocated in accordance
with subparagraph (1) above shall be allocated among the subscribing
Supplemental Eligible Account Holders on an equitable basis, related to
the amounts of their respective Qualifying Deposits as compared to the
total Qualifying Deposits of all subscribing Supplemental Eligible
Account Holders.
9. COMMUNITY OFFERING
If less than the total number of shares of Common Stock to be
subscribed for in the Minority Offering are sold in the Subscription Offering,
shares remaining may be made available for purchase in the Community Offering to
certain members of the general public.
The maximum amount of Common Stock that any Person may purchase in the
Community Offering, subject to the further limitations of Section 11 hereof (and
exclusive of an increase in the total number of shares issued due to an increase
in the Maximum of the Offering Range of up to 15%), shall not exceed $500,000.
The maximum amount may be decreased or increased to up to 5% of the total
offering of shares in the Minority Offering, subject to any required regulatory
approval but without notice to Participants, subject to the preferences set
forth in Section 11 of this Plan. In the Community Offering, if any, shares will
be available for purchase by the general public, and a preference may be given
to natural persons residing in the Local Community and second, to natural
persons residing in the State of New Jersey ("Community Purchasers").
8
If the Persons whose orders would otherwise be accepted, subscribe for
more shares than are available for purchase, the shares available to them will
be allocated among those persons submitting orders in the Community Offering up
to a maximum of 2% of the Common Stock offered in the Minority Offering and
thereafter remaining shares shall be allocated on an equal number of shares
basis per order until all orders have been filled. The Stock Holding Company and
the Bank may establish all terms and conditions of such offer in order to
allocate shares in an equitable manner as determined by the Board of Directors.
The Community Offering, if any, may commence simultaneously with,
during or subsequent to the completion of the Subscription Offering and if
commenced simultaneously with or during the Subscription Offering the Community
Offering may be limited to Community Purchasers. The Community Offering must be
completed within 45 days after the completion of the Subscription Offering
unless otherwise extended by the OTS.
The Bank and the Stock Holding Company, in their absolute discretion,
reserve the right to reject any or all orders in whole or in part which are
received in the Community Offering, at the time of receipt or as soon as
practicable following the completion of the Community Offering.
10. SYNDICATED COMMUNITY OFFERING
Any shares of Common Stock not sold in the Subscription Offering or in
the Community Offering, if any, may then be sold through the Underwriter to the
general public at the Purchase Price in a Syndicated Community Offering, subject
to such terms, conditions and procedures as may be determined by the Board of
Directors of the Bank and the Stock Holding Company, in a manner that will
achieve a wide distribution of the Common Stock and subject to the right of the
Bank and the Stock Holding Company, in their absolute discretion, to accept or
reject in whole or in part all subscriptions in the Syndicated Community
Offering. In the Syndicated Community Offering, if any, any person together with
any Associate or group of persons Acting in Concert may purchase up to the
maximum purchase limitation established for the Community Offering, subject to
the maximum and minimum purchase limitations specified in Section 11 and
exclusive of an increase in the total number of shares issued due to an increase
in the maximum of the Offering Range of up to 15%. Shares purchased by any
Person together with any Associate or group of persons Acting in Concert
pursuant to Section 9 shall be counted toward meeting the maximum purchase
limitation specified for this Section. The Bank may commence the Syndicated
Community Offering at any time after the commencement of the Subscription
Offering. It is expected that the Syndicated Community Offering, if any, will
commence just prior to, or as soon as practicable after, the termination of the
Subscription Offering. The Syndicated Community Offering shall be completed
within 45 days after the termination of the Subscription Offering, unless such
period is extended as provided above.
11. LIMITATION ON PURCHASES
The following limitations shall apply to all purchases of shares of
Common Stock in the Minority Stock Offering:
A. The maximum number of shares of Common Stock which may be purchased
in the Subscription Offering by any Person, or Persons through a single account,
in the First Priority and Third Priority shall not exceed $500,000 divided by
the Purchase Price.
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B. The number of shares of Common Stock which may be purchased by any
Person or group of persons Acting in Concert in the Community and/or Syndicated
Community Offering shall not exceed $750,000 divided by the Purchase Price.
C. The maximum number of shares of Common Stock which may be subscribed
for or purchased in all categories in the Minority Stock Offering by any Person
together with any Associate or group of persons Acting in Concert shall not
exceed [the lesser of] $750,000 divided by the Purchase Price per share, except
for Employee Plans, which in the aggregate may subscribe for up to 8% of the
shares of Common Stock issued in the Minority Stock Offering to persons other
than the Mutual Holding Company.
D. The maximum number of shares of Common Stock which may be purchased
in all categories in the Minority Stock Offering by Officers and Directors of
the Mutual Holding Company, the Stock Holding Company and the Bank and their
Associates in the aggregate shall not exceed 25% of the total number of shares
of Common Stock issued in the Minority Stock Offering.
E. A minimum of 25 shares of Common Stock must be purchased by each
Person purchasing shares in the Minority Stock Offering to the extent those
shares are available; provided, however, that the minimum number of shares
requirement will not apply if the number of shares of Common Stock purchased
times the price per share exceeds $500.
F. If the number of shares of Common Stock otherwise allocable pursuant
to Sections 6 through 10, inclusive, to any Person or that Person's Associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Common Stock allocated to each such Person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his Associates complies with the above maximums, and such maximum number of
shares shall be reallocated among that Person and his Associates as they may
agree, or in the absence of an agreement, in proportion to the shares subscribed
by each (after first applying the maximums applicable to each Person,
separately).
G. Depending upon market or financial conditions, the Board of
Directors of the Mutual Holding Company, the Stock Holding Company and the Bank,
without notification to Participants, may decrease or increase the purchase
limitations in this Plan, provided that the maximum purchase limitations may not
be increased to a percentage in excess of 5% of the Minority Stock Offering. If
the Mutual Holding Company, the Stock Holding Company and the Bank increases the
maximum purchase limitations, the Stock Holding Company is only required to
resolicit Persons who subscribed for the maximum purchase amount and may, in the
sole discretion of the Stock Holding Company, resolicit certain other large
subscribers. For purposes of this Section, the Directors of the Mutual Holding
Company, the Stock Holding Company and the Bank shall not be deemed to be
Associates or a group affiliated with each other or otherwise Acting in Concert
solely as a result of their being Directors of the Mutual Holding Company, the
Stock Holding Company and the Bank.
H. In the event of an increase in the total number of shares offered in
the Minority Stock Offering due to an increase in the maximum of the Offering
Range of up to 15% (the "Adjusted Maximum") the additional shares will be used
in the following order of priority: (i) to fill the Employees Plan's
subscription (unless the Employee Plans elect to purchase stock subsequent to
the offering in the open market); (ii) in the event that there is an
oversubscription at the Eligible Account Holder level, to fill unfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum
according to
10
Section 6; (iii) in the event that there is an oversubscription at the
Supplemental Eligible Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders exclusive of the Adjusted Maximum
according to Section 8; and (iv) to fill unfilled Subscriptions in the Community
Offering exclusive of the Adjusted Maximum.
I. Each Person purchasing Common Stock in the Minority Stock Offering
shall be deemed to confirm that such purchase does not conflict with the above
purchase limitations contained in this Plan.
J. For a period of three years following the Offering, no Officer,
Director or their Associates shall purchase, without the prior written approval
of the OTS, any outstanding shares of common stock of the Stock Holding Company,
except from a registered broker-dealer. This provision shall not apply to
negotiated transactions involving more than one percent of the outstanding
shares of common stock of the Stock Holding Company, the exercise of any options
pursuant to a stock option plan or purchases of common stock of the Stock
Holding Company, made by or held by any Tax-Qualified Employee Stock Benefit
Plan or Non-Tax Qualified Employee Stock Benefit Plan of the Stock Bank or Stock
Holding Company (including the Employee Plans) which may be attributable to any
Officer or Director. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any person acting on its behalf and the purchaser or his investment
representative. The term "investment representative" shall mean a professional
investment advisor acting as agent for the purchaser and independent of the
seller and not acting on behalf of the seller in connection with the
transaction.
12. PAYMENT FOR COMMON STOCK
All payments for Common Stock subscribed for in the Subscription and
Community Offering (if any), must be delivered in full to the Bank, together
with a properly completed and executed Order Form, on or prior to the expiration
date specified on the Order Form or purchase order, as the case may be, unless
such date is extended by the Bank; provided, however, that if the Employee Plans
subscribe for shares during the Subscription Offering, the Employee Plans will
not be required to pay for the shares at the time they subscribe but rather may
pay for such shares of Common Stock upon consummation of the Offering. The Bank
may make scheduled discretionary contributions to Employee Plans provided such
contributions do not cause the Bank to fail to meet its regulatory capital
requirement.
Notwithstanding the foregoing, the Bank and the Stock Holding Company
shall have the right, in their sole discretion, to permit institutional
investors to submit contractually irrevocable orders in the Community Offering
(if any), and to thereafter submit payment for the Common Stock for which they
are subscribing in the Community Offering (if any), at any time prior to the
completion of the Stock Offering.
Payment for Common Stock subscribed for shall be made [either by ]by
cash (if delivered in person), check or money order. Alternatively, subscribers
in the Subscription and Community Offering (if any) may pay for the shares
subscribed for by authorizing the Bank on the Order Form to make a withdrawal
from the subscriber's Savings Account at the Bank in an amount equal to the
purchase price of such shares. Such authorized withdrawal, whether from a
savings passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the subscriber's
Savings Account but may not be used by the subscriber until the Common Stock has
been sold or the 45-day period (or such longer period as may be approved by the
OTS) following the Subscription Offering has expired, whichever
11
occurs first. Thereafter, the withdrawal will be given effect only to the extent
necessary to satisfy the subscription (to the extent it can be filled) at the
Purchase Price per share. Interest will continue to be earned on any amounts
authorized for withdrawal until such withdrawal is given effect. Interest will
be paid by the Bank at not less than the annual passbook rate on payments for
Common Stock received by cash, money order or check. Such interest will be paid
from the date payment is received by the Bank until consummation or termination
of the Minority Offering. If for any reason the Minority Offering is not
consummated, all payments made by subscribers in the Minority Offering will be
refunded to them with interest. In case of amounts authorized for withdrawal
from Savings Accounts, refunds will be made by canceling the authorization for
withdrawal.
The Bank is prohibited by regulation from knowingly making any loans or
granting any lines of credit for the purchase of stock in the Stock Offering.
13. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the prospectus prepared by the Bank and
the Stock Holding Company has been approved by the OTS and declared effective by
the SEC, Order Forms will be distributed to the Participants at their last known
addresses appearing on the records of the Bank for the purpose of subscribing to
shares of Common Stock in the Subscription Offering and may be made available
for use in the Community Offering. Notwithstanding the foregoing, the Bank may
elect to send Order Forms only to those Persons who request them after such
notice as is approved by the OTS and is adequate to apprise the Participants of
the pendency of the Subscription Offering has been given.
Each Order Form will be preceded or accompanied by the Offering
Circular describing the Stock Holding Company, the Bank, the Common Stock and
the Subscription and Community Offering (if any). Each Order Form will contain,
among other things, the following:
A. A specified date by which all Order Forms must be received by the
Bank, which date shall be not less than twenty (20), nor more than forty-five
(45) days, following the date on which the Order Forms are mailed by the Bank,
and which date will constitute the termination of the Subscription Offering;
B. The purchase price per share for shares of Common Stock to be sold
in the Subscription and Community Offering (if any);
C. A description of the minimum and maximum number of shares of Common
Stock which may be subscribed for pursuant to the exercise of Subscription
Rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Common Stock for which such person
elects to subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received
a final copy of the prospectus, as the case may be, prior to execution of the
Order Form.
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of
12
Common Stock for which the recipient elects to subscribe in the Subscription
Offering (or by authorizing on the Order Form that the Bank withdraw said amount
from the subscriber's Savings Account at the Bank) to the Bank; and
G. A statement to the effect that the executed Order Form, once
received by the Bank, may not be modified or amended by the subscriber without
the consent of the Bank.
Notwithstanding the above, the Bank reserves the right in its sole
discretion to accept or reject orders received on photocopied or facsimilied
order forms or whose payment is to be made by wire transfer.
14. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
Bank by the United States Postal Service or the Bank is unable to locate the
addressee, (b) are not received back by the Bank or are received by the Bank
after the expiration date specified thereon, (c) are defectively filled out or
executed, (d) are not accompanied by the full required payment, or, in the case
of institutional investors in the Community Offering, by delivering irrevocable
orders together with a legally binding commitment to pay by cash, check, money
order or wire transfer the full amount of the purchase price prior to 48 hours
before the completion of the conversion for the shares of Common Stock
subscribed for (including cases in which Savings Accounts from which withdrawals
are authorized are insufficient to cover the amount of the required payment), or
(e) are not mailed pursuant to a "no mail" order placed in effect by the account
holder, the subscription rights of the person to whom such rights have been
granted will lapse as though such person failed to return the completed Order
Form within the time period specified thereon; provided, however, that the Bank
may, but will not be required to, waive any immaterial irregularity on any Order
Form or require the submission of corrected Order Forms or the remittance of
full payment for subscribed shares by such date as the Bank may specify. The
interpretation of the Bank of terms and conditions of the Plan and of the Order
Forms will be final, subject to the authority of the OTS.
15. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Common Stock purchased by Directors or Officers of the
Bank, the Stock Holding Company and the Mutual Holding Company in the Minority
Stock Offering shall be subject to the restriction that, except as provided in
Section 15B below, or as may be approved by the OTS, no interest in such shares
may be sold or otherwise disposed of for value for a period of one (1) year
following the date of purchase.
B. The restriction on disposition of shares of Common Stock set forth
in Section 15A above shall not apply to any disposition of such shares following
the death of the person to whom such shares were initially sold under the terms
of the Plan.
C. With respect to all shares of Common Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply;
(i) Each certificate representing shares restricted within the
meaning of Section 15A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
13
(ii) Instructions shall be issued to the stock transfer agent
to recognize or effect any transfer of any certificate or record of ownership of
any such shares in violation of the restriction on transfer; and
(iii) Any shares of capital stock of the Stock Holding Company
issued with respect to a stock dividend, stock split, or otherwise with respect
to ownership of outstanding shares of Common Stock subject to the restriction on
transfer hereunder shall be subject to the same restriction as is applicable to
such Common Stock.
16. CHARTER AND BYLAWS OF THE MUTUAL HOLDING COMPANY, THE STOCK
HOLDING COMPANY AND THE BANK
As part of the Offering, the existing Charter and Bylaws of the Mutual
Holding Company, the Stock Holding Company and the Bank shall remain unchanged.
17. CONVERSION OF MUTUAL HOLDING COMPANY TO STOCK FORM
Once the Offering is completed, the Mutual Holding Company may, if
approved by the OTS, elect to convert to the stock form of ownership pursuant to
federal law. As long as required by federal law or regulation, any such
conversion is also subject to the approval of the Members of the Mutual Holding
Company. The terms and conditions of such a conversion cannot be determined at
this time and there is no assurance when, if ever, such a conversion will occur.
If the conversion does not occur, the Mutual Holding Company will always own a
majority of the Common Stock of the Stock Holding Company.
If the Mutual Holding Company converts to stock form, either on a
stand-alone basis or in the context of a conversion-merger ("Conversion
Transaction"), under federal law, shares of stock issued in connection with the
Conversion Transaction shall be subject to subscription rights granted in
accordance with OTS regulations. In addition, pursuant to federal law and OTS
Regulations, in the Conversion Transaction, the shares of stock held by the
stockholders of the Stock Holding Company shall be exchanged for shares of the
converted Mutual Holding Company in a proportion established by independent
appraisals of the Mutual Holding Company, the Stock Holding Company and the
Bank. If, in a Conversion Transaction, the stockholders of the Bank or Stock
Holding Company do not receive, for any reason, shares of the converted Mutual
Holding Company (or its successor) on such proportionate basis, the Mutual
Holding Company (or its successor) shall be obligated to purchase all shares not
owned by it simultaneously with the closing of such Conversion Transaction at
the fair market value of such shares, determined as if such shares had such
exchange rights, as determined by the independent appraisals. Moreover, in the
event that the Mutual Holding Company converts to stock form in a Conversion
Transaction, any options or other convertible securities held by any Officer,
Director, or Employee of the Stock Holding Company, convertible into shares of
the Stock Holding Company shall be convertible into shares of the converted
Mutual Holding Company (or its successor), provided, that any exchange ratio
shall provide the holder of such options or convertible securities with shares
at least equal in value to those exchanged; provided, further however, that if
such shares cannot be so converted, the holders of such options or other
convertible securities shall be entitled to receive cash payment for such
options and other convertible securities in an amount equal to the appraised
value of the underlying securities represented by such options or other
convertible securities.
In any Conversion Transaction, stockholders of the Stock Holding
Company other than the Mutual Holding Company ("Minority Stockholders"), if any,
will be entitled to maintain the same percentage ownership interest in the Stock
Holding Company after the Conversion Transaction as their ownership
14
interest in the Stock Holding Company immediately prior to the Conversion
Transaction, subject only to certain adjustments (i.e., the transfer of assets
held solely by the Mutual Holding Company to the resulting stock company) that
may be required by the OTS. These adjustments may result in a decrease of
ownership interest of the Minority Stockholders.
Each certificate representing shares of Common Stock shall bear a
legend giving appropriate notice of the provisions applicable to a Conversion
Transaction.
18. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The Bank and the Stock Holding Company may declare dividends or make
other capital distributions or repurchase stock in accordance with applicable
laws and regulations. In accordance with applicable law, and the regulations and
policies of the OTS, the Mutual Holding Company may waive its right to receive
dividends declared to it by the Stock Holding Company.
19. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Stock Holding Company will make reasonable efforts to comply with
the securities laws of all states in the United States in which Persons entitled
to subscribe for shares of Common Stock pursuant to the Plan reside. However,
Persons may not be issued subscription rights nor be permitted to purchase
shares of Conversion Stock in the Subscription Offering (i) if such Person
resides in a foreign country or (ii) if such Person resides in a state of the
United States with respect to which, in the sole judgment of the Board of
Directors, any of the following apply: (a) a small number of Persons otherwise
eligible to subscribe for shares under the Plan reside in such state; (b) the
issuance of subscription rights or the offer or sale of shares of Common Stock
to such Persons would require the Bank, under the securities laws of such state,
to register as a broker, dealer, salesman or agent or to register or otherwise
qualify its securities for sale in such state; and (c) registration or
qualification in such state would be impracticable for reasons of cost or
otherwise.
20. REGISTRATION AND MARKET MAKING
Within the time period required by applicable laws and regulations, the
Stock Holding Company will register the securities issued in connection with the
Offering pursuant to the Securities Exchange Act of 1934 and will not deregister
such securities for a period of at least three years thereafter, except that the
maintenance of registration for three years requirement may be fulfilled by any
successor to the Stock Holding Company. In addition, the Stock Holding Company
will use its best efforts to encourage and assist a market-maker to establish
and maintain a market for the common stock issued in the Stock Offering and to
list those securities on a national or regional securities exchange or the
Nasdaq System.
21. EXPENSES OF OFFERING
The Bank shall use its best efforts to assure that expenses incurred by
it in connection with the Offering shall be reasonable.
22. AMENDMENT OR TERMINATION OF THE PLAN
This Plan may be substantively amended by the Board of Directors of the
Bank as a result of comments from the regulatory authorities or otherwise prior
to the commencement of the Offering, and at any time thereafter with the
concurrence of the OTS. This Plan may be terminated by the Board of
15
Directors of the Bank at any time prior to the completion of the Offering, and
at any time thereafter with the concurrence of the OTS.
An increase or decrease in the maximum purchase limitation or number of
shares sold in the Minority Stock Offering by the Board of Directors pursuant to
Section 11 subsequent to the subscription offering is specifically authorized by
this Plan, and is not an amendment to the Plan which would require notice to
Participants. In the event that mandatory new regulations pertaining to mutual
holding companies are adopted by the OTS prior to the completion of the Stock
Offering, the Plan may be amended to conform to the new mandatory regulations.
In the event that new mutual holding company regulations adopted by the OTS
prior to completion of the Stock Offering contain optional provisions, the Plan
may be amended to utilize such optional provisions at the discretion of the
Board of Directors.
23. MISCELLANEOUS
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the Mutual
Holding Company, the Stock Holding Company and the Bank shall be final, subject
to the authority of the OTS.
If any term, provision, covenant or restriction contained in this Plan
is held by a court or a federal or state regulatory agency of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions contained in this Plan shall remain in
full force and effect, and shall in no way be affected, impaired or invalidated.
This Plan is to be governed by and construed in accordance with the
laws of the United States. None of the cover page, the table of contents, or the
section headings are to be considered a part of this Plan, but are included
solely for convenience of reference and shall in no way define, limit, extend,
or describe the scope or intent of any of the provisions hereof. Words in the
singular include the plural, and words in the plural include the singular.
Except for such rights as are set forth herein for eligible account holders,
this Plan shall create no rights in any Person.
16
Malizia Spidi & Fisch, PC
ATTORNEYS AT LAW
1100 New York Avenue, N.W. 1900 South Atherton Street
Suite 340 West Suite 101
Washington, D.C. 20005 State College, PA 16801
(202) 434-4660 (814) 272-3502
Facsimile: (202) 434-4661 Facsimile: (814) 272-3514
October 27, 2004
Board of Directors
Kearny Financial Corp.
250 Valley Boulevard
Wood-Ridge, New Jersey 07075
Re: Registration Statement Under the Securities Act of 1933
Gentlemen:
This opinion is rendered in connection with the Registration Statement
on Form S-1 filed with the Securities and Exchange Commission under the
Securities Act of 1933 relating to the offer and sale of up to 18,845,625 shares
of common stock, par value $0.10 per share (the "Common Stock"), of Kearny
Financial Corp. (the "Company"). The Common Stock is proposed to be issued
pursuant to the Plan of Stock Issuance of the Company. The Company is chartered
by the Office of Thrift Supervision under the laws of the United States as a
federally chartered mutual holding company subsidiary holding company.
As special counsel to the Company, we have reviewed the corporate
proceedings relating to the Plan of Stock Issuance and such other legal matters
as we have deemed appropriate for the purpose of rendering this opinion. The
opinions expressed herein are limited solely to federal laws and regulations
applicable to the Company's offer, sale and issuance of the Common Stock in
pursuant to the Plan of Stock Issuance of the Company.
Based on the foregoing, we are of the opinion that under the laws of
the United States the shares of Common Stock of the Company covered by the
aforesaid Registration Statement will, when issued in accordance with the terms
of the Plan of Stock Issuance against full payment therefor and upon the
declaration of the effectiveness of the Registration Statement on Form S-1, be
duly authorized, legally issued, fully paid, and non-assessable shares of Common
Stock of the Company.
We assume no obligation to advise you of any event that may hereafter
be brought to our attention that may affect any statement made in the foregoing
paragraph after the declaration of effectiveness of the Registration Statement
on Form S-1.
We hereby consent to the use of this opinion and to the reference to
our firm appearing in the Company's Prospectus. We also consent to any
references to our legal opinion in the Prospectus.
Very truly yours,
/s/MAZIZIA SPIDI & FISCH, PC
-------------------------------------
MALIZIA SPIDI & FISCH, PC
KEARNY FEDERAL SAVINGS BANK
BENEFITS EQUALIZATION PLAN RELATED TO THE
EMPLOYEE STOCK OWNERSHIP PLAN
Article I
Introduction
Section 1.01 Purpose, Design and Intent.
(a) The purpose of the Kearny Federal Savings Bank Benefits Equalization Plan
related to the Employee Stock Ownership Plan (the "Plan") is to assist
Kearny Federal Savings Bank (the "Bank") and its affiliates in retaining
the services of key employees, to induce such employees to use their best
efforts to enhance the business of the Bank and its affiliates, and to
provide certain supplemental retirement benefits to such employees.
(b) The Plan, in relevant part, is intended to constitute an unfunded "excess
benefit plan" as defined in Section 3(36) of the Employee Retirement Income
Security Act of 1974, as amended. In this respect, the Plan is specifically
designed to provide certain key employees with retirement benefits that
would have been provided under various tax-qualified retirement plans
sponsored by the Bank but for the applicable limitations placed on benefits
and contributions under such plans by various provisions of the Internal
Revenue Code of 1986, as amended.
Article II
Definitions
Section 2.01 Definitions. In this Plan, whenever the context so indicates, the
singular or the plural number and the masculine or feminine gender shall be
deemed to include the other, the terms "he," "his," and "him," shall refer to a
Participant or a beneficiary of a Participant, as the case may be, and, except
as otherwise provided, or unless the context otherwise requires, the capitalized
terms shall have the following meanings:
"Affiliate" means any corporation, trade or business, which, at the
time of reference, is together with the Bank, a member of a controlled group of
corporations, a group of trades or businesses (whether or not incorporated)
under common control, or an affiliated service group, as described in Sections
414(b), 414(c), and 414(m) of the Code, respectively, or any other organization
treated as a single employer with the Bank under Section 414(o) of the Code.
"Applicable Limitations" means one or more of the following, as
applicable:
(i) the maximum limitations on annual additions to a tax-qualified defined
contribution plan under Section 415(c) of the Code; and
ii) the maximum limitation on the annual amount of compensation that may,
under Section 401(a)(17) ( of the Code, be taken into account in
determining contributions to and benefits under tax-qualified plans.
"Bank" means Kearny Federal Savings Bank, and its successors.
"Board of Directors" means the Board of Directors of the Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the person(s) designated by the Board of Directors,
pursuant to Section 9.02 of the Plan, to administer the Plan.
"Common Stock" means the common stock of the Company.
"Company" means Kearny Financial Corp. and any successors thereto.
"Eligible Individual" means any Employee who participates in the ESOP,
and whom the Board of Directors determines is one of a "select group of
management or highly compensated employees," as such phrase is used for purposes
of Sections 101, 201, and 301 of ERISA.
"Employee" means any person employed by the Bank or an Affiliate.
"Employer" means the Bank or Affiliate thereof that employs the
Employee.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESOP" means the Kearny Federal Savings Bank Employee Stock Ownership
Plan and Trust, as amended from time to time.
"ESOP Valuation Date" means any day as of which the income, assets and
investment experience of the trust fund of the ESOP is determined and
individuals' accounts under the ESOP are adjusted accordingly.
"Effective Date" means January 1, 2004.
"Participant" means an Eligible Employee who is entitled to benefits
under the Plan.
"Plan" means this Kearny Federal Savings Bank Benefits Equalization
Plan related to the Employee Stock Ownership Plan.
"Supplemental ESOP Account" means an account established by an
Employer, pursuant to Section 5.01 of the Plan, with respect to a Participant's
Supplemental ESOP Benefit.
"Supplemental ESOP Benefit" means the benefit credited to a Participant
pursuant to Section 4.01 of the Plan.
Article III
Eligibility and Participation
Section 3.01 Eligibility and Participation.
(a) Each Eligible Employee may participate in the Plan. An Eligible Employee
shall become a Participant in the Plan upon designation as such by the
Board of Directors. An Eligible Employee whom the Board of Directors
designates as a Participant in the Plan shall commence participation as of
the date established by the Board of Directors. The Board of Directors
shall establish an Eligible Employee's date of participation at the same
time it designates the Eligible Employee as a Participant in the Plan.
(b) The Board of Directors may, at any time, designate an Eligible Employee as
a Participant for any or all supplemental benefits provided for under
Article IV of the Plan.
Article IV
Benefits
Section 4.01 Supplemental ESOP Benefit.
As of each ESOP Valuation Date of the ESOP, the Employer shall credit the
Participant's Supplemental ESOP Account with a Supplemental ESOP Benefit equal
to the excess of (I) over (II), where:
(a) (I) equals the increase in the amount of cash and stock that would have
been allocated to the Participant's Accounts for the respective ESOP
Valuation Date in excess of the aggregate amount that would have been
credited to such Participant's Accounts as of the prior ESOP Valuation Date
based upon the allocation of: 1) current plan year dividends on previously
allocated stock, 2) dividends on unallocated stock, 3) other ESOP Trust
earnings, 4) plan forfeitures, and 5) Employer contributions under the
ESOP, determined as if the provisions of the ESOP were administered for the
current ESOP Valuation Date and all prior ESOP Valuation Dates without
regard to any of the Applicable Limitations; and
(b) (II) equals the amount of cash and stock actually allocated to the
Participant's
Accounts under the provisions of the ESOP for that particular ESOP
Valuation Date, after giving effect to any reduction of such allocation
required by any of the Applicable Limitations.
Article V
Accounts
Section 5.01 Supplemental ESOP Benefit Account.
For each Participant who is credited with a benefit pursuant to Section 4.01 of
the Plan, the Employer shall establish, as a memorandum account on its books, a
Supplemental ESOP Account. Each year, the Committee shall credit to the
Participant's Supplemental ESOP Account the amount of benefits determined under
Section 4.01 of the Plan for that year. The Committee shall credit the account
with an amount equal to the appropriate number of shares of Common Stock or
other medium of contribution that would have otherwise been made to the
Participant's accounts under the ESOP but for the limitations imposed by the
Code. Shares of Common Stock shall be valued under this Plan in the same manner
as under the ESOP. Cash contributions credited to a Participant's Supplemental
ESOP Account shall be credited annually with interest at a rate equal to the
combined weighted return provided to the Participant's non-stock accounts under
the ESOP.
Article VI
Supplemental Benefit Payments
Section 6.01 Payment of Supplemental ESOP Benefit.
(a) Except in the case of a Participant's death, disability or unforeseen
emergency, a Participant's Supplemental ESOP Benefit shall be paid to the
Participant in the form of a lump-sum payment as soon as administratively
feasible following six months after the date of separation of service of
the Participant in the form of shares of Common Stock of the Company;
provided however, if this Plan is unable to make distributions in the form
of Common Stock due to regulatory limitations, then distributions of such
portion of the Supplemental ESOP Benefit shall be made in cash with such
amounts to be valued based upon the fair market value of such Common Stock
at the time of such distribution. Distributions upon the death, disability
or unforeseen emergency of the Participant shall be made in the form of a
lump-sum as soon as administratively feasible.
(b) A Participant shall have a non-forfeitable right to the Supplemental ESOP
Benefit credited to him under this Plan in the same non-forfeitable
percentage as such Participant has non-forfeitable benefits allocated to
him under the ESOP at the time such benefits under the ESOP become
distributable.
(c) The Bank shall withhold such amounts of cash or stock as it deems necessary
with respect to any distributions to be made by the Plan in order to
satisfy its tax
withholding obligations under applicable Federal, State or local law.
Section 6.02 Alternative Payment of Benefits.
Notwithstanding the other provisions of this Article VI, a Participant may, with
prior written consent of the Committee and upon such terms and conditions as the
Committee may impose, request that the Supplemental ESOP Benefit to which he is
entitled be paid commencing at a different time, over a different period, in a
different form, or to different persons, than the benefit to which he or his
beneficiary may be entitled under the ESOP; provided, however, any such request
for an alternative distribution time or period (except in the case of death,
disability or unforeseen emergency) shall not be effective for one year from the
date that such request is filed with the Committee and such election to defer
the starting date of a previously elected deferral shall require that such
additional deferral shall be for a period of not less than five years from the
date that such payment would otherwise have been made.
Article VII
Claims Procedures
Section 7.01 Claims Reviewer.
For purposes of handling claims with respect to this Plan, the "Claims Reviewer"
shall be the Committee, unless the Committee designates another person or group
of persons as Claims Reviewer.
Section 7.02 Claims Procedure.
(a) An initial claim for benefits under the Plan must be made by the
Participant or his beneficiary or beneficiaries in accordance with the
terms of this Section 7.02.
(b) Not later than ninety (90) days after receipt of such a claim, the Claims
Reviewer will render a written decision on the claim to the claimant,
unless special circumstances require the extension of such 90-day period.
If such extension is necessary, the Claims Reviewer shall provide the
Participant or the Participant's beneficiary or beneficiaries with written
notification of such extension before the expiration of the initial 90-day
period. Such notice shall specify the reason or reasons for the extension
and the date by which a final decision can be expected. In no event shall
such extension exceed a period of ninety (90) days from the end of the
initial 90-day period.
(c) In the event the Claims Reviewer denies the claim of a Participant or any
beneficiary in whole or in part, the Claims Reviewer's written notification
shall specify, in a manner calculated to be understood by the claimant, the
reason for the denial; a reference to the Plan or other document or form
that is the basis for the denial; a description of any additional material
or information necessary for the claimant to perfect the claim; an
explanation as to why such information or material is necessary;
and an explanation of the applicable claims procedure.
(d) Should the claim be denied in whole or in part and should the claimant be
dissatisfied with the Claims Reviewer's disposition of the claimant's
claim, the claimant may have a full and fair review of the claim by the
Committee upon written request submitted by the claimant or the claimant's
duly authorized representative and received by the Committee within sixty
(60) days after the claimant receives written notification that the
claimant's claim has been denied. In connection with such review, the
claimant or the claimant's duly authorized representative shall be entitled
to review pertinent documents and submit the claimant's views as to the
issues, in writing. The Committee shall act to deny or accept the claim
within sixty (60) days after receipt of the claimant's written request for
review unless special circumstances require the extension of such 60-day
period. If such extension is necessary, the Committee shall provide the
claimant with written notification of such extension before the expiration
of such initial 60-day period. In all events, the Committee shall act to
deny or accept the claim within 120 days of the receipt of the claimant's
written request for review. The action of the Committee shall be in the
form
(e) In no event may a claimant commence legal action for benefits the claimant
believes are due the claimant until the claimant has exhausted all of the
remedies and procedures afforded the claimant by this Article VII.
Article VIII
Amendment and Termination
Section 8.01 Amendment of the Plan.
The Bank may from time to time and at any time amend the Plan; provided,
however, that such amendment may not adversely affect the rights of any
Participant or beneficiary with respect to any benefit under the Plan to which
the Participant or beneficiary may have previously become entitled prior to the
effective date of such amendment without the consent of the Participant or
beneficiary. The Committee shall be authorized to make minor or administrative
changes to the Plan, as well as amendments required by applicable federal or
state law (or authorized or made desirable by such statutes); provided, however,
that such amendments must subsequently be ratified by the Board of Directors.
Section 8.02 Termination of the Plan.
The Bank may at any time terminate the Plan; provided, however, that such
termination may not adversely affect the rights of any Participant or
beneficiary with respect to any benefit under the Plan to which the Participant
or beneficiary may have previously become entitled to prior to the effective
date of such termination without the consent of
the Participant or beneficiary. Any amounts credited to the Supplemental ESOP
Account of any Participant shall remain subject to the provisions of the Plan.
Article IX
General Provisions
Section 9.01 Unfunded, Unsecured Promise to Make Payments in the Future.
The right of a Participant or any beneficiary to receive a distribution under
this Plan shall be an unsecured claim against the general assets of the Bank or
its Affiliates, and neither a Participant, nor his designated beneficiary or
beneficiaries, shall have any rights in or against any amount credited to any
account under this Plan or any other assets of the Bank or an Affiliate. The
Plan at all times shall be considered entirely unfunded both for tax purposes
and for purposes of Title I of ERISA. Any funds invested hereunder shall
continue for all purposes to be part of the general assets of the Bank or an
Affiliate and available to its general creditors in the event of bankruptcy or
insolvency. Accounts under this Plan and any benefits which may be payable
pursuant to this Plan are not subject in any manner to anticipation, sale,
alienation, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of a Participant or a Participant's beneficiary. The
Plan constitutes a mere promise by the Bank or Affiliate to make benefit
payments in the future. No interest or right to receive a benefit may be taken,
either voluntarily or involuntarily, for the satisfaction of the debts of, or
other obligations or claims against, such Participant or beneficiary, including
claims for alimony, support, separate maintenance and claims in bankruptcy
proceedings.
Section 9.02 Committee as Plan Administrator.
(a) The Plan shall be administered by the Committee designated by the Board of
Directors of the Bank.
(b) The Committee shall have the authority, duty and power to interpret and
construe the provisions of the Plan as it deems appropriate. The Committee
shall have the duty and responsibility of maintaining records, making the
requisite calculations and disbursing the payments hereunder. In addition,
the Committee shall have the authority and power to delegate any of its
administrative duties to employees of the Bank or an Affiliate, as they may
deem appropriate. The Committee shall be entitled to rely on all tables,
valuations, certificates, opinions, data and reports furnished by any
actuary, accountant, controller, counsel or other person employed or
retained by the Bank with respect to the Plan. The interpretations,
determinations, regulations and calculations of the Committee shall be
final and binding on all persons and parties concerned.
Section 9.03 Expenses.
Expenses of administration of the Plan shall be paid by the Bank or an
Affiliate.
Section 9.04 Statements.
The Committee shall furnish individual annual statements of accrued benefits to
each Participant, or current beneficiary, in such form as determined by the
Committee or as required by law.
Section 9.05 Rights of Participants and Beneficiaries.
(a) The sole rights of a Participant or beneficiary under this Plan shall be to
have this Plan administered according to its provisions and to receive
whatever benefits he or she may be entitled to hereunder.
(b) Nothing in the Plan shall be interpreted as a guaranty that any funds in
any trust which may be established in connection with the Plan or assets of
the Bank or an Affiliate will be sufficient to pay any benefit hereunder.
(c) The adoption and maintenance of this Plan shall not be construed as
creating any contract of employment or service between the Bank or an
Affiliate and any Participant or other individual. The Plan shall not
affect the right of the Bank or an Affiliate to deal with any Participants
in employment or service respects, including their hiring, discharge,
compensation, and other conditions of employment or service.
Section 9.06 Incompetent Individuals.
The Committee may, from time to time, establish rules and procedures which it
determines to be necessary for the proper administration of the Plan and the
benefits payable to a Participant or beneficiary in the event that such
Participant or beneficiary is declared incompetent and a conservator or other
person is appointed and legally charged with that Participant's or beneficiary's
care. Except as otherwise provided for herein, when the Committee determines
that such Participant or beneficiary is unable to manage his financial affairs,
the Committee may pay such Participant's or beneficiary's benefits to such
conservator, person legally charged with such Participant's or beneficiary's
care, or institution then contributing toward or providing for the care and
maintenance of such Participant or beneficiary. Any such payment shall
constitute a complete discharge of any liability of the Bank or an Affiliate and
the Plan for such Participant or beneficiary.
Section 9.07 Sale, Merger or Consolidation of the Bank.
The Plan may be continued after a sale of assets of the Bank, or a merger or
consolidation of the Bank into or with another corporation or entity only if,
and to the extent that, the transferee, purchaser or successor entity agrees to
continue the Plan. Additionally, upon a merger, consolidation or other change in
control of the Bank or its parent company any amounts credited to a
Participant's Supplemental ESOP Account shall be placed in a grantor trust to
the extent not already in such a trust. In the event that the Plan is not
continued by the transferee, purchaser or successor entity, then the Plan shall
be
terminated subject to the provisions of Section 8.02 of the Plan. Any legal fees
incurred by a Participant in determining benefits to which such Participant is
entitled under the Plan following a sale, merger, or consolidation of the Bank
or an Affiliate of which the Participant is an Employee or, if applicable, a
member of the Board of Directors, shall be paid by the resulting or succeeding
entity.
Section 9.08 Location of Participants.
Each Participant shall keep the Bank informed of his current address and the
current address of his designated beneficiary or beneficiaries. The Bank shall
not be obligated to search for any person. If such person is not located within
three (3) years after the date on which payment of the Participant's benefits
payable under this Plan may first be made, payment may be made as though the
Participant or his beneficiary had died at the end of such three-year period.
Section 9.09 Liability of the Bank and its Affiliates.
Notwithstanding any provision herein to the contrary, neither the Bank nor any
individual acting as an employee or agent of the Bank shall be liable to any
Participant, former Participant, beneficiary, or any other person for any claim,
loss, liability or expense incurred in connection with the Plan, unless
attributable to fraud or willful misconduct on the part of the Bank or any such
employee or agent of the Bank.
Section 9.10 Governing Law.
All questions pertaining to the construction, validity and effect of the Plan
shall be determined in accordance with the laws of the United States and, to the
extent not preempted by such laws, by the laws of the State of New Jersey.
Having been adopted by its Board of Directors, this Plan is executed by its duly
authorized officer this day of _____________ day of _______________, 2004
KEARNY FEDERAL SAVINGS BANK
Attest:
_________________________________ By: _______________________________________
Corporate Secretary For the Entire Board of Directors
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 9, 2004 accompanying the
consolidated financial statements of Kearny Financial Corp. and Subsidiaries as
contained in Amendment No. 1 to the Registration Statement and Prospectus on
Form S-1 to be filed with the Securities and Exchange and as contained in
Amendment No. 1 to the Application for Approval of Stock Issuance on Form MHC-2
to be filed with the Office of Thrift Supervision. We consent to the use of the
aforementioned report in the amended Registration Statement and Prospectus and
the amended Form MHC-2 and to the use of our name as it appears under the
captions "The Stock Offering - Effects of the Stock Offering - Material Federal
and State Tax Consequences," "Legal and Tax Opinions," and "Experts."
/s/Radics & Co., LLC
Pine Brook, New Jersey
October 25, 2004
PRO FORMA VALUATION
MUTUAL HOLDING COMPANY
STOCK OFFERING
Kearny Financial Corp.
Kearny, New Jersey
Dated As Of:
August 20, 2004
Prepared By:
RP Financial, LC.
1700 North Moore Street
Suite
2210
Arlington, Virginia 22209
[LOGO] RP (R) FINANCIAL, LC.
