Summary.......................................................................
Risk Factors..................................................................
A Warning About Forward-Looking Statements....................................
Selected Financial and Other Data.............................................
Recent Developments...........................................................
Use of Proceeds...............................................................
Our Policy Regarding Dividends................................................
Market for the Stock..........................................................
Capitalization................................................................
Pro Forma Data................................................................
Historical and Pro Forma Capital Compliance...................................
Management's Discussion and Analysis
of Financial Condition and Results of Operations...........................
Business of Kearny MHC........................................................
Business of Kearny Financial Corp.............................................
Business of Kearny Federal Savings Bank ......................................
Regulation....................................................................
Taxation......................................................................
Management....................................................................
The Stock Offering............................................................
Restrictions on Acquisition of Kearny Financial Corp..........................
Description of Capital Stock..................................................
Legal and Tax Opinions........................................................
Experts.......................................................................
Registration Requirements.....................................................
Where You Can Find Additional Information.....................................
Index to Consolidated Financial Statements....................................
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read this entire document carefully, including the
consolidated financial statements and the notes to the consolidated financial
statements beginning at page F-1 of this document.
Kearny Financial Corp., Kearny MHC and Kearny Federal Savings Bank
Kearny Financial Corp. is a federally-chartered corporation organized
in March 2001 that was formed for the purpose of acquiring all of the capital
stock that Kearny Federal Savings Bank issued in its mutual holding company
reorganization. Kearny Financial Corp.'s principal executive offices are located
at 614 Kearny Avenue, Kearny, New Jersey 07032 and the telephone number is (201)
991-4100. Currently, all of the outstanding stock of Kearny Federal Savings Bank
is held by Kearny Financial Corp. and all of the outstanding stock of Kearny
Financial Corp. is held by Kearny MHC.
Kearny MHC is a federally-chartered mutual holding company that was
formed in 2001 in connection with the mutual holding company reorganization.
Kearny MHC has not engaged in any significant business since its formation in
2001. So long as Kearny MHC is in existence, it will at all times own a majority
of the outstanding stock of Kearny Financial Corp. After completion of the
offering, Kearny MHC will own 70% of the outstanding stock of Kearny Financial
Corp. We anticipate that the primary business activity of Kearny MHC going
forward will be to own a majority of Kearny Financial Corp.'s stock.
Kearny Federal Savings Bank is a federally-chartered stock savings
bank. It was originally founded in 1884 and received its federal charter in
1941. Kearny Federal Savings Bank's deposits are federally insured by the
Savings Association Insurance Fund as administered by the Federal Deposit
Insurance Corporation. Kearny Federal Savings Bank is regulated by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation. The Office of
Thrift Supervision also regulates Kearny MHC and Kearny Financial Corp. as
savings and loan holding companies.
During recent years we have experienced significant growth, completing
three whole bank acquisitions and the assumption of deposits of a branch office
of another financial institution. These transactions added a total of $936.0
million in assets to Kearny Financial Corp., more than doubling total assets,
which grew from $793.2 million at June 30, 1998 to $1.94 billion at June 30,
2004. At June 30, 2004, we had deposits of $1.54 billion and stockholders'
equity of $293.5 million.
Our assets are invested primarily in investment securities and
mortgage-backed securities. At June 30, 2004, the securities portfolio totaled
$1.25 billion while loans receivable, net of deferred fees and the allowance for
loan losses, were $505.8 million. Kearny Federal Savings Bank offers traditional
retail banking services, one- to four-family residential mortgage loans,
multi-family and commercial mortgage loans, construction loans, commercial
business loans and home equity loans and lines of credit. Kearny Federal Savings
Bank currently operates from its main office in Kearny, New Jersey, and
twenty-four branch offices located in Bergen, Hudson, Passaic, Morris,
Middlesex, Essex, Union and Ocean Counties, New Jersey.
The Corporate Structure Following the Offering.