Financial Services Industry Consultants
August 20, 2004
Board of Directors
Kearny MHC
Kearny Financial Corp.
Kearny Federal Savings Bank
614 Kearny Avenue
Kearny, New Jersey 07032
Members of the Boards of Directors:
At your request, we have completed and hereby provide an independent
appraisal ("Appraisal") of the estimated pro forma market value of the common
stock which is to be offered in connection with the plan of stock issuance
described below.
This Appraisal is furnished pursuant to the conversion regulations
promulgated by the Office of Thrift Supervision ("OTS"). Specifically, this
Appraisal has been prepared in accordance with the "Guidelines for Appraisal
Reports for the Valuation of Savings and Loan Associations Converting from
Mutual to Stock Form of Organization" as set forth by the OTS, and applicable
regulatory interpretations thereof.
Description of Reorganization and Plan of Stock Issuance
In March 2001, Kearny Federal Savings Bank ("Kearny Federal" or the
"Bank") reorganized into the two-tier mutual holding company structure. As part
of the reorganization, Kearny Federal formed Kearny Financial Corp. ("Kearny
Financial" or the "Company") and Kearny MHC (the "MHC"), a federally-chartered
mid-tier stock holding company and mutual holding company, respectively. Kearny
Federal became a federal stock savings bank, and a wholly-owned subsidiary of
Kearny Financial, and Kearny Financial became the wholly-owned subsidiary of the
MHC.
On June 7, 2004, the Board of Directors of Kearny Financial adopted a
plan of stock issuance. Pursuant to the plan of stock issuance, Kearny Financial
will issue a majority of its common stock to the MHC and sell a minority of its
common stock to the public. Concurrent with the completion of the public stock
offering, the Company will retain up to 50% of the net stock proceeds. The MHC
will own a controlling interest in the Company of at least 51%, and the Company
will be the sole subsidiary of the MHC. The Company will own 100% of the Bank's
outstanding stock. The Company's initial activity will be ownership of its
subsidiary, Kearny Federal, investment of the net cash proceeds retained at the
holding company level and extending a loan to the employee stock ownership plan
("ESOP").
--------------------------------------------------------------------------------
Washington Headquarters Telephone: (703) 528-1700
Rosslyn Center Fax No.: (703) 528-1788
1700 North Moore Street, Suite 2210 Toll-Free No.: (866) 723-0594
Arlington, VA 22209 E-Mail: mail@rpfinancial.com
www.rpfinancial.com
Board of Directors
August 20, 2004
Page 2
It is anticipated that the public shares will be offered in a
subscription offering to the Bank's Eligible Account Holders, Tax-Qualified
Employee Plans including the ESOP and Supplemental Eligible Account Holders. To
the extent that shares remain available for purchase after satisfaction of all
subscriptions received in the subscription offering, the shares may be offered
for sale in a community offering. The total shares offered for sale to the
public will constitute a minority interest of the Company's stock (49% or less).
RP(R) Financial, LC.
RP(R) Financial, LC. ("RP Financial") is a financial consulting firm
serving the financial services industry nationwide that, among other things,
specializes in financial valuations and analyses of business enterprises and
securities, including the pro forma valuation for savings institutions
converting from mutual-to-stock form. The background and experience of RP
Financial is detailed in Exhibit V-1. We believe that, except for the fee we
will receive for our appraisal, we are independent of the Bank, the Company and
the MHC and the other parties engaged by the Bank to assist in the stock
issuance process.
Valuation Methodology
In preparing our appraisal, we have reviewed the Bank's, the Company's
and MHC's regulatory applications, including the prospectus as filed with the
OTS and the Securities and Exchange Commission ("SEC"). We have conducted a
financial analysis of the Company and the Bank that has included a review of its
audited financial information for the fiscal years ended June 30, 2000 through
June 30, 2004, various unaudited information and internal financial reports
through June 30, 2004 and due diligence related discussions with the Company's
management; Radics & Co., LLC, the Company's independent auditor; Malizia Spidi
& Fisch, PC, the Company's counsel in connection with the plan of stock
issuance; and Sandler O'Neill & Partners, L.P., the Company's financial and
marketing advisor in connection with the stock offering. All conclusions set
forth in the Appraisal were reached independently from such discussions. In
addition, where appropriate, we have considered information based on other
available published sources that we believe are reliable. While we believe the
information and data gathered from all these sources are reliable, we cannot
guarantee the accuracy and completeness of such information.
We have investigated the competitive environment within which the
Company operates and have assessed the Company's relative strengths and
weaknesses. We have kept abreast of the changing regulatory and legislative
environment for financial institutions and analyzed the potential impact on the
Company and the industry as a whole. We have analyzed the potential effects of
the minority stock offering on the Company's operating characteristics and
financial performance as they relate to the pro forma market value. We have
reviewed the economy in the Company's primary market area and have compared the
Company's financial performance and condition with publicly-traded thrifts in
mutual holding company form, as well as all publicly-traded thrifts. We have
reviewed market conditions for stocks in general and market conditions
Board of Directors
August 20, 2004
Page 3
for thrift stocks in particular, including the market for existing thrift issues
and the market for initial public offerings by thrifts. We have considered the
market for the stocks of all publicly-traded mutual holding companies. We have
also considered the expected market for the Company's public shares. We have
excluded from such analyses thrifts subject to announced or rumored acquisition,
mutual holding company institutions that have announced their intent to pursue
second step conversions, and/or those institutions that exhibit other unusual
characteristics.
Our Appraisal is based on the Company's representation that the
information contained in the regulatory applications and additional information
furnished to us by the Company, its independent auditors, legal counsel and
other authorized agents are truthful, accurate and complete. We did not
independently verify the financial statements and other information provided by
the Company, its independent auditors, legal counsel and other authorized agents
nor did we independently value the assets or liabilities of the Company. The
valuation considers the Company only as a going concern and should not be
considered as an indication of the Company's liquidation value.
Our appraised value is predicated on a continuation of the current
operating environment for the Bank, the MHC and the Company and for all thrifts
and their holding companies. Changes in the local, state and national economy,
the legislative and regulatory environment for financial institutions and mutual
holding companies, the stock market, interest rates, and other external forces
(such as natural disasters or significant world events) may occur from time to
time, often with great unpredictability, and may materially impact the value of
thrift stocks as a whole or the Company's value alone. It is our understanding
that there are no current plans for pursuing a second step conversion or for
selling control of the Company or the Bank following the offering. To the extent
that such factors can be foreseen, they have been factored into our analysis.
Pro forma market value is defined as the price at which the Company's
stock, immediately upon completion of the offering, would change hands between a
willing buyer and a willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of relevant facts.
Valuation Conclusion
It is our opinion that, as of August 20, 2004, the estimated aggregate
pro forma market value of the shares to be issued immediately following the
conversion, both shares issued publicly as well as to the MHC, equaled
$475,000,000 at the midpoint, equal to 47,500,000 shares offered at a per share
value of $10.00. Pursuant to conversion guidelines, the 15% offering range
indicates a minimum value of $403.8 million and a maximum value of $546.3
million. Based on the $10.00 per share offering price determined by the Board,
this valuation range equates to total shares outstanding of 40,375,000 at the
minimum and 54,625,000 at the maximum. In the event the appraised value is
subject to an increase, the aggregate pro forma market value may be increased up
to a supermaximum value of $628.2 million without a
Board of Directors
August 20, 2004
Page 4
resolicitation. Based on the $10.00 per share offering price, the supermaximum
value would result in total shares outstanding of 62,818,750. The Board of
Directors has established a public offering range such that the public ownership
of the Company will constitute a 30.0% ownership interest. Accordingly, the
offering to the public of the minority stock will equal $121.1 million at the
minimum, $142.5 million at the midpoint, $163.9 million at the maximum and
$188.5 million at the supermaximum of the valuation range.
Limiting Factors and Considerations
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof.
RP Financial's valuation was determined based on the financial
condition and operations of Kearny Financial as of June 30, 2004, the date of
the financial data included in the regulatory applications and prospectus.
RP Financial is not a seller of securities within the meaning of any
federal and state securities laws and any report prepared by RP Financial shall
not be used as an offer or solicitation with respect to the purchase or sale of
any securities. RP Financial maintains a policy which prohibits the company, its
principals or employees from purchasing stock of its client institutions.
The valuation will be updated as provided for in the conversion
regulations and guidelines. These updates will consider, among other things, any
developments or changes in the Company's financial performance and condition,
management policies, and current conditions in the equity markets for thrift
stocks. These updates may also consider changes in other external factors which
impact value including, but not limited to: various changes in the legislative
and regulatory environment, the stock market and the market for thrift stocks,
and interest rates. Should any such new developments or changes be material, in
our opinion, to the valuation of the shares, appropriate adjustments to the
estimated pro forma market value will be
Board of Directors
August 20, 2004
Page 5
made. The reasons for any such adjustments will be explained in the update at
the date of the release of the update.
Respectfully submitted,
RP(R) FINANCIAL, LC.
/s/Ronald S. Riggins
Ronald S. Riggins
President
/s/Gregory E. Dunn
Gregory E. Dunn
Senior Vice President
RP(R) Financial, LC.
TABLE OF CONTENTS
KEARNY FINANCIAL CORP.
Kearny, New Jersey
PAGE
DESCRIPTION NUMBER
----------- ------
CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS
-----------
Introduction 1.1
Reorganization and Plan of Stock Issuance 1.1
Strategic Overview 1.2
Balance Sheet Trends 1.4
Income and Expense Trends 1.9
Interest Rate Risk Management 1.13
Lending Activities and Strategy 1.13
Asset Quality 1.16
Funding Composition and Strategy 1.17
Subsidiaries and Other Activities 1.18
Legal Proceedings 1.19
CHAPTER TWO MARKET AREA
-----------
Introduction 2.1
Market Area Demographics 2.2
National Economic Factors 2.5
Regional Economy 2.8
Market Area Deposit Characteristics 2.10
Competition 2.12
CHAPTER THREE PEER GROUP ANALYSIS
-----------
Peer Group Selection 3.1
Basis of Comparison 3.2
Kearny Financial's Peer Group 3.3
Financial Condition 3.6
Income and Expense Components 3.9
Loan Composition 3.13
Interest Rate Risk 3.15
Credit Risk 3.15
Summary 3.17
TABLE OF CONTENTS
KEARNY FINANCIAL CORP.
Kearny, New Jersey
(continued)
PAGE
DESCRIPTION NUMBER
----------- ------
CHAPTER FOUR VALUATION ANALYSIS
------------
Introduction 4.1
Appraisal Guidelines 4.1
RP Financial Approach to the Valuation 4.2
Valuation Analysis 4.3
1. Financial Condition 4.3
2. Profitability, Growth and Viability of Earnings 4.5
3. Asset Growth 4.7
4. Primary Market Area 4.7
5. Dividends 4.9
6. Liquidity of the Shares 4.10
7. Marketing of the Issue 4.10
A. The Public Market 4.10
B. The New Issue Market 4.15
C. The Acquisition Market 4.17
8. Management 4.19
9. Effect of Government Regulation and Regulatory Reform 4.19
Summary of Adjustments 4.19
Basis of Valuation - Fully-Converted Pricing Ratios 4.20
Valuation Approaches: Fully-Converted Basis 4.21
1. Price-to-Earnings ("P/E") 4.24
2. Price-to-Book ("P/B") 4.25
3. Price-to-Assets ("P/A") 4.25
Comparison to Recent Offerings 4.25
Valuation Conclusion 4.27
RP(R) Financial, LC.
List of Tables
KEARNY FINANCIAL CORP.
Kearny, New Jersey
TABLE
NUMBER DESCRIPTION PAGE
------ ----------- ----
1.1 Historical Balance Sheets 1.5
1.2 Historical Income Statements 1.10
2.1 Summary Demographic Data 2.3
2.2 New Jersey Employment Sectors 2.9
2.3 Market Area Unemployment Trends 2.9
2.4 Deposit Summary 2.11
2.5 Market Area Deposit Competitors 2.12
3.1 Peer Group of Publicly-Traded Thrifts 3.5
3.2 Balance Sheet Composition and Growth Rates 3.7
3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads 3.10
3.4 Loan Portfolio Composition Comparative Analysis 3.14
3.5 Interest Rate Risk Measures and Net Interest Income Volatility 3.16
3.6 Credit Risk Measures and Related Information 3.18
4.1 Market Area Unemployment Rates 4.8
4.2 Recent Conversion Pricing Characteristics 4.16
4.3 Market Pricing Comparatives 4.18
4.4 Calculation of Implied Per Share Data 4.22
4.5 MHC Institutions - Implied Pricing Ratios, Full Conversion Basis 4.26
4.6 Pricing Table: MHC Public Market Pricing 4.29
RP(R) Financial, LC.
Page 1.1
I. OVERVIEW AND FINANCIAL ANALYSIS
Introduction
Kearny Financial serves northern and central New Jersey through its
main office in Kearny and 24 branch offices. A map of the Company's branch
offices is provided in Exhibit I-1. The Company's wholly-owned subsidiary,
Kearny Federal, is a member of the Federal Home Loan Bank ("FHLB") system, and
its deposits are insured up to the regulatory maximums by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC"). At June 30, 2004, Kearny Financial had $1.9 billion in assets, $1.5
billion in deposits and consolidated equity of $293.5 million equal to 15.2% of
total assets. The Company had tangible capital of $209.0 million at June 30,
2004 equal to 10.8% of assets. Kearny Financial's audited financial statements
are included by reference as Exhibit I-2.
Reorganization and Plan of Stock Issuance
In March 2001, Kearny Federal reorganized into the two-tier mutual
holding company structure. As part of the reorganization, Kearny Federal formed
Kearny Financial and the MHC a federally-chartered mid-tier stock holding
company and mutual holding company, respectively. Kearny Federal became a
federal stock savings bank, and a wholly-owned subsidiary of Kearny Financial,
and Kearny Financial became the wholly-owned subsidiary of the MHC.
On June 7, 2004, the Board of Directors of Kearny Financial adopted a
plan of stock issuance. Pursuant to the plan of stock issuance, Kearny Financial
will issue a majority of its common stock to the MHC and sell a minority of its
common stock to the public. Concurrent with the completion of the public stock
offering, the Company will retain up to 50% of the net stock proceeds. The MHC
will own a controlling interest in the Company of at least 51%, and the Company
will be the sole subsidiary of the MHC. The Company will own 100% of the Bank's
outstanding stock. The Company's initial activity will be ownership of its
subsidiary, Kearny Federal, investment of the net cash proceeds retained at the
holding company level and extending a loan to the employee stock ownership plan
("ESOP"). Subsequent activities of the
RP(R) Financial, LC.
Page 1.2
Company may include payment of regular or special dividends, acquisitions of
other financial institutions, acquisitions of other financial service providers
and/or stock repurchases.
Strategic Overview
Kearny Financial maintains a local community banking emphasis, with a
primary strategic objective of meeting the borrowing and savings needs of its
local customer base. Historically, Kearny Financial's operating strategy has
been fairly reflective of a traditional thrift operating strategy, in which 1-4
family residential mortgage loans have been the primary source of loan
originations and assets have primarily funded with retail deposits. Pursuant to
the Company's business plan, Kearny Financial will continue to emphasize 1-4
family lending, but will also pursue greater diversification into other types of
lending. Types of lending diversification that are being emphasized by the
Company consist of commercial real estate, commercial business and home equity
loans. Overall, it is the Company's objective to grow the loan portfolio so that
loans will comprise a larger portion of interest-earning assets, which will
facilitate a higher yielding interest-earning asset composition than currently
maintained by the Company. Historically, the Company's interest-earning asset
composition has been concentrated in investments, which has provided for a
relatively low yielding interest-earning asset mix. The concentration of
investments comprising interest-earning assets has become more significant in
recent years, due to shrinkage that has been experienced in the loan portfolio.
In recent years growth by the Company has been substantially realized
through acquisition of other savings institutions. On October 18, 2002, the
Company completed the acquisition of Pulaski Bancorp, Inc. ("Pulaski"), in which
the Company purchased Pulaski's common stock held by public stockholders in a
cash transaction. Shares held by the public stockholders represented a minority
interest in Pulaski, with the majority of the shares held by Pulaski Bancorp,
MHC. The purchase of the minority interest shares was recorded as the
acquisition of the non-controlling interests of a subsidiary utilizing the
purchase method of accounting and the merger of Kearny MHC and subsidiaries with
Pulaski MHC and subsidiaries was recorded as a pooling of interests between two
mutual entities. The Pulaski acquisition added approximately $238 million to the
Company's assets and created goodwill and intangibles of $16.1 million.
RP(R) Financial, LC.
Page 1.3
On July 1, 2003, the Company completed the acquisition of West Essex
Bancorp, Inc. ("West Essex"), in which the Company purchased West Essex's common
stock held by public stockholders in a cash transaction. Shares held by the
public stockholders represented a minority interest in West Essex, with the
majority of the shares held by West Essex Bancorp, MHC. The purchase of the
minority interest shares was recorded as the acquisition of the non-controlling
interests of a subsidiary utilizing the purchase method of accounting and the
merger of Kearny MHC and subsidiaries with West Essex MHC and subsidiaries was
recorded as a pooling of interests between two mutual entities. The West Essex
acquisition added approximately $390 million to the Company's assets and created
goodwill and intangibles of $50.2 million.
Kearny Financial's earnings base is largely dependent upon net interest
income and operating expense levels, as income derived through non-interest
sources is a modest contributor to the Company's earnings. Overall, Kearny
Financial's operating strategy has provided for a relatively narrow interest
rate spread, which can be largely attributed to an interest-earning asset
composition that is concentrated in investments. The Company's operating
expenses are also viewed as being relatively low, which is supported by the high
level of interest-earning assets that are maintained in investments that are
less costly to service than loans. Likewise, on the liability side of the
balance sheet, CDs, which are less costly to service than transaction and
savings accounts, comprise the largest portion of the Company's deposit
composition.
Over the past five fiscal years, Kearny Financial has experienced
limited growth other than growth realized from the acquisitions of Pulaski and
West Essex. The Company's current business plan is to reverse the trend of loan
shrinkage and implement a growth strategy that will emphasize growth of the loan
portfolio such that the concentration of interest-earning assets comprised of
loans will increase. Growth of the loan portfolio will emphasize increasing the
diversification of the Company's loan portfolio composition, in which increased
originations of commercial real estate, commercial business and home equity
loans will be emphasized.
A key component of the Company's business plan is to increase capital
through the minority stock offering. The capital realized from the minority
stock offering will increase the operating flexibility and overall financial
strength of Kearny Financial. Kearny Financial's higher equity-to-assets ratio
will better position the Company to take advantage of additional expansion
opportunities as they arise. Such expansion is expected to occur through
establishing
RP(R) Financial, LC.
Page 1.4
additional branches in markets currently served by the branch network or in
surrounding contiguous markets. In addition, the increase in capital realized
from the stock offering will provide a larger capital cushion for growth through
other acquisitions of local thrifts, commercial banks or other financial service
providers as opportunities arise. The projected use of stock proceeds is
highlighted below.
o Kearny Financial. The Company is expected to retain up to 50% of the
net offering proceeds. At present, funds at the Company level, net of
the loan to the ESOP, are expected to be primarily invested initially
into short-term investment grade securities. Over time, the funds may
be utilized for various corporate purposes, possibly including
acquisitions, infusing additional equity into the Bank, repurchases of
common stock, and the payment of regular and/or special cash
dividends.
o Kearny Federal. Approximately 50% of the net conversion proceeds will
be infused into the Bank. Cash proceeds (i.e., net proceeds less
deposits withdrawn to fund stock purchases) infused into the Bank will
become part of general operating funds, and are expected to be
primarily utilized to fund growth of loans.
Overall, it is the Company's objective to pursue growth that will serve
to increase returns, while, at the same time, growth will not be pursued that
could potentially compromise the overall risk associated with Kearny Financial's
operations. The Company has acknowledged that it intends to operate with excess
capital in the near term, operating with a below market return on equity
("ROE"), until such time as the new capital can be leveraged in a safe and sound
manner over an extended period of time.
Balance Sheet Trends
Table 1.1 shows the Company's historical balance sheet data for the
past five fiscal years. From June 30, 2000 through June 30, 2004, Kearny
Financial's assets increased at a 3.6% annual rate. Asset growth was mostly
realized through growth of mortgage-backed securities, which more than offset
declines in investment securities and loans. Asset growth has been funded with
deposits and equity, which also funded a reduction in borrowings as well. A
summary of Kearny Financial's key operating ratios for the past five fiscal
years is presented in Exhibit I-3.
RP(R) Financial, LC.
Page 1.5
Table 1.1
Kearny Financial Corp.
Historical Balance Sheets
(Amount and Percent of Assets)(1)
Sources: Kearny Financial's prospectus, audited financial statements and RP
Financial calculations.
RP(R) Financial, LC.
Page 1.6
Kearny Financial's loans receivable portfolio declined at a 3.9% annual
rate from fiscal year end 2000 through fiscal year end 2004. After reaching a
peak balance of $602.2 million at fiscal year end 2001, the Company's loan
portfolio has decline during each of the past three fiscal years with the most
significant decline occurring during fiscal 2003. Accordingly, loans receivable
declined from 35.2% of assets at fiscal year end 2000 to 26.1% of assets at
fiscal year end 2004. Kearny Financial's historical emphasis on 1-4 family
lending is reflected in its loan portfolio composition, as 70.2% of total loans
receivable consisted of 1-4 family permanent mortgage loans at June 30, 2004.
Trends in the Company's loan portfolio composition over the past five fiscal
years show that the concentration of 1-4 family permanent mortgage loans
comprising total loans declined from a high of 78.1% at fiscal year end 2000 to
a low of 70.2% at June 30, 2004, which was most attributable to a decline in the
balance of 1-4 family loans and, to a lesser extent, growth of other loan types.
Over the past five fiscal years, lending diversification by the Company has
consisted primarily of commercial real estate/multi-family loans, which has been
the most significant source of loan growth since fiscal year end 2000.
Commercial real estate/multi-family loans comprising total loans increased from
8.5% at fiscal year end 2000 to 16.4% at fiscal year end 2004. Consumer loans,
which consist substantially of second mortgages and home equity loans, represent
the second largest area of lending diversification for the Company with such
loans comprising 11.0% of the loan portfolio at fiscal year end 2004 as compared
to 8.5% of the loan portfolio at fiscal year end 2000. The balance of the loan
portfolio consists of commercial business loans and construction loans, which
equaled 1.0% and 1.4% of total loans outstanding, respectively, at fiscal year
end 2004. Comparatively, at fiscal year end 2000, commercial business loans and
construction loans equaled 0.1% and 4.9% of total loans outstanding,
respectively.
The intent of the Company's investment policy is to provide adequate
liquidity and to generate a favorable return within the context of supporting
Kearny Financial's overall credit and interest rate risk objectives. It is
anticipated that proceeds retained at the holding company level will primarily
be invested into investments with short-term maturities. Since fiscal year end
2000, mortgage-backed securities have been the most prominent source of asset
growth for the Company and represent the Company's largest investment
concentration. Recent growth of the mortgage-backed securities portfolio has
been facilitated by redeployment of cash flow
RP(R) Financial, LC.
Page 1.7
generated from loan repayments, which increased significantly during the past
two years as the result of borrowers refinancing into lower rate mortgages. The
portfolio of mortgage-backed securities consists substantially of
mortgage-pass-through certificates that are guaranteed or insured by a federal
agency, most of which have fixed rate terms of more than 10 years. In previous
years, collateralized mortgage obligations ("CMOs") have comprised a very minor
portion of the Company's mortgage-backed securities portfolio. Kearny
Financial's investment in mortgage-backed securities reached a peak balance of
$968.5 million or 50.8% of assets at fiscal year end 2000 and equaled $771.4
million or 39.8% of assets at fiscal year end 2004. The Company's investment in
mortgage-backed securities is classified as held to maturity and, as of June 30,
2004, the market value of the portfolio was $1.4 million above the carrying
value of the portfolio.
Over the past five fiscal years, the Company's level of cash and
investment securities (inclusive of FHLB stock) ranged from a low of 15.3% of
assets at year fiscal end 2002 to a high of 33.3% of assets at year end 2003.
The relatively low cash and investments ratio maintained at fiscal year end 2002
was the result of the higher concentration of funds that were maintained in
mortgage-backed securities, while the comparatively higher cash and investments
ratio maintained at fiscal year end 2003 reflects the redeployment of cash flow
realized from repayments of mortgage-backed securities and loans into cash and
investments. As of June 30, 2004, the Company maintained total cash and
investments of $528.3 million or 27.3% of assets, which included $39.5 million
of cash and equivalents. Investments held by the Company at June 30, 2004
consisted of U.S. Government and agency securities ($274.4 million), municipal
bonds ($161.5 million), Freddie Mac stock ($15.9 million), mutual funds ($13.9
million), FHLB stock ($11.4 million) and trust preferred securities ($11.8
million). As of June 30, 2004, the Company maintained $41.6 million of
investment securities classified as available for sale (Freddie Mac stock,
mutual funds and trust preferred securities) and $435.9 of investment securities
classified as held to maturity (U.S Government and agency securities and
municipal bonds). As of June 30, 2004, the net unrealized gain on available for
sale portfolio equaled $15.5 million and the market value of the held to
maturity investment portfolio was $7.1 million below the carrying value of the
portfolio. Exhibit I-4 provides historical detail of the Company's investment
portfolio.
RP(R) Financial, LC.
Page 1.8
Retail deposits have consistently been the primary funding source for
the Company's assets, while the Company's use of borrowings has typically been
limited. From fiscal year end 2000 through fiscal year end 2004, the Company's
deposits increased at an annual rate of 5.1%. Positive deposit growth was
sustained from fiscal year end 2000 through fiscal year end 2003, which was
followed by a slight decline in deposits during the fiscal year ended 2004. Over
the past five years, deposits ranged from a low of 75.0% of assets at fiscal
year end 2000 to a high of 80.8% of assets at fiscal year end 2003. As of June
30, 2004, the Company maintained total deposits of $1.5 billion equal to 79.4%
of assets. As of June 30, 2004, CDs and transaction and savings accounts
comprised 62.7% and 37.3% of the Company's total deposits, respectively, which
was fairly consistent with the Company's historical deposit composition.
Borrowings serve as an alternative funding source for the Company to
address funding needs for liquidity purposes and to facilitate management of
deposit costs. Over the past five years, borrowings ranged from a high of 8.2%
of assets at fiscal year end 2000 to a low of 3.8% of assets at fiscal year end
2003. As of June 30, 2004, the Company maintained total borrowings of $94.2
million equal to 4.9% of assets. The Company's use of borrowings has generally
been limited to FHLB advances and at June 30, 2004 the entire balance of the
Company's borrowings consisted of short- and intermediate-term FHLB advances.
The Company's capital increased at a 4.9% annual rate from fiscal year
end 2000 through fiscal year end 2004, reflecting the retention of earnings and
capital growth realized from the acquisitions of Pulaski and West Essex. Equity
as a percent of assets remained fairly consistent throughout the five year
period, ranging from a low of 13.9% of assets at fiscal year end 2003 to a high
of 15.2% of assets at fiscal year end 2004. As the result of the goodwill and
intangibles created by the Pulaski and West Essex acquisitions, the Company's
tangible equity-to-assets ratio declined from a peak ratio of 13.5% at fiscal
year end 2001 to 10.8% at fiscal year end 2004. Kearny Federal maintained
capital surpluses relative to all of its regulatory capital requirements at June
30, 2004. The addition of stock proceeds will serve to strengthen the Company's
capital position and competitive posture within its primary market area, as well
as possibly support expansion through acquisition. At the same time, as the
result of the Company's relatively high pro forma capital position, Kearny
Financial's return on equity can be expected to be below industry averages
following its stock offering.
RP(R) Financial, LC.
Page 1.8
Income and Expense Trends
Table 1.2 shows the Company's historical income statements for the past
five fiscal years. The Company reported positive earnings over the past five
fiscal years, ranging from a low of 0.45% of average assets during fiscal 2003
to a high of 0.91% of average assets during fiscal 2000. For the fiscal year
ended June 30, 2004, the Company reported net income of $12.9 million equal to
0.67% of average assets. The lower return posted in fiscal 2003 was mostly
related to merger expenses incurred in connection with the acquisition of West
Essex. Net interest income and operating expenses represent the primary
components of Kearny Financial's core earnings. Non-interest operating income
derived from Kearny Financial's retail banking activities has been a limited
contributor to earnings, while loan loss provisions established over the past
five years have been nominal. Likewise, income derived from sources of
non-operating income has not been a significant factor in the Company earnings
over the past five fiscal years.
Kearny Financial has maintained a relatively low net interest margin
throughout the period shown in Table 1.2, which has been mostly related to an
interest-earning composition that has a high concentration of investments as
opposed to comparatively higher yielding loans. Over the past five fiscal years,
the Company's net interest income to average assets ratio ranged from a high of
2.99% during fiscal 2000 to a low of 2.42% during fiscal 2004. Most of the
decline in the Company's net interest income ratio has occurred during the past
two fiscal years, which has resulted from a more significant reduction in yield
income relative to funding expense. The decline in the Company's net interest
income ratio reflects the impact of loan portfolio shrinkage, as well as
accelerated repayments incurred in the mortgage-backed securities portfolio, and
the redeployment of those funding into lower yielding investments. The Company's
historical net interest rate spreads and yields and costs are set forth in
Exhibits I-3 and I-5.
Consistent with the Company's adherence to a traditional thrift
operating philosophy and resultant limited diversification, sources of
non-interest operating income have been a somewhat modest contributor to the
Company's earnings. Throughout the period shown in Table 1.2, sources of
non-interest operating income have ranged from a low of 0.08% of average assets
during fiscal years 2001 and 2004 to a high of 0.11% of average assets during
fiscal 2003. Non-interest operating income equaled 0.09% of average assets
during fiscal 2004. Sources of non-
RP Financial, LC
Page 1.10
Table 1.2
Kearny Financial Corp.
Historical Income Statements
(Amount and Percent of Avg. Assets)(1)
(1) Ratios are as a percent of average assets.
(2) Assumes tax rate of 40.85%
Sources: Kearny Financial's prospectus, audited financial statements and RP
Financial calculations.
RP Financial, LC
Page 1.11
interest operating income consist substantially of fees and service charges
generated from the Company's retail banking activities. Overall, beyond Kearny
Financial's limited diversification in general, the absence of a loans serviced
for others portfolio has been a limiting factor in the amount of non-interest
operating income generated by the Company. Notwithstanding, the potential
increase in non-interest operating income that may be realized through further
growth of checking accounts, Kearny Financial's earnings can be expected to
remain highly dependent upon the net interest margin.
Operating expenses represent the other major component of the Company's
earnings, ranging from a low of 1.49% of average assets during fiscal 2003 to a
high of 1.60% of average assets during fiscal 2001. Operating expenses equaled
1.50% of average assets during fiscal 2004. In general, the Company's low
operating expense ratio has been facilitated by implementation of a relatively
undiversified operating strategy and maintenance of a relatively high
concentration of interest-earning assets in less service intensive cash and
investments. Upward pressure will be placed on the Company's operating expense
ratio following the stock offering, due to expenses associated with operating as
a publicly-traded company, including expenses related to the stock benefit
plans. At the same, the increase in capital realized from the stock offering
will increase the Company's capacity to leverage operating expenses through
pursuing a more aggressive growth strategy.
Overall, the general trends in the Company's net interest margin and
operating expense ratio since fiscal 2000 reflect a decline in core earnings, as
indicated by the Company's expense coverage ratio (net interest income divided
by operating expenses). Kearny Financial's expense coverage ratio equaled 1.94
times during fiscal 2000, versus a comparable ratio of 1.61 times during fiscal
2004. The decline in the expense coverage ratio was the result of a decline in
the net interest income ratio. Similarly, Kearny Financial's efficiency ratio
(operating expenses, net of amortization of intangibles, as a percent of the sum
of net interest income and other operating income) of 43.5% during fiscal 2000
was more favorable than the 58.8% efficiency ratio maintained during fiscal
2004.
Over the past five fiscal years, maintenance of favorable credit
quality measures and a declining loan balance have served to substantially limit
the amount of loss provisions established during the period. During the past two
fiscal years, the Company has not established
RP Financial, LC
Page 1.12
loan loss provisions. As of June 30, 2004, the Company maintained valuation
allowances of $5.1 million, equal to 1.02% of net loans receivable and 221.0% of
non accruing loans and accruing loans that are 90 days or more past due. Exhibit
I-6 sets forth the Company's loan loss allowance activity during the past five
fiscal years.
Non-operating income and expenses typically have not been a material
factor in the Company's earnings. Non-operating income has been substantially
limited by the Company's general philosophy of retaining all loans originated
for investment. During fiscal years 2000 through 2002, the Company recorded a
modest amount of trading account income. Merger expenses incurred in connection
with the acquisitions of Pulaski and West Essex have been recorded during the
past three fiscal years, with the most significant merger expenses incurred
during fiscal 2003. Merger expenses recorded during fiscal 2003 amounted to
$14.9 million or 0.75% of average assets.
Earnings for the fiscal years ended 2000 through 2003 include the
accounting adjustment for West Essex's and Pulaski's earnings, based on the
public or minority ownership interest that were maintained in each entity.
During fiscal years 2000 through 2002, West Essex and Pulaski reported net
income on a combined basis and therefore the accounting adjustment for minority
interests reflected a reduction to the Company's net income. During fiscal 2003,
West Essex and Pulaski reported a net loss on a combined basis and therefore the
accounting adjustment for minority interest reflected an increase to the
Company's net income. The net loss reflected for the minority interests during
fiscal 2003 was the result of one time expenses that were incurred by West Essex
in connection with the acquisition, most of which were in the area of
compensation costs.
The Company's effective tax equaled 30.8% during fiscal 2004, which was
less than the effective statutory rate as the result of tax exempt income earned
on certain investments. As set forth in the prospectus, the Company's effective
statutory tax rate equals 40.85%.
RP Financial, LC
Page 1.13
Interest Rate Risk Management
The Company's balance sheet is liability-sensitive in the short-term
(less than one year) and, thus, the net interest margin will typically be
adversely affected during periods of rising and higher interest rates. As of
June 30, 2004, the Net Portfolio Value ("NPV") analysis provided by the OTS
indicated that a 2.0% instantaneous and sustained increase in interest rates
would result in a 34% decline in the Company's NPV (see Exhibit I-7).
The Company manages interest rate risk from the asset side of the
balance sheet through such strategies as emphasizing investments with shorter
term maturities in low interest rate environments, investing in adjustable rate
mortgage-backed securities, investing in U.S. Government and agency securities
with laddered maturities out to eight years and underwriting 1-4 family fixed
rate loan originations to allow for their sale in the secondary market. As of
June 30, 2004, of the total loans due after June 30, 2005, fixed rate loans
comprised 80.7% of those loans (see Exhibit I-8). On the liability and equity
side of the balance sheet, management of interest rate risk has been pursued
through maintaining a strong capital position and through emphasizing the
build-up of less interest rate sensitive and lower costing transaction and
savings accounts.
The infusion of stock proceeds will serve to further limit the
Company's interest rate risk exposure, as most of the net proceeds will be
redeployed into interest-earning assets and the increase to capital will lessen
the proportion of interest rate sensitive liabilities funding assets.
Lending Activities and Strategy
Kearny Financial's lending activities have traditionally emphasized 1-4
family permanent mortgage loans and such loans continue to comprise the largest
component of the Company's loan portfolio. Beyond 1-4 family loans, lending
diversification by the Company has emphasized commercial real estate and
multi-family loans. To a lesser extent, the Company's lending activities include
construction, commercial business and consumer loans. Going forward, the
Company's lending strategy is to pursue further diversification of the loan
portfolio, whereby growth of commercial real estate, commercial business and
home equity loans will be emphasized. However, the origination of 1-4 family
permanent mortgage loans is expected to
RP Financial, LC
Page 1.14
remain as the Company's most prominent lending activity. Exhibit I-9 provides
historical detail of Kearny Financial's loan portfolio composition over the past
five fiscal years and Exhibit I-10 provides the contractual maturity of the
Company's loan portfolio by loan type as of June 30, 2004.
Kearny Financial originates both fixed rate and adjustable rate 1-4
family permanent mortgage loans. All loans originated by the Company are
retained for investment. In the relatively low interest rate environment that
has prevailed in recent years, the substantial portion of the Company's 1-4
family lending volume has consisted of fixed rate loans. ARM loans offered by
the Company include loans with repricing terms of one, three, five, seven or ten
years and are indexed to the one year U.S. Treasury note. Initial rates on ARM
loans are typically discounted from the fully-indexed rate. After the initial
repricing period, ARM loans convert to a one-year ARM loan for the balance of
the mortgage term. The Company also offers a five-year ARM loan with a five year
repricing period for the term of the loan. Fixed rate loans offered by the
Company have terms ranging from 10 through 30 years. The Company typically
requires a loan-to-value ("LTV") ratio of 80.0% or less for 1-4 family loans,
but will lend up to a 95.0% LTV ratio with private mortgage insurance ("PMI").
From time-to-time, the Company has supplemented originations of 1-4 family loans
with purchases of loan packages. Purchased loans are underwritten to Freddie Mac
guidelines and are secured by local properties. As of June 30, 2004, the Company
maintained 1-4 family permanent mortgage loans totaling $358.2 million, equal to
70.2% of total loans outstanding.
Commercial real estate/multi-family loans represent the most
significant area of lending diversification for the Company. Commercial real
estate/multi-family loans are collateralized by properties in the Company's
regional market area. Kearny Financial originates commercial real estate loans
up to a maximum LTV ratio of 75.0% and requires a minimum debt-coverage ratio of
1.25 times. Loan terms provide for up to 20 year amortizations with terms to
maturity of 15 years or less. Commercial real estate/multi-family loans are
offered as fixed and floating rate loans some of which have a balloon provision
of five-to-fifteen years. In light of the higher credit risk associated with
commercial real estate and multi-family loans, loan rates offered on those loans
are at a premium to the Company's 1-4 family loan rates and as a policy have a
rate of at least 400 basis points above the Company's cost of funds. Properties
securing the
RP Financial, LC
Page 1.15
commercial real estate/multi-family loan portfolio include retail properties,
warehouses, mix-use buildings, office buildings and apartment buildings. Growth
of commercial real estate lending is currently an area of lending emphasis for
the Company. As of June 30, 2004, the Company's commercial real
estate/multi-family loan portfolio totaled $83.4 million or 16.4% of the total
loan portfolio.
Construction loans originated by the Company generally consist of loans
to finance the construction of 1-4 family residences and, to a lesser extent,
financing for the construction of multi-family and commercial properties.
Construction loans extended for 1-4 family properties are typically for the
construction of pre-sold homes. In addition, the Company makes construction
loans to home builders on a speculative basis, but such loans are typically
limited to one loan per builder and do not constitute a significant part of the
Company's construction lending activities. Construction loans generally are
offered for a one-year term and require payment of interest only during the
construction period. The Company will originate construction loans up to a LTV
ratio of 80.0%. Commercial real estate and multi-family construction loans are
originated as construction/permanent loans and are subject to the same
underwriting criteria as required for permanent mortgage loans, as well as
submission of completed plans, specifications and cost estimates related to the
proposed construction. As of June 30, 2004, Kearny Financial's outstanding
balance of construction loans totaled $7.2 million or 1.4% of total loans
outstanding.
Diversification into non-mortgage lending consists primarily of
consumer loans and, to a lesser extent, commercial business loans. Home equity
loans constitute the major portion of the consumer loan portfolio. Home equity
loans are offered as fixed rate amortizing loans, fixed rate lines of credit or
floating rate lines of credit. Home equity loans are offered for terms of up to
15 years and the Company will lend up to maximum LTV ratio of 80.0% of the
combined balance of the first mortgage and an amortizing home equity loan. For
home equity lines of credit, the Company will lend up to a maximum LTV ratio of
75.0% of the combined balance of the first mortgage and the line of credit. The
balance of the consumer loan portfolio consists primarily of loans secured by
deposits, with other types of consumer loans held by Company being nominal.
Other than home equity and second mortgage loans, consumer lending is expected
to remain as a
RP Financial, LC
Page 1.16
limited area of loan diversification for the Company. As of June 30 2004, the
Company's consumer loan portfolio, totaled $56.1 million equal to 11.0% of total
loans outstanding.
The Company offers commercial business loans to small and medium sized
companies in its market area. Commercial business loans generally are offered as
lines of credit with a one year term. The commercial business loan portfolio
consists primarily of secured loans, while the portfolio also includes a modest
balance of unsecured loans. Commercial business lending is being emphasized as a
source of loan growth for the Company. As of June 30, 2004, Kearny Financial's
outstanding balance of commercial business loans totaled $5.2 million or 1.0% of
total loans outstanding.
Exhibit I-11 provides a summary of the Company's lending activities
over the past three fiscal years. The Company's lending volume had declined
during the past three fiscal years, with most of the decline attributable to
reduced lending volumes for 1-4 family permanent mortgage loans. Total loan
originated declined from $187.7 million during fiscal 2002 to $141.8 million
during fiscal 2004, while over the same time period originations of 1-4 family
permanent mortgage loans declined from $119.4 million to $69.6 million. During
the past three fiscal years, originations of residential mortgage loans
accounted for 56.2% of the total loans originated by the Company. Home equity
loans and commercial real estate loans have been the most active areas of
lending diversification for the Company over the past three fiscal years,
accounting for 22.8% and 11.8%, respectively, of total loans originated.
Partially offsetting the decline in loan originations was an increase in loans
purchased, with total loans purchased amounting to $15.0 million during fiscal
2004 compared to $5.7 million during fiscal 2003 and $9.6 million during fiscal
2002. Loan repayments were more significant than loans originated and loans
purchased during each of the past three fiscal years, particularly during fiscal
2003 when loan repayments equaled $249.4 million compared to total loans
originated and purchased of $168.0 million. Overall, net loans receivable
declined from $591.1 million at fiscal year end 2002 to $505.8 million at fiscal
year end 2004.
Asset Quality
The Company's 1-4 family lending emphasis has generally supported
favorable credit quality measures. Over the past five fiscal years, Kearny
Financial's balance of non-performing
RP Financial, LC
Page 1.17
assets ranged from a high of 0.21% of assets at fiscal year end 2000 to a low of
0.13% of assets at fiscal year end 2004. As shown in Exhibit I-12, the Company's
balance of non-performing assets at June 30, 2004 consisted of $2.3 million of
non-accruing loans, $39,000 of accruing loans past due 90 days or more and
$209,000 of real estate owned. The non-accruing loan balance at June 30, 2004
consisted of $771,000 of loans secured by 1-4 family properties, $1.4 million of
loans secured by commercial real estate and multi-family properties, $39,000 of
commercial business loans and $65,000 of consumer loans.
To track the Company's asset quality and the adequacy of valuation
allowances, Kearny Financial has established detailed asset classification
policies and procedures which are consistent with regulatory guidelines.
Detailed asset classifications are reviewed monthly by senior management and the
Board. Additionally, the Company has retained an independent consulting firm to
perform a quarterly review of the loan portfolio. Pursuant to these procedures,
when needed, the Company establishes additional valuation allowances to cover
anticipated losses in classified or non-classified assets. As of June 30, 2004,
the Company maintained valuation allowances of $5.1 million, equal to 1.02% of
net loans receivable and 221.0% of non-accruing loans and accruing loans which
are past due 90 days or more.
Funding Composition and Strategy
Deposits have consistently accounted for the substantial portion of the
Company's interest-bearing funding composition and at June 30, 2004 deposits
equaled 94.2% of Kearny Financial's interest-bearing funding composition.
Exhibit I-13 sets forth the Company's deposit composition for the past three
fiscal years and Exhibit I-14 provides the interest rate and maturities of the
CD portfolio at June 30, 2004. CDs represent the largest component of the
Company's deposit composition. As of June 30, 2004, the CD portfolio totaled
$897.0 million or 58.3% of total deposits and 79.1% of the CDs were scheduled to
mature in one year or less. As of June 30, 2004, jumbo CDs (CD accounts with
balances of $100,000 or more) amounted to $188.0 million or 21.0% of total CDs.
Kearny Financial does not maintain any brokered CDs. Deposit rates offered by
the Association are generally in the middle-to-upper end of the range of rates
offered by local competitors. Transaction and savings account deposits comprise
the balance of the Company's deposit base, which in aggregate equaled $640.5
million or 41.7% of
RP Financial, LC
Page 1.18
total deposits. Comparatively, at fiscal year end 2002, the ratio of transaction
and savings accounts comprising total deposits equaled 35.4%. The low interest
rate environment is believed to have contributed to the increase in transaction
and savings accounts maintained by the Company, as the general decline in CD
rates has increased depositor preference to hold funds in liquid transaction
accounts. Growth of saving accounts has been largest source of deposit growth
for the company since fiscal year end 2002, with such deposits increasing from
$265.3 million or 17.9% of total deposits at fiscal year end 2002 to $481.5
million or 31.3% of total deposits at fiscal year end 2004.
Borrowings serve as an alternative funding source for the Company to
facilitate management of liquidity and funding costs. In general, the Company's
utilization of borrowings has been limited to FHLB advances. Borrowings held by
the Company at June 30, 2004 consisted of $94.2 million of short- and
intermediate-term FHLB advances. Exhibit I-15 provides further detail of Kearny
Financial's borrowing activities during the past three fiscal years.
Subsidiaries and Other Activities
Kearny Financial's only subsidiary is Kearny Federal. Kearny Federal
has two active subsidiaries, KFS Financial Services, Inc. and Kearny Federal
Investment Corp. At June 30, 2004, West Essex Insurance Agency, a full service
insurance agency which was acquired in the West Essex merger, also existed as a
subsidiary of Kearny Federal. There has been limited activity in the West Essex
Insurance Agency following the acquisition of West Essex by Kearny Financial,
and it its anticipated that the West Essex Insurance Agency will be dissolved in
September 2004.
KFS Financial Services, Inc. ("KFS Financial") was incorporated as a
New Jersey corporation in 1994 under the name of South Bergen Financial
Services, Inc. and was acquired in Kearny Financial's merger with South Bergen
Savings Bank in 1999. KFS Financial is a service corporation subsidiary
organized for the purpose of selling insurance and investment products,
including annuities, to Kearny Federal customers and the general public through
a third party affiliation.
RP Financial, LC
Page 1.19
Kearny Federal Investment Corp. was organized in June 2004 under New
Jersey law as an investment company primarily to hold investment securities. At
June 30, 2004, it did not hold any assets.
Legal Proceedings
Kearny Financial is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of the Company.
RP(R) Financial, LC.
Page 2.1
II. MARKET AREA
Introduction
Kearny Financial currently conducts operations through the main office
in Kearny and 24 branch offices. The Company's branch network serves an eight
county market area in northern and central New Jersey. Fifteen of the Company's
branches were acquired through the acquisitions of Pulaski and West Essex.
Overall, the counties in which the Company operates encompasses 59% of the
entire population of New Jersey. A map of the Company's office locations is
included as Exhibit II-1. In September 2004, the Company will move its
administrative offices into a newly built office facility located in Fairfield,
New Jersey. The new administrative office facility is owned by the Company.
The Company's market area is largely suburban and urban in nature as
implied by the relatively high population density of the counties where the
Company's branches are maintained. The northern New Jersey market (including
Bergen, Essex, Hudson, Middlesex, Morris, Passaic and Union Counties) represents
the greatest concentration of population, deposits and income in the state. For
example, these counties combined represent 52% of the entire New Jersey
population and a similar percentage of New Jersey households. The northern New
Jersey market also represents the greatest concentration of Kearny Financial's
retail operations. Ocean County is located on the central New Jersey coastline.
Maintaining operations in a large metropolitan area serves as a benefit to the
Company in periods of economic growth, while at the same time fosters
significant competition for the financial services provided by Kearny Financial.
The Company's competitive environment includes a significant number of thrifts,
commercial banks and other financial services companies, some of which have a
regional or national presence and many of which are larger than the Company in
terms of deposits, loans, scope of operations, and number of branches.
Future business and growth opportunities will be partially influenced
by economic and demographic characteristics of the markets served by the
Company, particularly the future growth and stability of the regional economy,
demographic growth trends, and the nature and intensity of the competitive
environment for financial institutions. These factors have been
RP Financial, LC
Page 2.2
examined to help determine the growth potential that exists for the Company and
the relative economic health of the Company's market area.
Market Area Demographics
Overall, the markets served by the Company's branches exhibited a range
of historical and projected demographic trends (see Table 2.1). All of the
primary market area counties experienced increases in population and households
from 2000 through 2004, with the more urbanized northern New Jersey markets
generally recording slower growth compared to the state and the U.S. Ocean
County's 2.2% annual population growth rate was the strongest among the primary
market area counties, which has been supported by growth of retirement and
resort communities along the central coastline of New Jersey. Projected
population growth rates for the primary market area counties are not expected to
vary materially from recent historical trends, with the counties of Middlesex,
Morris and Ocean projected to continue to experience the strongest population
growth rates over the next five years. Growth in households generally paralleled
the population growth rates, with Ocean County posting the highest household
growth rate among the primary market area counties. The counties of Middlesex,
Morris and Ocean are also projected to experience the strongest household growth
rates over the next five years.
Median household and per capita income measures for the primary market
area counties indicate that Morris County is a relatively affluent market, while
Bergen County also had household and per capita income measures that were well
above the comparable New Jersey measures. The relative affluence of Morris
County is also implied by the higher percentage of households with incomes that
exceed $100,000. Household and per capita income measures for New Jersey, as
well as the substantial majority of the primary market area counties, were above
the comparable U.S. measures, reflecting the higher costing of living associated
with densely populated markets that comprise a large potion of the Company's
market area. Median household income increased in all eight of the primary
market area counties since 2000, with annual growth rates approximating the
comparable New Jersey annual growth rate of 2.4%. Household income growth rates
for the primary market area counties are projected to increase at slightly
higher rates than recorded during the previous four years.
RP Financial, LC
Page 2.3
Table 2.1
Kearny Financial Corporation
Summary Demographic Data
Year Growth Rate
------------------------------ ---------------------
2000 2004 2009 2000-2004 2004-2009
---- ---- ---- --------- ---------
Population (000)
----------------
United States 281,422 295,628 314,309 1.2% 1.2%
New Jersey 8,414 8,706 9,076 0.9% 0.8%
Bergen County 884 900 919 0.4% 0.4%
Essex County 794 801 812 0.2% 0.3%
Hudson County 609 614 618 0.2% 0.1%
Middlesex County 750 779 812 0.9% 0.9%
Morris County 470 491 518 1.1% 1.1%
Ocean County 511 558 622 2.2% 2.2%
Passaic County 489 499 510 0.5% 0.5%
Union County 522 533 546 0.5% 0.5%
Households (000)
----------------
United States 105,480 111,573 119,335 1.4% 1.4%
New Jersey 3,065 3,178 3,322 0.9% 0.9%
Bergen County 331 337 345 0.5% 0.5%
Essex County 284 289 295 0.4% 0.4%
Hudson County 231 232 234 0.2% 0.1%
Middlesex County 266 276 288 0.9% 0.8%
Morris County 170 177 186 1.0% 1.0%
Ocean County 200 218 243 2.2% 2.2%
Passaic County 164 166 169 0.4% 0.4%
Union County 186 188 192 0.3% 0.3%
Median Household Income ($)
---------------------------
United States $42,729 $48,124 $56,710 3.0% 3.3%
New Jersey $55,908 $61,437 $70,239 2.4% 2.7%
Bergen County $66,174 $74,497 $87,136 3.0% 3.2%
Essex County $45,337 $49,923 $59,628 2.4% 3.6%
Hudson County $40,742 $44,272 $50,176 2.1% 2.5%
Middlesex County $62,120 $67,597 $77,072 2.1% 2.7%
Morris County $77,714 $86,734 $103,856 2.8% 3.7%
Ocean County $46,802 $50,637 $56,054 2.0% 2.1%
Passaic County $49,343 $53,857 $61,366 2.2% 2.6%
Union County $56,163 $61,814 $72,005 2.4% 3.1%
RP Financial, LC
Page 2.4
Table 2.1 (continued)
Kearny Financial Corporation
Summary Demographic Data
Year Growth Rate
------------------------------ ------------------
2000 2004 2000-2004
---- ---- ---------
Per Capita Income ($)
---------------------
United States $21,587 $25,866 4.6%
New Jersey $27,006 $31,614 4.0%
Bergen County $33,638 $40,402 4.7%
Essex County $24,943 $29,897 4.6%
Hudson County $21,154 $24,384 3.6%
Middlesex County $26,535 $30,531 3.6%
Morris County $36,964 $43,856 4.4%
Ocean County $23,054 $26,062 3.1%
Passaic County $21,370 $24,307 3.3%
Union County $26,992 $31,435 3.9%
Less Than $25,000 to $50,000 to $100,000 to Over
2004 HH Income Dist. (%) $25,000 50,000 $100,000 $150,000 $150,000
------------------------ ------- ------ -------- -------- --------
United States 24.7% 27.1% 30.8% 10.9% 6.5%
New Jersey 18.6% 22.5% 32.1% 15.5% 11.4%
Bergen County 14.0% 19.2% 31.2% 18.7% 17.0%
Essex County 26.9% 23.2% 26.8% 12.1% 11.1%
Hudson County 28.7% 27.0% 27.3% 10.6% 6.4%
Middlesex County 14.4% 21.0% 35.9% 18.2% 10.5%
Morris County 9.2% 15.9% 32.0% 21.1% 21.8%
Ocean County 22.4% 26.9% 32.8% 12.4% 5.5%
Passaic County 22.0% 24.6% 31.2% 14.1% 8.0%
Union County 18.6% 22.3% 31.7% 15.2% 12.2%
Source: ESRI Business Information Solutions
RP Financial, LC
Page 2.5
National Economic Factors
The future success of the Company's operations is partially dependent
upon various national and local economic trends. The recovery in the national
economy showed signs of accelerating in third quarter of 2003, based on third
quarter GDP growth of 8.2%. Job growth pushed the national unemployment rate
down to 6.0% in October and 5.9% in November. Employment gains were aided by a
pick-up in manufacturing activity, which was attributable to a surge in new
orders. Despite the pick-up in economic activity, inflation remained low as core
consumer prices fell in November for the first time since 1982. The December
national unemployment rate unexpectedly dropped to a 14-month low of 5.7%;
however, the decline was attributable to workers exiting the labor force rather
than new jobs beings created.
Economic data for January 2004 suggested that the economic recovery was
gaining traction, as evidenced by a strong increase in U.S. industrial
production for the month of January. Factory activity continued to rise in
January and non-manufacturing activity grew for a tenth consecutive month in
January 2004. The U.S. unemployment rate fell to a two-year low of 5.6% in
January, as the pace of job growth picked-up. However, consumer confidence
slipped in February, as hiring activity continued to lag the pace of the
economic recovery. Employment data for February showed that jobs were added but
well below expectations and the unemployment rate was unchanged at 5.6%. A
stronger than expected increase in U.S. industrial production in February and
initial jobless claims falling to their lowest level in three years in mid-March
provided further indications that the U.S. economy was improving. Housing starts
slowed in February for a second straight month, but demand for new homes
remained strong. The March unemployment rate edged up to 5.7%, although job
growth for the month was the strongest in four years and for the first time in
44 months there was no decline in manufacturing jobs. March economic data also
showed manufacturing activity accelerating, a strong increase in retail sales, a
surge in housing starts and new home sales, and a strong increase in
durable-goods orders.
The economy in general showed signs of accelerating going into the
second quarter of 2004, even though first quarter GDP growth increased at a
slower than expected 3.9% annual rate. Job growth in April exceeded
expectations, as the economy created 288,000 new jobs and the national
unemployment rate fell to 5.6% in April. Some other economic data for April was
RP Financial, LC
Page 2.6
not as strong, as higher interest rates slowed new housing starts and sales of
new homes. Orders for durable goods also fell in April, while fears of higher
interest rates fueled a strong increase in home resales during April. Job growth
remained strong in May, including in the manufacturing sector. An additional
248,000 jobs were created in May, bringing the three month total of jobs added
to almost one million - the biggest three month increase since 2000. The May
unemployment rate remained at 5.6%, as more people entered the labor market
looking for work. Despite higher mortgage rates, sales of new and existing homes
surged to record highs in May. Consumer spending rose 1.0% in May, which was the
largest increase since October 2001. However, orders for durable goods posted an
unexpected decline in May, resulting in the first back-to-back month drops in
durable goods orders since the end of 2002.
The economy showed signs of slowing at the end of the second quarter of
2004, as higher energy prices reduced consumer spending. Retail sales,
industrial production and housing starts all fell in June. Job growth was also
less than anticipated in June and the unemployment rate remained unchanged at
5.6% for the third straight month. The index of leading indicators fell in June
for the first time in over a year and second quarter GDP declined to a 3.0%
annual growth rate. Surging oil prices continued to hamper the U.S. economy
during July, as employers added just 32,000 jobs in July. Despite modest job
growth, the July unemployment rate dropped to 5.5%.
In terms of interest rate trends over the past year, weak employment
data for August 2003 provided a boost to the bond market in early-September.
U.S. Treasury bonds continued to strengthen through mid-September, as the
Federal Reserve left interest rates unchanged and indicated they would remain
low, as government data showed underlying inflation at a 37-year low. Weaker
than expected economic data that showed a decline in consumer confidence and a
slow down in manufacturing activity further contributed to the decline in
Treasury yields at the close of the third quarter.
The decline in interest rates was reversed in the fourth quarter, as
data indicating that the economic recovery was strengthening pushed Treasury
yields higher during October and early-November 2003. Indications that the
Federal Reserve would keep interest rates low and favorable inflation data
served to push interest rates lower in mid-November. Treasury yields moved up
again in early-December, largely on the basis of economic data that showed an
RP Financial, LC
Page 2.7
increase in manufacturing activity and the Federal Reserve's more upbeat
assessment of the economy. The Federal Reserve concluded its December meeting
with no change in the federal funds target rate of 1% and indicated that low
interest rate levels could be maintained for a considerable period. Favorable
inflation data supported a relatively stable interest rate environment at the
close of 2003.
Treasury bonds rallied at the beginning of 2004 on news of a weaker
than expected December employment report, which showed job creation far below
forecasted levels. In late-January, the Federal Reserve concluded to leave
short-term interest rates unchanged at a 45-year low of 1%, but dropped its
commitment to keep rates low for a considerable period of time. The change in
the Federal Reserve's wording pushed Treasury yields higher at the end of
January and into early-February. Following the spike-up in bond yields, interest
rates eased lower into mid-February as January employment data showed that job
growth remained less than robust. Interest rates stabilized during the second
half of February, with the yield on the 10-year Treasury note edging below 4.0%
at the end of the month. A weaker than expected employment report for February
sparked a rally in Treasury bonds in early-March, as the lack of meaningful job
growth raised expectations that the Federal Reserve would not increase rates
anytime soon. The Federal Reserve left rates unchanged at its mid-March meeting,
indicating that it could be patient about increasing rates because of low
inflation, unused factory capacity and limited job growth. Treasury yields
dropped to an eight month low following the Federal Reserve meeting and then
eased higher through the end of March on indications that the economy was
getting stronger.
The upward trend in interest rates continued into the beginning of the
second quarter of 2004, as strong economic data increased expectations that the
Federal Reserve would increase interest rates. Bond yields were also pushed
higher by signs of inflation coming back into the economy, as the consumer price
index for March rose 0.5%. March economic data that showed a strengthening
economy pressured bond yields higher through the end of April. Robust job growth
in April sharpened the sell-off in long-term Treasurys during the first half of
May, reflecting increased expectations that the Federal Reserve would raise
interest rates soon. Treasury yields eased lower during mid-May, as investors
shifted money to the relative safety of bonds in reaction to India's election
results and the assassination of the head of the Iraqi
RP Financial, LC
Page 2.8
Governing Council. Strong job growth reflected in the May employment data and
growing inflation concerns reversed the downward trend in bond yields during the
first half of June, with the yield on the 10-year U.S. Treasury note hitting a
two year in mid-June. Bond yields stabilized ahead of the Federal Reserve
meeting at the end of June, as only a moderate increase in core consumer prices
during May served to subdue concerns of a sharp rise in inflation. The Federal
Reserve's decision to raise its short-term rate from 1.0% to 1.25% provided a
boost to bond prices at the close of the second quarter, as the Federal Reserve
indicated that it would continue to raise the federal funds rate a quarter-point
at a time.
Signs of slower economic growth and a smaller than expected increase in
June consumer prices served to stabilize interest rates through most of July
2004. Bond yields declined during the first half of August, as higher oil prices
slowed the pace of economic expansion. The Federal Reserve raised short-term
rates a quarter-point to 1.5% in August and signaled that more increases remain
in store this year, based on expectations that the slowdown in the economy would
only be temporary. As of August 20, 2004, one- and 10-year U.S. government bonds
were yielding 1.89% and 4.21%, respectively, versus comparable year ago yields
of 1.21% and 4.46%. Exhibit II-2 provides historical interest rate trends from
1995 through August 20, 2004.
Regional Economy
The primary market area economy is relatively broad based and due to
its overall geographic size, in general, is somewhat reflective of the New
Jersey state economy. Consistent with the U.S. employment data, service jobs
represent the largest employment sector in New Jersey and the service sector has
added the most jobs over the past five years. As shown in Table 2.1,
wholesale/retail trade, government and manufacturing comprised the other major
employment sectors in New Jersey. From 1998 through 2002, the state of New
Jersey added jobs in each of the past five years with the strongest job growth
experienced in 2000. Comparatively, six of the eight primary market area
counties experienced a decline in jobs in either 2001 or 2002. Morris County and
Ocean County were the only two primary market area counties that added jobs in
both 2001 and 2002, with the most significant job growth occurring in Ocean
County. Ocean County's rapidly growing population has fueled the stronger pace
of job growth in that market.
RP Financial, LC
Page 2.9
Table 2.2
New Jersey Employment Sectors(1)
Employment Sectors % of Labor Force
------------------ ----------------
Services 40.5%
Government 12.8
Wholesale/Retail Trade 16.4
Finance, insurance and real estate 9.9
Manufacturing 7.9
Construction 4.8
Transportation and warehousing 4.2
Information 2.6
Other 0.9
100.0%
(1) As of 2002.
Source: Regional Economic Information System Bureau of Economic Analysis.
Recent unemployment data for the market area is shown in Table 2.3. The
data indicates that the June 2004 unemployment rate of 4.7% for state of New
Jersey was below the comparable U.S. unemployment rate of 5.8%. Unemployment
rates for both the state of New Jersey and the U.S. were lower in June 2004
compared to June 2003. June 2004 unemployment rates for the primary market area
counties ranged from a low of 3.4% in Morris County to a high of 6.8% in Hudson
County. The June 2004 unemployment rates for the primary market area counties
showed an equal distribution between counties with higher and lower unemployment
rates in comparison to the New Jersey unemployment rate. Consistent with the
U.S. and New Jersey, all eight of the primary market area counties reflected
lower unemployment rates for June 2004 compared to the year ago period.
Table 2.3
Kearny Financial Corporation
Market Area Unemployment Trends
June 2003 June 2004
Region Unemployment Unemployment
------ ------------ ------------
United States 6.5% 5.8%
New Jersey 5.9 4.7
Bergen County 5.2 4.0
Essex County 7.7 6.2
RP Financial, LC
Page 2.10
Table 2.3(continued)
Kearny Financial Corporation
Market Area Unemployment Trends
June 2003 June 2004
Region Unemployment Unemployment
------ ------------ ------------
Hudson County 8.6 6.8
Middlesex County 5.6 4.4
Morris County 4.5 3.4
Ocean County 5.5 4.5
Passaic County 7.8 6.3
Union County 6.4 5.2
(1) Unemployment rates are not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics.
Market Area Deposit Characteristics
The Company's retail deposit base is closely tied to the economic
fortunes of the New Jersey economy and, in particular, the economies of the
markets where branches are currently maintained. Table 2.4 displays deposit
market trends from June 30, 2000 through June 30, 2003 for the counties where
the Company maintained branches during that period. The Company's deposit data
includes the deposits that were acquired through the mergers of Pulaski and West
Essex. Additional data is also presented for the state of New Jersey. The data
indicates that deposit growth in all eight of the primary market area counties
has been positive for the three year period covered in Table 2.4. Similar to the
state of New Jersey, commercial banks maintained a larger market share of
deposits than savings institutions in seven of the eight primary market area
counties. Savings institutions maintained a slightly larger market share of
deposits in Ocean County.
Kearny Financial's largest deposit holding and largest market share of
deposits is in Bergen County. The Company's $823.0 million of deposits at the
Bergen County branches represented a 2.8% market share of bank and thrift
deposits at June 30, 2003. Hudson County accounted for the Company's second
largest holding and market share of deposits, with $281 million of deposits
providing the Company with a 1.2% market share of bank and thrift deposits
at June 30, 2003. Kearny Financial's relatively low market share of deposits
highlights the presence of significantly larger competitors that operate in the
markets that are served by the Company's branches. Deposit growth was recorded
by the Company in all eight of the primary market counties during the three year
period covered in Table 2.4, which generally served to preserve its deposit
market share. From June 30, 2000 to June 2003, the Company gained deposit market
share in three counties with Union County being the only county where the
Company experienced a decline in deposit market share.
Competition
The Company faces notable competition in both deposit gathering and
lending activities, including direct competition with several financial
institutions that primarily have a local or regional presence. Securities firms
and mutual funds also represent major sources of competition in raising
deposits. In many cases, these competitors are also seeking to provide some or
all of the community-oriented services as Kearny Financial. With regard to
lending competition, the Company encounters the most significant competition
from the same institutions providing deposit services. In addition, the Company
competes with mortgage companies, independent mortgage brokers, and credit
unions in originating mortgage loans. Table 2.5 lists the Company's largest
competitors in the primary market area counties served by its branches, based on
deposit market share as noted parenthetically. The Company's deposit market
share and market rank are also provided in Table 2.5.
Table 2.5
Kearny Financial Corporation
Market Area Deposit Competitors
Location Name
-------- ----
Bergen County Bank of America Corp. (25.4%)
Hudson City Bancorp (11.2%)
Commerce Bancorp (5.3%)
Kearny Financial (2.8%) - Rank of 12
Essex County Wachovia Corp. (14.1%)
Bank of America Corp. (11.8%)
PNC Financial Services (10.9%)
Kearny Financial (1.1%) - Rank of 20
RP Financial, LC
Page 2.13
Table 2.5(continued)
Kearny Financial Corporation
Market Area Deposit Competitors
Location Name
-------- ----
Hudson County Bank of America Corp. (39.0%)
TD Bank Financial Group (23.8%)
North Fork Bancorp (9.2%)
Kearny Financial (1.2%) - Rank of 13
Middlesex County Merrill Lynch & Co. (44.0%)
Bank of America Corp. (8.7%)
Wachovia Corp. (8.6%)
Kearny Financial (0.4%) - Rank of 23
Morris County Bank of America Corp. (17.7%)
Hudson City Bancorp (10.9%)
J.P. Morgan Chase & Co. (10.2%)
Kearny Financial (0.8%) - Rank of 20
Ocean County Bank of America Corp. (14.8%)
Commerce Bancorp (13.7%)
Wachovia Corp. (12.9%)
Kearny Financial (0.7%) - Rank of 17
Passaic County Valley National Bancorp (27.7%)
PNC Financial Services (11.2%)
Wachovia Corp. (8.5%)
Kearny Financial (0.3%) - Rank of 21
Union County Wachovia Corp. (30.4%)
Bank of America Corp. (16.9%)
Investors Bancorp (5.9%)
Kearny Financial (0.4%) - Rank of 27
Sources: FDIC and SNL Financial.
RP(R) Financial, LC.
Page 3.1
III. PEER GROUP ANALYSIS
This chapter presents an analysis of Kearny Financial's operations
versus a group of comparable companies (the "Peer Group") selected from the
universe of all publicly-traded savings institutions. The primary basis of the
pro forma market valuation of Kearny Financial is provided by these public
companies. Factors affecting the Company's pro forma market value such as
financial condition, credit risk, interest rate risk, and recent operating
results can be readily assessed in relation to the Peer Group. Current market
pricing of the Peer Group, subject to appropriate adjustments to account for
differences between Kearny Financial and the Peer Group, will then be used as a
basis for the valuation of Kearny Financial's to-be-issued common stock.
Peer Group Selection
The mutual holding company form of ownership has been in existence in
its present form since 1991. As of the date of this appraisal, there were
approximately 20 publicly-traded institutions operating as subsidiaries of MHCs.
We believe there are a number of characteristics of MHC shares that make them
different from the shares of fully-converted companies. These factors include:
(1) lower aftermarket liquidity in the MHC shares since less than 50% of the
shares are available for trading; (2) guaranteed minority ownership interest,
with no opportunity of exercising voting control of the institution in the MHC
form of organization; (3) the potential impact of "second-step" conversions on
the pricing of public MHC institutions; (4) the regulatory policies regarding
the dividend waiver by MHC institutions; and (5) most MHCs have formed mid-tier
holding companies, facilitating the ability for stock repurchases, thus
improving the liquidity of the stock on an interim basis. We believe that each
of these factors has an impact on the pricing of the shares of MHC institutions,
and that such factors are not reflected in the pricing of fully-converted public
companies.
Given the unique characteristics of the MHC form of ownership, RP
Financial concluded that the appropriate Peer Group for Kearny Financial's
valuation should be comprised of subsidiary institutions of mutual holding
companies. The selection of publicly-traded mutual holding companies for the
Company's Peer Group is consistent with the regulatory guidelines
RP Financial, LC
Page 3.2
and other recently completed MHC transactions. Further, the Peer Group should be
comprised of only those MHC institutions whose common stock is either listed on
a national exchange or is NASDAQ listed, since the market for companies trading
in this fashion is regular and reported. We believe non-listed MHC institutions
are inappropriate for the Peer Group, since the trading activity for
thinly-traded stocks is typically highly irregular in terms of frequency and
price and may not be a reliable indicator of market value. We have excluded from
the Peer Group those public MHC institutions that are currently pursuing a
"second-step" conversion and/or companies whose market prices appear to be
distorted by speculative factors or unusual operating conditions. MHCs which
have recently completed a minority stock offering have been excluded as well,
due to the lack of a seasoned trading history and insufficient quarterly
financial data that includes the impact of the offering proceeds. The universe
of all publicly-traded institutions is included as Exhibit III-1.
Basis of Comparison
This appraisal includes two sets of financial data and ratios for the
Peer Group institutions. The first set of financial data reflects the actual
book value, earnings, assets and operating results reported by the Peer Group
institutions in its public filings inclusive of the minority ownership interest
outstanding to the public. The second set of financial data, discussed at length
in the following chapter, places the Peer Group institutions on equal footing by
restating their financial data and pricing ratios on a "fully-converted" basis
through assuming the sale of the majority shares held by the MHCs in public
offerings based on their current trading prices and standard assumptions for a
thrift conversion offering. Throughout the appraisal, the adjusted figures will
be specifically identified as being on a fully-converted basis. Unless so noted,
the figures referred to in the appraisal will be actual financial data reported
by the Peer Group institutions.
Both sets of financial data have their specific use and applicability
to the appraisal. The actual financial data, as reported by the Peer Group
companies and reflective of the minority interest outstanding, will be used in
Chapter III to make financial comparisons between the Peer Group and the
Company. The differences between the Peer Group's reported financial data and
the financial data of Kearny Financial are not significant enough to distort the
conclusions of the
RP Financial, LC
Page 3.3
comparison (in fact, such differences are greater in a standard conversion
appraisal). The adjusted financial data (fully-converted basis) will be more
fully described and quantified in the pricing analysis discussed in Chapter IV.
The fully-converted pricing ratios are considered critical to the valuation
analysis in Chapter IV, because they place each Peer Group institution on a
fully-converted basis (making their pricing ratios comparable to the pro forma
valuation conclusion reached herein), eliminate distortion in pricing ratios
between Peer Group institutions that have sold different percentage ownership
interests to the public, and reflect the implied pricing ratios being placed on
the Peer Group institutions in the market today to reflect the unique trading
characteristics of publicly-traded MHC institutions.
Kearny Financial's Peer Group
Under ideal circumstances, the Peer Group would be comprised of ten
publicly-traded New Jersey-based MHC institutions with capital, earnings, loan
portfolio composition, credit quality and interest rate risk comparable to
Kearny Financial. However, given the limited number of publicly-traded
institutions in the MHC form of ownership, the selection criteria was
necessarily broad-based and not confined to a particular geographic market area.
The selection criteria for Kearny Financial's Peer Group was defined as the ten
largest companies with assets of less than $10 billion. The asset sizes of the
Peer Group companies ranged from $266 million to $8.4 billion. The universe of
all publicly-traded MHC institutions, exclusive of institutions that have
announced second-step conversions, is included as Exhibit III-2 and Exhibit
III-3 provides summary demographic and deposit market share data for the primary
market areas served by each of the Peer Group companies.
Unlike the universe of fully-converted publicly-traded thrifts, which
includes approximately 196 companies, the universe of public MHC institutions is
small, thereby reducing the prospects of a highly comparable Peer Group.
Nonetheless, because the trading characteristics of public MHC institution
shares are significantly different from those of fully-converted companies,
public MHC institutions were the most appropriate group to consider as Peer
Group candidates for this valuation. Relying solely on full stock public
companies for the Peer Group would not capture the difference in current market
pricing for public MHC institutions and thus could lead to distorted valuation
conclusions. The federal regulatory
RP Financial, LC
Page 3.4
agencies have previously concurred with this selection procedure of the Peer
Group for MHC valuations. To account for differences between Kearny Financial
and the MHC Peer Group in reaching a valuation conclusion, it will be necessary
to make certain valuation adjustments. The following discussion addresses
financial similarities and differences between Kearny Financial and the Peer
Group.
Table 3.1 on the following page lists key general characteristics of
the Peer Group companies. Although there are differences among several of the
Peer Group members, by and large they are well-capitalized and profitable
institutions and their decision to reorganize in MHC form suggests a commonality
of operating philosophy. Importantly, the trading prices of the Peer Group
companies reflect the unique operating and other characteristics of public MHC
institutions. While the Peer Group is not exactly comparable to Kearny
Financial, we believe such companies form a good basis for the valuation of
Kearny Financial, subject to certain valuation adjustments.
In aggregate, the Peer Group companies maintain a slightly higher level
of capitalization relative to the universe of all public thrifts (10.99% of
assets versus 10.67% for the all public average), generate lower earnings on a
return on average assets basis (0.59% ROAA versus 0.82% for the all public
average), and generate a lower return on equity (5.58% ROE versus 8.76% for the
all public average). The summary table below underscores the key differences,
particularly in the average pricing ratios between full stock and MHC
institutions (both as reported and on a fully-converted basis).
Source: Corporate offering circulars, data derived from information published in
SNL Securities Quarterly Thrift Report, and financial reports of
publicly-traded thrifts.
The following sections present a comparison of Kearny Financial's
financial condition, income and expense trends, loan composition, interest rate
risk and credit risk versus the figures reported by the Peer Group. The
conclusions drawn from the comparative analysis are then factored into the
valuation analysis discussed in the final chapter.
Financial Condition
Table 3.2 shows comparative balance sheet measures for Kearny Financial
and the Peer Group. Kearny Financial's and the Peer Group's ratios reflect
balances as of June 30, 2004, unless otherwise indicated for the Peer Group
companies. Kearny Financial's net worth base of 15.2% was above the Peer Group's
average net worth ratio of 11.0%. Accordingly, with the infusion of the net
proceeds realized from the public offering, the Company will maintain a
significantly higher equity-to-assets ratio than the Peer Group. However, the
difference between the Company's and the Peer Group's tangible equity-to-assets
ratio will be less significant, in light of the Company's higher level of
intangibles. Tangible equity-to-assets ratios for the Company and the Peer Group
equaled 10.8% and 10.1%, respectively, as goodwill and intangibles maintained by
the Company and the Peer Group equaled 4.4% and 0.9% of assets, respectively.
The increase in Kearny Financial's pro forma capital position will be favorable
from a risk perspective and in terms of future earnings potential that could be
realized through leverage and lower funding costs. At the same time, the
Company's higher pro forma capitalization will also result in a relatively low
return on equity. Both Kearny Financial's and the Peer Group's regulatory
capital ratios reflected capital surpluses with respect to the
RP(R) Financial, LC.
Page 3.7
Table 3.2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of June 30, 2004
Balance Sheet as a Percent of Assets
---------------------------------------------------------------------------
Cash & Borrow- Good- MEMO:
Equiva- MBS & ed Subd. Net will Tng Net Pref.
lents Invest Loans Deposits Funds Debt Worth & Intang Worth Stock
----- ------ ----- -------- ----- ---- ----- -------- ----- -----
Kearny Financial Corp.
----------------------
June 30, 2004 2.0% 65.1% 26.1% 79.4% 4.9% 0.0% 15.2% 4.4% 10.8% 0.0%
All Public Companies 3.8% 23.6% 67.9% 66.4% 21.0% 0.7% 10.6% 0.8% 9.9% 0.0%
State of NJ 3.1% 38.0% 56.0% 66.8% 20.3% 0.5% 11.5% 0.1% 11.4% 0.0%
Comparable Group Average 3.9% 40.3% 50.7% 71.2% 15.2% 0.7% 11.0% 0.9% 10.1% 0.0%
Mid-Atlantic Companies 4.5% 34.3% 55.1% 78.0% 11.5% 1.1% 8.7% 1.2% 7.4% 0.0%
Midwest Companies 1.8% 43.7% 51.0% 69.1% 20.0% 0.3% 9.3% 0.6% 8.8% 0.0%
Other Comparative Companies 4.4% 55.0% 37.2% 53.0% 21.4% 0.0% 19.6% 0.3% 19.3% 0.0%
Comparable Group
----------------
Mid-Atlantic Companies
----------------------
ALLB Alliance Bank MHC of PA (20.0) 6.7% 33.6% 54.0% 74.0% 16.1% 0.0% 9.2% 0.0% 9.2% 0.0%
BCSB BCSB Bankcorp MHC of MD (36.4) 2.2% 44.5% 48.9% 77.6% 13.2% 3.1% 5.4% 0.4% 5.0% 0.0%
GCBC Green Co Bcrp MHC of NY (43.9) 7.5% 37.4% 52.3% 85.6% 3.5% 0.0% 10.5% 0.0% 10.5% 0.0%
NWSB Northwest Bancorp MHC of PA (41.4) 3.0% 25.1% 65.6% 81.1% 7.8% 1.8% 8.7% 2.5% 6.2% 0.0%
ONFC Oneida Fincl MHC of NY (42.4) 2.7% 39.4% 47.8% 71.7% 16.2% 0.0% 11.3% 3.1% 8.2% 0.0%
PBHC Pathfinder BC MHC of NY (35.3) 4.8% 25.7% 61.7% 78.0% 12.1% 1.7% 7.0% 1.5% 5.5% 0.0%
Midwest Companies
-----------------
CFFN Capitol Fed. Fin. MHC of KS (29.2) 1.2% 44.1% 53.7% 49.4% 37.6% 0.6% 11.4% 0.0% 11.4% 0.0%
JXSB Jcksnville Bcp MHC of IL (46.8) 2.3% 43.3% 48.3% 88.7% 2.4% 0.0% 7.2% 1.1% 6.1% 0.0%
New England Companies
---------------------
WFD Westfield Finl MHC of MA (46.5) 6.8% 43.5% 45.1% 78.6% 5.9% 0.0% 14.8% 0.0% 14.8% 0.0%
Southeast Companies
-------------------
CHFN Charter Financial MHC of GA (18.4) 2.0% 66.6% 29.3% 27.4% 36.8% 0.0% 24.4% 0.6% 23.9% 0.0%
RP(R) Financial, LC.
Page 3.7 (continued)
Table 3.2 (Continued)
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of June 30, 2004
Balance Sheet Annual Growth Rates Regulatory Capital
--------------------------------------------------------- ----------------------
MBS,
Cash & Borrows.
Invest- & Net Tng Net Tangi-
Assets ments Loans Deposit Subdebt Worth Worth ble Core Reg.Cap.
------ ----- ----- ------- ------------- ------ ----- -------------
Kearny Financial Corp.
----------------------
June 30, 2004 -3.00% -3.46% -0.66% -4.72% 24.40% 5.45% -14.24% 10.87% 10.87% 32.87%
All Public Companies 10.90% 1.97% 12.32% 7.94% 19.30% 2.40% 2.12% 9.41% 9.42% 16.81%
State of NJ 12.09% 10.56% 21.50% 5.60% 13.66% 1.11% 0.96% 11.91% 11.18% 25.01%
Comparable Group Average 4.69% 5.24% 4.43% 4.26% 14.52% 2.36% 0.90% 9.85% 9.31% 19.96%
Mid-Atlantic Companies 7.41% 8.20% 6.31% 7.30% 5.48% 4.19% 1.79% 7.59% 8.16% 15.17%
Midwest Companies -0.17% 0.78% -0.56% -0.88% -1.61% -4.90% -5.30% 10.40% 8.52% 19.43%
Other Comparative Companies 1.32% 0.83% 3.79% 0.25% 45.19% 4.14% 4.41% 11.84% 11.84% 27.68%
Comparable Group
----------------
Mid-Atlantic Companies
----------------------
ALLB Alliance Bank MHC of PA (20.0) -0.47% -12.36% 8.30% -0.62% -0.01% 0.01% 0.01% N.M. 9.32% 16.89%
BCSB BCSB Bankcorp MHC of MD (36.4) 17.23% 40.36% -1.96% 6.31% N.M. 12.42%-13.07% 7.21% 7.21% 15.24%
GCBC Green Co Bcrp MHC of NY (43.9) 10.75% 8.36% 12.65% 11.77% 25.00% 2.41% 2.41% N.M. N.M. N.M.
NWSB Northwest Bancorp MHC of PA (41.4) 10.65% -6.04% 16.69% 9.90% 18.35% 40.08% 29.14% N.M. N.M. N.M.
ONFC Oneida Fincl MHC of NY (42.4) 0.35% -4.77% 4.09% 2.13% -2.13% -3.02% -6.59% 7.96% 7.96% 13.39%
PBHC Pathfinder BC MHC of NY (35.3) 5.94% 23.65% -1.94% 14.34% -13.80% -1.92% -1.14% N.M. N.M. N.M.