Kearny Financial Corp. is offering shares representing 30% of the
outstanding stock of Kearny Financial Corp. after the completion of the
offering. The shares are being offered to certain depositors of Kearny Federal
Savings Bank, the employee stock ownership plan of Kearny Federal Savings Bank
and
1
possibly to the general public, to the extent shares are available. See How We
Will Prioritize Orders if We Receive Orders for More Shares than are Available
on page __ and Conduct of the Offering on page __. Kearny MHC will own the
remaining 70% of the outstanding stock of Kearny Financial Corp. The following
chart shows the corporate structure after completion of the stock offering.
Use of the Proceeds Raised from the Sale of Stock.
Kearny Financial Corp. will use 50% of the net proceeds from the
offering to make a capital contribution to Kearny Federal Savings Bank.
Concurrent with the offering, Kearny Financial Corp. will also lend Kearny
Federal Savings Bank's employee stock ownership plan cash from subscriptions
received to enable the plan to buy up to 8% of the shares sold in the offering.
The balance of the proceeds will be retained by Kearny Financial Corp. and used
for general business purposes, which may include investment in securities,
repurchasing shares of its common stock, paying cash dividends or supporting
acquisitions.
The capital contribution from Kearny Financial Corp. to Kearny Federal
Savings Bank will provide the bank with additional equity capital, which will
support future growth and expanded operations. While Kearny Federal Savings Bank
currently exceeds the regulatory capital requirements to be considered well
capitalized, the sale of shares of Kearny Financial Corp. common stock, coupled
with the accumulation of earnings, less dividends or other reductions in capital
from year to year, provides a means for the orderly preservation and expansion
of our capital base. If we expand our business as we currently plan, Kearny
Federal Savings Bank will need the additional capital to remain well capitalized
under regulatory capital requirements.
The funds received by Kearny Federal Savings Bank will be used for
general business purposes, including originating loans and purchasing
securities. We intend to increase the balance of our loan portfolio relative to
the size of our securities portfolio, however, such a change will take time and
in the near future our assets will continue to consist primarily of securities.
We intend to continue investing in securities of the same type we currently hold
and to continue Kearny Federal Savings Bank's current mix of deposit and loan
products.
In addition to building our core banking business through internal
growth and de novo branching, we will also actively consider expansion
opportunities such as the acquisition of branches and other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. We may also pursue other business activities, including possibly
offering asset management services, acquiring a title insurance company and/or
acquiring a mortgage banking operation. There are, however, no current
understandings, arrangements or agreements for these activities and we cannot
assure you that we will commence such activities. See Use of Proceeds on page
__.
2
Persons Who May Order Stock in the Offering.
Note: Subscription rights are not transferable, and persons with subscription
rights may not subscribe for shares for the benefit of any other person. If you
violate this prohibition, you may lose your rights to purchase shares and may
face criminal prosecution and/or other sanctions.
We have granted rights to subscribe for shares of Kearny Financial
Corp. common stock in a subscription offering to the following persons in the
following order of priority:
o Priority 1 - depositors of Kearny Federal Savings Bank at the close of
business on March 31, 2003 with deposits of at least $50.00. Former
depositors of West Essex Bank, which was acquired by Kearny Federal Savings
Bank in July 2003, will be treated as Eligible Account Holders if they had
deposits with West Essex Bank at the close of business on March 31, 2003 of
at least $50.00.
o Priority 2 - the tax qualified employee stock benefit plans of Kearny
Federal Savings Bank.
o Priority 3 - depositors of Kearny Federal Savings Bank at the close of
business on September 30, 2004 with deposits of at least $50.00.
o Priority 4 - depositors of Kearny Federal Savings Bank at the close of
business on October 31, 2004.
If we receive subscriptions for more shares than are to be sold in this
offering, we may be unable to fill, or may only partially fill, your order.
Shares will be allocated in order of the priorities described above under a
formula outlined in the plan of stock issuance. If we increase the number of
shares to be sold above 18,975,000, Kearny Federal Savings Bank's employee stock
ownership plan will have the first priority right to purchase any shares
exceeding that amount to the extent that its subscription has not previously
been filled. Any shares remaining will be allocated in the order of the
priorities described above. See The Stock Offering - Subscription Offering and
Subscription Rights for a description of the allocation procedure.