Midwest Companies
-----------------
CFFN Capitol Fed. Fin. MHC of KS (29.2) -2.11% -9.58% 5.33% -2.43% -1.61% -2.64% -2.64% 10.40% 10.40% 25.50%
JXSB Jcksnville Bcp MHC of IL (46.8) 1.78% 11.14% -6.44% 0.67% N.M. -7.15% -7.97% N.M. 6.64% 13.35%
New England Companies
---------------------
WFD Westfield Finl MHC of MA (46.5) -2.52% -2.37% -3.00% -5.43% 90.00% -6.70% -6.70% 14.59% 14.59% 27.89%
Southeast Companies
-------------------
CHFN Charter Financial MHC of GA (18.4) 5.35% 4.03% 10.58% 5.93% 0.37% 14.98% 15.51% 9.08% 9.08% 27.46%
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP Financial, LC
Page 3.8
regulatory capital requirements, with the Company's ratios currently exceeding
the Peer Group's ratios.
The interest-earning asset compositions for the Company and the Peer
Group were somewhat different, as the Company's interest-earning asset
composition reflected a significantly lower concentration of loans in comparison
to the Peer Group. The Company's loans-to-assets ratio equaled 26.1%, versus a
comparable ratio of 50.7% for the Peer Group. Comparatively, the Company's cash
and investments-to-assets ratio of 67.1% was well above the comparable Peer
Group ratio of 44.2%, as the Company's higher ratio of investment securities
more than offset the Peer Group's slightly higher ratio of cash and cash
equivalents. Overall, Kearny Financial's interest-earning assets amounted to
93.2% of assets, which was less than the comparable Peer Group ratio of 94.9%.
The Company's lower ratio was attributable to the larger impact of goodwill and
intangibles on its balance sheet.
Kearny Financial's funding liabilities reflected a funding strategy
that was somewhat similar to that of the Peer Group's funding composition. The
Company's deposits equaled 79.4% of assets, which was slightly above the Peer
Group's ratio of 71.2%. Comparatively, borrowings accounted for a higher portion
of the Peer Group's interest-bearing funding composition, as indicated by
borrowings-to-assets ratios of 4.9% and 15.9% for Kearny Financial and the Peer
Group, respectively. Total interest-bearing liabilities maintained by the
Company and the Peer Group, as a percent of assets, equaled 84.3% and 87.1%,
respectively, with the Company's lower ratio supported by its maintenance of a
higher capital position.
A key measure of balance sheet strength for a thrift institution is its
IEA/IBL ratio. Presently, the Company's IEA/IBL ratio of 110.6% approximates the
Peer Group's IEA/IBL ratio of 109.0%. The additional capital realized from stock
proceeds should serve to increase the Company's IEA/IBL ratio, as the interest
free capital realized in Kearny Financial's stock offering is expected to be
mostly deployed into interest-earning assets.
The growth rate section of Table 3.2 shows annual growth rates for key
balance sheet items. Kearny Financial's and the Peer Group's growth rates are
based on annual growth for the twelve month period ended June 30, 2004, unless
otherwise indicated for the Peer Group companies. Kearny Financial's assets
declined by 3.0% during the twelve month period, versus
RP Financial, LC
Page 3.9
4.7% growth posted by the Peer Group. The Company's asset shrinkage was mostly
attributable to a decline in cash and investments and, to a lesser extent, a
decline in loans. Comparatively, asset growth for the Peer Group was realized
through a combination of loan growth and growth of cash and investments.
Overall, the Peer Group's asset growth measures, as well as composition of
interest-earning assets, would tend to indicate greater earnings growth
potential relative to the Company's measures.
Asset shrinkage and increased utilization of borrowings funded a 4.7%
decline in the Company's deposits. Growth of deposits and borrowings funded the
Peer Group's asset growth, with a higher growth rate indicated for borrowings.
Deposit growth of 4.3% was recorded by the Peer Group, while the Peer Group's
growth rate for borrowings of 14.5% was lower than the Company's comparable
growth rate of 24.4%. The Company's higher growth rate for borrowings was the
result of adding borrowings to a comparatively lower level of borrowings than
maintained by the Peer Group. Capital growth rates posted by the Company and the
Peer Group equaled 5.5% and 2.4%, respectively. The Company's slightly higher
capital growth rate was supported by earning a slightly higher return on assets,
as well as the negative impact that dividend payments and stock repurchases had
on the Peer Group's capital growth. The Company's tangible capital declined by
14.2% as the result of the goodwill and intangibles created by the acquisition
of West Essex Bancorp. Comparatively, the Peer Group posted tangible capital
growth of 0.9%. The increase in capital realized from stock proceeds, as well as
possible dividend payments and stock repurchases, will likely depress the
Company's capital growth rate following the stock offering and thereby reduce or
eliminate the comparative advantage currently maintained by the Company with
respect to its capital growth rate.
Income and Expense Components
Table 3.3 displays comparable statements of operations for the Company
and the Peer Group, based on earnings for the twelve months ended June 30, 2004,
unless otherwise indicated for the Peer Group companies. Kearny Financial and
the Peer Group reported net income to average assets ratios of 0.67% and 0.59%,
respectively. Lower levels of operating expenses and loss provisions accounted
for the Company's higher return. The Peer Group's earnings reflected
RP(R) Financial, LC.
Page 3.10
Table 3.3
Income as Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the Twelve Months Ended June 30, 2004
Net Interest Income Other Income
---------------------------- --------------------
Loss NII Total
Net Provis.After Loan R.E. Other Other
Income Income Expense NII on IEA Provis Fees Oper. Income Income
------ ------ ------- --- ------ ------ ---- ----- ------ ------
Kearny Financial Corp.
----------------------
June 30, 2004 0.67% 4.09% 1.67% 2.42% 0.00% 2.42% 0.00% 0.00% 0.08% 0.08%
All Public Companies 0.83% 5.07% 2.03% 3.04% 0.15% 2.90% 0.06% 0.00% 0.62% 0.68%
State of NJ 0.83% 4.69% 1.86% 2.83% 0.04% 2.79% 0.07% 0.00% 0.27% 0.34%
Comparable Group Average 0.59% 4.65% 1.99% 2.66% 0.11% 2.55% 0.03% 0.00% 0.64% 0.68%
Mid-Atlantic Companies 0.65% 4.90% 1.91% 2.99% 0.11% 2.88% 0.02% 0.01% 0.82% 0.85%
Midwest Companies 0.29% 4.59% 2.65% 1.94% 0.16% 1.78% 0.09% 0.00% 0.44% 0.53%
Other Comparable Companies 0.73% 3.94% 1.56% 2.38% 0.04% 2.33% 0.02% -0.01% 0.32% 0.33%
Comparable Group
----------------
Mid-Atlantic Companies
----------------------
ALLB Alliance Bank MHC of PA (20.0) 0.63% 5.23% 2.09% 3.14% 0.10% 3.03% 0.01% 0.02% 0.32% 0.35%
BCSB BCSB Bankcorp MHC of MD (36.4) 0.09% 4.55% 2.30% 2.25% 0.07% 2.17% 0.03% -0.01% 0.22% 0.24%
GCBC Green Co Bcrp MHC of NY (43.9) 1.08% 4.92% 1.24% 3.67% 0.04% 3.63% 0.00% 0.00% 1.04% 1.04%
NWSB Northwest Bancorp MHC of PA (41.4) 0.88% 4.97% 2.18% 2.79% 0.12% 2.67% 0.00% 0.02% 0.42% 0.45%
ONFC Oneida Fincl MHC of NY (42.4) 0.70% 4.67% 1.71% 2.96% 0.12% 2.84% 0.00% 0.00% 2.40% 2.40%
PBHC Pathfinder BC MHC of NY (35.3) 0.51% 5.05% 1.92% 3.13% 0.18% 2.95% 0.09% 0.01% 0.53% 0.63%
Midwest Companies
-----------------
CFFN Capitol Fed. Fin. MHC of KS (29.2) 0.31% 4.48% 3.38% 1.11% 0.00% 1.11% 0.03% 0.00% 0.25% 0.28%
JXSB Jcksnville Bcp MHC of IL (46.8) 0.26% 4.70% 1.93% 2.78% 0.32% 2.45% 0.15% 0.00% 0.62% 0.77%
New England Companies
---------------------
WFD Westfield Finl MHC of MA (46.5) 0.72% 4.24% 1.47% 2.77% 0.08% 2.69% 0.02% 0.00% 0.34% 0.36%
Southeast Companies
-------------------
CHFN Charter Financial MHC of GA (18.4) 0.75% 3.65% 1.66% 1.99% 0.01% 1.98% 0.02% -0.01% 0.30% 0.30%
RP(R) Financial, LC.
Page 3.10 (continued)
Table 3.3 (Continued)
Income as Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the Twelve Months Ended June 30, 2004
G&A/Other Exp. Non-Op. Items Yields, Costs, and Spreads
---------------- -------------- --------------------------
Yld- MEMO: MEMO:
G&A Goodwill Net Extrao. Yield Cost Cost Assets/ Effective
Expense Amort. Gains Items On Assets Of Funds Spread FTE Emp. Tax Rate
------- ------ ----- ----- --------- -------- ------ -------- --------
Kearny Financial Corp.
----------------------
June 30, 2004 1.50% 0.03% 0.00% 0.00% 4.38% 2.01% 2.37% $7,594 30.82%
All Public Companies 2.47% 0.02% 0.15% 0.01% 5.26% 2.29% 2.97% $5,212 34.02%
State of NJ 1.87% 0.02% 0.09% 0.00% 4.83% 2.11% 2.71% $7,353 37.05%
Comparable Group Average 2.52% 0.02% 0.11% 0.00% 4.89% 2.30% 2.59% $4,811 25.00%
Mid-Atlantic Companies 2.92% 0.03% 0.09% 0.00% 5.20% 2.12% 3.08% $3,710 20.80%
Midwest Companies 1.89% 0.02% 0.06% 0.00% 4.77% 2.99% 1.78% $6,936 38.51%
Other Comparable Companies 1.93% 0.01% 0.25% 0.00% 4.08% 2.15% 1.94% $5,437 24.08%
Comparable Group
----------------
Mid-Atlantic Companies
----------------------
ALLB Alliance Bank MHC of PA (20.0) 2.71% 0.00% 0.01% 0.00% 5.52% 2.33% 3.20% $4,845 7.00%
BCSB BCSB Bankcorp MHC of MD (36.4) 2.31% 0.01% 0.01% 0.00% 4.72% 2.53% 2.19% $4,285 8.73%
GCBC Green Co Bcrp MHC of NY (43.9) 3.13% 0.00% 0.00% 0.00% 5.05% 1.41% 3.64% N.M. 29.30%
NWSB Northwest Bancorp MHC of PA (41.4) 1.90% 0.08% 0.10% 0.00% 5.28% 2.40% 2.88% $3,585 28.46%
ONFC Oneida Fincl MHC of NY (42.4) 4.43% 0.03% 0.15% 0.00% 5.17% 1.96% 3.21% $2,950 24.79%
PBHC Pathfinder BC MHC of NY (35.3) 3.05% 0.08% 0.24% 0.00% 5.43% 2.11% 3.32% $2,884 26.52%
Midwest Companies
-----------------
CFFN Capitol Fed. Fin. MHC of KS (29.2) 0.87% 0.00% 0.00% 0.00% 4.53% 3.85% 0.68% $11,619 40.11%
JXSB Jcksnville Bcp MHC of IL (46.8) 2.90% 0.03% 0.12% 0.00% 5.00% 2.12% 2.88% $2,253 36.91%
New England Companies
---------------------
WFD Westfield Finl MHC of MA (46.5) 2.18% 0.00% 0.15% 0.00% 4.44% 1.75% 2.69% $5,194 28.66%
Southeast Companies
-------------------
CHFN Charter Financial MHC of GA (18.4) 1.68% 0.02% 0.35% 0.00% 3.73% 2.54% 1.18% $5,679 19.50%
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP Financial, LC
Page 3.11
comparative earnings advantages with respect to posting higher levels of net
interest income, non-interest operating income and net gains.
The Peer Group's stronger net interest income ratio was realized
through a higher interest income ratio, which was partially offset by the
Company's lower interest expense ratio. The Peer Group's higher interest income
ratio was realized through earning a higher yield on interest-earning assets
(4.89% versus 4.38% for the Company) and maintenance of a higher concentration
of assets in interest-earning assets. The Peer Group's higher yield was
consistent with an interest-earning asset composition that reflected a higher
concentration of loans as compared to the Company's interest-earning asset
composition. Interest expense ratios for the Company and the Peer Group equaled
1.67% and 1.99% of average assets, respectively. The Company's lower interest
expense ratio was supported by its higher level of capital and resulting lower
level of interest-bearing liabilities funding assets, as well as maintenance of
a lower cost of funds (2.01% versus 2.30% for the Peer Group). Overall, Kearny
Financial and the Peer Group reported net interest income to average assets
ratios of 2.42% and 2.66%, respectively.
In another key area of core earnings strength, the Company maintained a
significantly lower level of operating expenses than the Peer Group. For the
period covered in Table 3.3, the Company and the Peer Group reported operating
expense to average assets ratios of 1.53% and 2.54%, respectively, inclusive of
amortization of goodwill and other intangibles. In general, the Company's lower
operating expense ratio is supported by the more limited staffing needs that
result from maintaining an interest-earning asset composition that is highly
concentrated in investments and the lack of any significant diversification into
areas that generate income from non-interest earning sources including the
absence of off-balance sheet loan servicing. Consistent with the Company's lower
operating expense ratio and less diversified operations, Kearny Financial
maintained a comparatively lower number of employees relative to its asset size.
Assets per full time equivalent employee equaled $7.6 million for the Company,
versus a comparable measure of $4.8 million for the Peer Group. On a
post-offering basis, the Company's operating expenses can be expected to
increase with the addition of stock benefit plans and expenses related to
operating as a publicly-traded company, with such expenses already impacting the
Peer Group's operating expenses. At the same time, Kearny Financial's
RP Financial, LC
Page 3.12
capacity to leverage operating expenses will be greater than the Peer Group's
leverage capacity following the increase in capital realized from the infusion
of net stock proceeds.
When viewed together, net interest income and operating expenses
provide considerable insight into a thrift's earnings strength, since those
sources of income and expenses are typically the most prominent components of
earnings and are generally more predictable than losses and gains realized from
the sale of assets or other non-recurring activities. In this regard, as
measured by their expense coverage ratios (net interest income divided by
operating expenses), the Company's earnings strength was greater than the Peer
Group's. Expense coverage ratios posted by Kearny Financial and the Peer Group
equaled 1.58x and 1.04x, respectively. An expense coverage ratio of greater than
1.0x indicates that an institution is able to sustain pre-tax profitability
without having to rely on non-interest sources of income.
Sources of non-interest operating income provided a larger contribution
to the Peer Group's earnings, with such income amounting to 0.68% and 0.08% of
the Peer Group's and Kearny Financial's average assets, respectively. The
Company's relatively low earnings contribution realized from non-interest
operating income highlights it implementation of a traditional thrift operating
strategy, in which diversification into areas that generate revenues from
non-interest sources has been very limited. Taking non-interest operating income
into account in comparing the Company's and the Peer Group's earnings, Kearny
Financial's efficiency ratio (operating expenses, net of amortization of
intangibles, as a percent of the sum of non-interest operating income and net
interest income) of 60.0% compared favorably to the Peer Group's efficiency
ratio of 75.4%.
Loan loss provisions had a larger impact on the Peer Group's earnings,
as no loss provisions were established by the Company during the twelve month
period. Comparatively, loss provisions established by the Peer Group equaled
0.11% of average assets. The higher level of loss provisions established by the
Peer Group was consistent with its lower level of reserves maintained as a
percent of loans (see Table 3.6) and its greater degree of diversification into
higher risk types of lending (see Table 3.4).
Net gains realized from the sale of assets were not a factor in
Company's earnings, while the Peer Group recorded net gains equal to 0.11% of
average assets. Given the volatile nature of
RP Financial, LC
Page 3.13
gains resulting from the sale of loans, investments and other assets, the net
gains reflected in the Peer Group's earnings will be discounted in evaluating
the relative strengths and weaknesses of the Company's and the Peer Group's
respective earnings. Extraordinary items were not a factor in either the
Company's or the Peer Group's earnings.
Taxes had a larger impact on the Company's earnings, as Kearny
Financial and the Peer Group posted effective tax rates of 30.8% and 25.0%,
respectively.
Loan Composition
Table 3.4 presents data related to the Company's and the Peer Group's
loan portfolio compositions and investment in mortgage-backed securities. The
Company's loan portfolio composition reflected a higher concentration of 1-4
family permanent mortgage loans and mortgage-backed securities than maintained
by the Peer Group (58.3% versus 48.8% for the Peer Group). The Company's higher
ratio was attributable to maintaining a higher concentration of mortgage-backed
securities, as the Peer Group's ratio of 1-4 family permanent mortgage loans was
higher than the Company's ratio. Given the Company's philosophy of retaining all
loan originations for investment, loans serviced for others necessarily
represented a more significant off-balance sheet item for the Peer Group. Loans
serviced for others equaled 10.8% of the Peer Group's assets, which was a factor
that contributed to the Peer Group's higher level of non-interest operating
income. The Peer Group's balance of loans serviced for others translated into a
modest balance of servicing intangibles.
Diversification into higher risk types of lending was more significant
for the Peer Group companies on average. Commercial real estate/multi-family
loans represented the most significant area of lending diversification for the
Peer Group (10.3% of assets), followed by consumer loans (4.3% of assets). The
Company's lending diversification consisted primarily of commercial real
estate/multi-family loans (4.3% of assets), with other areas of lending
diversification substantially limited to consumer loans (2.9% of assets).
Overall, lending diversification for the Peer Group was more significant in all
loan types. The Peer Group's more significant diversification into higher risk
types of loans and higher concentration of assets
RP(R) Financial, LC.
Page 3.14
Table 3.4
Loan Portfolio Composition and Related Information
Comparable Institution Analysis
As of June 30, 2004
Portfolio Composition as a Percent of Assets
---------------------------------------------------------
1-4 Constr. 5+Unit Commerc. RWA/ Serviced Servicing
Institution MBS Family & Land Comm RE Business Consumer Assets For Others Assets
----------- --- ------ ------ ------- -------- -------- ------ ---------- ------
(%) (%) (%) (%) (%) (%) (%) ($000) ($000)
Kearny Financial Corp. 39.83% 18.50% 0.37% 4.31% 0.27% 2.89% 33.25% $0 $0
All Public Companies 12.43% 36.89% 4.91% 15.62% 3.60% 3.92% 60.20% $737,790 $9,137
State of NJ 24.57% 39.95% 0.83% 8.51% 2.37% 1.63% 49.24% $129,606 $1,180
Comparable Group Average 19.58% 29.26% 1.25% 10.30% 3.39% 4.32% 51.71% $199,140 $814
Comparable Group
----------------
ALLB Alliance Bank MHC of PA (20.0) 6.15% 23.31% 1.79% 27.89% 0.96% 1.42% 58.80% $3,200 $0
BCSB BCSB Bankcorp MHC of MD (36.4) 21.61% 27.77% 1.18% 7.52% 10.61% 1.18% 48.14% $22,195 $0
CFFN Capitol Fed. Fin. MHC of KS (29.2) 35.40% 50.79% 0.30% 0.50% 0.18% 0.00% 40.93% $652,542 $3,844
CHFN Charter Financial MHC of GA (18.4) 35.03% 14.12% 3.53% 9.15% 0.65% 1.81% 48.26% $42,654 $161
GCBC Green Co. Bancorp MHC of NY (43.9) 20.47% 40.67% 1.48% 4.74% 1.65% 1.95% 45.84% $0 $0
JXSB Jacksonville Bancorp MHC of IL (46.8) 4.57% 24.06% 1.80% 8.58% 4.13% 7.89% 53.87% $159,542 $1,116
NWSB Northwest Bancorp MHC of PA (41.4) N.A. N.A. N.A. N.A. N.A. N.A. 47.49% $946,000 $2,371
ONFC Oneida Financial MHC of NY (42.4) 11.56% 21.98% 0.02% 8.24% 8.81% 8.01% 61.43% $89,727 $330
PBHC Pathfinder BC MHC of NY (35.3) 11.60% 45.30% 0.71% 10.32% 1.21% 5.34% 56.91% $47,600 $253
WFD Westfield Fin. MHC of MA (46.5) 29.81% 15.35% 0.40% 15.77% 2.34% 11.24% 55.39% $27,936 $64
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP Financial, LC
Page 3.15
maintained in loans compared to lower risk-weighted investments translated into
a higher risk-weighted assets-to-assets ratio of 51.7%, as compared to the
Company's ratio of 33.3%.
Interest Rate Risk
Table 3.5 reflects various key ratios highlighting the relative
interest rate risk exposure of the Company versus the Peer Group companies. In
terms of balance sheet composition, Kearny Financial's interest rate risk
characteristics were considered to be fairly similar to the Peer Group's. Most
notably, Kearny Financial's tangible capital position and IEA/IBL ratio
approximated the comparable Peer Group ratios. A lower level of non-interest
earning assets represented an advantage for the Peer Group with respect to
capacity to generate net interest income and, in turn, limiting the interest
rate risk associated with the balance sheet. On a pro forma basis, the infusion
of stock proceeds should provide the Company with more favorable balance sheet
interest rate risk characteristics than currently maintained by the Peer Group,
particularly with respect to the increases that will be realized in Company's
equity-to-assets and IEA/IBL ratios.
To analyze interest rate risk associated with the net interest margin,
we reviewed quarterly changes in net interest income as a percent of average
assets for Kearny Financial and the Peer Group. In general, the relative
fluctuations in the Company's and the Peer Group's net interest income to
average assets ratios were considered to be fairly comparable and, thus, based
on the interest rate environment that prevailed during the period analyzed in
Table 3.5, Kearny Financial and the Peer Group were viewed as maintaining a
similar degree of interest rate risk exposure in their respective net interest
margins. The stability of the Company's net interest margin should be enhanced
by the infusion of stock proceeds, as the increase in capital will reduce the
level of interest rate sensitive liabilities funding Kearny Financial's assets.
Credit Risk
Overall, the credit risk associated with the Company's loan portfolio
was considered to be slightly less than the Peer Group's, as implied by the
Company's more favorable credit quality measures for problem loans and less
significant diversification into higher risk types of
RP(R) Financial, LC.
Page 3.16
Table 3.5
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of June 30, 2004 or Most Recent Date Available
Balance Sheet Measures
---------------------------
Non-Earn. Quarterly Change in Net Interest Income
------------------------------------------------------
Equity/ IEA/ Assets/
Institution Assets IBL Assets 6/30/04 3/31/04 12/31/03 9/30/03 6/30/03 3/31/03
----------- ------ --- ------ ------- ------- -------- ------- ------- -------
(%) (%) (%) (change in net interest income is annualized in
basis points)
Kearny Financial Corp. 10.8% 110.6% 6.8% -15 -3 23 -1 -13 NA
All Public Companies 9.9% 108.6% 4.7% -3 1 7 -4 -8 -4
State of NJ 11.4% 111.6% 2.9% -7 4 21 -23 -15 6
Comparable Group Average 10.1% 110.3% 5.1% -4 7 16 -10 -20 -5
Comparable Group
----------------
ALLB Alliance Bank MHC of PA (20.0) 9.2% 104.7% 5.7% 1 8 -3 26 -22 -12
BCSB BCSB Bankcorp MHC of MD (36.4) 5.0% 101.8% 4.4% 8 -17 3 -35 -35 0
CFFN Capitol Fed. Fin. MHC of KS (29.2) 11.4% 113.0% 1.0% -9 36 25 -35 -33 -51
CHFN Charter Financial MHC of GA (18.4) 23.9% 152.5% 2.0% -2 8 31 17 NA NA
GCBC Green Co. Bancorp MHC of NY (43.9) 10.5% 109.1% 2.7% -20 8 13 1 -11 9
JXSB Jacksonville Bancorp MHC of IL (46.8) 6.1% 103.2% 6.0% -4 19 19 -17 -29 1
NWSB Northwest Bancorp MHC of PA (41.4) 6.2% 103.4% 6.3% -9 14 33 -15 -20 4
ONFC Oneida Financial MHC of NY (42.4) 8.2% 102.3% 10.0% 5 8 -5 -6 0 -7
PBHC Pathfinder BC MHC of NY (35.3) 5.5% 100.5% 7.7% 0 -27 16 -16 -10 19
WFD Westfield Fin. MHC of MA (46.5) 14.8% 112.9% 4.6% -8 18 27 -17 -14 -8
NA=Change is greater than 100 basis points during the quarter.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP Financial, LC
Page 3.17
lending. As shown in Table 3.6, Kearny Financial's' ratio of non-performing
assets and accruing loans that are more than 90 days past due as a percent of
assets was less than the comparable Peer Group ratio (0.13% versus 0.62% for the
Peer Group). Non-performing loans equaled 0.45% of the Company's loans compared
to 0.88% for the Peer Group. The Company maintained a higher level of loss
reserves as a percent of non-performing loans (224.7% versus 156.8% for the Peer
Group), while the Company and the Peer Group maintained comparable levels of
reserves as a percent of loans (1.02% versus 1.07% for the Peer Group). The
Company's credit risk exposure was also considered to be more favorable with
respect to the lower net charge-offs that were recorded for the twelve month
period, as net loan charge-offs equaled 0.01% and 0.10% of net loans receivable
for the Company and the Peer Group, respectively.
Summary
Based on the above analysis, RP Financial concluded that the Peer Group
forms a reasonable basis for determining the pro forma market value of Kearny
Financial. Such general characteristics as asset size, capital position,
interest-earning asset composition, funding composition, core earnings measures,
loan composition, credit quality and exposure to interest rate risk all tend to
support the reasonability of the Peer Group from a financial standpoint. Those
areas where differences exist will be addressed in the form of valuation
adjustments to the extent necessary.
RP(R) Financial, LC.
Page 3.18
Table 3.6
Credit Risk Measures and Related Information
Comparable Institution Analysis
As of June 30, 2004 or Most Recent Date Available
NPAs & Rsrves/
REO/ 90+Del/ NPLs/ Rsrves/ Rsrves/ NPAs & Net Loan NLCs/
Institution Assets Assets Loans Loans NPLs 90+Del Chargoffs Loans
----------- ------ ------ ----- ----- ---- ------ --------- -----
(%) (%) (%) (%) (%) (%) ($000) (%)
Kearny Financial Corp. 0.01% 0.13% 0.45% 1.02% 224.73% 202.76% $36 0.01%
All Public Companies 0.09% 0.55% 0.61% 0.95% 225.77% 188.77% $294 0.15%
State of NJ 0.00% 0.18% 0.20% 0.65% 411.98% 303.18% $101 0.02%
Comparable Group Average 0.15% 0.62% 0.88% 1.07% 156.83% 121.94% $249 0.10%
Comparable Group
----------------
ALLB Alliance Bank MHC of PA (20.0) 0.98% 1.42% 0.54% 1.22% 227.36% 47.09% $459 -0.23%
BCSB BCSB Bankcorp MHC of MD (36.4) 0.02% 0.17% 0.30% 0.65% 216.50% 191.96% $139 0.15%
CFFN Capitol Fed. Fin. MHC of KS (29.2) 0.06% 0.15% 0.18% 0.10% 54.73% 34.83% $64 0.01%
CHFN Charter Financial MHC of GA (18.4) 0.03% 0.58% 1.73% 2.08% 120.06% 108.08% $222 -0.15%
GCBC Green Co. Bancorp MHC of NY (43.9) 0.03% N.A. N.A. 0.83% N.A. N.A. $22 0.06%
JXSB Jacksonville Bancorp MHC of IL (46.8) 0.17% 1.05% 1.73% 1.60% 92.90% 74.67% $253 0.78%
NWSB Northwest Bancorp MHC of PA (41.4) 0.07% 0.62% 0.84% 0.78% 92.60% 82.68% $1,196 0.13%
ONFC Oneida Financial MHC of NY (42.4) 0.02% 0.17% 0.30% 1.09% 360.60% 316.97% $61 0.12%
PBHC Pathfinder BC MHC of NY (35.3) 0.10% 1.11% 1.61% 0.98% 60.88% 55.29% $47 0.10%
WFD Westfield Fin. MHC of MA (46.5) 0.00% 0.33% 0.72% 1.33% 185.86% 185.86% $27 0.03%
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) Financial, LC.
Page 4.1
IV. VALUATION ANALYSIS
Introduction
This chapter presents the valuation analysis and methodology used to
determine Kearny Financial's estimated pro forma market value for purposes of
pricing the minority stock. The valuation incorporates the appraisal methodology
promulgated by the OTS and adopted in practice by the FDIC for standard
conversions and mutual holding company offerings, particularly regarding
selection of the Peer Group, fundamental analysis on both the Company and the
Peer Group, and determination of the Company's pro forma market value utilizing
the market value approach.
Appraisal Guidelines
The OTS written appraisal guidelines specify the market value
methodology for estimating the pro forma market value of an institution. The
FDIC, state banking agencies and other Federal agencies have endorsed the OTS
appraisal guidelines as the appropriate guidelines involving mutual-to-stock
conversions. As previously noted, the appraisal guidelines for MHC offerings is
somewhat different, particularly in the Peer Group selection process.
Specifically, the regulatory agencies have indicated that the Peer Group should
be based on the pro forma fully-converted pricing characteristics of
publicly-traded MHCs, rather than on already fully-converted publicly-traded
stock thrifts, given the unique differences in stock pricing of MHCs and
fully-converted stock thrifts. Pursuant to this methodology: (1) a peer group of
comparable publicly-traded MHC institutions is selected; (2) a financial and
operational comparison of the subject company to the peer group is conducted to
discern key differences; and (3) the pro forma market value of the subject
company is determined based on the market pricing of the peer group, subject to
certain valuation adjustments based on key differences. In addition, the pricing
characteristics of recent conversions and MHC offerings must be considered.
RP(R) Financial, LC.
Page 4.2
RP Financial Approach to the Valuation
The valuation analysis herein complies with such regulatory approval
guidelines. Accordingly, the valuation incorporates a detailed analysis based on
the Peer Group, discussed in Chapter III, which constitutes "fundamental
analysis" techniques. Additionally, the valuation incorporates a "technical
analysis" of recently completed conversions and stock offerings of comparable
MHCs, including closing pricing and aftermarket trading of such offerings. It
should be noted that these valuation analyses, based on either the Peer Group or
the recent conversions and MHC transactions, cannot possibly fully account for
all the market forces which impact trading activity and pricing characteristics
of a stock on a given day.
The pro forma market value determined herein is a preliminary value for
the Company's to-be-issued stock. Throughout the stock offering process, RP
Financial will: (1) review changes in the Company's operations and financial
condition; (2) monitor the Company's operations and financial condition relative
to the Peer Group to identify any fundamental changes; (3) monitor the external
factors affecting value including, but not limited to, local and national
economic conditions, interest rates, and the stock market environment, including
the market for thrift stocks; and (4) monitor pending MHC offerings, and to a
lesser extent, standard conversion offerings, both regionally and nationally. If
material changes should occur prior to close of the offering, RP Financial will
evaluate if updated valuation reports should be prepared reflecting such changes
and their related impact on value, if any. RP Financial will also prepare a
final valuation update at the closing of the offering to determine if the
prepared valuation analysis and resulting range of value continues to be
appropriate.
The appraised value determined herein is based on the current market
and operating environment for the Company and for all thrifts. Subsequent
changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces (such
as natural disasters or major world events), which may occur from time to time
(often with great unpredictability) may materially impact the market value of
all thrift stocks, including Kearny Financial's value, the market value of the
stocks of public MHC institutions, or Kearny Financial's value alone. To the
extent a change in factors impacting the
RP(R) Financial, LC.
Page 4.3
Company's value can be reasonably anticipated and/or quantified, RP Financial
has incorporated the estimated impact into its analysis.
Valuation Analysis
A fundamental analysis discussing similarities and differences relative
to the Peer Group was presented in Chapter III. The following sections summarize
the key differences between the Company and the Peer Group and how those
differences affect the pro forma valuation. Emphasis is placed on the specific
strengths and weaknesses of the Company relative to the Peer Group in such key
areas as financial condition, profitability, growth and viability of earnings,
asset growth, primary market area, dividends, liquidity of the shares, marketing
of the issue, management, and the effect of government regulations and/or
regulatory reform. We have also considered the market for thrift stocks, in
particular new issues, to assess the impact on value of Kearny Financial coming
to market at this time.
1. Financial Condition
The financial condition of an institution is an important determinant
in pro forma market value because investors typically look to such factors as
liquidity, capital, asset composition and quality, and funding sources in
assessing investment attractiveness. The similarities and differences in the
Company's and the Peer Group's financial strength are noted as follows:
o Overall A/L Composition. The Company's interest-earning asset
composition was concentrated in investments, while loans accounted for
the largest portion of the Peer Group's interest-earning asset
composition. Loan diversification was also more significant for the
Peer Group. The smaller size of the Company's loan portfolio relative
to total assets and more limited diversification into higher risk
types of loans provided for a lower yielding and a lower risk weighted
assets-to-assets ratio than maintained by the Peer Group. Kearny
Financial's funding composition reflected a slightly higher
concentration of deposits and slightly lower concentration of
borrowings relative to the Peer Group's ratios. Overall, as a percent
of assets, the Company maintained a lower level of interest-earning
assets and a lower level of interest-bearing liabilities than
indicated for the Peer Group, which resulted in similar IEA/IBL ratios
for the Company and the Peer Group. After factoring in the impact of
the net conversion proceeds, the Company's IEA/IBL ratio will be
stronger than the Peer Group's ratio. For valuation purposes, the less
favorable earnings potential of the Company's interest-earning asset
composition is somewhat negated by its stronger pro forma IEA/IBL
ratio. Accordingly,
RP(R) Financial, LC.
Page 4.4
RP Financial concluded that no adjustment was warranted for the
Company's overall asset/liability composition.
o Credit Quality. The Company maintained lower ratios of non-performing
assets-to-assets and non-performing loans-to-loans. The Company also
maintained higher valuation allowances as a percent of non-performing
assets, while loss reserves as a percent of loans were comparable for
the Company and the Peer Group. Net loan charge-offs were higher for
the Peer Group and the Peer Group maintained a higher risk weighted
assets-to-assets ratio. Overall, in comparison to the Peer Group, the
Company's measures imply a lower degree of credit exposure and, thus,
RP Financial concluded that a slight upward adjustment was warranted
for the Company's credit quality.
o Balance Sheet Liquidity. The Company operated with a higher level of
cash and investment securities relative to the Peer Group (67.1% of
assets versus 44.2% for the Peer Group); however, since most of the
Company's investments are classified as held-to-maturity, the
Company's higher cash and investments ratio does not represent a
comparative advantage with respect to balance sheet liquidity. Kearny
Financial's future borrowing capacity was considered to be slightly
greater than the Peer Group's, in light of the higher level of
borrowings maintained by the Peer Group. Overall, after factoring the
increase in liquidity that will initially be provided by the infusion
of the net stock proceeds, RP Financial concluded that a slight upward
adjustment was warranted for the Company's balance sheet liquidity.
o Funding Liabilities. Retail deposits served as the primary
interest-bearing source of funds for the Company and the Peer Group,
with borrowings being utilized to a greater degree by the Peer Group.
Overall, the Company maintained a slightly lower cost of funds than
the Peer Group. The Company currently maintains a slightly lower level
of interest-bearing liabilities than the Peer Group. Accordingly,
following the stock offering, the increase in Kearny Financial's
capital position should serve to further lower the Company's level of
interest-bearing liabilities relative to the Peer Group's ratio.
Accordingly, RP Financial concluded that a slight upward adjustment
was warranted for Kearny Financial's funding composition.
o Capital. The Company's equity-to-assets ratio was higher than the
comparable Peer Group ratio, while the Company and the Peer Group
maintained comparable tangible equity-to-assets ratios. Accordingly,
following the minority stock offering, Kearny Financial's pro forma
capital position will exceed Peer Group's capital ratios both on a
reported and tangible capital basis. The Company's higher pro forma
capital position implies greater leverage capacity, lower dependence
on interest-bearing liabilities to fund assets and a greater capacity
to absorb unanticipated losses. Overall, RP Financial concluded that a
slight upward adjustment was warranted for the Company's pro forma
capital position.
On balance, Kearny Financial's balance sheet strength was considered to
be more favorable than Peer Group's, as implied by the more favorable credit
quality, balance sheet
RP(R) Financial, LC.
Page 4.5
liquidity, funding composition and capital strength of the Company's pro forma
balance sheet. Accordingly, we concluded that a slight upward valuation
adjustment was warranted for the Company's financial strength.
2. Profitability, Growth and Viability of Earnings
Earnings are a key factor in determining pro forma market value, as the
level and risk characteristics of an institution's earnings stream and the
prospects and ability to generate future earnings heavily influence the multiple
that the investment community will pay for earnings. The major factors
considered in the valuation are described below.
o Reported Earnings. The Company reported slightly higher earnings on a
ROAA basis (0.67% of average assets versus 0.59% for the Peer Group).
Lower levels of operating expenses and loss provisions supported the
Company's higher return, which was largely offset by the Peer Group's
higher levels of net interest income and non-interest operating
income. A lower effective tax rate and higher net gains also
represented earnings advantages for the Peer Group. Reinvestment and
leveraging of the net stock proceeds should enhance returns for the
Company, but the pick-up in earnings will be somewhat offset by the
increase in operating expenses that will result from the
implementation of the stock benefit plans and expenses related to
operating as a publicly-traded company with shareholders to report to.
Overall, the Company's and the Peer Group's reported earnings were
considered to be fairly comparable and, thus, RP Financial concluded
that no adjustment was appropriate for the Company's reported
earnings.
o Core Earnings. The Company's and the Peer Group's earnings were
derived largely from recurring sources, including net interest income,
operating expenses, and non-interest operating income. In these
measures, the Company operated with a lower net interest margin, a
lower operating expense ratio and a lower level of non-interest
operating income. The Company's lower net interest margin and lower
level of operating expenses translated into a higher expense coverage
ratio than maintained by the Peer Group (1.58x versus 1.05x for the
Peer Group). Likewise, the Company's lower operating expense ratio
also provided for an efficiency ratio that was more favorable than the
Peer Group's ratio (60.0% versus 75.4% for the Peer Group). Loss
provisions had a larger impact on the Peer Group's earnings, as no
loss provisions were established by the Company during the twelve
month period analyzed. Overall, these measures, as well as the
expected earnings benefits the Company should realize from the
redeployment of stock proceeds into interest-earning assets which will
be somewhat negated by expenses associated with the stock benefit
plans and operating as a publicly-traded company, indicate that the
Company's core earnings are stronger than the Peer Group's. Therefore,
RP Financial concluded that a slight upward adjustment should be
applied for the Company's core earnings.
RP(R) Financial, LC.
Page 4.6
o Interest Rate Risk. Quarterly changes in the Company's and the Peer
Group's net interest income to average assets ratios indicated a
similar degree of volatility was associated with their respective net
interest margins. However, the interest rate risk associated with the
Company's overall earnings was considered to be greater, in light of
the Company's less diversified operations into areas that generate
non-interest operating income that would support sustainability of
earnings during periods when net interest margins come under pressure
as the result of higher interest rates. Interest rate risk as measured
by tangible capital and IEA/IBL ratios were comparable for the Company
and the Peer Group, while the Peer Group's interest rate risk was
slightly more favorable with respect to maintaining a lower level of
non-interest earning assets as a percent of total assets. On a pro
forma basis, the Company's capital position and IEA/IBL ratio will be
enhanced by the infusion of stock proceeds and, thus, provide the
Company with comparative advantages relative to the Peer Group's
balance sheet ratios. Overall, RP Financial concluded that the
interest rate risk associated with the Company's earnings was
comparable to the Peer Group's earnings interest rate risk exposure
and no valuation adjustment was necessary for this factor.
o Credit Risk. Loan loss provisions were a larger factor in the Peer
Group's earnings, as no loss provisions were established by the
Company for the twelve months ended June 30, 2004. In terms of future
exposure to credit quality related losses, lending diversification
into higher risk types of loans was greater for the Peer Group and the
Peer Group maintained a higher concentration of assets in loans. The
Company's and the Peer Group's credit quality measures indicated that
the Company maintained a lower level of non-performing assets, a
higher level of loss reserves as a percent of non-performing assets
and a comparable level of loss reserves as a percent of loans.
Overall, RP Financial concluded that a slight upward adjustment was
warranted for this factor.
o Earnings Growth Potential. Several factors were considered in
assessing earnings growth potential. First, potential earnings growth
that may be realized through balance sheet growth has been less
favorable for the Company based on recent historical growth trends,
particularly in the important area of higher yielding loan growth.
Second, the infusion of stock proceeds will increase the Company's
earnings growth potential with respect to leverage capacity, as the
Company's pro forma leverage capacity should be greater than the Peer
Group's. Lastly, the Peer Group's more diversified operations into
areas that generate non-interest operating income provides greater
earnings growth potential and sustainability of earnings during
periods when net interest margins come under pressure as the result of
higher interest rates. Overall, the Company's earnings growth
potential appears to be comparable to the Peer Group's, and, thus, we
concluded that no adjustment was warranted for this factor.
o Return on Equity. As the result of the increase in capital that will
be realized from the infusion of net stock proceeds, the Company's
return on equity will be below the
RP(R) Financial, LC.
Page 4.7
comparable averages for the Peer Group and all publicly-traded
thrifts. In view of the lower capital growth rate that will be imposed
by Kearny Financial's lower ROE, we concluded that a moderate downward
adjustment was warranted for the Company's ROE.
Overall, a slight upward adjustment was applied for the Company's
profitability, growth and viability of earnings.
3. Asset Growth
Recent asset growth trends for the Company and the Peer Group reflected
more favorable growth characteristics for the Peer Group, as the Company
experienced a 3.0% decline in assets and a 0.7% decline in loans for the twelve
month period ended June 30, 2004. Comparatively, over the same time period, the
Peer Group posted a 4.7% increase in assets and a 4.4% increase in loans. On a
pro forma basis, the Company's tangible equity-to-assets ratio will be above the
Peer Group's tangible equity-to-assets ratio, indicating greater leverage
capacity for the Company. On average, the demographic characteristics of the
Company's primary market area were considered to be comparable to the markets
served by the Peer Group companies with respect to supporting growth
opportunities. On balance, we concluded that the Company's weaker historical
growth trends were offset by its greater pro forma leverage capacity and,
therefore, no adjustment was warranted for this factor.
4. Primary Market Area
The general condition of an institution's market area has an impact on
value, as future success is in part dependent upon opportunities for profitable
activities in the local market served. The market area served by the Company
consists substantially of densely populated suburban and urban markets. The
eight-county primary market area has experienced population and household growth
since 2000, with the strongest growth occurring in Ocean County. The primary
market area has a fairly diversified economy, with varied household and per
capita income measures. Four of the primary market area counties had median
household incomes that were above the New Jersey median and four of the primary
market area counties had median household incomes that were below the New Jersey
median. Competition faced by the Company
RP(R) Financial, LC.
Page 4.8
for deposits and loans is significant, which includes other locally based banks
and savings institutions, as well as regional and super regional banks.
Overall, the markets served by the Peer Group companies were viewed as
being comparable with respect to supporting growth opportunities. The primary
market areas served by the Peer Group companies are generally less populous and
have generally experienced stronger population growth rates compared to the
Company's market area. In general, the Peer Group companies faced less
competition than the Company, as indicated by the significantly higher deposit
market share that was maintained by the Peer Group companies on average (25.9%
versus 1.2% for the Company). Summary demographic and deposit market share data
for the Company and the Peer Group companies is provided in Exhibit III-3. As
shown in Table 4.1, June 2004 unemployment rates for the majority of the markets
served by the Peer Group companies were lower than the unemployment rate
reflected for Hudson County, which had the highest unemployment rate among the
eight-count market area served by the Company's branch network. On balance, we
concluded that no adjustment was appropriate for the Company's market area.
Table 4.1
Market Area Unemployment Rates
Kearny Financial and the Peer Group Companies(1)
June 2004
County Unemployment
------ ------------
Kearny Financial - NJ Hudson 6.8%
The Peer Group
Alliance Bank MHC - PA Delaware 5.5%
BCSB Bankcorp MHC - MD Baltimore 4.5
Capitol Federal Financial MHC - KS Shawnee 5.5
Charter Financial MHC - GA Troup 5.9
Greene Co. Bancorp MHC - NY Greene 4.9
Jacksonville SB MHC - IL Morgan 6.0
Northwest Bancorp MHC - PA Warren 7.1
Oneida Financial MHC - NY Madison 5.7
Pathfinder Bancorp MHC - NY Oswego 8.7
Westfield Financial Group MHC- MA Hampden 6.5
(1) Unemployment rates are not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics.
RP(R) Financial, LC.
Page 4.9
5. Dividends
At this time the Company has not established a dividend policy. Future
declarations of dividends by the Board of Directors will depend upon a number of
factors, including investment opportunities, growth objectives, financial
condition, profitability, tax considerations, minimum capital requirements,
regulatory limitations, stock market characteristics and general economic
conditions.
All ten of the Peer Group companies pay regular cash dividends, with
implied dividend yields ranging from 1.20% to 6.15%. The average dividend yield
on the stocks of the Peer Group institutions equaled 2.83% as of August 20,
2004. As of August 20, 2004, approximately 92% of all publicly-traded thrifts
had adopted cash dividend policies (see Exhibit IV-1), exhibiting an average
yield of 2.24%. The dividend paying thrifts generally maintain higher than
average profitability ratios, thereby facilitating their ability to pay cash
dividends.
Our valuation adjustment for dividends for Kearny Financial also
considered the regulatory policy with regard to waiver of dividends by the MHC.
Under current policy, any waiver of dividends by an FDIC regulated MHC requires
that the minority stockholders' ownership interest be reduced in a second-step
conversion to reflect the cumulative waived dividend account. Comparatively, no
adjustment for waived dividends is required for OTS regulated companies in a
second-step conversion. As an MHC operating under OTS regulation, the Company
will be subject to the same regulatory dividend policy as a large majority of
the Peer Group companies (nine of the Peer Group companies operate under OTS
regulation). Accordingly, we believe that to the extent Kearny Financial's pro
forma market value would be influenced by the OTS' dividend policy regarding MHC
institutions, it has been sufficiently captured in the pricing of the Peer Group
companies.
While the Company has not established a definitive dividend policy
prior to the stock offering, the Company will have the capacity to pay a
dividend comparable to the Peer Group's average dividend yield based on pro
forma earnings and capitalization. On balance, we concluded that no adjustment
was warranted for purposes of the Company's dividend policy.
RP(R) Financial, LC.
Page 4.10
6. Liquidity of the Shares
The Peer Group is by definition composed of companies that are traded
in the public markets. Nine of the Peer Group members trade on the NASDAQ system
and one Peer Group member trades on the AMEX. Typically, the number of shares
outstanding and market capitalization provides an indication of how much
liquidity there will be in a particular stock. The market capitalization of the
Peer Group companies, based on the shares issued and outstanding to public
shareholders (i.e., excluding the majority ownership interest owned by the
respective MHCs) ranged from $13.7 million to $699.2 million as of August 20,
2004, with average and median market values of $150.0 million and $33.3 million,
respectively. The shares issued and outstanding to the public shareholders of
the Peer Group members ranged from 688,000 to 21.5 million, with average and
median shares outstanding of 5.8 million and 2.7 million, respectively. The
Company's minority stock offering is expected to have a pro forma market value
and shares outstanding that are in the upper end of the comparable Peer Group
ranges. Like the majority of the Peer Group companies, the Company's stock will
be quoted on the NASDAQ National Market System following the stock offering.
Overall, we anticipate that the Company's public stock will have a comparable
trading market as the Peer Group companies on average and, therefore, concluded
no adjustment was necessary for this factor.
7. Marketing of the Issue
Three separate markets exist for thrift stocks: (1) the after-market
for public companies, both fully-converted stock companies and MHCs, in which
trading activity is regular and investment decisions are made based upon
financial condition, earnings, capital, ROE, dividends and future prospects; (2)
the new issue market in which converting thrifts are evaluated on the basis of
the same factors but on a pro forma basis without the benefit of prior
operations as a publicly-held company and stock trading history; and (3) the
thrift acquisition market. All three of these markets were considered in the
valuation of the Company's to-be-issued stock.
A. The Public Market
The value of publicly-traded thrift stocks is easily
measurable, and is tracked by most investment houses and related organizations.
Exhibit IV-1 provides pricing and financial
RP(R) Financial, LC.
Page 4.11
data on all publicly-traded thrifts. In general, thrift stock values react to
market stimuli such as interest rates, inflation, perceived industry health,
projected rates of economic growth, regulatory issues and stock market
conditions in general. Exhibit IV-2 displays historical stock market trends for
various indices and includes historical stock price index values for thrifts and
commercial banks. Exhibit IV-3 displays historical stock price indices for
thrifts only.
In terms of assessing general stock market conditions, the
performance of the overall stock market has been mixed over the past year.
Economic data that showed a strengthening economy, particularly in the
manufacturing sector, propelled stocks higher through August 2003 and into-early
September, as the DJIA and NASDAQ posted respective 14-month and 16-month highs.
Stocks retreated following the release of August employment data which showed
further job losses, but then recovered in mid-September as the Federal Reserve
indicated that it would not raise rates in the near term. Weaker than expected
numbers for consumer confidence and manufacturing activity pulled the boarder
market lower at the close of the third quarter, which ended a streak of six
monthly gains in the DJIA.
Comparatively, at the start of the fourth quarter stocks
showed renewed strength, as optimism about third quarter earnings and employment
data for September 2003 provided a boost to stocks. In mid-October, the DJIA and
the NASDAQ hit 16- and 19-month highs, respectively, primarily on the basis of
some favorable third quarter earnings reports. The broader stock market rally
cooled in mid-October, as the result of profit taking and the posting of some
less favorable third quarter earnings by some of the bellwether technology and
manufacturing stocks. Indications that the economic recovery was gaining
momentum, including an annualized GDP growth rate of 8.2% in the third quarter,
as well as the Federal Reserve's statement that it would not raise its target
interest rates for a considerable period, supported a stock market rally during
late-October and into early-November. Despite upbeat economic news, including
employment data that showed the size of the U.S. workforce increased in October,
stocks edged lower in mid-November on profit taking and concerns over increased
terrorism in the Middle East. In late-November and early-December 2003, positive
economic news such as improved third quarter corporate profits and a strong
start to the Christmas shopping season provided a boost to stocks. Stocks
continued to move higher at the close of 2003, as key sectors of the economy
continued to show signs of strengthening.
RP(R) Financial, LC.
Page 4.12
Year end momentum in the stock market was sustained at the
beginning of 2004, reflecting generally favorable fourth quarter earnings and an
increase in consumer confidence. Profit taking and slower than expected GDP
growth in the fourth quarter of 2003 caused stocks to falter in late-January.
However, aided by January employment data that showed jobs were added and a
decline in the national unemployment rate to 5.6%, the broader stock market
moved higher during the first half of February. Stocks generally declined during
the balance of February and during the first half of March, reflecting valuation
concerns following a year of strong gains and weaker than expected job growth
during February. Concerns about terrorism and higher oil prices caused stocks to
tumble in late-March, before rebounding at the close of the first quarter on
more attractive fundamentals and optimism about first quarter earnings.
Stocks moved higher in early April 2004, as investors reacted
favorably to a strong employment report for March. For the balance of April
trading in the broader market produced uneven results, as generally favorable
first quarter earnings and strong economic data weighed against the growing
threat of inflation and higher interest rates. The DJIA closed below 10000 for
the first time in 2004 in the second week of May, as strong job growth during
April raised expectations of a rate increase by the Federal Reserve. The
downward trend in stocks prevailed through most of May, on concerns about higher
oil prices, violence in the Middle East and higher interest rates. Stocks
rebounded in late-May, primarily on the basis of higher corporate earnings and
lower oil prices. Strong employment data for May combined with lower oil prices
and favorable inflation data provided for a positive trend in the broader market
through mid-June. Stocks traded in a narrow range through the end of the second
quarter, as investors awaited the outcome of the Federal Reserve meeting at the
end of June.
Rising oil prices and profit warnings from some technology
companies caused major stock indices to fall at the start of the third quarter
of 2004. Stocks continued to trend lower through most of July, as a slow down in
the economic expansion raised concerns about future earnings growth. Strong
consumer confidence numbers for July reversed the downward in stocks during the
last week of July, with the DJIA closing up for the week for the first time
since mid-June. The recovery in the stock market was short-lived, as record high
oil prices, weak retail sales for July and weaker than expected job growth for
July pulled stocks lower in early-August. A positive economic outlook by the
Federal Reserve and bargain hunting supported
RP(R) Financial, LC.
Page 4.13
gains in the stock market during mid-August, as the DJIA moved back above the
10000 barrier. As an indication of the general trends in the nation's stock
markets over the past year, as of August 20, 2004, the DJIA closed at 10110.14,
an increase of 8.1% from one year ago and a decline of 3.3% year-to-date. As of
August 20, 2004 the NASDAQ closed at 1838.02, an increase of 4.1% from one year
ago and decline of 8.3% year-to-date. The Standard & Poors 500 Index closed at
1098.35 on August 20, 2004, an increase of 10.6% from a year ago and a decline
of 1.2% year-to-date.
The market for thrift stocks has been mixed as well during the
past twelve months, but, in general, thrift issues have paralleled trends in the
broader market. Higher mortgage rates and strength in technology stocks pushed
thrift stocks lower in early-August 2003, as investors rotated into sectors that
were expected to benefit from an economic recovery. After edging higher in
mid-August, thrift stocks eased lower at the end of August on expectations that
interest rates would continue to move higher as the economic recovery gained
momentum. Merger activity and acquisition speculation in the thrift sector
provided a boost to thrift prices in early-September. After easing lower into
mid-September on data that showed a slow down in refinancing activity, thrift
stocks strengthened following the Federal Reserve's decision to leave interest
rates unchanged at its mid-September meeting.
After following the broader stock market lower as the close of
the third quarter approached, thrift issues posted solid gains at the beginning
of the fourth quarter of 2003. A rally in the broader stock market and
acquisition activity were noteworthy factors that supported the positive trend
in thrift stocks. Following a two week run-up, thrift stocks declined in
mid-October on profit taking and a pullback in the broader market. Merger
activity, most notably Bank America's announced acquisition of FleetBoston
Financial Corp., along with strength in the broader market, provided for gains
in the thrift sector during late-October. The positive trend in thrift stocks
carried into early-November, reflecting expectations of improving net interest
margins and more consolidation of thrifts. Thrifts stocks eased lower in
mid-November in conjunction with the decline in the broader market. In
late-November and early-December 2003, thrift stocks followed the broader market
higher and then stabilized at the close of the fourth quarter.
RP(R) Financial, LC.
Page 4.14
After trading in a narrow range at the beginning of 2004,
thrift issues trended higher in late-January and the first half of February. The
positive trend was supported by further consolidation in the thrift sector,
including GreenPoint Financial's agreement to sell to North Fork Bancorp, as
well as generally favorable fourth quarter earnings. Indications that interest
rates would continue to remain low provided further support to thrift prices.
Thrift stocks followed the broader market lower in mid-February, before
recovering in late-February following a dip in long term Treasury yields. Thrift
issues generally experienced some selling pressure during the first half of
March, reflecting profit taking and weakness in the broader stock market. Higher
interest rates and weakness in the broader market pressured thrift issues lower
in late-March, which was followed by an upward move in thrift prices at the
close of the first quarter.
Thrifts stocks generally traded lower at the start of the
second quarter of 2004, as a strong employment report for March pushed interest
rates higher. Higher interest rates and inflation worries pressured interest
rate sensitive issues lower through most of April, with the sell-off sharpening
in early-May following another strong employment report for April. Thrift stocks
recovered modestly in mid-May as the yield on 10-year Treasury note declined
slightly. Acquisition speculation involving the sale of Washington Mutual lifted
the thrift sector in late-May. Thrift stocks generally retreated during the
first half of June, as the yield on the 10-year Treasury note moved to a
two-year high on inflation concerns. Following the sharp sell-off, thrift stocks
rebounded as a moderate increase in core consumer prices during may and comments
by the Federal Reserve Chairman that inflation did not seem likely to be a
serious problem eased fears of a sharp rise in inflation. Acquisition activity
helped to boost thrift stocks in late-June, but the upward trend was abruptly
reversed at the end of June as a significant decline in Washington Mutual's 2004
earnings guidance pulled the broader thrift sector lower.
Thrift stocks responded favorably to the 25 basis point rate
increase implemented by the Federal Reserve at the close of the 2004 second
quarter, as the Federal Reserve indicated that it would continue to raise the
federal funds rate 25 basis points at a time. June employment data which showed
weaker than expected job growth also provided support to thrift stocks in
early-July. For most of July there was little movement in thrift stocks, as
second quarter earnings were generally in line with expectations. A rally in the
broader market in late-July
RP(R) Financial, LC.
Page 4.15
provided a boost to thrift stocks as well. Thrift issues traded down with the
rest of the market in early-August, although losses in the thrift sector were
mild compared to the sell-off experienced in the boarder market as weaker than
expected job growth for July pushed interest rates lower. Improved inflation
data, lower interest rates and a rally in the broader stock market combined to
push the thrift sector in mid-August. On August 20, 2004, the SNL Index for all
publicly-traded thrifts closed at 1,453.1, an increase of 12.1% from one year
ago and a decline of 2.0% year-to-date. The SNL MHC Index closed at 2,589.3 on
August 20, 2004, an increase of 23.7% from one year ago and a decline of 2.8%
year-to-date.
B. The New Issue Market
In addition to thrift stock market conditions in general, the
new issue market for converting thrifts is also an important consideration in
determining the Company's pro forma market value. The new issue market is
separate and distinct from the market for seasoned thrift stocks in that the
pricing ratios for converting issues are computed on a pro forma basis,
specifically: (1) the numerator and denominator are both impacted by the
conversion offering amount, unlike existing stock issues in which price change
affects only the numerator; and (2) the pro forma pricing ratio incorporates
assumptions regarding source and use of proceeds, effective tax rates, stock
plan purchases, etc. which impact pro forma financials, whereas pricing for
existing issues are based on reported financials. The distinction between
pricing of converting and existing issues is perhaps no clearer than in the case
of the price/book ("P/B") ratio in that the P/B ratio of a converting thrift
will typically result in a discount to book value whereas in the current market
for existing thrifts the P/B ratio often reflects a premium to book value.
Therefore, it is appropriate to also consider the market for new issues, both at
the time of the conversion and in the aftermarket.
Thrift offerings completed in 2004 have generally been well
received, with most offerings being oversubscribed and trading higher in initial
trading activity. However, reflecting the general pull back in thrift stocks,
four of the six recent offerings shown in Table 4.2 were not oversubscribed and
the two second-step conversion offerings and one of the stand conversion
offerings traded below their IPO prices in initial trading activity. As shown in
Table 4.2, two standard conversions, two second-step conversions and two mutual
holding company offerings
RP(R) Financial, LC.
Page 4.16
Table 4.2
Pricing Characteristics and After-Market Trends
Recent Conversions Completed (Last Three Months)
------------------------------------------------------------------------------------------------------------------------------------
Institutional Information Pre-Conversion Data Offering Information
------------------------------------------------------------------------------------------------------------------------------------
Financial Info. Asset Quality
------------------------------------------------------------------------------------------------------------------------------------
Conversion Equity/ NPAs/ Res. Gross % % of Exp./
Institution ST. Date Ticker Assets Assets Assets Cov. Proc. Offered Mid. Proc.
----------- --- ---- ------ ------ ------ ------ ---- ----- ------- ---- -----
($Mil) (%) (%) (%) ($Mil.) (%) (%) (%)
Standard Conversions
--------------------
Third Century Bancorp IN 6/30/04 TDCB-OTS BB $ 107 7.62% 0.47% 662% $ 16.5 100% 132% 3.8%
SE Financial Corp. PA 5/6/04 SEFL-OTS BB $ 86 9.22% 0.22% 150% $ 25.8 100% 132% 2.2%
Averages - Standard Converisons: $ 97 8.42% 0.35% 406% $ 21.2 100% 132% 3.0%
Medians - Standard Conversions: $ 97 8.42% 0.35% 406% $ 21.2 100% 132% 3.0%
Second Step Conversions
-----------------------
DSA Financial Corporation IN 7/30/04 DSFN-OTS BB $ 78 12.07% 0.71% 59% $ 8.5 52% 108% 6.1%
Partners Trust Financial Group, Inc.* NY 7/15/04 PRTR-NASDAQ $ 3,628 11.01% 0.59% 264% $148.8 54% 85% 3.6%
Averages - Second Conversions: $ 1,853 11.54% 0.65% 162% $ 78.6 53% 97% 4.9%
Medians - Second Conversions: $ 1,853 11.54% 0.65% 162% $ 78.6 53% 97% 4.9%
Mutual Holding Company Conversions
----------------------------------
First Federal Financial Services, Inc. 6/29/04 FFFS-NASDAQ $ 123 15.62% 0.07% 471% $ 17.6 45% 92% 3.9%
Monadnock Community Bncp, INC.*(9 NH 6/29/04 MNCK-OTC BB $ 45 5.64% 0.37% 207% $ 3.4 45% 100% 14.8%
Averages - Mutual Holding Company Conversions: $ 84 10.63% 0.22% 339% $ 10.5 45% 96% 9.3%
Medians - Mutual Holding Company Conversions: $ 84 10.63% 0.22% 339% $ 10.5 45% 96% 9.3%
Averages - All Conversions: $ 678 10.20% 0.41% 302% $ 36.8 66% 108% 5.7%
Medians - All Conversions: $ 97 10.12% 0.42% 236% $ 17.1 53% 104% 3.8%
------------------------------------------------------------------------------------------------------------------------------------
RP(R) Financial, LC.
Page 4.16 (continued)
Table 4.2 (Continued)
Pricing Characteristics and After-Market Trends
Recent Conversions Completed (Last Three Months)
---------------------------------------------------------------------------------------------------------------
Institutional Information Contribution to Insider Purchases
---------------------------------------------------------------------------------------------------------------
Charitable Found.
---------------------------------------------------------------------------------------------------------------
Benefit Plans Initial
Conversion % of Recog. Mgmt.& Dividend
Institution ST. Date Ticker Form Offering ESOP Plans Dirs. Yield
----------- --- ---- ------ ---- -------- ---- ----- ----- -----
(%) (%) (%) (%)(2) (%)
Standard Conversions
--------------------
Third Century Bancorp IN 6/30/04 TDCB-OTS BB NA NA 8.0% 4.0% 9.6% 0.00%
SE Financial Corp. PA 5/6/04 SEFL-OTS BB NA NA 8.0% 4.0% 3.9% 0.00%
Averages - Standard Converisons: N.A. N.A. 8.0% 4.0% 6.8% 0.00%
Medians - Standard Conversions: N.A. N.A. 8.0% 4.0% 6.8% 0.00%
Second Step Conversions
-----------------------
DSA Financial Corporation IN 7/30/04 DSFN-OTS BB N.A N.A 8.0% 4.0% 7.4% 4.00%
Partners Trust Financial Group, Inc.* NY 7/15/04 PRTR-NASDAQ N.A N.A 8.0% 4.0% 0.7% 2.50%
Averages - Second Conversions: NA NA 8.0% 4.0% 4.0% 3.25%
Medians - Second Conversions: NA NA 8.0% 4.0% 4.0% 3.25%
Mutual Holding Company Conversions
----------------------------------
First Federal Financial Services, Inc. 6/29/04 FFFS-NASDAQ N.A N.A 5.0% 4.0% 8.6% 2.40%
Monadnock Community Bncp, INC.*(9 NH 6/29/04 MNCK-OTC BB N.A N.A 4.0% 4.0% 13.5% 0.00%
Averages - Mutual Holding Company Conversions: NA NA 4.5% 4.0% 11.0% 1.20%
Medians - Mutual Holding Company Conversions: NA NA 4.5% 4.0% 11.0% 1.20%
Averages - All Conversions: NA NA 6.8% 4.0% 7.3% 1.48%
Medians - All Conversions: NA NA 8.0% 4.0% 8.0% 1.20%
---------------------------------------------------------------------------------------------------------------
RP(R) Financial, LC.
Page 4.16 (continued)
Table 4.2 (Continued)
Pricing Characteristics and After-Market Trends
Recent Conversions Completed (Last Three Months)
--------------------------------------------------------------------------------------------------------------
Institutional Information Pro Forma Data
--------------------------------------------------------------------------------------------------------------
Pricing Ratios(3) Financial Charac.
--------------------------------------------------------------------------------------------------------------
Conversion Core Core Core
Institution ST. Date Ticker P/TB P/E P/A ROA TE/A ROE
----------- --- ---- ------ ---- --- --- --- ---- ---
(%) (x) (%) (%) (%) (%)
Standard Conversions
--------------------
Third Century Bancorp IN 6/30/04 TDCB-OTS BB 74.9% 39.1x 13.7% 0.4% 18.3% 1.9%
SE Financial Corp. PA 5/6/04 SEFL-OTS BB 85.7% 41.7x 23.8% 0.6% 27.8% 2.1%
Averages - Standard Converisons: 80.3% 40.4x 18.7% 0.5% 23.0% 2.0%
Medians - Standard Conversions: 80.3% 40.4x 18.7% 0.5% 23.0% 2.0%
Second Step Conversions
-----------------------
DSA Financial Corporation IN 7/30/04 DSFN-OTS BB 100.3% 20.0x 19.3% 1.0% 19.2% 5.0%
Partners Trust Financial Group, Inc.* NY 7/15/04 PRTR-NASDAQ 188.9% 17.2x 12.7% 0.7% 6.7% 11.0%
Averages - Second Conversions: 144.6% 18.6x 16.0% 0.9% 13.0% 8.0%
Medians - Second Conversions: 144.6% 18.6x 16.0% 0.9% 13.0% 8.0%
Mutual Holding Company Conversions
----------------------------------
First Federal Financial Services, Inc. 6/29/04 FFFS-NASDAQ 73.4% 23.7x 24.9% 1.2% 25.0% 4.8%
Monadnock Community Bncp, INC.*(9 NH 6/29/04 MNCK-OTC BB 84.1% 458.9x 14.7% 0.0% 10.7% 0.0%
Averages - Mutual Holding Company Conversions: 78.7% 241.3x 19.8% 0.6% 17.9% 2.4%
Medians - Mutual Holding Company Conversions: 78.7% 241.3x 19.8% 0.6% 17.9% 2.4%
Averages - All Conversions: 101.2% 100.1x 18.2% 0.6% 18.0% 4.1%
Medians - All Conversions: 84.9% 31.4x 17.0% 0.7% 18.8% 3.4%
--------------------------------------------------------------------------------------------------------------
RP(R) Financial, LC.
Page 4.16 (continued)
Table 4.2 (Continued)
Pricing Characteristics and After-Market Trends
Recent Conversions Completed (Last Three Months)
-------------------------------------------------------------------------------------------------------------------------
Institutional Information Post-IPO Pricing Trends
-------------------------------------------------------------------------------------------------------------------------
Closing Price:
-------------------------------------------------------------------------------------------------------------------------
First After After
Conversion IPO Trading % First % First %
Institution ST. Date Ticker Price Day Change Week(4) Change Month(5) Change
----------- --- ---- ------ ----- --- ------ ------- ------ -------- ------
($) ($) (%) ($) (%) ($) (%)
Standard Conversions
--------------------
Third Century Bancorp IN 6/30/04 TDCB-OTS BB $10.00 $11.32 13.2% $11.05 10.5% $11.25 12.5%
SE Financial Corp. PA 5/6/04 SEFL-OTS BB $10.00 $ 9.95 -0.5% $ 9.85 -1.5% $9.40 -6.0%
Averages - Standard Converisons: $10.00 $10.64 6.4% $10.45 4.5% $10.33 3.3%
Medians - Standard Conversions: $10.00 $10.64 6.4% $10.45 4.5% $10.33 3.3%
Second Step Conversions
-----------------------
DSA Financial Corporation IN 7/30/04 DSFN-OTS BB $10.00 $ 9.80 -2.0% $ 9.50 -5.0% $9.50 -5.0%
Partners Trust Financial Group, Inc.* NY 7/15/04 PRTR-NASDAQ $10.00 $ 9.99 -0.1% $ 9.98 -0.2% $9.79 -2.1%
Averages - Second Conversions: $10.00 $ 9.90 -1.1% $ 9.74 -2.6% $9.65 -3.6%
Medians - Second Conversions: $10.00 $ 9.90 -1.1% $ 9.74 -2.6% $9.65 -3.6%
Mutual Holding Company Conversions
----------------------------------
First Federal Financial Services, Inc. 6/29/04 FFFS-NASDAQ $10.00 $11.50 15.0% $12.25 22.5% $13.50 35.0%
Monadnock Community Bncp, INC.*(9 NH 6/29/04 MNCK-OTC BB $ 8.00 $ 8.30 3.8% $ 8.00 0.0% $7.70 -3.8%
Averages - Mutual Holding Company Conversions: $ 9.00 $ 9.90 9.4% $10.13 11.3% $10.60 15.6%
Medians - Mutual Holding Company Conversions: $ 9.00 $ 9.90 9.4% $10.13 11.3% $10.60 15.6%
Averages - All Conversions: $ 9.67 $10.14 4.9% $10.11 4.4% $10.19 5.1%
Medians - All Conversions: $10.00 $ 9.97 1.8% $ 9.92 -0.1% $9.65 -2.9%
-------------------------------------------------------------------------------------------------------------------------
Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not Applicable, Not Available; C/S-Cash/Stock.
(1) Non-OTS regulated thrift. (5) Latest price if offering is more than one week
but less than one month old. (9) Former credit union.
(2) As a percent of MHC offering for MHC transactions. (6) Mutual holding company pro forma data on full conversion basis.
(3) Does not take into account the adoption of SOP 93-6. (7) Simultaneously completed acquisition of another financial
(4) Latest price if offering is less than one week old. institution.
(8) Simultaneously converted to a commercial bank charter.
August 20, 2004
------------------------------------------------------------------------------------------------------------------------------------
RP(R) Financial, LC.
Page 4.17
were completed during the past three months. The mutual holding company
offerings are considered to be more relevant for purposes of our analysis. Both
of the mutual holding company offerings were closed within their respective
valuation ranges. On a fully-converted basis, the average closing pro forma
price/tangible book ratio of the recent MHC offerings equaled 78.7%. On average,
the two recent MHC offerings reflected price appreciation of 11.3% after the
first week of trading and price appreciation of 15.6% after one month of
trading. However, one of the recent mutual holding company offerings, Monadnock
Community Bancorp, was trading below its IPO price after the first month of
trading.
Shown in Table 4.3 are the current pricing ratios of Partner Trust
Financial Group, which is the only NASDAQ or Exchange listed fully-converted
offering that has been completed within the past three months. Partners Trust's
closing market price of $9.81 on August 20, 2004 represented a 1.0% decline from
its IPO price.
C. The Acquisition Market
Also considered in the valuation was the potential impact on
Kearny Financial's stock price of recently completed and pending acquisitions of
other savings institutions operating in New Jersey. As shown in Exhibit IV-4,
there were eight New Jersey thrift acquisitions completed from 2000 through
year-to-date 2004, and there are currently no pending acquisitions of a New
Jersey savings institution. To the extent that speculation of a re-mutualization
may impact the Company's valuation, we have largely taken this into account in
selecting companies which operate in the MHC form of ownership. Accordingly, the
Peer Group companies are considered to be subject to the same type of
acquisition speculation that may influence Kearny Financial's trading price.
* * * * * * * * * * *
In determining our valuation adjustment for marketing of the issue, we
considered trends in both the overall thrift market, the new issue market
including the new issue market for MHC shares and the local acquisition market
for thrift stocks. Taking these factors and trends into account, RP Financial
concluded that no adjustment was appropriate in the valuation analysis for
purposes of marketing of the issue.
RP(R) Financial, LC.
Page 4.18
Table 4.3
Market Pricing Comparatives
Prices As of August 20, 2004
Market Per Share Data
Capitalization --------------- Dividends(4)
---------------- Core Book Pricing Ratios(3) ---------------------
Price/ Market 12 Month Value/ ------------------------------------ Amount/ Payout
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core Share Yield Ratio(5)
--------------------- --------- ------ ------ ----- --- --- --- ---- ------- ----- ----- --------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x) ($) (%) (%)
All Public Companies $21.70 $446.17 $1.02 $14.16 17.37x 156.40% 16.58% 170.19% 19.27x $0.48 2.24% 35.95%
Converted Last 3 Months (no MHC) $9.81 $272.16 $0.58 $11.00 16.35x 89.18% 12.47% 185.44% 16.91x $0.25 2.55% 43.10%
State of NJ $20.56 $536.16 $0.92 $10.48 21.96x 169.77% 21.79% 172.11% 24.20x $0.43 1.94% 34.18%
Comparable Group
----------------
Converted Last 3 Months (no MHC)
--------------------------------
PRTR Partners Trust Fin. Group Of NY $9.81 $272.16 $0.58 $11.00 16.35x 89.18% 12.47% 185.44%16.91x $0.25 2.55% 43.10%
RP(R) Financial, LC.
Page 4.18 (continued)
Table 4.3 (Continued)
Market Pricing Comparatives
Prices As of August 20, 2004
Financial
Characteristics(6)
------------------------ Reported Core
Total Equity/ NPAs/ ----------------------------
Financial Institution Assets Assets Assets ROA ROE ROA ROE
--------------------- ------------- ------- --- --- --- ---
($Mil) (%) (%) (%) (%) (%) (%)
All Public Companies $2,879 10.67% 0.55% 0.82% 8.76% 0.71% 7.26%
Converted Last 3 Months (no MHC) $2,183 13.98% 0.24% 0.76% 5.45% 0.74% 5.27%
State of NJ $3,771 11.54% 0.18% 0.83% 9.57% 0.77% 8.75%
Comparable Group
----------------
Converted Last 3 Months (no MHC)
--------------------------------
PRTR Partners Trust Fin. Group Of NY $2,183 13.98% 0.24% 0.76% 5.45% 0.74% 5.27%
(1) Average of High/Low or Bid/Ask price per share.
(2) EPS (estimate core basis) is based on actual trailing 12 month data,
adjusted to omit non-operating items (including the SAIF assessment) on a
tax-effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB =
Price to tangible book value; and P/Core = Price to core earnings.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated
core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios
based on trailing 12 month common earnings and average common equity and
total assets balances.
(7) Excludes from averages and medians those companies the subject of actual or
rumored acquisition activities or unusual operating characteristics.
Source: Corporate reports, offering circulars, and RP(R) Financial, LC.
calculations. The information provided in this report has been
obtained from sources we believe are reliable, but we cannot guarantee
the accuracy or completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) Financial, LC.
Page 4.19
8. Management
Kearny Financial's management team appears to have experience and
expertise in all of the key areas of the Company's operations. Exhibit IV-5
provides summary resumes of Kearny Financial's Board of Directors and senior
management. The financial characteristics of the Company suggest that the Board
and senior management have been effective in implementing an operating strategy
that can be well managed by the Company's present organizational structure. The
Company currently does not have any senior management positions that are vacant.
Similarly, the returns, capital positions and other operating measures
of the Peer Group companies are indicative of well-managed financial
institutions, which have Boards and management teams that have been effective in
implementing competitive operating strategies. Therefore, on balance, we
concluded no valuation adjustment relative to the Peer Group was appropriate for
this factor.
9. Effect of Government Regulation and Regulatory Reform
In summary, as a federally-insured savings bank operating in the MHC
form of ownership, the Company will operate in substantially the same regulatory
environment as the Peer Group members -- all of whom are adequately capitalized
institutions and are operating with no apparent restrictions. Exhibit IV-6
reflects the Bank's pro forma regulatory capital ratios. The one difference
noted between Kearny Financial and the one Peer Group company that operates as
an FDIC regulated institutions was in the area of regulatory policy regarding
dividend waivers (see the discussion above for "Dividends"). Since this factor
was already accounted for in the "Dividends" section of this appraisal, no
further adjustment has been applied for the effect of government regulation and
regulatory reform.
Summary of Adjustments
Overall, based on the factors discussed above, we concluded that the
Company's pro forma market value should reflect the following valuation
adjustments relative to the Peer Group:
RP(R) Financial, LC.
Page 4.20
Key Valuation Parameters: Valuation Adjustment
------------------------- --------------------
Financial Condition Slight Upward
Profitability, Growth and Viability of Earnings Slight Upward
Asset Growth No Adjustment
Primary Market Area No Adjustment
Dividends No Adjustment
Liquidity of the Shares No Adjustment
Marketing of the Issue No Adjustment
Management No Adjustment
Effect of Government Regulations and Regulatory Reform No Adjustment
Basis of Valuation - Fully-Converted Pricing Ratios
As indicated in Chapter III, the valuation analysis included in this
section places the Peer Group institutions on equal footing by restating their
financial data and pricing ratios on a "fully-converted" basis. We believe there
are a number of characteristics of MHC shares that make them different from the
shares of fully-converted companies. These factors include: (1) lower
aftermarket liquidity in the MHC shares since less than 50% of the shares are
available for trading; (2) no opportunity for public shareholders to exercise
voting control; (3) the potential pro forma impact of second-step conversions on
the pricing of MHC institutions; (4) the regulatory policies regarding the
dividend waiver policy by MHC institutions; and (5) the middle-tier structure
maintained by most MHCs facilitates the ability for stock repurchases. The above
characteristics of MHC shares have provided MHC shares with different trading
characteristics versus fully-converted companies. To account for the unique
trading characteristics of MHC shares, RP Financial has placed the financial
data and pricing ratios of the Peer Group on a fully-converted basis to make
them comparable for valuation purposes. Using the per share and pricing
information of the Peer Group on a fully-converted basis accomplishes a number
of objectives. First, such figures eliminate distortions that result when trying
to compare institutions that have different public ownership interests
outstanding. Secondly, such an analysis provides ratios that are comparable to
the pricing information of fully-converted public companies, and more
importantly, are directly applicable to determining the pro forma market value
range of the 100% ownership interest in Kearny Financial as an MHC. Lastly, such
an analysis allows for consideration of the potential dilutive impact of
RP(R) Financial, LC.
Page 4.21
dividend waiver policies adopted by the Federal agencies. This technique is
validated by the investment community's evaluation of MHC pricing, which also
incorporates the pro forma impact of a second-step conversion based on the
current market price.
To calculate the fully-converted pricing information for MHCs, the
reported financial information for the public MHCs must incorporate the
following assumptions, based on completed second-step conversions to date: (1)
all shares owned by the MHC are assumed to be sold at the current trading price
in a second step-conversion; (2) the gross proceeds from such a sale were
adjusted to reflect reasonable offering expenses and standard stock based
benefit plan parameters that would be factored into a second-step conversion of
MHC institutions; (3) net proceeds are assumed to be reinvested at market rates
on a tax effected basis; and (4) the public ownership interest is adjusted to
reflect the pro forma impact of the waived dividends pursuant to applicable
regulatory policy. Book value per share and earnings per share figures for the
public MHCs were adjusted by the impact of the assumed second step-conversion,
resulting in an estimation of book value per share and earnings per share
figures on a fully-converted basis. Table 4.4 on the following page shows the
calculation of per share financial data (fully-converted basis) for each of the
ten public MHC institutions that form the Peer Group.
Valuation Approaches: Fully-Converted Basis
In applying the accepted valuation methodology promulgated by the OTS
and adopted by the FDIC, i.e., the pro forma market value approach, including
the fully-converted analysis described above, we considered the three key
pricing ratios in valuing Kearny Financial's to-be-issued stock --
price/earnings ("P/E"), price/book ("P/B"), and price/assets ("P/A") approaches
-- all performed on a pro forma basis including the effects of the stock
proceeds. In computing the pro forma impact of the conversion and the related
pricing ratios, we have incorporated the valuation parameters disclosed in
Kearny Financial's prospectus for reinvestment rate, effective tax rate and
stock benefit plan assumptions (summarized in Exhibits IV-7 and IV-8). Pursuant
to the minority stock offering, we have also incorporated the valuation
parameters disclosed in Kearny Financial's prospectus for offering expenses. The
assumptions utilized in the pro forma analysis in calculating the Company's full
conversion value were consistent with the
RP(R) Financial, LC.
Page 4.22
Table 4.4
Calculation of Implied Per Share Data--Incorporating MHC Second Step Conversion
Comparable Institution Analysis
For the Twelve Months Ended June 30, 2004
Current Ownership Current Per Share Data (MHC Ratios)
------------------------- --------------------------------------
Total Public MHC Core Book Tang.
Shares Shares Shares EPS EPS Value Book Assets
------ ------ ------ --- --- ----- ---- ------
(000) (000) (000) ($) ($) ($) ($) ($)
Publicly-Traded MHC Institutions
--------------------------------
ALLB Alliance Bank MHC of PA (20.0) 3,441 688 2,753 $0.70 $0.69 $10.18 $10.18 $111.23
BCSB BCSB Bankcorp MHC of MD (36.4) 5,899 2,144 3,755 $0.11 $0.10 $ 6.84 $ 6.38 $127.13
CFFN Capitol Fed. Fin. MHC of KS (29.2) 73,970 21499 52,471 $0.36 $0.36 $13.03 $13.03 $114.20
CHFN Charter Financial MHC of GA (18.4) 19,571 3571 16,000 $0.39 $0.27 $13.34 $13.03 $54.56
GCBC Green Co. Bancorp MHC of NY (43.9) 42,054 902 1,152 $1.42 $1.42 $14.52 $14.52 $138.55
JXSB Jacksonville Bancorp MHC of IL (46.8) 1,952 913 1,039 $0.35 $0.25 $ 9.86 $ 8.30 $136.17
NWSB Northwest Bancorp MHC of PA (41.4) 47,960 19850 28,110 $1.05 $0.97 $10.42 $ 7.46 $120.49
ONFC Oneida Financial MHC of NY (42.4) 27,488 3,178 4,310 $0.40 $0.34 $ 6.52 $ 4.74 $57.53
PBHC Pathfinder BC MHC of NY (35.3) 2,448 865 1,583 $0.61 $0.42 $ 8.61 $ 6.74 $122.52
WFD Westfield Fin. MHC of MA (46.5) 10,057 4,877 5,180 $0.57 $0.50 $11.59 $11.59 $78.50
RP(R) Financial, LC.
Page 4.22
Table 4.4 (Continued)
Calculation of Implied Per Share Data--Incorporating MHC Second Step Conversion
Comparable Institution Analysis
For the Twelve Months Ended June 30, 2004
Pro Forma
Impact of Second Step Conversion(4) Per Share Data (Fully-Converted)(4)
- ----------------------------------------- -----------------------------------------
Share Gross Net Incr. Net Incr. Core Book Tang.