We may offer shares not sold in the subscription offering to the
general public in a community offering. In the community offering, we will give
a preference first to natural persons who reside in Bergen, Hudson, Passaic,
Morris, Monmouth, Middlesex, Essex, Union and Ocean Counties, New Jersey, and
second to other residents of New Jersey. This part of the offering may commence
concurrently with the subscription offering or any time thereafter and may
terminate at any time without notice but no later than __________, 2005.
Shares not sold in the subscription or community offering may be
offered for sale in a syndicated community offering, which would be an offering
to the general public on a best efforts basis managed by Sandler O'Neill &
Partners, L.P. This part of the offering may terminate at any time without
notice but no later than __________, 2005.
You cannot transfer your subscription rights. If you attempt to
transfer your rights, you may lose the right to purchase shares and may be
subject to criminal prosecution and/or other sanctions. With the exception of
IRA and Keogh account stock purchases, shares purchased in the subscription
offering must be registered in the names of all depositors on the qualifying
account(s). Deleting names of depositors or adding non-depositors or otherwise
altering the form of beneficial ownership of a qualifying account will result in
the loss of your subscription rights.
We have the right to reject any orders for stock in the community
offering and syndicated community offering. We have described the offering in
greater detail beginning on page __.
3
Deadline for Ordering Stock.
The subscription offering will expire 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
__________, 2005, 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
cancelled and funds will be returned with interest.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
Purchase Limitations.
Limitations on the purchase of stock in the offering have been set by
the plan of stock issuance adopted by our Board of Directors. These limitations
include the following:
o The minimum purchase is 25 shares.
o The maximum number of shares of stock that any individual (or individuals
through a single account) may purchase is 50,000 shares.
o The maximum number of shares of stock that any individual may purchase
together with any associate or group of persons acting in concert is 75,000
shares.
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. Thus, we may increase or
decrease the purchase limitations. In the event the maximum purchase limitation
is increased, persons who subscribed for the maximum will be notified and
permitted to increase their subscription.
How to Purchase Stock in the Offering.
If you want to place an order for shares in the offering, you must
complete an original stock order form and send it to us together with full
payment. You must sign the certification that is on the reverse side of the
stock order form. We must receive your stock order form before the end of the
subscription offering or the end of the community offering, as appropriate. Once
we receive your order, you cannot cancel or change it without our consent.
To ensure that we properly identify your subscription rights, you must
provide on your stock order form all of the information requested for each of
your deposit accounts as of the eligibility dates. If you fail to do so, your
subscription may be reduced or rejected if the offering is oversubscribed.
We may, in our sole discretion, reject orders received in the community
offering either in whole or in part. If your order is rejected in part, you
cannot cancel the remainder of your order.
You may pay for shares in the subscription offering or the community
offering in any of the following ways:
4
o In cash, if delivered in person.
o By check or money order made payable to Kearny Financial Corp.
o By authorizing withdrawal from an account at Kearny Federal Savings Bank.
To use funds in an IRA or Keogh account at Kearny Federal Savings Bank, you
must transfer your account to an unaffiliated institution or broker. Please
contact the stock information center as soon as possible for assistance.
We will pay interest on your subscription funds from the date we
receive your funds until the offering is completed or terminated. All funds
authorized for withdrawal from deposit accounts with us will earn interest at
the applicable account rate until the offering is completed or terminated. If,
as a result of a withdrawal from a certificate of deposit, the balance falls
below the minimum balance requirement, the remaining funds will be transferred
to a savings account and will earn interest at our regular passbook savings
rate. There will be no early withdrawal penalty for withdrawals from
certificates of deposit used to pay for stock. We may, at our discretion,
determine during the offering period that it is in the best interest of Kearny
Federal Savings Bank to hold subscription funds in an escrow account at another
insured financial institution instead of at Kearny Federal Savings Bank.