Price Proceeds(1)Capital(2) Income(3) EPS EPS Value Book Assets
----- ------------------------------- --- --- ----- ---- ------
($) ($000) ($000) ($000) ($) ($) ($) ($) ($)
Publicly-Traded MHC Institutions
--------------------------------
ALLB Alliance Bank MHC of PA (20.0) $30.00 $89,247 $83,007 $975 $0.92 $0.91 $32.22 $127.15 $127.15
BCSB BCSB Bankcorp MHC of MD (36.4) $14.79 $55,536 $47,761 $517 $0.20 $0.19 $14.94 $135.23 $135.23
CFFN Capitol Fed. Fin. MHC of KS (29.2) $32.52 $1,706,35 $1,467,467 $15,879 $0.57 $0.57 $32.87 $134.04 $134.04
CHFN Charter Financial MHC of GA (18.4) $33.18 $530,880 $456,557 $4,940 $0.64 $0.52 $36.67 $ 77.89 $ 77.89
GCBC Green Co. Bancorp MHC of NY (43.9) $32.89 $37,889 $32,585 $353 $1.59 $1.59 $30.38 $154.41 $154.41
JXSB Jacksonville Bancorp MHC of IL (46.8) $14.99 $15,575 $13,394 $145 $0.42 $0.32 $16.72 $143.03 $143.03
NWSB Northwest Bancorp MHC of PA (41.4) $21.89 $615,328 $529,182 $5,726 $1.17 $1.09 $21.45 $131.52 $131.52
ONFC Oneida Financial MHC of NY (42.4) $10.95 $47,194 $40,587 $439 $0.46 $0.40 $11.94 $ 62.95 $ 62.95
PBHC Pathfinder BC MHC of NY (35.3) $16.50 $26,120 $22,463 $243 $0.71 $0.52 $17.79 $131.70 $131.70
WFD Westfield Fin. MHC of MA (46.5) $21.10 $109,298 $93,996 $1,017 $0.67 $0.60 $20.94 $ 87.85 $ 87.85
RP(R) Financial, LC.
Page 4.22 (continued)
Table 4.4 (Continued)
Calculation of Implied Per Share Data--Incorporating MHC Second Step Conversion
Comparable Institution Analysis
For the Twelve Months Ended June 30, 2004
Pro Forma(5)
-----------------
Public
Pct. Dilution
---- --------
(%) (%)
Publicly-Traded MHC Institutions
--------------------------------
ALLB Alliance Bank MHC of PA (20.0) 18.80% -1.20%
BCSB BCSB Bankcorp MHC of MD (36.4) 36.30% 0.00%
CFFN Capitol Fed. Fin. MHC of KS (29.2) 29.10% 0.00%
CHFN Charter Financial MHC of GA (18.4) 18.20% 0.00%
GCBC Green Co. Bancorp MHC of NY (43.9) 43.90% 0.00%
JXSB Jacksonville Bancorp MHC of IL (46.8) 46.80% 0.00%
NWSB Northwest Bancorp MHC of PA (41.4) 41.40% 0.00%
ONFC Oneida Financial MHC of NY (42.4) 42.40% 0.00%
PBHC Pathfinder BC MHC of NY (35.3) 35.30% 0.00%
WFD Westfield Fin. MHC of MA (46.5) 48.50% 0.00%
(1) Gross proceeds calculated as stock price multiplied by the number of shares
owned by the mutual holding company (i.e., non-public shares).
(2) Net increase in capital reflects gross proceeds less offering expenses,
contra-equity account for leveraged ESOP and deferred compensation account
for restricted stock plan. For institutions with assets at the MHC level,
the net increase in capital also includes consolidation of MHC assets with
the capital of the institution concurrent with hypothetical second step.
(3) Net increase in earnings reflects after-tax reinvestment income (assumes
ESOP and recognition plan do not generate reinvestment income), less
after-tax ESOP amortization and recognition plan vesting:
After-tax reinvestment 2.31%
ESOP loan term (years) 10
Recognition plan vesting (years) 5
Effective tax rate 34.00%
(4) Figures reflect adjustments to "non-grandfathered" companies to reflect
dilutive impact of cumulative dividends waived by the MHC (reflect FDIC
policy regarding waived dividends).
(5) Reflects pro forma ownership position of minority stockholders after taking
into account the OTS and FDIC policies regarding waived dividends assuming
a hypothetical second step. For OTS "grandfathered" companies, dilution
reflects excess waived dividends and MHC assets. For all other companies,
dilution reflects all waived dividends and MHC assets.
Source: Corporate reports, offering circulars, and RP(R) Financial, LC.
calculations. The information provided in this report has been
obtained from sources we believe are reliable, but we cannot guarantee
the accuracy or completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) Financial, LC.
Page 4.23
assumptions utilized for the minority stock offering, except expenses
were assumed to equal 2.0% of gross proceeds.
In our estimate of value, we assessed the relationship of the pro forma
pricing ratios relative to the Peer Group, recent conversions and MHC offerings.
RP Financial's valuation placed an emphasis on the following:
o P/E Approach. The P/E approach is generally the best indicator of
long-term value for a stock. Given the similarities between the
Company's and the Peer Group's earnings composition and overall
financial condition, the P/E approach was carefully considered in
this valuation. At the same time, recognizing that (1) the
earnings multiples will be evaluated on a pro forma
fully-converted basis for the Company as well as for the Peer
Group; and (2) the Peer Group on average has had the opportunity
to realize the benefit of reinvesting the minority offering
proceeds, we also gave weight to the other valuation approaches.
o P/B Approach. P/B ratios have generally served as a useful
benchmark in the valuation of thrift stocks, particularly in the
context of an initial public offering, as the earnings approach
involves assumptions regarding the use of proceeds. RP Financial
considered the P/B approach to be a valuable indicator of pro
forma value taking into account the pricing ratios under the P/E
and P/A approaches. We have also modified the P/B approach to
exclude the impact of intangible assets (i.e., price/tangible
book value or "P/TB"), in that the investment community
frequently makes this adjustment in its evaluation of this
pricing approach.
o P/A Approach. P/A ratios are generally a less reliable indicator
of market value, as investors typically assign less weight to
assets and attribute greater weight to book value and earnings.
Furthermore, this approach as set forth in the regulatory
valuation guidelines does not take into account the amount of
stock purchases funded by deposit withdrawals, thus understating
the pro forma P/A ratio. At the same time, the P/A ratio is an
indicator of franchise value, and, in the case of highly
capitalized institutions, high P/A ratios may limit the
investment community's willingness to pay market multiples for
earnings or book value when ROE is expected to be low.
The Company will adopt Statement of Position ("SOP") 93-6, which will
cause earnings per share computations to be based on shares issued and
outstanding excluding unreleased ESOP shares. For purposes of preparing the pro
forma pricing analyses, we have reflected all shares issued in the offering,
including all ESOP shares, to capture the full dilutive impact, particularly
since the ESOP shares are economically dilutive, receive dividends and can be
voted. However, we did consider the impact of the adoption of SOP 93-6 in the
valuation.
RP(R) Financial, LC.
Page 4.24
Based on the application of the three valuation approaches, taking into
consideration the valuation adjustments discussed above, RP Financial concluded
that as of August 20, 2004, the pro forma market value of Kearny Financial's
full conversion offering equaled $475,000,000 at the midpoint, equal to
47,500,000 shares at $10.00 per share.
1. Price-to-Earnings ("P/E"). The application of the P/E valuation
method requires calculating the Company's pro forma market value by applying a
valuation P/E multiple (fully-converted basis) to the pro forma earnings base.
In applying this technique, we considered both reported earnings and a recurring
earnings base, that is, earnings adjusted to exclude any one-time non-operating
items, plus the estimated after-tax earnings benefit of the reinvestment of the
net proceeds. The Company's reported earnings, incorporating the reinvestment of
$613,000 of MHC assets at an after-tax reinvestment rate of 1.24%, equaled
$12.905 million for the twelve months ended June 30, 2004. In deriving Kearny
Financial's core earnings, the only adjustment made to reported earnings was to
eliminate one-time merger expenses of $592,000. As shown below, on a tax
effected basis, assuming an effective marginal tax rate of 40.85% for the merger
expenses eliminated, the Company's core earnings were determined to equal
$13.255 million for the twelve months ended June 30, 2004. (Note: see Exhibit
IV-9 for the adjustments applied to the Peer Group's earnings in the calculation
of core earnings).
Amount
------
($000)
Net income $12,905
Elimination of merger expenses(1) 350
-------
Core earnings estimate $13,255
=======
(1) Tax effected at 40.85%.
Based on Kearny Financial's reported and estimated core earnings, and
incorporating the impact of the pro forma assumptions discussed previously, the
Company's pro forma reported and core P/E multiples (fully-converted basis) at
the $475.0 million midpoint value equaled 35.29 times and 34.48 times,
respectively, which provided for premiums of 40.7% and 29.8% relative to the
Peer Group's average reported and core P/E multiples (fully-converted basis) of
RP(R) Financial, LC.
Page 4.25
25.09 times and 26.57 times, respectively (see Table 4.5). The implied premiums
reflected in the Company's pro forma P/E multiples take into consideration the
Company's pro forma P/B and P/A ratios. It also should be noted that in
assessing the relative premiums indicated for the Company's P/E multiples, the
P/E multiples for the Peer Group excluded multiples above 35 times and are shown
as "NM" in Table 4.5.
2. Price-to-Book ("P/B"). The application of the P/B valuation method
requires calculating the Company's pro forma market value by applying a
valuation P/B ratio, as derived from the Peer Group's P/B ratio (fully-converted
basis), to Kearny Financial's pro forma book value (fully-converted basis).
Based on the $475.0 million midpoint valuation, Kearny Financial's pro forma P/B
and P/TB ratios equaled 67.60% and 76.84%, respectively. In comparison to the
average P/B and P/TB ratios for the Peer Group of 96.67% and 102.32%, the
Company's ratios reflected a discount of 30.1% on a P/B basis and a discount of
24.9% on a P/TB basis. RP Financial considered the discounts under the P/B
approach to be reasonable in light of the Company's resulting P/E multiples,
higher level of pro forma capitalization and lower return on equity.
3. Price-to-Assets ("P/A"). The P/A valuation methodology determines
market value by applying a valuation P/A ratio (fully-converted basis) to the
Company's pro forma asset base, conservatively assuming no deposit withdrawals
are made to fund stock purchases. In all likelihood there will be deposit
withdrawals, which results in understating the pro forma P/A ratio which is
computed herein. At the midpoint of the valuation range, Kearny Financial's full
conversion value equaled 20.25% of pro forma assets. Comparatively, the Peer
Group companies exhibited an average P/A ratio (fully-converted basis) of
20.38%, which implies a discount of 0.6% has been applied to the Company's pro
forma P/A ratio (fully-converted basis).
Comparison to Recent Offerings
As indicated at the beginning of this chapter, RP Financial's analysis
of recent conversion and MHC offering pricing characteristics at closing and in
the aftermarket has been limited to a "technical" analysis and, thus, the
pricing characteristics of recent conversion offerings can not be a primary
determinate of value. Particular focus was placed on the P/TB approach in this
RP(R) Financial, LC.
Page 4.26
Table 4.5
MHC Institutions -- Implied Pricing Ratios, Full Conversion Basis
Kearny Financial Corp. and the Comparables
As of August 20, 2004
Fully Converted
Implied Value Per Share(8)
------------------ -----------------
Price/ Market Core 12 Book Value Pricing Ratios(3)
--------------------------------------------
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core
--------------------- -------- ----- ------ ----- --- --- --- ---- ------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x)
Kearny Financial Corp.
---------------------
Superrange $10.00 $628.19 $0.22 $13.03 46.73x 76.73% 25.52% 85.56% 45.45x
Maximum $10.00 $546.25 $0.25 $13.98 40.34x 71.51% 22.70% 80.40% 40.00x
Midpoint $10.00 $475.00 $0.29 $14.79 35.29x 67.60% 20.25% 76.84% 34.48x
Minimum $10.00 $403.75 $0.34 $15.63 30.47x 63.96% 17.75% 73.84% 29.41x
All Public Companies(7)
-----------------------
Averages $21.70 $446.17 $1.02 $14.16 17.37x 156.40% 16.58% 170.19% 19.27x
Medians -- -- -- -- 16.21x 145.74% 14.50% 161.24% 17.55x
All Non-MHC State of NJ(7)
--------------------------
Averages $20.56 $536.16 $0.92 $10.48 21.96x 169.77% 21.79% 172.11% 24.20x
Medians -- -- -- -- 16.76x 171.04% 16.58% 173.03% 27.36x
Publicly-Traded MHC Institutions, Full Conversion Basis
-------------------------------------------------------
Averages $22.88 $473.33 $0.67 $23.59 25.09x 96.67% 20.38% 102.32% 26.57x
Medians -- -- -- -- 23.52x 96.03% 19.35% 101.45% 27.38x
Publicly-Traded MHC Institutions, Full Conversion Basis
-------------------------------------------------------
ALLB Alliance Bank MHC of PA (20.0) $30.00 $109.89 $0.91 $32.22 32.61x 93.11% 23.59% 93.11% 32.97x
BCSB BCSB Bankcorp MHC of MD (36.4) $14.79 $87.25 $0.19 $14.94 N.M. 99.00% 10.94% 102.14% N.M.
CFFN Capitol Federal Financial MHC of KS(29.2)$32.52 $2,405.50 $0.57 $32.87 N.M. 98.94% 24.26% 98.94% N.M.
CHFN Charter Financial MHC of GA (18.4) $33.18 $649.37 $0.52 $36.67 N.M. 90.48% 42.60% 91.25% N.M.
GCBC Green Co. Bancorp MHC of NY (43.9) $32.89 $67.56 $1.59 $30.38 20.69x 108.26% 21.30% 108.26% 20.69x
JXSB Jacksonville Bancorp MHC of IL (46.8) $14.99 $29.26 $0.32 $16.72 N.M. 89.65% 10.48% 98.88% N.M.
NWSB Northwest Bancorp MHC of PA (41.4) $21.89 $1,049.84 $1.09 $21.45 18.71x 102.05% 16.64% 118.39% 20.08x
ONFC Oneida Financial MHC of NY (42.4) $10.95 $81.99 $0.40 $11.94 23.80x 91.71% 17.39% 107.78% 27.38x
PBHC Pathfinder BC MHC of NY (35.3) $16.50 $40.39 $0.52 $17.79 23.24x 92.75% 12.53% 103.64% 31.73x
WFD Westfield Financial MHC of MA (46.5) $21.10 $212.20 $0.60 $20.94 31.49x 100.76% 24.02% 100.76% N.M.
RP(R) Financial, LC.
Page 4.26 (continued)
Table 4.5 (Continued)
MHC Institutions -- Implied Pricing Ratios, Full Conversion Basis
Kearny Financial Corp. and the Comparables
As of August 20, 2004
(1) Current stock price of minority stock. Average of High/Low or Bid/Ask price
per share.
(2) EPS (estimated core earnings) is based on reported trailing 12 month data,
adjusted to omit non-operating gains and losses on a tax-effected basis.
Public MHC data reflects additional earnings from reinvestment of proceeds
of second step conversion.
(3) P/E = Price to Earnings; P/B = Price to Book; P/A = Price to Assets; P/TB =
Price to Tangible Book; and P/Core = Price to Core Earnings. Ratios are pro
forma assuming a second step conversion to full stock form.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated
core earnings (earnings adjusted to reflect second step conversion).
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios
based on trailing 12 month earnings and average equity and assets balances.
(7) Excludes from averages and medians those companies the subject of actual or
rumored acquisition activities or unusual operating characteristics.
(8) Figures estimated by RP Financial to reflect a second step conversion of
the MHC to full stock form.
Source: Corporate reports, offering circulars, and RP(R) Financial, LC.
calculations. The information provided in this report has been
obtained from sources we believe are reliable, but we cannot guarantee
the accuracy or completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) Financial, LC.
Page 4.27
analysis, since the P/E multiples do not reflect the actual impact of
reinvestment and the source of the stock proceeds (i.e., external funds vs.
deposit withdrawals). The two recently completed MHC offerings closed at a
price/tangible book ratio of 78.7% (fully-converted basis) and, on average,
appreciated 11.3% during the first week of trading. In comparison, the Company's
P/TB ratio of 76.8% at the midpoint value reflects an implied discount of 2.4%
relative to the average closing P/TB ratio of the recent MHC offerings. At the
top of the super range, the Company's P/TB ratio of 85.6% reflected an implied
premium of 8.8% relative to the average closing P/TB ratio of the recent MHC
offerings. Of the two recent MHC offerings, only First Federal Financial
Services is traded on NASDAQ. Based on First Federal's current P/TB ratio of
84.0% (fully-converted basis), the Company's P/TB ratio at the midpoint reflects
an implied discount of 8.6% and at the top of the super range reflects an
implied premium of 1.9%.
Valuation Conclusion
Based on the foregoing, it is our opinion that, as of August 20, 2004,
the estimated aggregate pro forma market value of the shares to be issued
immediately following the conversion, both shares issued publicly as well as to
the MHC, equaled $475,000,000 at the midpoint, equal to 47,500,000 shares
offered at a per share value of $10.00. Pursuant to conversion guidelines, the
15% offering range indicates a minimum value of $403.8 million and a maximum
value of $546.3 million. Based on the $10.00 per share offering price determined
by the Board, this valuation range equates to total shares outstanding of
40,375,000 at the minimum and 54,625,000 at the maximum. In the event the
appraised value is subject to an increase, the aggregate pro forma market value
may be increased up to a supermaximum value of $628.2 million without a
resolicitation. Based on the $10.00 per share offering price, the supermaximum
value would result in total shares outstanding of 62,818,750. The Board of
Directors has established a public offering range such that the public ownership
of the Company will constitute a 30.0% ownership interest. Accordingly, the
offering to the public of the minority stock will equal $121.1 million at the
minimum, $142.5 million at the midpoint, $163.9 million at the maximum and
$188.5 million at the supermaximum of the valuation range. The pro forma
valuation calculations relative to the Peer Group (fully-converted basis) are
shown in Table 4.5 and are detailed in Exhibit IV-7 and Exhibit IV-8; the pro
forma valuation calculations
RP(R) Financial, LC.
Page 4.28
relative to the Peer Group based on reported financials are shown in Table 4.6
and are detailed in Exhibits IV-10 and IV-11.
RP(R) Financial, LC.
Page 4.29
Table 4.6
Public Market Pricing
Kearny Financial Corp. and the Comparables
As of August 20, 2004
Fully Converted
Implied Value Per Share
---------------- -------------------
Price/ Market Core 12 Mo. Book Value/ Pricing Ratios(3)
------------------------------------------
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core
--------------------- ------- ----- ------ ----- --- --- --- ---- ------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x)
Kearny Financial Corp.
Superrange $10.00 $188.46 $0.20 $7.18 50.38x 139.28% 29.99% 171.23% 50.00x
Maximum $10.00 $163.88 $0.24 $7.88 43.62x 126.90% 26.34% 157.98% 41.67x
Midpoint $10.00 $142.50 $0.27 $8.68 37.79x 115.15% 23.11% 144.72% 37.04x
Minimum $10.00 $121.13 $0.32 $9.77 32.00x 102.36% 19.82% 130.21% 31.25x
All Public Companies(7)
-----------------------
Averages $21.70 $446.17 $1.02 $14.16 17.37x 156.40% 16.58% 170.19% 19.27x
Medians -- -- -- -- 16.21x 145.74% 14.50% 161.24% 17.55x
All Non-MHC State of NJ(7)
--------------------------
Averages $20.56 $536.16 $0.92 $10.48 21.96x 169.77% 21.79% 172.11% 24.20x
Medians -- -- -- -- 16.76x 171.04% 16.58% 173.03% 27.36x
Comparable Group Averages
-------------------------
Averages $22.88 $149.98 $0.53 $10.49 24.61x 213.95% 24.02% 238.92% 25.98x
Medians -- -- -- -- 25.11x 213.15% 21.39% 238.31% 23.16x
State of NJ
-----------
CSBK Clifton Svg. Bancorp MHC of NJ (45.0) $11.74 $161.30 $0.13 $ 6.56 N.M. 178.96% 47.13% 178.96% N.M.
FMCO FMS Financial Corp. of Burlington NJ $16.05 $104.34 $1.11 $10.05 14.46x 159.70% 8.41% 167.19% 14.46x
HCBK Hudson City Bancorp MHC of NJ (34.5) $34.24 $2,211.22 $1.10 $ 6.88 29.52x N.M. 34.32% N.M. 31.13x
OCFC OceanFirst Financial Corp. of NJ $22.71 $300.77 $0.83 $10.23 16.58x 221.99% 16.19% 224.41% 27.36x
PBCI Pamrapo Bancorp, Inc. of NJ $21.95 $109.20 $1.60 $10.68 13.72x 205.52% 16.96% 205.52% 13.72x
PFSB PennFed Financial Services of NJ $29.83 $202.49 $1.73 $17.44 16.76x 171.04% 10.64% 173.03% 17.24x
PFSB Provident Financial Services Inc. of NJ $17.90 $1,075.16 $0.54 $13.59 30.34x 131.71% 25.02% 135.40% 33.15x
SNYF Synergy Financial Group of NJ $10.02 $124.77 $0.31 $ 8.39 32.32x 119.43% 15.59% 120.29% 32.32x
Comparable Group
----------------
ALLB Alliance Bank MHC of PA (20.0) $30.00 $20.64 $0.69 $10.18 N.M. 294.70% 26.97% 294.70% N.M.
BCSB BCSB Bankcorp MHC of MD (36.4) $14.79 $31.71 $0.10 $6.84 N.M. 216.23% 11.63% 231.82% N.M.
CFFN Capitol Federal Financial MHC of KS (29.2) $32.52 $699.15 $0.36 $13.03 N.M. 249.58% 28.48% 249.58% N.M.
CHFN Charter Financial MHC of GA (18.4) $33.18 $118.49 $0.27 $13.34 N.M. 248.73% 60.81% 254.64% N.M.
GCBC Green Co. Bancorp MHC of NY (43.9) $32.89 $29.67 $1.42 $14.52 23.16x 226.52% 23.74% 226.52% 23.16x
JXSB Jacksonville Bancorp MHC of IL (46.8) $14.99 $13.69 $0.25 $9.86 N.M. 152.03% 11.01% 180.60% N.M.
NWSB Northwest Bancorp MHC of PA (41.4) $21.89 $434.52 $0.97 $10.42 20.85x 210.08% 18.17% 293.43% 22.57x
ONFC Oneida Financial MHC of NY (42.4) $10.95 $34.80 $0.34 $6.52 27.38x 167.94% 19.03% 231.01% 32.21x
PBHC Pathfinder BC MHC of NY (35.3) $16.50 $14.27 $0.42 $8.61 27.05x 191.64% 13.47% 244.81% N.M.
WFD Westfield Financial MHC of MA (46.5) $21.10 $102.90 $0.50 $11.59 N.M. 182.05% 26.88% 182.05% N.M.
RP(R) Financial, LC.
Page 4.29 (continued)
Table 4.6 (Continued)
Public Market Pricing
Kearny Financial Corp. and the Comparables
As of August 20, 2004
(1) Current stock price of minority stock. Average of High/Low or Bid/Ask price
per share.
(2) EPS (estimated core earnings) is based on reported trailing 12 month data,
adjusted to omit non-operating gains and losses on a tax-effected basis.
Public MHC data reflects additional earnings from reinvestment of proceeds
of second step conversion.
(3) P/E = Price to Earnings; P/B = Price to Book; P/A = Price to Assets; P/TB =
Price to Tangible Book; and P/Core = Price to Core Earnings. Ratios are pro
forma assuming a second step conversion to full stock form.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated
core earnings (earnings adjusted to reflect second step conversion).
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios
based on trailing 12 month earnings and average equity and assets balances.
(7) Excludes from averages and medians those companies the subject of actual or
rumored acquisition activities or unusual operating characteristics.
Source: Corporate reports, offering circulars, and RP(R) Financial, LC.
calculations. The information provided in this report has been
obtained from sources we believe are reliable, but we cannot guarantee
the accuracy or completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
Kearny Federal Savings Bank
(Kearny Financial Corp.)
PROPOSED MAILING AND INFORMATIONAL MATERIALS
INDEX
1. Dear Depositor Letter*
2. Dear Friend Letter - Eligible Account Holders who are no longer Depositors*
3. Dear Potential Investor Letter*
4. Dear Customer Letter - Used as a Cover Letter for States Requiring "Agent"
Mailing*
5.-9. Stock Q&A
10. Stock Order Form (page 1 of 2)*
11. Stock Order Form (page 2 of 2)*
12. Stock Order Form Guidelines*
13. Invitation Letter - Informational Meetings
14. Dear Subscriber/Acknowledgment Letter - Initial Response to Stock Order
Received
15. Dear Shareholder - Confirmation Letter
16. Dear Interested Investor - No Shares Available Letter
17. Welcome Shareholder Letter - For Initial Certificate Mailing
18. Dear Interested Subscriber Letter - Subscription Rejection
19. Letter for Sandler O'Neill Mailing to Clients*
* Accompanied by a Prospectus
Note:Items 1 through 12 are produced by the Financial Printer and Items 13
through 19 are produced by the stock information center.
[Kearny Financial Corp.]
Dear Depositor:
The Board of Directors of Kearny Financial Corp., the holding company for Kearny
Federal Savings Bank, has voted unanimously in favor of a plan of stock
issuance, under which Kearny Financial Corp. is offering common stock in a
minority stock offering. We are raising capital to support Kearny Federal
Savings Bank's future growth.
As a qualifying account holder, you may take advantage of your nontransferable
rights to subscribe for shares of Kearny Financial Corp. common stock on a
priority basis, before the stock is offered to the general public. The enclosed
prospectus describes the stock offering and the operations of Kearny Federal
Savings Bank, Kearny Financial Corp. and Kearny MHC. If you wish to subscribe
for common stock, please complete the stock order and certification form and
mail it, along with full payment for the shares (or appropriate instructions
authorizing withdrawal from a deposit account with Kearny Federal Savings Bank)
to Kearny Financial Corp. in the enclosed postage-paid envelope marked "STOCK
ORDER RETURN", or return it to any full service branch office of Kearny Federal
Savings Bank. Your order must be physically received by Kearny Federal Savings
Bank no later than 12:00 noon, eastern time, on ___day, ____ x, 2004. Please
read the prospectus carefully before making an investment decision.
If you wish to use funds in your IRA at Kearny Federal Savings Bank to subscribe
for common stock, please be aware that federal law requires that such funds
first be transferred to a self-directed retirement account with a trustee other
than Kearny Federal Savings Bank. The transfer of such funds to a new trustee
takes time, so please make arrangements as soon as possible.
If you have any questions after reading the enclosed material, please call our
stock information center at xxx-xxx-xxxx, Monday through Friday, between the
hours of 10:00 a.m. and 4:00 p.m. Please note that the stock information center
will be closed from 12:00 noon Wednesday, November 24 through 12:00 noon Monday,
November 29, in observance of the Thanksgiving holiday.
Sincerely,
John N. Hopkins
President and Chief Executive Officer
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock.
The offer is made only by the prospectus.
[Kearny Financial Corp.]
Dear Friend of Kearny Federal Savings Bank:
The Board of Directors of Kearny Financial Corp., the holding company for Kearny
Federal Savings Bank, has voted unanimously in favor of a plan of stock
issuance, under which Kearny Financial Corp. is offering common stock in a
minority stock offering. We are raising capital to support Kearny Federal
Savings Bank's future growth.
As a former account holder, you may take advantage of your nontransferable
rights to subscribe for shares of Kearny Financial Corp. common stock on a
priority basis, before the stock is offered to the general public. The enclosed
prospectus describes the stock offering and the operations of Kearny Federal
Savings Bank, Kearny Financial Corp. and Kearny MHC. If you wish to subscribe
for common stock, please complete the stock order and certification form and
mail it, along with full payment for the shares (or appropriate instructions
authorizing withdrawal from a deposit account with Kearny Federal Savings Bank)
to Kearny Financial Corp. in the enclosed postage-paid envelope marked "STOCK
ORDER RETURN" or return it to any full service branch office of Kearny Federal
Savings Bank. Your order must be physically received by Kearny Federal Savings
Bank no later than 12:00 noon, eastern time, on ___day, ____ x, 2004. Please
read the prospectus carefully before making an investment decision.
If you have any questions after reading the enclosed material, please call our
stock information center at xxx-xxx-xxxx, Monday through Friday, between the
hours of 10:00 a.m. and 4:00 p.m. Please note that the stock information center
will be closed from 12:00 noon Wednesday, November 24 through 12:00 noon Monday,
November 29, in observance of the Thanksgiving holiday.
Sincerely,
John N. Hopkins
President and Chief Executive Officer
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock.
The offer is made only by the prospectus.
[Kearny Financial Corp.]
Dear Potential Investor:
We are pleased to provide you with the enclosed material in connection with the
stock offering by Kearny Financial Corp. We are raising capital to support
Kearny Federal Savings Bank's future growth.
This information packet includes the following:
PROSPECTUS: This document provides detailed information about the
operations of Kearny Federal Savings Bank, Kearny Financial Corp. and
Kearny MHC and the proposed stock offering by Kearny Financial Corp.
Please read it carefully before making an investment decision.
STOCK ORDER & CERTIFICATION FORM: Use this form to subscribe for common
stock and mail it, along with full payment for the shares (or
appropriate instructions authorizing withdrawal from a deposit account
with Kearny Federal Savings Bank), to Kearny Financial Corp. in the
enclosed postage-paid envelope marked "STOCK ORDER RETURN" or return it
to any full service branch office of Kearny Federal Savings Bank. Your
order must be physically received by Kearny Federal Savings Bank no
later than 12:00 noon, eastern time, on ___day, ____ x, 2004.
We are pleased to offer you this opportunity to become one of our shareholders.
If you have any questions regarding the stock offering or the prospectus, please
call our stock information center at xxx-xxx-xxxx, Monday through Friday,
between the hours of 10:00 a.m. and 4:00 p.m.
Sincerely,
John N. Hopkins
President and Chief Executive Officer
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock.
The offer is made only by the prospectus.
[Sandler O'Neill & Partners, L.P.]
Dear Customer of Kearny Federal Savings Bank:
At the request of Kearny Federal Savings Bank and its holding company, Kearny
Financial Corp., we have enclosed material regarding the offering of common
stock by Kearny Financial Corp. These materials include a prospectus and a stock
order form, which offer you the opportunity to subscribe for shares of common
stock of Kearny Financial Corp.
Please read the prospectus carefully before making an investment decision. If
you decide to subscribe for shares, you must return the properly completed and
signed stock order form and signed certification form, along with full payment
for the shares (or appropriate instructions authorizing withdrawal from a
deposit account with Kearny Federal Savings Bank) to Kearny Financial Corp. in
the accompanying postage-paid envelope marked "STOCK ORDER RETURN" or return it
to any full service branch office of Kearny Federal Savings Bank. Your order
must be physically received by Kearny Federal Savings Bank no later than 12:00
noon, eastern time, on ___day, ____ x, 2004. If you have any questions after
reading the enclosed material, please call the stock information center at
xxx-xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00
p.m., and ask for a Sandler O'Neill representative.
We have been asked to forward these documents to you in view of certain
requirements of the securities laws of your jurisdiction. We should not be
understood as recommending or soliciting in any way any action by you with
regard to the enclosed material.
Sincerely,
Sandler O'Neill & Partners, L.P.
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock.
The offer is made only by the prospectus.
Enclosures
Questions
& Answers
About the Stock Issuance
Kearny Financial Corp.
QUESTIONS AND ANSWERS
About the Stock Issuance
The Board of Directors of Kearny Financial Corp., the holding company for Kearny
Federal Savings Bank, has voted unanimously in favor of a plan of stock
issuance, under which Kearny Financial Corp. is offering common stock in a
minority stock offering. We are raising capital to support Kearny Federal
Savings Bank's future growth.
Effect on Deposits and Loans
Q. Will the offering affect any of my deposit accounts or loans?
A. No. The offering will have no effect on the balance or terms of any deposit
account. Your deposits will continue to be federally insured to the fullest
extent permissible. The terms, including interest rate, of your loans with
us will also be unaffected by the offering.
About The Stock
Investment in common stock involves certain risks. For a discussion of these
risks and other factors, investors are urged to read the accompanying
prospectus.
Q. Who can purchase stock?
A. The common stock of Kearny Financial Corp. will be offered in the
Subscription Offering in the following order of priority:
o Eligible Account Holders, depositors of Kearny Federal Savings Bank
with accounts totaling $50 or more as of March 31, 2003 (Former
depositors of West Essex Bank, which was acquired by Kearny Federal
Savings Bank in July 2003, will be treated as Eligible Account Holders
if they had deposits with West Essex at the close of business on March
31, 2003 of at least $50.00) ;
o Kearny Financial Corp.'s employee stock ownership plan;
o Supplemental Eligible Account Holders, depositors of Kearny Federal
Savings Bank with accounts totaling $50 or more as of September 30,
2004; and
Upon completion of the subscription offering, common stock that is not sold in
the subscription offering, if any, will be offered first to certain members of
the general public in a community offering and then, to the extent any shares
remain, to the general public in a syndicated community offering and/or a public
offering.
Q. Will any account I hold with the Bank be converted into stock?
A. No. All accounts remain as they were prior to the offering.
Q. How many shares of stock are being offered, and at what price?
A. Kearny Financial Corp. is offering for sale a maximum of 16,387,500 shares
of common stock at a subscription price of $10 per share. Under certain
circumstances, Kearny Financial Corp., may increase the maximum and sell up
to 18,845,625 shares.
Q. How much stock can I purchase?
A. The minimum purchase is $250 (25 shares). As more fully discussed in the
plan of stock issuance described in the prospectus, the maximum purchase by
any person in the Subscription or Community Offering is $500,000 (50,000
shares); no person by himself or herself, with an associate or group of
persons acting in concert, may purchase more than $750,000 (75,000 shares)
of common stock offered in the offering.
Q. How do I order stock?
A. You may subscribe for shares of common stock by completing and returning
the stock order and certification form, together with your payment, either
in person to any full service branch office of Kearny Federal Savings Bank
or by mail in the postage-paid envelope marked "STOCK ORDER RETURN." Stock
order forms may not be delivered to a walk up or drive through window
located at any of Kearny Federal Savings Bank's branch offices.
Q. How can I pay for my shares of stock?
A. You can pay for the common stock in cash (if delivered in person) or by
check, bank draft money order or withdrawal from your deposit account at
Kearny Federal Savings Bank.
Q. When is the deadline to subscribe for stock?
A. An executed stock order form with the required full payment must be
physically received by Kearny Federal Savings Bank no later than 12:00
noon, eastern time on ___day, ____ x, 2004.
Q. Can I subscribe for shares using funds in my IRA at Kearny Federal Savings
Bank?
A. Federal regulations do not permit the purchase of common stock with your
existing IRA at Kearny Federal Savings Bank. To use such funds to subscribe
for common stock, you need to establish a "self directed" trust account
with an outside trustee. Please call our stock information if you require
additional information. Transfer of such funds takes time, so please make
arrangements as soon as possible.
Q. Can I subscribe for shares and add someone else who is not on my account to
my stock registration?
A. No. Federal regulations prohibit the transfer of subscription rights.
Adding the names of other persons who are not owners of your qualifying
account(s) will result in the loss of your subscription rights.
Q. Can I subscribe for shares in my name alone if I have a joint account?
A. No. A name can be deleted only in the event of the death of a named
eligible depositor.
Q. Am I guaranteed to receive shares by placing an order?
A. No. It is possible that orders received during the offering period will
exceed the number of shares being sold. Such an oversubscription would
result in shares being allocated among subscribers starting with
subscribers who are Eligible Account Holders. If the offering is
oversubscribed in the subscription offering, no orders received in the
community offering will be filled.
Q. Will payments for common stock earn interest until the offering closes?
A. Yes. Any payment made in cash or by check or money order will earn interest
at Kearny Federal Savings Bank's passbook savings rate from the date of
receipt to the completion or termination of the offering.
Q. Will dividends be paid on the stock?
A. Kearny Financial Corp. intends to consider paying cash dividends, but has
not declared the amount that may be paid or when payments may begin.
Q. Will my stock be covered by deposit insurance?
A. No
Q. Where will the stock be traded?
A. Upon completion of the offering, our shares of common stock will trade on
the Nasdaq National Market under the symbol "xxxx."
Q. Can I change my mind after I place an order to subscribe for stock?
A. No. After receipt, your order may not be modified or withdrawn.
Additional Information
Q. What if I have additional questions or require more information?
A. Kearny Financial Corp.'s prospectus that accompanies this brochure
describes the offering in detail. Please read the prospectus carefully
before subscribing for stock. If you have any questions after reading the
enclosed material you may call our stock information at xxx-xxx-xxxx,
Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.
Additional material may only be obtained from the stock information.
To ensure that each purchaser in the subscription and community offering
receives a prospectus at least 48 hours before the applicable expiration date,
in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as
amended, no prospectus will be mailed any later than five days prior to such
date or hand delivered any later than two days prior to such date.
The shares of common stock offered in the offering are not savings accounts or
deposits and are not insured or guaranteed by Kearny Federal Savings Bank,
Kearny MHC, Kearny Financial Corp., the Federal Deposit Insurance Corporation or
any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock.
The offer is made only by the prospectus.
[Kearny Financial Corp.]
_______________, 2004
Dear __________:
The Board of Directors of Kearny Financial Corp., the holding company for Kearny
Federal Savings Bank, has voted unanimously in favor of a plan of stock
issuance, under which Kearny Financial Corp. is offering common stock in a
minority stock offering. We are raising capital to support the Bank's future
growth.
To learn more about the stock offering you are cordially invited to join members
of our senior management team at a community meeting to be held on___ at ___:00
_._.
A member of our staff will be calling to confirm your interest in attending the
meeting.
If you would like additional information regarding the meeting or our stock
offering, please call our stock information center at (___) ___-____, Monday
through Friday between the hours of 10:00 a.m. to 4:00 p.m.
Sincerely,
John N. Hopkins
President and Chief Executive Officer
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
This correspondence is not an offer to sell or a solicitation of an offer to buy
common stock. The offer is made only by the prospectus.
(Printed by Stock Information Center)
13
[Kearny Financial Corp.]
_______________, 2004
Dear Subscriber:
We hereby acknowledge receipt of your order for shares of Kearny Financial Corp.
common stock.
At this time, we cannot confirm the number of shares of Kearny Financial Corp.
common stock that will be issued to you. Such allocation will be made in
accordance with the plan of stock issuance following completion of the stock
offering.
If you have any questions, please call our stock information center at (___)
___-____.
Sincerely,
Kearny Financial Corp.
Stock Information Center
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
(Printed by Stock Information Center)
14
[Kearny Financial Corp.]
_______________, 2004
Dear Shareholder:
Our subscription offering has been completed and we are pleased to confirm your
subscription for shares at a price of $10.00 per share. If your subscription was
paid for by cash, check, bank draft or money order, interest and any refund due
to you will be mailed promptly.
The closing of the transaction occurred on ______ __, 2004; this is your stock
purchase date. Trading will commence on the Nasdaq National Market under the
symbol "xxxx" on ________ __, 2004.
Thank you for your interest in Kearny Financial Corp. Your stock certificate
will be mailed to you shortly.
Sincerely,
Kearny Financial Corp.
Stock Information Center
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
(Printed by Stock Information Center)
15
[Kearny Financial Corp.]
_______________, 2004
Dear Interested Investor:
We recently completed our subscription offering. Unfortunately, due to the
excellent response from our Eligible Account Holders, stock was not available
for our Supplemental Eligible Account Holders or community friends. If your
subscription was paid for by cash, check, bank draft or money order, a refund of
any balance due you with interest will be mailed promptly.
We appreciate your interest in Kearny Financial Corp. and hope you become an
owner of our stock in the future. The stock trades on the Nasdaq National Market
under the symbol "xxxx."
Sincerely,
Kearny Financial Corp.
Stock Information Center
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
(Printed by Stock Information Center)
16
[Kearny Financial Corp.]
_______________, 2004
Welcome Shareholder:
We are pleased to enclose your stock certificate representing your shares of
common stock of Kearny Financial Corp. Please examine your stock certificate to
be certain that it is properly registered. If you have any questions about your
certificate, you should contact the Transfer Agent immediately at the following
address:
Registrar and Transfer Company
Investor Relations Department
10 Commerce Drive
Cranford, New Jersey 07016-3572
1 (800) 368-5948
email: info@rtco.com
Please remember that your certificate is a negotiable security that should be
stored in a secure place, such as a safe deposit box or on deposit with your
stockbroker.
On behalf of the Board of Directors, officers and employees of Kearny Financial
Corp., I thank you for supporting our offering.
Sincerely,
John N. Hopkins
President and Chief Executive Officer
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
(Printed by Stock Information Center)
17
[Kearny Financial Corp.]
_______________, 2004
Dear Interested Subscriber:
We regret to inform you that Kearny Federal Savings Bank, Kearny MHC and Kearny
Financial Corp., the holding company for Kearny Federal Savings Bank, did not
accept your order for shares of Kearny Financial Corp. common stock in its
community offering. This action is in accordance with our plan of stock
issuance, which gives Kearny Federal Savings Bank, Kearny MHC and Kearny
Financial Corp. the absolute right to reject the order of any person, in whole
or in part, in the community offering.
If your subscription was paid for by check, enclosed is your original check.
Sincerely,
Kearny Financial Corp.
Stock Information Center
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
(Printed by Stock Information Center)
18
[Sandler O'Neill & Partners, L. P.]
_______________, 2004
To Our Friends:
We are enclosing material in connection with the stock offering by Kearny
Financial Corp., the holding company for Kearny Federal Savings Bank. Kearny
Financial Corp. is raising capital to support the Bank's future growth.
Sandler O'Neill & Partners, L.P. is acting as financial and marketing advisor in
connection with the subscription offering, which will conclude at 12:00 noon,
eastern time, on ______ __. 2004. In the event that all the stock is not sold in
the subscription and community offering, Sandler O'Neill may form and manage a
syndicated community offering to sell the remaining stock.
Members of the general public, other than residents of _______, are eligible to
participate. If you have any questions about this transaction, please do not
hesitate to call.
Sincerely,
Sandler O'Neill & Partners, L.P.
The shares of common stock being offered are not savings accounts or deposits
and are not insured or guaranteed by Kearny Federal Savings Bank, Kearny MHC,
Kearny Financial Corp., the Federal Deposit Insurance Corporation or any other
government agency.
This correspondence is not an offer to sell or a solicitation of an offer to buy
common stock. The offer is made only by the prospectus.
(Printed by Sandler O'Neill)
19
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Kearny Financial Corp.
Subscription & Community
Offering
Stock Order Form
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Kearny Federal Savings Bank Expiration Date
for Stock Order Forms:
Stock Information Center ___day, ____ x. 2004
120 Passaic Ave. 12:00 Noon, Eastern
Fairfield, NJ 07004 Time
xxx-xxx-xxxx (received not
postmarked)
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IMPORTANT: A properly completed original stock order form must be used to
subscribe for common stock. Copies of this form are not required to be
accepted. Please read the Stock Ownership Guide and Stock Order Form
Instructions as you complete this form.
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1) Number of Shares Subscription (2) Total Payment Due Minimum number of shares: 25 shares ($250.00)
------------------- Price --------------------------- Maximum number of shares: 50,000 shares ($500,000.00)
X 10.00 = $ See Instructions.
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(3) Employee/Officer/Director Information
[_] Check here if you are an employee, officer or director of Kearny Federal Savings Bank or member of such person's immediate
family living in the same household.
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(4) Method of Payment/Check Total Check $ .
Enclosed is a check, bank draft or money order payable to Kearny Financial Corp.
in the amount indicated in this box.
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(5) Method of Payment/Withdrawal - The undersigned authorizes withdrawal from the following account(s) at Kearny Federal Savings
Bank. There is no early withdrawal penalty for this form of payment. Individual Retirement Accounts maintained at Kearny
Federal Savings Bank cannot be used unless special transfer arrangements are made.
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Bank Use Account Number(s) To Withdraw $ Withdrawal Amount
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$ .
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$ .
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(6) Purchaser Information
Subscription Offering - Check here if you are:
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[_] a. An Eligible Account Holder with a deposit account(s) totaling $50.00 or
more on March 31, 2003. (Former depositors of West Essex Bank, which was
acquired by Kearny Federal Savings Bank in July 2003, will be treated as
Eligible Account Holders if they had deposits with West Essex at the close
of business on March 31, 2003 of at least $50.00) List account(s) below.
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b. A Supplemental Eligible Account Holder with a deposit account(s) totaling $50.00 or more on September 30, 2004 but are not
an Eligible Account Holder. List account(s) below.
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PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT IN THE LOSS OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS. SEE REVERSE SIDE
FOR ADDITIONAL SPACE.
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Account Number(s) Account Title (Name(s) on Account) BANK USE
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(7) Form of Stock Ownership & SS# or Tax ID#: SS#/Tax ID#-
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[_] Individual [_] Joint Tenants [_] Tenants in Common [_] Fiduciary (i.e. trust, estate) SS#/Tax ID#-
[_] Uniform Transfers to Minors Act [_] Company/Corporation/ [_] IRA or other qualified plan ---------------------------------
(Indicate SS# of Minor only) Partnership
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(8) Stock Registration & Address:
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Name and address to appear on stock certificate.
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Shares must be registered as reflected as reflected on your qualifying account.
Adding or deleting a name or otherwise altering the form of beneficial ownership of a qualifying account will
result in a loss of your subscription rights (with certain exceptions for IRA and Keogh purchases).
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Name:
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Name
Continued:
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Mail to-
Street:
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City: State: Zip Code:
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(9) Telephone ( ) -- ( ) -- County of
Daytime/Evening Residence
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(10) [_] NASD Affiliation - Check here if you are a member (11) [_] Associates/Acting in Concert - Check here and complete
of the National Association of Securities Dealers, Inc. ("NASD"), the reverse side of this form, if you or any associates or
a person affiliated, or associated, with a NASD member, persons acting in concert with you have submitted other orders
(continued on reverse side) for shares.
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(12) Acknowledgement - To be effective, this stock order form must be properly completed and physically received by Kearny Federal
Savings Bank no later than 12:00 noon, eastern time, on ___day, ____ x, 2004, unless extended; otherwise this stock order form and
all subscription rights will be void. The undersigned agrees that after receipt by Kearny Federal Savings Bank, this stock order
form may not be modified, withdrawn or canceled without Kearny Federal Savings Bank's consent and if authorization to withdraw from
deposit accounts at Kearny Federal Savings Bank has been given as payment for shares, the amount authorized for withdrawal shall not
otherwise be available for withdrawal by the undersigned. Under penalty of perjury, I hereby certify that the Social Security or
Tax ID Number and the information provided on this stock order form are true, correct and complete and that I am not subject to
back-up withholding. It is understood that this stock order form will be accepted in accordance with, and subject to, the terms
and conditions of the Plan of Stock Issuance of Kearny Financial Corp. described in the accompanying prospectus. The undersigned
hereby acknowledges receipt of the prospectus at least 48 hours prior to execution and delivery of this stock order form to
Kearny Federal Savings Bank.
Federal regulations prohibit any person from transferring, or entering into any agreement, directly or indirectly, to transfer the
legal or beneficial ownership of subscription rights or the underlying securities to the account of another. Kearny Federal Savings
Bank, Kearny MHC and Kearny Financial Corp. will pursue any and all legal and equitable remedies in the event they become aware of
the transfer of subscription rights and will not honor orders known by them to involve such transfer. Bank Use Under penalty of
perjury, I certify that I am purchasing shares solely for my account and that there is no agreement or understanding regarding the
sale or transfer of such shares, or my right to subscribe for shares.
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THE CERTIFICATION FORM ON THE REVERSE SIDE MUST BE SIGNED IN ADDITION TO THE SIGNATURE BELOW
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Signature Signature
Date Date
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Item (6) Purchaser Account Information - continued:
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Account Number(s) Account Title (Name(s) on Account) BANK USE
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Item (10) NASD continued:
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a member of the immediate family of any such person to whose support such person contributes, directly or indirectly, or the holder
of an account in which a NASD member or person associated with a NASD member has a beneficial interest. You agree, if you have
checked the NASD Affiliation box, to report this subscription in writing to the applicable NASD member within one day of payment
therefor.
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Item (11) Associates/Acting In Concert continued:
If you checked the box in item #11 on the reverse side of this form, list below all other orders submitted by you or associates
(as defined below) or by persons acting in concert with you (also defined below).
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Name(s) listed on other stock order forms Number of shares ordered
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Associate - The term "associate" of a particular person means:
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(1) any corporation or organization (other than the Bank or a majority-owned subsidiary or a majority-owning parent corporation
of the Bank) of which a person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities;
(2) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as a
trustee or in a similar fiduciary capacity; or
(3) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a
director or officer of the Bank or the Stock Holding Company, or any of its parents or subsidiaries.
Acting in concert - The term "acting in concert" means:
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(1) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
(2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.
In general, a person who acts in concert with another party will also be deemed to be acting in concert with any person who is
also acting in concert with that other party.
We may presume that certain persons are acting in concert based upon various facts, among other things, joint account
relationships and the fact that persons may have filed joint Schedules 13D or 13G with the Securities and Exchange Commission
with respect to other companies.
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YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
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CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, AND IS NOT INSURED OR GUARANTEED BY KEARNY MHC, KEARNY FINANCIAL CORP., KEARNY FEDERAL SAVINGS BANK, THE
FEDERAL GOVERNMENT OR BY ANY GOVERNMENT AGENCY. THE ENTIRE AMOUNT OF AN INVESTOR'S PRINCIPAL IS SUBJECT TO LOSS.
If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call Robert
Albanese, Regional Director of the Northeast Regional Office of the Office of Thrift Supervision at (201) 413-1000.
I further certify that, before purchasing the common stock, par value $0.10 per share, of Kearny Financial Corp. (the "Company"),
the holding company for Kearny Federal Savings Bank, I received a prospectus of the Company dated _____, 2004 relating to such
offer of common stock.
The prospectus that I received contains disclosure concerning the nature of the common stock being offered by the Company and
describes in the "Risk Factors" section beginning on page __, the risks involved in the investment in this common stock, including
but not limited to the following:
1. After this offering, our return on equity will be low compared to other companies. This could negatively impact the price of our
stock.
2. An increase in interest rates is expected to adversely affect our earnings.
3. Additional public company and annual stock employee compensation and benefit expenses following the offering may reduce our
profitability and stockholder's equity.
4. The implementation of stock-based plans may dilute your ownership interest in Kearny Financial Corp.
5. We have recently opened a new administrative building and intend to construct new buildings for certain existing branch
locations. Costs related to these buildings will negatively impact earnings in future periods.
6. We may not be able to successfully implement our plans for growth, continue to experience the same rate of growth that we have
in the past, and we may not be able to successfully manage our future growth.
7. Persons who purchase stock in the offering will own a minority of Kearny Financial Corp.'s common stock and will not be able to
exercise voting control over most matters to put to a vote of stockholders, including any proposal regarding the acquisition
of Kearny Financial Corp.
8. A portion of our loan portfolio consists of multi-family and commercial real estate loans and commercial loans, and we intend
to continue our origination of such loans after the offering at the same level, if not higher. The repayment risk related to
these types of loans is considered to be greater than the risk related to one-to-four family residential loans.
9. Our business is geographically concentrated in a small area and a downturn in local conditions could have an adverse impact on
our profitability.
10. We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would
reduce our profitability.
11. Our stock price may decline when trading commences.
12. Office of Thrift Supervision policy on remutualization transactions could prohibit acquisition of Kearny Financial Corp., which
may adversely affect our stock price.
(By Executing this Certification Form the Investor is Not Waiving Any Rights Under the Federal Securities Laws,
Including the Securities Act of 1933 and the Securities Exchange Act of 1934)
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Signature Date Signature Date
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Print Name Print Name
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THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK
Kearny Financial Corp.
Stock Ownership Guide
Individual
Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership rights,
such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
Joint Tenants
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
Tenants in Common
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or sale of shares
held by tenants in common.
Uniform Transfers to Minors Act ("UTMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Transfers to Minors Act of each state. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation for Custodian
is "CUST", while the Uniform Transfers to Minors Act is "UTMA". Standard U.S.
Postal Service state abbreviations should be used to describe the appropriate
state. For example, stock held by John Doe as custodian for Susan Doe under the
New Jersey Uniform Transfers to Minors Act will be abbreviated John Doe, CUST
Susan Doe UTMA NJ (use minor's social security number).
Fiduciaries
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
o The name(s) of the fiduciary. If an individual, list the first name,
middle initial and last name. If a corporation, list the full
corporate title (name). If an individual and a corporation, list the
corporation's title before the individual.
o The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
o A description of the document governing the fiduciary relationship,
such as a trust agreement or court order. Documentation establishing a
fiduciary relationship may be required to register your stock in a
fiduciary capacity.
o The date of the document governing the relationship, except that the
date of a trust created by a will need not be included in the
description.
o The name of the maker, donor or testator and the name of the
beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John Doe,
Trustee Under Agreement Dated 10-1-93 for Susan Doe.
Stock Order Form Instructions
Items 1 and 2 - Number of Shares and Total Payment Due
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares by the
subscription price of $10.00 per share. The minimum purchase in the Subscription
Offering is 25 shares. As more fully described in the plan of stock issuance
outlined in the prospectus, the maximum purchase in any category of the
Subscription Offering is $500,000 (50,000 shares), and the maximum purchase in
the Community Offering (if held) by any person, is $500,000 (50,000 shares).
However, no person, together with associates and persons acting in concert with
such person, may purchase in the aggregate more than $750,000 (75,000 shares) of
common stock.
Item 3 - Employee/Officer/Director Information
Check this box to indicate whether you are an employee, officer or director of
Kearny Federal Savings Bank or a member of such person's immediate family living
in the same household.
Item 4 - Method of Payment by Check
If you pay for your stock by check, bank draft or money order, indicate the
total amount in this box. Payment for shares may be made by check, bank draft or
money order payable to Kearny Financial Corp. Payment in cash may be made only
if delivered in person. Your funds will earn interest at Kearny Federal Savings
Bank's passbook savings rate of interest until the stock offering is completed.
Item 5 - Method of Payment by Withdrawal
If you pay for your stock by a withdrawal from a deposit account at Kearny
Federal Savings Bank, indicate the account number(s) and the amount of your
withdrawal authorization for each account. The total amount withdrawn should
equal the amount of your stock purchase. There will be no penalty assessed for
early withdrawals from certificate accounts used for stock purchases. This form
of payment may not be used if your account is an Individual Retirement Account.
Item 6 - Purchaser Information
Subscription Offering
a. Check this box if you had a deposit account(s) totaling $50.00 or more on
March 31, 2003 ("Eligible Account Holder"). (Former depositors of West
Essex Bank, which was acquired by Kearny Federal Savings Bank in July 2003,
will be treated as Eligible Account Holders if they had deposits with West
Essex at the close of business on March 31, 2003 of at least $50.00)
b. Check this box if you had a deposit account(s) totaling $50.00 on September
30, 2004 but are not an Eligible Account Holder ("Supplemental Eligible
Account Holder").
Please list all account numbers and all names on accounts you had on these dates
in order to insure proper identification of your purchase rights.
Note:Failure to list all your accounts may result in the loss of part or
all of your subscription rights.
Items 7 and 8 - Form of Stock Ownership, SS# or Tax ID#, Stock Registration,
Mailing Address and County
Check the box that applies to your requested form of stock ownership and
indicate your social security or tax ID number(s) in item 7. Complete the
requested stock certificate registration, mailing address and county in item 8.
The stock transfer industry has developed a uniform system of shareholder
registrations that will be used in the issuance of your common stock.
If you have any questions regarding the registration of your stock, please
consult your legal advisor. Stock ownership must be registered in one of the
ways described above under "Stock Ownership Guide". Shares must be registered as
reflected on your qualifying account. Adding or deleting a name or otherwise
altering the form of beneficial ownership of a qualifying account will result in
a loss of your subscription rights. (With certain exceptions for IRA and Keogh
purchases).
Item 9 - Telephone Number(s)
Indicate your daytime and evening telephone number(s). We may need to call you
if we have any questions regarding your order or we cannot execute your order as
given.
Item 10 - NASD Affiliation
Check this box if you are a member of the NASD or if this item otherwise applies
to you.
Item 11 - Associates/Acting in Concert
Check this box if you or any associate or person acting in concert with you(as
defined on the reverse side of the stock order form) has submitted another order
for shares and complete the reverse side of the stock form.
Item 12 - Acknowledgement
Sign and date the stock order form and certification form where indicated.
Before you sign, review the stock order and certification form, including the
acknowledgement. Normally, one signature is required. An additional signature is
required only when payment is to be made by withdrawal from a deposit account
that requires multiple signatures to withdraw funds.
You may mail your completed stock order form and certification form in the
envelope that has been provided, or you may deliver your stock order and
certification form to any full service branch office of Kearny Federal Savings
Bank. Your stock order form, properly completed, signed certification form and
payment in full (or withdrawal authorization) at the subscription price must be
physically received (not postmarked) by Kearny Financial Corp. no later than
12:00 noon, eastern time, on ___day, ____ x, 2004 or it will become void. If you
have any remaining questions, or if you would like assistance in completing your
stock order form, you may call our stock information center at xxx-xxx-xxxx,
Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. The stock
information center will be closed for bank holidays.
Kearny Federal Savings Bank
Stock Information Center
120 Passaic Ave.
Fairfield, NJ 07004
Interests in
Kearny Federal Savings Bank
Employees' Savings and Profit Sharing Plan and Trust
and
Offering of 384,304 Shares of
Common Stock, $.10 par value per share,
of
Kearny Financial Corp.
This prospectus supplement relates to the offer and sale to
participants in the Kearny Federal Savings Bank Employees' Savings and Profit
Sharing Plan and Trust of participation interests and shares of Kearny Financial
Corp.
In connection with the initial public offering of common stock of
Kearny Financial Corp., the plan has been amended to permit the investment of
plan assets in various participant directed investment alternatives, including
investment in the stock of Kearny Financial Corp. Your eligibility to purchase
stock utilizing your 401(k) Plan assets is determined based upon your stock
subscription rights as a depositor of Kearny Federal Savings Bank. Participation
in the 401(k) Plan does not give you any special rights to purchase stock in the
initial public offering. You may direct the trustee of the plan to purchase the
stock with plan assets which are attributable to you as a participant. This
prospectus supplement relates to your decision whether or not to invest all or a
portion of your plan funds in Kearny Financial Corp. common stock.
If you direct the trustee to invest all or a portion of your plan funds
in Kearny Financial Corp. common stock in the initial public offering, the price
paid for such shares will be $10.00 per share. This price is the price that will
be paid by all other persons who purchase shares of Kearny Financial Corp.
common stock in the initial public offering.
If you direct the trustee to invest all or a portion of your plan funds
in Kearny Financial Corp. common stock after the initial public offering, shares
purchased for your account in open market transactions, and the price paid for
such shares will be the market price at the time of the purchase, which may be
more or less than the initial public offering price of $10.00 per share.
The prospectus of Kearny Financial Corp., dated ________ __, 2004 which
is attached to this prospectus supplement, includes detailed information
regarding Kearny Financial Corp. common stock, and the financial condition,
results of operation, and business of Kearny. This prospectus supplement
provides information regarding the plan. You should read this prospectus
supplement together with the prospectus and keep both for future reference.
Please refer to Risk Factors beginning on page __ of the prospectus.
These securities have not been approved or disapproved by the
Securities and Exchange Commission, the Office of Thrift Supervision, or any
other federal agency or any state securities commission, nor has such
commission, office, or other agency or any state securities commission passed
upon the accuracy or adequacy of this prospectus supplement. Any representation
to the contrary is a criminal offense.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
The date of this prospectus supplement is November __, 2004.
TABLE OF CONTENTS
The Offering......................................................................................................1
Securities Offered.......................................................................................1
Election to Purchase Stock in the Initial Offering.......................................................1
Value of Participation Interests.........................................................................2
Purchase Price of Kearny Financial Corp. Common Stock....................................................2
Method of Directing Investments..........................................................................3
Time for Directing Investment............................................................................3
Irrevocability of Investment Direction...................................................................3
Direction to Purchase the Stock After the Initial Offering...............................................3
Nature of Each Participant's Interest in
Kearny Financial Corp. Common Stock.............................................................4
Voting and Tender Rights of the Stock....................................................................4
Minimum Investment.......................................................................................4
Description of the Plan...........................................................................................4
General..................................................................................................4
Eligibility and Participation............................................................................5
Contributions and Benefits Under the Plan................................................................5
Limitations on Contributions.............................................................................5
Investment of Plan Assets................................................................................6
Performance of Previous Funds............................................................................8
Performance of Employer Stock Fund.......................................................................8
Benefits Under the Plan................................................................................. 9
Withdrawals and Distributions From the Plan............................................................. 9
Administration of the Plan............................................................................. 11
Reports to Plan Participants........................................................................... 11
Amendment and Termination.............................................................................. 12
Merger, Consolidation, or Transfer..................................................................... 12
Federal Income Tax Consequences.........................................................................12
Restrictions on Resale..................................................................................13
Additional Employee Retirement Income Security Act ("ERISA") Considerations.............................13
SEC Reporting and Short-Swing Profit Liability..........................................................13
Additional Information..................................................................................14
Legal Opinions...................................................................................................14
Investment Election Form.................................................................................Appendix-A
Change of Investment Allocation Form.....................................................................Appendix-B
Special Tax Notice Regarding Plan Payments...............................................................Appendix-C
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement
are participation interests in the plan and shares of Kearny Financial Corp.
common stock. Only employees of Kearny who meet the eligibility requirements
under the plan may participate. Information with regard to the plan is contained
in this prospectus supplement and information with regard to the stock offering
and the financial condition, results of operation, and business of Kearny is
contained in the attached prospectus.
Election to Purchase Stock in the Initial Offering
Your eligibility to purchase stock utilizing your 401(k) Plan assets is
determined based upon your stock subscription rights as a member of Kearny
Federal Savings Bank. Participation in the 401(k) Plan does not give you any
special rights to purchase stock in the initial public offering. You may direct
the trustee of the plan to invest all or part of the funds in your account in
the Employer Stock Fund. Based upon your election, the trustees of the plan will
subscribe for Kearny Financial Corp. shares in the initial offering. You also
will be permitted to direct ongoing purchases of the stock under the plan after
the initial offering. See "Direction to Purchase Stock After the Initial
Offering." The plan's trustee will follow your investment directions. Amounts
not transferred to the Employer Stock Fund will remain invested in the other
investment funds of the plan as directed by you. See "Investment of Plan
Assets." Your investment in the common stock of Kearny Financial Corp. in the
offering through the Kearny Financial Corp. Stock Fund available under the Plan
is subject to the purchase priorities contained in the plan of stock issuance of
Kearny Financial Corp.
All Plan participants are eligible to direct a transfer of funds to the
Kearny Financial Corp. Stock Fund. However, such directions are subject to the
purchase priorities in the plan of stock issuance as follows:
1. Eligible account holders
2. Tax-qualified employee benefit plans of Kearny Financial Corp.,
including the employee stock ownership plan which we intend to adopt,
and
3. Supplemental eligible account holders
An eligible account holder is a depositor whose deposit account(s)
totaled $50.00 or more on March 31, 2003. A supplemental eligible account holder
is a depositor whose deposit account(s) totaled $50.00 or more on September 30,
2004. If you fall into subscription offering categories (1) or (3), you have
subscription rights to purchase shares of Kearny Financial Corp. common stock in
the subscription offering and you may use funds in the Plan account to pay for
the shares of Kearny Financial Corp. common stock which you are eligible to
purchase. You may also be able to purchase shares of Kearny Financial Corp.
common stock in the subscription offering even though you are unable to purchase
through subscription offering categories (1) or (3) if Kearny Financial Corp.
determines to allow the Plan to purchase shares through subscription offering
category (2), reserved for its tax-qualified employee plans, including the
employee stock ownership plan which will be adopted by Kearny Financial Corp. in
connection with the offering. The trustee of the Kearny Financial Corp. Stock
Fund will purchase common stock in accordance with your directions. No later
than the closing date of the subscription offering period, the amount that you
elect to transfer from your existing account balances for the purchase of common
stock in the offering will
1
be removed from your existing accounts and transferred to an interest-bearing
account, pending the closing of the offering. At the close of the offering, and
subject to a determination as to whether all or any portion of your order may be
filed (based on your purchase priority and whether the offering is
oversubscribed), all or a portion of the amount that you have transferred to
purchase stock in the offering will be applied to the common stock purchase.
In the event the offering is oversubscribed, i.e. there are more orders
for common stock than shares available for sale in the offering, and the trustee
is unable to use the full amount allocated by you to purchase common stock in
the offering, the amount that cannot be invested in common stock will be
reinvested in the investment funds of the Plan. The amount that cannot be
applied to the purchase of common stock in the offering and any interest your
account earned, pending investment in common stock, will be reinvested in
accordance with your then existing investment election (in proportion to your
investment direction for future contributions). If you fail to direct the
investment of your account balances towards the purchase of any shares in
connection with the offering, your account balances will remain in the
investment funds of the Plan as previously directed by you.
Value of Participation Interests
As of August 13, 2004, the total market value of the assets of the plan
equaled $3,843,039. The plan administrator has informed each participant of the
value of his or her account in the plan as of ________ __, 2004. The value of
the plan assets represents your past contributions to the plan, employer
matching contributions, profit-sharing contributions, plus or minus earnings or
losses on contributions, less withdrawals and loans. You may direct up to 100%
of the value of your account assets to invest in the Employer Stock Fund.
However, in connection with the initial offering of the stock, if you elect to
purchase the stock, you will be required to invest a minimum amount of your
account assets in the Employer Stock Fund.
Purchase Price of Kearny Financial Corp. Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
the stock issued in the initial offering will be used by the trustee to purchase
shares of Kearny Financial Corp. common stock. The price paid for such shares of
the stock will be $10.00. This price is the price that will be paid by all other
persons who purchase shares of the stock in the initial offering.
Your account assets directed for investment in the Employer Stock Fund
after the initial offering shall be invested by the trustee to purchase shares
of Kearny Financial Corp. common stock in open market transactions. The price
paid by the trustee for shares of the Kearny Financial Corp. common stock in the
initial offering, or otherwise, will not exceed "adequate consideration" as
defined in Section 3(18) of the Employee Retirement Income Security Act.
2
Method of Directing Investments
Appendix A of this prospectus supplement includes an investment
election form for you to direct a transfer to the Employer Stock Fund in the
initial offering of all or a portion of your account under the plan. Appendix B
of this prospectus supplement includes Pentegra's change of investment
allocation form which is to be used to direct future contributions to the
Employer Stock Fund after the initial offering.
If you wish to invest all or part of your account in the Employer Stock
Fund in the initial offering you need to complete Appendix A. Additionally, you
may indicate the directed investment of future contributions under the plan for
investment in the Employer Stock Fund. If you wish to direct investment of
future contributions in the Employer Stock Fund, you need to complete Appendices
A and B. If you do not wish to make an investment election, you do not need to
take any action.
Time for Directing Investment
The deadline for submitting your direction to invest funds in the
Employer Stock Fund in order to purchase the stock issued in the initial
offering is noon on ________ __, 2004. If you want to invest in the Employer
Stock Fund, you must return the attached form to Kim Manfredo of Kearny by noon
on ________ __, 2004.
After the initial offering, you will still be able to direct the
investment of your account under the plan in the Employer Stock Fund and in
other investment alternatives.
Irrevocability of Investment Direction
The direction to invest your plan funds in the Employer Stock Fund in
the initial offering cannot be changed after you have turned in your forms.
However, you will be able to direct your account to purchase the stock after the
initial offering by directing amounts in your account into the Employer Stock
Fund.
Direction to Purchase the Stock After the Stock Offering
Following completion of the stock offering, you will be permitted to
direct that a certain percentage of your interest in the trust fund (up to 100%)
be transferred to the Employer Stock Fund and invested in Kearny Financial Corp.
common stock, or to the other investment funds available under the plan.
Alternatively, you may direct that a certain percentage of your interest in the
Employer Stock Fund be transferred to the trust fund to be invested in the other
investment funds available in accordance with the terms of the plan. You can
direct future contributions made to the plan by you or on your behalf to be
invested in the Employer Stock Fund. Following your initial election, the
allocation of your interest in the Employer Stock Fund may be changed daily by
filing a change of investment allocation form with the plan administrator or by
calling Pentegra's voice response unit at (800) 433-4422 and changing your
investment allocation by phone or by internet at www.Pentegra.com
3
Nature of Each Participant's Interest in Kearny Financial Corp. Common Stock
The trustee will hold Kearny Financial Corp. common stock in the name
of the plan. Each participant has an allocable interest in the investment funds
of the plan but not in any particular assets of the plan. Accordingly, a
specific number of shares of the stock will not be directly attributable to the
account of any individual participant. Dividend rights associated with the stock
held by the Employer Stock Fund will be allocated to the Employer Stock Fund.
Any increase (or decrease) in the value of the fund as a result of dividend
rights will be reflected in each participant's allocable interest in the
Employer Stock Fund.
Voting and Tender Rights of the Stock
You will direct the trustee of the plan about how to vote your Kearny
Financial Corp. shares. If you do not give voting instruction or tender
instruction to the trustee, the trustee will vote or tender those shares within
its discretion as a fiduciary under the plan or as directed by the plan
administrator.
Minimum Investment
The minimum investment of assets directed by a participant for the
purchase of the stock in the initial offering is $250.00, and investments must
be in increments of $10.00. Funds may be directed for the purchase of the stock
attributable to your account regardless of whether your account assets are 100%
vested at the time of your investment election. There is no minimum level of
investment after the initial offering for investment in the Employer Stock Fund.
DESCRIPTION OF THE PLAN
General
Kearny adopted a 401(k) plan effective July 1, 2000. Effective October
1, 2004, Kearny amended and restated its old plan into the new plan in order to
include the Employer Stock Fund as an investment alternative. The new plan is a
deferred compensation arrangement established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code. The plan will be submitted to the IRS for a determination by the IRS that
the plan is qualified under Section 401(a) of the Internal Revenue Code and that
its trust is qualified under Section 501(a) of the Internal Revenue Code. Kearny
intends for the plan, in operation, to comply with the requirements under
Section 401(a) and Section 401(k) of the Internal Revenue Code. Kearny will
adopt any amendments to the plan that may be necessary to ensure the continued
qualified status of the plan under the Internal Revenue Code and other federal
regulations.
Employee Retirement Income Security Act. The plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act. As such, the plan is subject to all
of the provisions of Title I (Protection of Employee Benefit Rights) and Title
II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of the
act, except the funding requirements contained in Part 3 of Title I of the act,
which do not apply to an individual account plan (other than a money purchase
plan). The plan is not subject to Title IV (Plan Termination Insurance) of the
act. Neither the funding requirements contained in Part 3 of Title I of the act
nor the plan
4
termination insurance provisions contained in Title IV of the act will be
extended to participants or beneficiaries under the plan.
Federal tax law imposes substantial restrictions on your right to
withdraw amounts held under the plan before your termination of employment with
Kearny. Federal law may also impose a 10% excise tax on withdrawals you make
from the plan before you reach the age of 59 1/2, regardless of whether the
withdrawal occurs during or after your employment with Kearny.
Full Text of Plan. The following portions of this prospectus supplement
are summaries of provisions in the plan. They are not complete and are qualified
in their entirety by the full text of the plan. You may obtain copies of the
full plan by sending a request to Kim Manfredo at Kearny. You should carefully
read the full text of the plan document to understand your rights and
obligations under the plan.
Eligibility and Participation
You may participate in the plan on the first day of the month after
completing 1,000 hours of service during a 12-month period with Kearny. As of
August 13, 2004, there were 216 employees eligible to participate in the plan
and 205 employees had elected to participate. The plan year is January 1 to
December 31.
Contributions and Benefits Under the Plan
Plan Participant Contributions. You can contribute to the plan on a
pretax basis. Contributions are automatically deducted from your salary each pay
period. Salary means base salary plus overtime. When you contribute on a pretax
basis, you pay no federal income tax on your deferrals until you withdraw money
from the plan. You are permitted amounts of not less than 1% and not more than
75% of your annual base salary to the plan excluding bonuses and commissions.
You may change the amount of your contributions at any time and your changes
will be effective on the first day of the following pay period.
Kearny Contributions. Kearny may match your contribution to the plan,
but we are not obligated to match your contributions. Kearny currently matches
100% of your contributions up to 3% of your salary. Kearny contributions are
subject to revision by us.
Limitation on Contributions
Limitation on Employee Salary Deferral. Although you may contribute up
to 75% of your pay to the plan, federal tax law limits the dollar amount of your
annual contribution to $13,000 in 2004. If you are age 50 or more you can make
catch-up contributions of $3,000 in 2004. The Internal Revenue Service
periodically adjusts this limit for inflation. Contributions in excess of this
limit and earnings on those contributions generally will be returned to you by
April 15 of the year following your contribution, and they will be subject to
regular federal income taxes.
Limitation on Annual Additions and Benefits. Under federal tax law,
your contributions and our contributions to the plan may not exceed the lesser
of 100% of your annual pay, or $41,000.
5
Contributions that we make to any other retirement program that we sponsor may
also count against these limits.
Special Rules About Highly-Paid Employees. Special provisions of the
Internal Revenue Code limit contributions by employees who receive annual pay
greater than $90,000. If you are in this category, some of your contribution may
be returned if your contribution, when measured as a percentage of your pay, is
substantially higher than the contributions made by other employees.
If your annual pay is less than $130,000, we may be required to make a
minimum contribution to the plan of 3% of your annual pay if the plan is
considered to be a "top heavy" plan under federal tax law. The plan is
considered "top heavy" if, in any year, the value of the plan accounts of
employees making more than $130,000 represent more than 60 percent of the value
of all accounts.
Investment of Plan Assets
All amounts credited to your plan account are held in trust. A trustee
appointed by Kearny's Board of Directors administers the trust and invests the
plan assets. The plan offers the following investment choices:
S&P 500 Stock Fund: Invests in the stocks of a broad array of
established U.S. companies. Its objective is long-term: to earn higher returns
by investing in the largest companies in the U.S. economy.
Stable Value Fund: Invests primarily in Guaranteed Investment Contracts
and Synthetic Guaranteed Investment Contracts. Its objective is
short-to-intermediate term: to achieve a stable return over short to
intermediate periods of time while preserving the value of a participant's
investment.
S&P MidCap Stock Fund: Invests in the stocks of mid-sized U.S.
companies. Its objective is long- term: to earn higher returns which reflect the
growth potential of such companies.
Money Market Fund: Invests in a broad range of high-quality short-term
instruments. Its objective is short-term: to achieve competitive short-term
rates of return while preserving the value of the participant's principal.
Government Bond Fund: Invests in U.S. Treasury bonds with maturities of
20 years or more. Its objective is long-term: to earn a higher level of income
along with the potential for capital appreciation.
Income Plus Asset Allocation Fund: Invests approximately 80% of its
portfolio in a combination of stable value investments and U.S. bonds. The
balance is invested in U.S. and international stocks. Its objective is
intermediate-term: to preserve the value of a participant's investment over
short periods of time and to offer some potential for growth.
Growth and Income Asset Allocation Fund: Invests in U.S. domestic and
international stocks, U.S. domestic bonds, and stable value investments. Its
objective is intermediate-term: to provide a balance between the pursuit of
growth and protection from risk.
6
Growth Asset Allocation Fund: Invests the majority of its assets in
stocks -- domestic as well as international. Its objective is long-term: to
pursue high growth of a participant's investment over time.
International Stock Fund: Invests in over 1,000 foreign stocks in 20
countries. Its objective is long-term: to offer the potential return of
investing in the stocks of established non-U.S. companies, as well as the
potential risk-reduction of broad diversification.
Russell 2000 Stock Fund: Invests in most, or all, of the same stocks
held in the Russell 2000 Index. Its objective is long-term: to earn high returns
in smaller U.S. companies by matching its benchmark, the Russell 2000 Index.
S&P 500/Growth Stock Fund: Invests in most, or all, of the stocks held
in the S&P/BARRA Growth Index which are large-capitalization growth stocks. Its
objective is long-term: to match its benchmark, the S&P/BARRA Growth Index.
S&P 500/Value Stock Fund: Invests in most, or all, of the stocks held
in the S&P/BARRA Value Index which are large-capitalization value stocks. Its
objective is long-term: to match its benchmark, the S&P/BARRA Value Index.
Nasdaq 100 Stock Fund: The fund is intended for long-term investors
seeking to capture the growth potential of the 100 largest and most actively
traded non-financial companies on the Nasdaq Stock Market. The Fund's benchmark
is the Nasdaq 100 Index.
Employer Stock Fund. The Employer Stock Fund invests primarily in the
common stock of Kearny Financial Corp.
7
Performance of Previous Funds
The annual percentage return on these funds for calendar years 2003,
2002 and 2001 was approximately:
Fund 2003 2002 2001
---- ---- ---- ----
Money Market Fund 0.9% 1.6% 4.0%
Stable Value Fund 4.3% 5.3% 5.7%
Government Bond Fund 1.3% 16.4% 3.2%
S&P 500 Stock Fund 28.0% (22.4%) (12.3%)
S&P MidCap Stock Fund 35.1% (15.0%) ( 0.9%)
International Stock Fund 37.1% (18.5%) (22.0%)
Income Plus Asset Allocation Fund 11.7% (2.6%) 1.7%
Growth Asset Allocation Fund 28.3% (18.8%) (14.0%)
Growth & Income Asset Allocation Fund 19.7% (10.3%) (5.2%)
Russell 2000 Stock Fund 46.0% (20.7%) 2.0%
S&P 500/Growth Stock Fund 24.9% (24.0%) (13.3%)
S&P 500/Value Stock Fund 30.6% (21.2%) (12.2%)
Nasdaq 100 Stock Fund 48.3% (37.6%) (32.7%)
Employer Stock Fund N/A N/A N/A
Performance of the Employer Stock Fund
The Employer Stock Fund is invested in the common stock of Kearny
Financial Corp. As of the date of this prospectus supplement, none of the shares
of common stock have been issued or are outstanding and there is no established
market for the Kearny Financial Corp. common stock. Accordingly, there is no
record of the investment performance of the Employer Stock Fund. Performance of
the Employer Stock Fund depends on a number of factors, including the financial
condition and profitability of Kearny Financial Corp. and market conditions for
Kearny Financial Corp. common stock generally.
Please note that investment in the Employer Stock Fund is not an
investment in a savings account or certificate of deposit, and such investment
in Kearny Financial Corp. common stock through the Employer Stock Fund is not
insured by the FDIC or any other regulatory agency. Further, no assurances can
be given with respect to the price at which the stock may be sold in the future.
8
Investments in the Employer Stock Fund may involve certain special
risks relating to investments in the common stock of Kearny Financial Corp. For
a discussion of these risk factors, see "Risk Factors" beginning on page __ of
the prospectus.
Benefits Under the Plan
Vesting. The contributions that you make in the plan are fully vested
and cannot be forfeited. You are 100% vested in our matching contributions. You
vest in employer supplemental contributions as follows:
Withdrawals and Distributions From the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH KEARNY FINANCIAL CORP. A SUBSTANTIAL FEDERAL TAX PENALTY MAY
ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE
59 1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER
EMPLOYMENT WITH KEARNY FINANCIAL CORP. OR AFTER TERMINATION OF EMPLOYMENT.
Withdrawals Before Termination of Employment. Your plan account
provides you with a source of retirement income. But, while you are employed by
Kearny, if you need funds from your account before retirement, you may be
eligible to receive either an in-service withdrawal, or (from your pre-tax
contributions) a hardship distribution or a loan. You can apply for a hardship
distribution or a loan from the plan by contacting Kim Manfredo at Kearny. In
order to qualify for a hardship withdrawal, you must have an immediate and
substantial need to meet certain expenses, like a mortgage payment or medical
bill, and have no other reasonably available resources to meet your financial
need. If you qualify for a hardship distribution, the trustee will make the
distribution proportionately from the investment funds in which you have
invested your account balance. Hardship withdrawals (except for medical expenses
exceeding 7.5% of your adjusted gross income) and in-service withdrawals are
subject to the 10% early distribution penalty. Loans are not subject to the 10%
early distribution penalty.
Participants' pre-tax elective deferrals may not be distributed earlier
than upon separation from service, death, disability, or attainment of age 59
1/2.
You may make voluntary withdrawals of your pre-tax elective deferrals
and earnings thereon as of December 31, 1988 only in the event of hardship or
attainment of age 59 1/2. You may withdraw earnings after December 31, 1988 only
in the event of attainment of age 59 1/2. You may also make withdrawals of your
employee rollover contributions and the earnings thereon, and of employer
matching contributions, if any, and the earnings thereon. You may make not more
than one voluntary withdrawal from your account in a Plan Year.
In general, employer contributions credited on your behalf will not be
available for in-service withdrawal until such employer contributions have been
invested in the Plan for at least 2 years or you
9
have been a participant in the Plan for at least 5 years or in the event of your
death, disability, retirement, attainment of age 59 1/2 or termination of
employment.
Distributions Upon Termination for Any Other Reason. If you terminate
employment with Kearny for any reason other than retirement, disability or death
and your account balance exceeds $500, the trustee will distribute your benefits
to you the later of the April 1 of the calendar year after you turn age 70 1/2
or when you retire, unless you request otherwise. You may elect to maintain your
account balance in the plan for as long as Kearny maintains the plan or you may
elect one or more of the forms of distribution available under the plan. If your
account balance does not exceed $500, the trustee will generally distribute your
benefits to you as soon as administratively practicable following termination of
employment.
Distributions Upon Disability. If you can no longer work because of a
disability, as defined in the plan, you may withdraw your total account balance
under the plan and have that amount paid to you in accordance with the terms of
the plan. If you later become reemployed after you have withdrawn some or all of
your account balance, you may not repay to the plan any withdrawn amounts.
Withdrawal Upon Death. If you die while you are a participant in the
Plan, the value of your entire account will be payable to your beneficiary. You
may elect to have your beneficiary receive distribution in 5 annual installments
(10 if your spouse is your beneficiary, provided that your spouse's remaining
life expectancy is at least 10 years). If such an election is not in effect at
the time of your death, your beneficiary may elect to receive the benefit in the
form of annual installments over a period not to exceed 5 years (10 years if
your spouse is your beneficiary, provided that your spouse's remaining life
expectancy is at least 10 years) or make withdrawals as often as once per year,
except that any balance remaining must be withdrawn by the 5th anniversary (10th
anniversary if your spouse is your beneficiary, provided that your spouse's
remaining life expectancy is at least 10 years) of your death.