Receiving a Prospectus and an Order Form.
The subscription offering will expire at 12:00 noon, Eastern time, on
__________, 2004. We may extend this expiration date without notice to you for
up to 45 days, until __________, 2005. If a community offering is held, it may
terminate at any time without notice but no later than __________, 2005. To
ensure that each purchaser in the subscription and community offerings receives
a prospectus at least 48 hours before the expiration date, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed
any later than five days prior to this expiration date or otherwise distributed
any later than two days prior to this expiration date. Execution of the order
form will confirm receipt of delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
Conditions to Completing the Offering.
We are conducting the offering under the terms of our plan of stock
issuance. We cannot complete the offering unless:
o we sell at least the minimum number of shares offered; and
o we receive the final approval of the Office of Thrift Supervision to
complete the offering.
How We Determined the Offering Range and the $10.00 Price Per Share.
The independent appraisal by RP Financial, LC, dated as of October 22,
2004, established the pro forma market value of Kearny Financial Corp. This
appraisal was based on our financial condition and results of operations and
considered the effect of the additional capital raised in the stock offering.
The per share price was set at $10.00 because it is the price most commonly used
in stock offerings involving mutual-to-stock conversions and stock issuances by
financial institutions in the mutual holding company form of organization. After
taking into account our current financial condition, the appraisal and our
business plans, our Board of Directors decided to offer for sale to public
stockholders 30% of the total shares to be outstanding after the offering, with
the remaining 70% of the total shares to be outstanding after the offering to be
held by Kearny MHC, our parent mutual holding company.
5
The appraisal incorporated an analysis of a peer group of publicly
traded mid-tier thrift holding company subsidiaries of mutual holding companies
that RP Financial deemed comparable to us. This analysis included an evaluation
of the average and median price-to-earnings, price-to-book value and
price-to-tangible book value ratios indicated by the market prices of the peer
group companies. RP Financial applied the peer group's pricing ratios, as
adjusted for certain qualitative valuation factors to account for differences
between the peer group and us, to our pro forma earnings, book value and
tangible book value in order to derive our estimated pro forma market value.
RP Financial has estimated that as of October 22, 2004, the pro forma
market value of Kearny Financial Corp. ranged from a minimum of $467.5 million
to a maximum of $632.5 million. Based on this valuation and the $10.00 per share
price, the number of shares of common stock to be issued by Kearny Financial
Corp. and outstanding upon completion of the offering will range from a minimum
of 46,750,000 shares to a maximum of 63,250,000 shares. Kearny Financial Corp.
is offering for sale 30% of these shares, or between 14,025,000 and 18,975,000
shares. Kearny MHC will own between 32,725,000 and 44,275,000 shares, or 70%, of
Kearny Financial Corp. at the completion of the stock offering.
Stock Trading Multiples of Mutual Holding Companies. The following
table presents the pricing ratios for the peer group of publicly traded mid-tier
thrift holding company subsidiaries of mutual holding companies and the pro
forma pricing ratios for Kearny Financial Corp. as calculated by RP Financial.
Price-to-earnings Price-to-book Price-to-tangible
multiple value ratio book value ratio
-------- ----------- ----------------
Kearny Financial Corp. (pro forma)(1)
Minimum............................. 32.9x 112.6% 141.2%
Midpoint............................ 38.8x 126.1% 156.5%
Maximum............................. 44.8x 138.5% 170.1%
Maximum, as adjusted................ 51.7x 151.3% 183.5%
Valuation of peer group companies
as of October 22, 2004 (2)
Average............................. 25.6x 228.8% 256.2%
Median.............................. 25.3x 218.3% 256.1%
(1) Based on Kearny Financial Corp.'s financial data as of and for the twelve
months ended September 30, 2004.
(2) Reflects earnings for the most recent 12-month period for which data was
publicly available.
The independent appraisal is not necessarily indicative of the
post-stock offering trading value. Do not assume or expect that the valuation of
Kearny Financial Corp. as indicated above means that the common stock will trade
at or above the $10.00 purchase price after the stock offering is completed.