Distributions of the Stock of Kearny Financial Corp. If you receive a
distribution from the plan and assets under the plan have been directed by you
to be invested in the Employer Stock Fund, you may have those assets distributed
in kind in the form of stock of Kearny Financial Corp.
Form of Benefits. Payment of your benefits upon your retirement,
disability, or other termination of employment will be made either in a lump sum
payment or installments.
If you die before receiving benefits pursuant to your retirement,
disability, or termination of employment, your beneficiary will receive a lump
sum payment, unless the payment would exceed $500 and an election is made for
annual installments up to 5 years. Your spouse can receive payments for up to 10
years.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, as defined in the Internal Revenue Code, benefits payable under the plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the plan shall be void.
10
Plan Loans. You may borrow money from the vested portion of your
account. The minimum amount you may borrow is $1,000. The maximum amount is 50%
of your vested account balance. You may never borrow more than $50,000 minus the
highest outstanding balance on any individual loan during the last 12 months.
You may take up to five years to repay a general purpose loan. If you
are using the loan to purchase your primary residence, a repayment period of 15
years is permissible. You must repay the loan through payroll deductions.
If you fail to make any loan repayment when due, your loan will be in
default. The full amount of the loan will be due and payable by the last day of
the calendar quarter following the calendar quarter which contains the due date
of the last monthly installment payment. If the outstanding balance of the loan
is in default and is not repaid in the aforementioned time period, you will be
considered to have received a distribution of said amount.
Administration of the Plan
Effective ________ __, 2004, Kearny will administer the plan. The Bank
of New York will serve as trustee and custodian for all investment funds under
the plan except the Employer Stock Fund. John N. Hopkins, John Mazur and Matthew
McClane will serve as trustees with respect to the Employer Stock Fund during
the initial public offering by Kearny Financial Corp. After the stock of Kearny
Financial Corp. begins trading, the Bank of New York also will be the trustee
for the Employer Stock Fund. The plan administrator is responsible for the
administration of the plan, interpretation of the provisions of the plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the plan, and preparation and filing of all returns and reports relating to the
plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to participants, beneficiaries
and others under the Employee Retirement Income Security Act.
The trustee receives and holds the contributions to the plan in trust
and distributes them to participants and beneficiaries in accordance with the
terms of the plan and the directions of the plan administrator. The trustee is
responsible for investment of the assets of the trust. The address of the plan
administrator and the trustee for the Employer Stock Fund is 401k Plan
Administrator c/o Kearny Federal Savings Bank, 614 Kearny Avenue, Kearny, New
Jersey 07032. The address of the Bank of New York is One Wall Street, New York,
New York, 10286.
Reports to Plan Participants
The plan administrator will furnish to each participant a statement at
least quarterly showing:
o the balance in your account as of the end of that period;
o the amount of contributions allocated to your account for that period; and
o the adjustments to your account to reflect earnings or losses (if any).
11
If you invest in the Employer Stock Fund, you will also receive a copy
of Kearny Financial Corp.'s Annual Report to Stockholders and a proxy statement
related to stockholder meetings.
Amendment and Termination
It is the intention of Kearny to continue the plan indefinitely.
Nevertheless, Kearny, within its sole discretion may terminate the plan at any
time. If the plan is terminated in whole or in part, then regardless of other
provisions in the plan, you will have a fully vested interest in your accounts.
Kearny reserves the right to make, from time to time, any amendment or
amendments to the plan that do not cause any part of the trust to be used for,
or diverted to, any purpose other than the exclusive benefit of participants or
their beneficiaries; provided, however, that Kearny may make any amendment it
determines necessary or desirable, with or without retroactive effect, to comply
with the Employee Retirement Income Security Act.
Merger, Consolidation, or Transfer
In the event of the merger or consolidation of the plan with another
plan, or the transfer of the trust assets to another plan, the plan requires
that each participant would (if either the plan or the other plan then be
terminated) receive a benefit immediately after the merger, consolidation, or
transfer that is equal to or greater than the benefit he or she would have been
entitled to receive immediately before the merger, consolidation, or transfer
(if the plan had then terminated).
Federal Income Tax Consequences
The following discussion is only a brief summary of certain federal
income tax aspects of the plan. You should not rely on this summary as a
complete or definitive description of the material federal income tax
consequences relating to the plan. At the time you receive a distribution from
the plan, you will receive a tax notice which conforms to the IRS safe harbor
explanation of the distribution in accordance with IRS Notice 2002-3. The tax
rules that affect your benefits under the plan change frequently and may vary
based on your individual situation. This summary also does not discuss how state
or local tax laws affect your plan benefits. We urge you to consult your tax
advisor with respect to any distribution from the plan and transactions
involving the plan.
Federal tax law provides the participants under the plan with a number
of special benefits:
(1) you pay no current income tax on your contributions or Kearny
contributions; and
(2) the earnings on your plan accounts are not taxable until you
receive a distribution.
These benefits are conditioned on the plan's compliance with special
requirements of federal tax law. We intend to satisfy all of the rules that
apply to the plan. However, if the rules are not satisfied, the special tax
benefits available to the plan may be lost.
Special Distribution Rules. If you turned 50 before 1986, you may be
eligible to spread the taxes on the distribution over as much as 10 years. You
should consult with your tax advisor to determine if you are eligible for this
special tax benefit and whether it is appropriate to your financial needs.
Kearny Financial Corp. Common Stock Included in Lump Sum Distribution.
If a distribution of all of your benefits includes shares of Kearny Financial
Corp. common stock, you will generally not
12
be taxed on the increase in the value of the stock since its purchase until you
sell the stock. You will be taxed on the amount of the distribution equal to
your original cost for the stock when you receive your distribution.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. You may roll over virtually all distributions from the plan to
retirement programs sponsored by other employers or to an individual retirement
account. We will provide you with detailed information on how to roll over a
distribution when you are eligible to receive benefits under the plan.
Restrictions on Resale
If you are an "affiliate" of Kearny Financial Corp. or Kearny Federal
Savings Bank, you may be subject to special rules under federal securities laws
that affect your ability to sell shares you hold in the Employer Stock Fund.
Directors, officers and substantial shareholders of Kearny Financial Corp. are
generally considered "affiliates." Any person who may be an "affiliate" of
Kearny may wish to consult with counsel before transferring any common stock
they own. If you are not considered an "affiliate" of Kearny you may freely sell
any shares of Kearny Financial Corp. common stock distributed to you under the
plan, either publicly or privately.
Additional Employee Retirement Income Security Act ("ERISA") Considerations
As noted above, the Plan is subject to certain provisions of ERISA,
including special provisions relating to control over the Plan's assets by
participants and beneficiaries. The Plan's feature that allows you to direct the
investment of your account balances is intended to satisfy the requirements of
section 404(c) of ERISA relating to control over plan assets by a participant or
beneficiary. The effect of this is two-fold. First, you will not be deemed a
"fiduciary" because of your exercise of investment discretion. Second, no person
who otherwise is a fiduciary, such as Kearny Financial Corp., the Plan
administrator, or the Plan's trustee is liable under the fiduciary
responsibility provision of ERISA for any loss which results form your exercise
of control over the assets in your Plan account.
Because you will be entitled to invest all of or a portion of your
account balance in the Plan in Kearny Financial Corp. common stock, the
regulations under Section 404(c) of the ERISA require that the Plan establish
procedures that ensure the confidentiality of your decision to purchase, hold,
or sell employer securities, except to the extent that disclosure of such
information is necessary to comply with federal or state laws not preempted by
ERISA. These regulations also require that your exercise of voting and similar
rights with respect to the common stock to be conducted in a way that ensures
the confidentiality of your exercise of these rights.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors, and persons beneficially owning
more than 10% of public companies such as Kearny Financial Corp. Section 16(a)
of the Securities Exchange Act of 1934 requires the filing of reports of
beneficial ownership. Within 10 days of becoming an officer, director or person
beneficially owning more than 10% of the shares of Kearny Financial Corp., a
Form 3 reporting initial beneficial ownership must be filed with the Securities
and Exchange Commission. Changes in beneficial ownership, such as purchases,
sales and gifts generally must be reported periodically, either on a Form 4
within 2 business days after the change occurs, or annually on a Form 5 within
45 days after the close of Kearny Financial Corp.'s fiscal year. Discretionary
transactions in and beneficial ownership of the Common Stock through
13
the Kearny Financial Corp. Stock Fund of the Plan by officers, directors and
persons beneficially owning more than 10% of the common stock of Kearny
Financial Corp. generally must be reported to the Securities and Exchange
Commission by such individuals.
In addition to the reporting requirements described above, section
16(b) of the Securities Exchange Act of 1934 provides for the recovery by Kearny
Financial Corp. of profits realized by an officer, director or any person
beneficially owning more than 10% of Kearny Financial Corp.'s common stock
resulting from non-exempt purchases and sales of Kearny Financial Corp.'s common
stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide
exemptions from the profit recovery provisions of section 16(b) for all
transactions in employer securities within an employee benefit plan, provided
certain requirements are met. These requirements generally involve restrictions
upon the timing of elections to acquire or dispose of employer securities for
the accounts of section 16(b) persons.
Except for distributions of common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, persons affected by section 16(b) are required to hold shares of Common
Stock distributed from the Plan for six months following such distribution and
are prohibited form directing additional purchases of units within the Kearny
Financial Corp. stock fund for six months after receiving such a distribution.
Additional Information
This prospectus supplement dated November __, 2004, is part of the
prospectus of Kearny Financial Corp. dated November __, 2004. This prospectus
supplement shall be delivered to plan participants together with the prospectus
and is not complete unless it is accompanied by the prospectus.
LEGAL OPINIONS
The validity of the issuance of the common stock will be passed upon by
Malizia Spidi & Fisch, PC, Washington, D.C., which acted as special counsel for
Kearny Financial Corp. in connection with the initial public offering by Kearny
Financial Corp.
14
Appendix-A: Investment Election Form
Appendix-A
KEARNY FEDERAL SAVINGS BANK
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND TRUST
Participant Voluntary Investment Election Form
Name of Plan Participant:
Social Security Number:
1. Instructions.
In connection with the initial public offering of Kearny Financial
Corp., Kearny has adopted the Kearny Federal Savings Bank Employees' Savings and
Profit Sharing Plan and Trust to permit plan participants to direct all, or a
portion, of the assets attributable to their participant accounts into a new
fund: the Employer Stock Fund. The assets attributable to a participant's
account that are transferred at the direction of the participant into the
Employer Stock Fund will be used to purchase shares of common stock of Kearny
Financial Corp. to be issued in the initial stock offering of Kearny Financial
Corp.
To direct a transfer of all or a part of the funds credited to your
account to the Employer Stock Fund, you should complete this form and return it
to Kim Manfredo at Kearny Federal Savings Bank, at 250 Valley Boulevard,
Wood-Ridge, New Jersey 07075 who will retain this form and return a copy to you.
If you need any assistance in completing this form, please contact Kim Manfredo
at (201) 939-3400 Ext. 104. If you do not complete and return this form by March
4, 2004, at noon, the funds credited to your account under the plan will
continue to be invested in accordance with your prior investment direction, or
in accordance with the terms of the plan if no investment direction has been
provided.
2. Investment Directions.
As a participant in the plan, I hereby voluntarily elect to direct the
trustee of the plan to invest the below indicated dollar sum of my participant
account balance under the plan as indicated below.
I hereby voluntarily elect and request to direct investment of the
below indicated dollar amount of my participant account funds for the purchase
of the common stock to be issued in Kearny Financial Corp.'s initial offering
(minimum investment of $250.00; rounded to the nearest $10.00 increment; maximum
investment permissible is 50,000 shares of common stock or $500,000):
$___________. Enter your $ level of requested purchase through the plan. Such
amount may not exceed the vested portion of assets held under the plan for you.
Please note that the actual number of shares of common stock purchased on your
behalf under the plan may be limited or reduced in accordance with the plan of
stock issuance of Kearny Financial Corp. based upon the total number of shares
of common stock subscribed for by other parties. On the attached Appendix-B,
please indicate from which funds such investments should be transferred. Only
available funds may be used for purchase.
2
All other funds in my participant account will remain invested as
previously requested. All future contributions under the plan will continue to
be invested as previously requested or as revised by me at a later date.
3. Acknowledgment.
I fully understand that this self-directed portion of my participant
account does not share in the overall net earnings, gains, losses, and
appreciation or depreciation in the value of assets held by the plan's other
investment funds, but only in my account's allocable portion of such items from
the directed investment account invested in the common stock. I understand that
the plan's trustee, in complying with this election and in following my
directions for the investment of my account, is not responsible or liable in any
way for the expenses or losses that may be incurred by my account assets
invested in common stock under the Employer Stock Fund.
I further understand that this one time election shall become
irrevocable by me upon execution and submission of this Investment Form. Only
properly signed forms delivered to the plan trustee on or before , 2004, at
noon, will be honored.
The undersigned participant acknowledges that he or she has received
the prospectus of the Kearny Financial Corp., dated November __, 2004, the
prospectus supplement dated November __, 2004, regarding the Kearny Federal
Savings Bank Employees' Savings and Profit Sharing Plan and Trust as adopted by
Kearny Federal Savings Bank and this Investment Form. The undersigned hereby
acknowledges that the shares of common stock to be purchased with the funds
noted above are not savings accounts or deposits and are not insured by the
Federal Deposit Insurance Corporation, Bank Insurance Fund, the Savings
Association Insurance Fund, or any other governmental agency. Investment in the
common stock will expose the undersigned to the investment risks and potential
fluctuations in the market price of the common stock. Investment in the common
stock does not offer any guarantees regarding maintenance of the principal value
of such investment or any projections or guarantees associated with future value
or dividend payments with respect to the common stock. The undersigned hereby
voluntarily makes and consents to this investment election and voluntarily
signed his (her) name as of the date listed below. If you so elect, you may
choose not to make any investment decision at this time.
I UNDERSTAND THAT BY EXECUTING THIS ORDER I DO NOT WAIVE ANY RIGHTS AFFORDED TO
ME BY THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934.
-------------------- ---------- ------------------------ ---------
Witness Date Participant Date
For the Trustee For the Plan Administrator
-------------------- ---------- ------------------------ ---------
Date Date
2
Appendix-B: Change of Investment Allocation Form
Appendix-B
Change of Investment Allocation Form
Kearny Financial Corp.
CHANGE OF INVESTMENT ALLOCATION
1. Member Data
Print your full name above (Last, first, middle initial) Social Security Number
Street Address City State Zip
2. Instructions
Kearny Federal Savings Bank Employees' Savings and Profit Sharing Plan and Trust
is giving members a special opportunity to invest their 401(k) account balances
in a new investment fund - the Employer Stock Fund - which is comprised
primarily of common stock issued by Kearny Financial Corp. in connection with
the initial stock offering of Kearny Financial Corp. The percentage of a
member's account transferred at the direction of the member into the Employer
Stock Fund will be used to purchase shares of the common stock during the
initial offering of Kearny Financial Corp. Please review the prospectus and the
prospectus supplement before making any decision.
In the event of an oversubscription in the offering so that the total amount you
allocate to the Employer Stock Fund can not be used by the trustee to purchase
the common stock, your account will be reinvested in the other funds of the plan
as previously directed in your last investment election. If no investment
election is provided, your account will be invested in the Money Market Fund.
Investing in the common stock entails some risks, and we encourage you to
discuss this investment decision with your spouse and investment advisor. The
plan trustee and the plan administrator are not authorized to make any
representations about this investment other than what appears in the prospectus
and prospectus supplement, and you should not rely on any information other than
what is contained in the prospectus and prospectus supplement. For a discussion
of certain factors that should be considered by each member in deciding whether
to invest in the common stock, see "Risk Factors" beginning on page __ of the
prospectus. Any shares purchased by the plan pursuant to your election will be
subject to the conditions or restrictions otherwise applicable to the common
stock, as discussed in the prospectus and prospectus supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
To direct a transfer of all or part of the funds credited to your accounts to
the Employer Stock Fund, you should complete and file this form with Kim
Manfredo, of Kearny Federal Savings Bank no later than ________ __, 2004 at
noon. If you need any assistance in completing this form, please contact Kim
Manfredo at (201) 939-3400 Ext. 104. If you do not complete and return this form
to Kim Manfredo by ________ __, 2004 at noon, the funds credited to your account
under the plan will continue to be invested in accordance with your prior
investment direction, or in accordance with the terms of the plan if no
investment direction has been provided by you.
Notwithstanding the election made in Appendix-A for purchases of the
Employer Stock Fund, your purchase of Kearny Financial Corp. Stock will be
limited to the amounts available in the following funds. No purchases of the
Employer Stock Fund will be made with insufficient funds in any funds.
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following funds, to the extent
permissible, be transferred out of the specified fund and invested in the
Employer Stock Fund as follows:
Dollar Amount
to be
Fund transferred
---- -----------
S&P 500 Stock Fund.................................... ______
Russell 2000 Stock Fund............................... ______
S&P 500/Growth Stock Fund............................. ______
S&P 500/Value Stock Fund.............................. ______
Stable Value Fund..................................... ______
S&P MidCap Stock Fund................................. ______
Money Market Fund..................................... ______
Government Bond Fund.................................. ______
International Stock Fund.............................. ______
Income Plus Fund...................................... ______
Growth & Income Fund.................................. ______
Growth Fund........................................... ______
Nasdaq 100 Stock Fund................................. ______
Total (Important!).......................... ______
(The Total should equal the total dollar amount on Page 1 of Appendix-A.)
Note: The total amount transferred may not exceed the total value of your
accounts.
4. Investment Directions (Applicable to Future Contributions Only) I hereby
revoke any previous investment instructions and now direct that any future
contributions and/or loan repayments, if any, made by me or on my behalf by
Kearny Financial Corp. including those contributions and/or repayments received
by Kearny Federal Savings Bank Employees' Savings and Profit Sharing Plan and
Trust during the same reporting period as this form, be invested in the
following funds (in whole percentages). If I elect to invest in the common stock
of Kearny Financial Corp., such future contributions or loan repayments, if any,
will be invested in the Employer Stock Fund the month following the conclusion
of the stock offering. Please read "Notes" on the following page before
completing. ------
2
Fund Percentage
---- ----------
S&P 500 Stock Fund................................... ____ %
Russell 2000 Stock Fund.............................. ____ %
S&P 500/Growth Stock Fund............................ ____ %
S&P 500/Value Stock Fund............................. ____ %
Stable Value Fund.................................... ____ %
S&P MidCap Stock Fund................................ ____ %
Money Market Fund.................................... ____ %
Government Bond Fund................................. ____ %
International Stock Fund............................. ____ %
Income Plus Fund..................................... ____ %
Growth & Income Fund................................. ____ %
Growth Fund.......................................... ____ %
Employer Stock Fund.................................. ____ %
Nasdaq 100 Stock Fund................................ ____ %
Total (Important!)............................ 100%
Notes: No amounts invested in the Stable Value Fund may be transferred
directly to the Money Market Fund. Stable Value Fund amounts invested
in the S&P 500 Stock Fund, Russell 2000 Stock Fund, S&P 500/Growth
Stock Fund, S&P 500/Value Stock Fund, S&P MidCap Stock Fund, Government
Bond Fund, International Stock Fund, Income Plus Fund, Growth & Income
Fund, Growth Fund, Nasdaq 100 Stock Fund and/or Employer Stock Fund,
for a period of three months may be transferred to the Money Market
Fund upon the submission of a separate Change of Investment Allocation
Form. The percentage that can be transferred to the Money Market Fund
may be limited by any amounts previously transferred from the Stable
Value Fund that have not satisfied the equity wash requirement. Such
amounts will remain in either the S&P 500 Stock Fund, Russell 2000
Stock Fund, S&P 500/Growth Stock Fund, S&P 500/Value Stock Fund, S&P
MidCap Stock Fund, Government Bond Fund, International Stock Fund,
Income Plus Fund, Growth & Income Fund, Growth Fund, Nasdaq 100 Stock
Fund and/or Employer Stock Fund and a separate direction to transfer
them to the Money Market Fund will be required when they become
available.
5. Participant Signature and Acknowledgment - Required
By signing this Change of Investment Allocation form, I authorize and direct the
plan administrator and trustee to carry out my instructions. If investing in the
Employer Stock Fund, I acknowledge that I have been provided with and read a
copy of the prospectus and prospectus supplement relating to the issuance of the
common stock. I am aware of the risks involved in the investment in the common
stock, and understand that the trustee and plan administrator are not
responsible for my choice of investment.
3
MEMBER'S SIGNATURE
I understand that the above directed change(s) will be processed within one to
five days of the form being received by Pentegra. I further understand that if I
do not complete either Section 3 or Section 4, no change will be made to my
current directions for future contributions or accumulated balances,
respectively.
Signature of Member Date
Pentegra Services, Inc. is hereby authorized to make the above listed change(s)
to this member's record.
On behalf of the above named member, I certify that the signature above is that
of the participant making this request.
--------------------------------------- --------------
Signature of Kearny Federal Savings Bank Date
Authorized Representative
Please complete and return by noon on ________ __, 2004
4
Appendix-C: Special Tax Notice Regarding Plan Payments
Appendix-C
SPECIAL TAX NOTICE REGARDING PLAN PAYMENTS
This notice explains how you can continue to defer federal income tax
on your retirement savings in the Kearny Federal Savings Bank Employees' Savings
and Profit Sharing Plan and Trust (the "Plan") and contains important
information you will need before you decide how to receive your Plan benefits.
This notice is provided to you by Kearny Federal Savings Bank (your
"Plan Administrator") because all or part of the payment that you will soon
receive from the Plan may be eligible for rollover by you or your Plan
Administrator to a traditional IRA or an eligible employer plan. A rollover is a
payment by you or the Plan Administrator of all or part of your benefit to
another plan or IRA that allows you to continue to postpone taxation of that
benefit until it is paid to you. Your payment cannot be rolled over to a Roth
IRA, a SIMPLE IRA, or a Coverdell Education Savings Account (formerly known as
an education IRA). An "eligible employer plan" includes a plan qualified under
section 401(a) of the Internal Revenue Code, including a 401(k) plan,
profit-sharing plan, defined benefit plan, stock bonus plan, and money purchase
plan; a section 403(a) annuity plan; a section 403(b) tax-sheltered annuity; and
an eligible section 457(b) plan maintained by a governmental employer
(governmental 457 plan).
An eligible employer plan is not legally required to accept a rollover.
Before you decide to roll over your payment to another employer plan, you should
find out whether the plan accepts rollovers and, if so, the types of
distributions it accepts as a rollover. You should also find out about any
documents that are required to be completed before the receiving plan will
accept a rollover. Even if a plan accepts rollovers, it might not accept
rollovers of certain types of distributions, such as after-tax amounts. If this
is the case, and your distribution includes after-tax amounts, you may wish
instead to roll your distribution over to a traditional IRA or split your
rollover amount between the employer plan in which you will participate and a
traditional IRA. If an employer plan accepts your rollover, the plan may
restrict subsequent distributions of the rollover amount or may require your
spouse's consent for any subsequent distribution. A subsequent distribution from
the plan that accepts your rollover may also be subject to different tax
treatment than distributions from this Plan. Check with the administrator of the
plan that is to receive your rollover prior to making the rollover.
If you have additional questions after reading this notice, you can
contact your plan administrator, Albert Gossweiler at (201) 939-3400 Ext. 102.
SUMMARY
There are two ways you may be able to receive a Plan payment that is
eligible for rollover:
(1) Certain payments can be made directly to a traditional IRA that you
establish or to an eligible employer plan that will accept it and hold it for
your benefit ("DIRECT ROLLOVER"); or
(2) The payment can be PAID TO YOU.
1
If you choose a DIRECT ROLLOVER:
* Your payment will not be taxed in the current year and no
income tax will be withheld.
* You choose whether your payment will be made directly to your
traditional IRA or to an eligible employer plan that accepts
your rollover. Your payment cannot be rolled over to a Roth
IRA, a SIMPLE IRA, or a Coverdell Education Savings Account
because these are not traditional IRAs.
* The taxable portion of your payment will be taxed later when
you take it out of the traditional IRA or the eligible
employer plan. Depending on the type of plan, the later
distribution may be subject to different tax treatment than it
would be if you received a taxable distribution from this
Plan.
If you choose to have a Plan payment that is eligible for rollover PAID
TO YOU:
* You will receive only 80% of the taxable amount of the
payment, because the Plan Administrator is required to
withhold 20% of that amount and send it to the IRS as income
tax withholding to be credited against your taxes.
* The taxable amount of your payment will be taxed in the
current year unless you roll it over. Under limited
circumstances, you may be able to use special tax rules that
could reduce the tax you owe. However, if you receive the
payment before age 59 1/2, you may have to pay an additional
10% tax.
* You can roll over all or part of the payment by paying it to
your traditional IRA or to an eligible employer plan that
accepts your rollover within 60 days after you receive the
payment. The amount rolled over will not be taxed until you
take it out of the traditional IRA or the eligible employer
plan.
* If you want to roll over 100% of the payment to a traditional
IRA or an eligible employer plan, you must find other money to
replace the 20% of the taxable portion that was withheld. If
you roll over only the 80% that you received, you will be
taxed on the 20% that was withheld and that is not rolled
over.
YOUR RIGHT TO WAIVE THE 30-DAY NOTICE PERIOD. Generally, neither a
direct rollover nor a payment can be made from the Plan until at least 30 days
after your receipt of this notice. Thus, after receiving this notice, you have
at least 30 days to consider whether or not to have your withdrawal directly
rolled over. If you do not wish to wait until this 30-day notice period ends
before your election is processed, you may waive the notice period by making an
affirmative election indicating whether or not you wish to make a direct
rollover. Your withdrawal will then be processed in accordance with your
election as soon as practical after it is received by the Plan Administrator.
2
MORE INFORMATION
I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER
II. DIRECT ROLLOVER
III. PAYMENT PAID TO YOU
IV. SURVIVING SPOUSES, ALTERNATE PAYEES, AND OTHER BENEFICIARIES
I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER
Payments from the Plan may be "eligible rollover distributions." This
means that they can be rolled over to a traditional IRA or to an eligible
employer plan that accepts rollovers. Payments from a plan cannot be rolled over
to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account. Your Plan
Administrator should be able to tell you what portion of your payment is an
eligible rollover distribution.
The following types of payments cannot be rolled over:
PAYMENTS SPREAD OVER LONG PERIODS. You cannot roll over a payment if it
is part of a series of equal (or almost equal) payments that are made at least
once a year and that will last for:
* your lifetime (or a period measured by your life expectancy),
or
* your lifetime and your beneficiary's lifetime (or a period
measured by your joint
life expectancies), or
* a period of 10 years or more.
REQUIRED MINIMUM PAYMENTS. Beginning when you reach age 70 1/2 or
retire, whichever is later, a certain portion of your payment cannot be rolled
over because it is a "required minimum payment" that must be paid to you.
Special rules apply if you own more than 5% of your employer.
HARDSHIP DISTRIBUTIONS. A hardship distribution cannot be rolled over.
ESOP DIVIDENDS. Cash dividends paid directly to you on employer stock
held in an employee stock ownership plan cannot be rolled over.
CORRECTIVE DISTRIBUTIONS. A distribution that is made to correct a
failed nondiscrimination test or because legal limits on certain contributions
were exceeded cannot be rolled over.
3
LOANS TREATED AS DISTRIBUTIONS. The amount of a plan loan that becomes
a taxable deemed distribution because of a default cannot be rolled over.
However, a loan offset amount is eligible for rollover, as discussed in Part III
below. Ask the Plan Administrator of this Plan if distribution of your loan
qualifies for rollover treatment.
The Plan Administrator of this Plan should be able to tell you if your
payment includes amounts which cannot be rolled over.
II. DIRECT ROLLOVER
A DIRECT ROLLOVER is a direct payment of the amount of your Plan
benefits to a traditional IRA or an eligible employer plan that will accept it.
You can choose a DIRECT ROLLOVER of all or any portion of your payment that is
an eligible rollover distribution, as described in Part I above. You are not
taxed on any taxable portion of your payment for which you choose a DIRECT
ROLLOVER until you later take it out of the traditional IRA or eligible employer
plan. In addition, no income tax withholding is required for any taxable portion
of your Plan benefits for which you choose a DIRECT ROLLOVER. This Plan might
not let you choose a DIRECT ROLLOVER if your distributions for the year are less
than $200.
DIRECT ROLLOVER to a Traditional IRA. You can open a traditional IRA to
receive the direct rollover. If you choose to have your payment made directly to
a traditional IRA, contact an IRA sponsor (usually a financial institution) to
find out how to have your payment made in a direct rollover to a traditional IRA
at that institution. If you are unsure of how to invest your money, you can
temporarily establish a traditional IRA to receive the payment. However, in
choosing a traditional IRA, you may wish to make sure that the traditional IRA
you choose will allow you to move all or a part of your payment to another
traditional IRA at a later date, without penalties or other limitations. See IRS
Publication 590, Individual Retirement Arrangements, for more information on
traditional IRAs (including limits on how often you can roll over between IRAs).
DIRECT ROLLOVER to a Plan. If you are employed by a new employer that
has an eligible employer plan, and you want a direct rollover to that plan, ask
the plan administrator of that plan whether it will accept your rollover. An
eligible employer plan is not legally required to accept a rollover. Even if
your new employer's plan does not accept a rollover, you can choose a DIRECT
ROLLOVER to a traditional IRA. If the employer plan accepts your rollover, the
plan may provide restrictions on the circumstances under which you may later
receive a distribution of the rollover amount or may require spousal consent to
any subsequent distribution. Check with the plan administrator of that plan
before making your decision.
DIRECT ROLLOVER of a Series of Payments. If you receive a payment that
can be rolled over to a traditional IRA or an eligible employer plan that will
accept it, and it is paid in a series of payments for less than 10 years, your
choice to make or not make a DIRECT ROLLOVER for a payment will apply to all
later payments in the series until you change your election. You are free to
change your election for any later payment in the series.
CHANGE IN TAX TREATMENT RESULTING FROM A DIRECT ROLLOVER. The
tax treatment of any payment from the eligible employer plan or traditional IRA
receiving your DIRECT ROLLOVER might be different than if you received your
benefit in a taxable distribution
4
directly from the Plan. For example, if you were born before January 1, 1936,
you might be entitled to ten-year averaging or capital gain treatment, as
explained below. However, if you have your benefit rolled over to a section
403(b) tax-sheltered annuity, a governmental 457 plan, or a traditional IRA in a
DIRECT ROLLOVER, your benefit will no longer be eligible for that special
treatment. See the sections below entitled "Additional 10% Tax if You Are under
Age 59 1/2" and "Special Tax Treatment if You Were Born before January 1, 1936."
III. PAYMENT PAID TO YOU
If your payment can be rolled over (see Part I above) and the payment
is made to you in cash, it is subject to 20% federal income tax withholding on
the taxable portion (state tax withholding may also apply). The payment is taxed
in the year you receive it unless, within 60 days, you roll it over to a
traditional IRA or an eligible employer plan that accepts rollovers. If you do
not roll it over, special tax rules may apply.
Income Tax Withholding:
MANDATORY WITHHOLDING. If any portion of your payment can be rolled
over under Part I above and you do not elect to make a DIRECT ROLLOVER, the Plan
is required by law to withhold 20% of the taxable amount. This amount is sent to
the IRS as federal income tax withholding. For example, if you can roll over a
taxable payment of $10,000, only $8,000 will be paid to you because the Plan
must withhold $2,000 as income tax. However, when you prepare your income tax
return for the year, unless you make a rollover within 60 days (see "Sixty-Day
Rollover Option" below), you must report the full $10,000 as a taxable payment
from the Plan. You must report the $2,000 as tax withheld, and it will be
credited against any income tax you owe for the year. There will be no income
tax withholding if your payments for the year are less than $200.
VOLUNTARY WITHHOLDING. If any portion of your payment is taxable but
cannot be rolled over under Part I above, the mandatory withholding rules
described above do not apply. In this case, you may elect not to have
withholding apply to that portion. If you do nothing, an amount will be taken
out of this portion of your payment for federal income tax withholding. To elect
out of withholding, ask the Plan Administrator for the election form and related
information.
SIXTY-DAY ROLLOVER OPTION. If you receive a payment that can be rolled
over under Part I above, you can still decide to roll over all or part of it to
a traditional IRA or to an eligible employer plan that accepts rollovers. If you
decide to roll over, you must contribute the amount of the payment you received
to a traditional IRA or eligible employer plan within 60 days after you receive
the payment. The portion of your payment that is rolled over will not be taxed
until you take it out of the traditional IRA or the eligible employer plan.
You can roll over up to 100% of your payment that can be rolled over
under Part I above, including an amount equal to the 20% of the taxable portion
that was withheld. If you choose to roll over 100%, you must find other money
within the 60-day period to contribute to the traditional IRA or the eligible
employer plan, to replace the 20% that was withheld. On the other hand, if you
roll over only the 80% of the taxable portion that you received, you will be
taxed on the 20% that was withheld.
5
EXAMPLE: The taxable portion of your payment that can be rolled over
under Part I above is $10,000, and you choose to have it paid to you. You will
receive $8,000, and $2,000 will be sent to the IRS as income tax withholding.
Within 60 days after receiving the $8,000, you may roll over the entire $10,000
to a traditional IRA or an eligible employer plan. To do this, you roll over the
$8,000 you received from the Plan, and you will have to find $2,000 from other
sources (your savings, a loan, etc.). In this case, the entire $10,000 is not
taxed until you take it out of the traditional IRA or an eligible employer plan.
If you roll over the entire $10,000, when you file your income tax return you
may get a refund of part or all of the $2,000 withheld.
If, on the other hand, you roll over only $8,000, the $2,000 you did
not roll over is taxed in the year it was withheld. When you file your income
tax return, you may get a refund of part of the $2,000 withheld. (However, any
refund is likely to be larger if you roll over the entire $10,000.)
ADDITIONAL 10% TAX IF YOU ARE UNDER AGE 59 1/2. If you receive a
payment before you reach age 59 1/2 and you do not roll it over, then, in
addition to the regular income tax, you may have to pay an extra tax equal to
10% of the taxable portion of the payment. The additional 10% tax generally does
not apply to (1) payments that are paid after you separate from service with
your employer during or after the year you reach age 55, (2) payments that are
paid because you retire due to disability, (3) payments that are paid as equal
(or almost equal) payments over your life or life expectancy (or your and your
beneficiary's lives or life expectancies), (4) dividends paid with respect to
stock by an employee stock ownership plan (ESOP) as described in Code section
404(k), (5) payments that are paid directly to the government to satisfy a
federal tax levy, (6) payments that are paid to an alternate payee under a
qualified domestic relations order, or (7) payments that do not exceed the
amount of your deductible medical expenses. See IRS Form 5329 for more
information on the additional 10% tax.
SPECIAL TAX TREATMENT IF YOU WERE BORN BEFORE JANUARY 1, 1936.
If you receive a payment from a plan qualified under section 401(a) or a section
403(a) annuity plan that can be rolled over under Part I and you do not roll it
over to a traditional IRA or an eligible employer plan, the payment will be
taxed in the year you receive it. However, if the payment qualifies as a "lump
sum distribution," it may be eligible for special tax treatment. (See also
"Employer Stock or Securities", below.) A lump sum distribution is a payment,
within one year, of your entire balance under the Plan (and certain other
similar plans of the employer) that is payable to you after you have reached age
59 1/2 or because you have separated from service with your employer (or, in the
case of a self-employed individual, after you have reached age 59 1/2 or have
become disabled). For a payment to be treated as a lump sum distribution, you
must have been a participant in the Plan for at least five years before the year
in which you received the distribution. The special tax treatment for lump sum
distributions that may be available to you is described below.
TEN-YEAR AVERAGING. If you receive a lump sum distribution and you were
born before January 1, 1936, you can make a one-time election to figure the tax
on the payment by using "10-year averaging" (using 1986 tax rates). Ten-year
averaging often reduces the tax you owe.
6
There are other limits on the special tax treatment for lump sum
distributions. For example, you can generally elect this special tax treatment
only once in your lifetime, and the election applies to all lump sum
distributions that you receive in that same year. You may not elect this special
tax treatment if you rolled amounts into this Plan from a 403(b) tax-sheltered
annuity contract, a governmental 457 plan, or from an IRA not originally
attributable to a qualified employer plan. If you have previously rolled over a
distribution from this Plan (or certain other similar plans of the employer),
you cannot use this special averaging treatment for later payments from the
Plan. If you roll over your payment to a traditional IRA, governmental 457 plan,
or 403(b) tax-sheltered annuity, you will not be able to use special tax
treatment for later payments from that IRA, plan, or annuity. Also, if you roll
over only a portion of your payment to a traditional IRA, governmental 457 plan,
or 403(b) tax-sheltered annuity, this special tax treatment is not available for
the rest of the payment. See IRS Form 4972 for additional information on lump
sum distributions and how you elect the special tax treatment.
EMPLOYER STOCK OR SECURITIES. There is a special rule for a payment
from the Plan that includes employer stock (or other employer securities). To
use this special rule, 1) the payment must qualify as a lump sum distribution,
as described above, except that you do not need five years of plan
participation, or 2) the employer stock included in the payment must be
attributable to "after-tax" employee contributions, if any. Under this special
rule, you may have the option of not paying tax on the "net unrealized
appreciation" of the stock until you sell the stock. Net unrealized appreciation
generally is the increase in the value of the employer stock while it was held
by the Plan. For example, if employer stock was contributed to your Plan account
when the stock was worth $1,000 but the stock was worth $1,200 when you received
it, you would not have to pay tax on the $200 increase in value until you later
sold the stock.
You may instead elect not to have the special rule apply to the net
unrealized appreciation. In this case, your net unrealized appreciation will be
taxed in the year you receive the stock, unless you roll over the stock. The
stock can be rolled over to a traditional IRA or another eligible employer plan,
either in a direct rollover or a rollover that you make yourself. Generally, you
will no longer be able to use the special rule for net unrealized appreciation
if you roll the stock over to a traditional IRA or another eligible employer
plan.
If you receive only employer stock in a payment that can be rolled
over, no amount will be withheld from the payment. If you receive cash or
property other than employer stock, as well as employer stock, in a payment that
can be rolled over, the 20% withholding amount will be based on the entire
taxable amount paid to you (including the value of the employer stock determined
by excluding the net unrealized appreciation). However, the amount withheld will
be limited to the cash or property (excluding employer stock) paid to you.
If you receive employer stock in a payment that qualifies as a lump sum
distribution, the special tax treatment for lump sum distributions described
above (such as 10-year averaging) also may apply. See IRS Form 4972 for
additional information on these rules.
REPAYMENT OF PLAN LOANS. If your employment ends and you have an
outstanding loan from your Plan, your employer may reduce (or "offset") your
balance in the Plan by the amount of the loan you have not repaid. The amount of
your loan offset is treated as a distribution to you at the time of the offset
and will be taxed unless you roll over an amount equal to the
7
amount of your loan offset to another qualified employer plan or a traditional
IRA within 60 days of the date of the offset. If the amount of your loan offset
is the only amount you receive or is treated as having received, no amount will
be withheld from it. If you receive other payments of cash or property from the
Plan, the 20% withholding amount will be based on the entire amount paid to you,
including the amount of the loan offset. The amount withheld will be limited to
the amount of other cash or property paid to you (other than any employer
securities). The amount of a defaulted plan loan that is a taxable deemed
distribution cannot be rolled over.
IV. SURVIVING SPOUSES, ALTERNATE PAYEES, AND OTHER
BENEFICIARIES
In general, the rules summarized above that apply to payments to
employees also apply to payments to surviving spouses of employees and to
spouses or former spouses who are "alternate payees." You are an alternate payee
if your interest in the Plan results from a "qualified domestic relations
order," which is an order issued by a court, usually in connection with a
divorce or legal separation.
If you are a surviving spouse or an alternate payee, you may choose to
have a payment that can be rolled over, as described in Part I above, paid in a
DIRECT ROLLOVER to a traditional IRA or to an eligible employer plan or paid to
you. If you have the payment paid to you, you can keep it or roll it over
yourself to a traditional IRA or to an eligible employer plan. Thus, you have
the same choices as the employee.
If you are a beneficiary other than a surviving spouse or an alternate
payee, you cannot choose a direct rollover, and you cannot roll over the payment
yourself.
If you are a surviving spouse, an alternate payee, or another
beneficiary, your payment is generally not subject to the additional 10% tax
described in Part III above, even if you are younger than age 59 1/2.
If you are a surviving spouse, an alternate payee, or another
beneficiary, you may be able to use the special tax treatment for lump sum
distributions and the special rule for payments that include employer stock, as
described in Part III above. If you receive a payment because of the employee's
death, you may be able to treat the payment as a lump sum distribution if the
employee met the appropriate age requirements, whether or not the employee had 5
years of participation in the Plan.
HOW TO OBTAIN ADDITIONAL INFORMATION
This notice summarizes only the federal (not state or local) tax rules
that might apply to your payment. The rules described above are complex and
contain many conditions and exceptions that are not included in this notice.
Therefore, you may want to consult with the Plan Administrator or a professional
tax advisor before you take a payment of your benefits from your Plan. Also, you
can find more specific information on the tax treatment of payments from
qualified employer plans in IRS Publication 575, Pension and Annuity Income, and
IRS Publication 590, Individual Retirement Arrangements. These publications are
available from your local IRS office, on the IRS's Internet Web Site at
www.irs.gov, or by calling 1-800-TAX-FORMS.
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