The amount of common stock being offered may be increased by up to 15%
without notice to persons who have subscribed for stock, so that a total of
21,821,250 shares would be sold in the offering. We received authorization from
the Office of Thrift Supervision to conduct the stock offering on _______ __,
2004. The independent appraisal must be updated before we can complete the stock
offering and such updated appraisal will be subject to the further approval of
the Office of Thrift Supervision. If the updated independent valuation would
result in more than 21,821,250 shares being sold, we would notify persons who
have subscribed for stock and they would have the opportunity to confirm, change
or cancel their subscription orders.
6
After-Market Performance Information Provided by Independent Appraiser.
The following tables, prepared by our independent appraiser, present
for all mutual holding company reorganizations with a "first-step" minority
stock issuance from January 1, 2002 to October 22, 2004 and from January 1, 2004
to October 22, 2004, the percentage stock appreciation from the initial trading
date of the offering to the dates shown in the table. The tables also present
the average and median percentage stock appreciation. This information relates
to stock appreciation experienced by other companies that reorganized in
different markets and that may have issued more or less than 30% of their common
stock to the public. In addition, the companies may have no similarities to
Kearny with regard to the market in which Kearny competes, earnings quality and
growth potential, among other factors. The information shown in the following
tables was not included in the appraisal report, however, the appraisal prepared
by RP Financial did consider the aftermarket trading experience of transactions
that closed within the three months prior to the October 22, 2004 valuation date
used in the appraisal.
These tables are not intended to indicate how our stock may perform.
Stock appreciation is affected by many factors, including, but not limited to,
the factors set forth below. Furthermore, these tables present only short-term
price performance and may not be indicative of the longer-term stock price
performance of these companies. Before you make an investment decision, we urge
you to carefully read this prospectus, including, but not limited to, the Risk
Factors beginning on page ___.
"First-Step" Mutual Holding Company Offerings with
Completed Closing Dates between January 1, 2002 and October 22, 2004
Price Performance from Initial Trading Date
-------------------------------------------
Transaction 1 day 1 week 1 month October 22, 2004
----------- ----- ------ ------- ----------------
PSB Holdings, Inc. (MHC) 5.0% 6.0% 5.5% 5.5%
Atlantic Coast Federal Corp. (MHC) 17.5% 23.1% 29.0% 29.0%
Naugatuck Valley Financial Corp. (MHC) 8.0% 8.1% 6.0% 6.0%
SI Financial Group, Inc. (MHC) 12.0% 10.6% 9.9% 9.9%
First Federal Financial Services (MHC) 15.0% 22.5% 35.0% 35.0%
Monadnock Community (MHC) 3.8% 0.0% -3.8% 0.0%
Wawel Savings Bank (MHC) 29.5% 25.0% 12.5% 17.0%
Osage Federal Financial, Inc. (MHC) 20.0% 22.5% 9.5% 20.0%
K-Fed Bancorp (MHC) 34.9% 29.3% 15.9% 45.0%
Citizens Community Bancorp (MHC) 23.7% 27.5% 18.0% 18.0%
Clifton Savings Bancorp, Inc. (MHC) 22.5% 40.9% 32.9% 13.1%
Cheviot Financial Corp. (MHC) 33.2% 33.5% 34.2% 13.5%
Flatbush Federal Bancorp, Inc. (MHC) 63.8% 56.3% 63.8% 37.5%
ASB Holding Company (MHC) 62.0% 69.0% 67.5% 50.0%
Synergy Financial Group (MHC) 29.3% 27.0% 27.0% N/A(1)
Minden Bancorp (MHC) 19.5% 19.5% 18.5% 93.5%
New England Bancshares (MHC) 23.0% 23.5% 23.5% 85.5%
Partners Trust Financial Group (MHC) 42.5% 48.5% 49.8% N/A(1)
Average 25.8% 27.4% 25.3% 29.9%
Median 22.8% 24.3% 21.0% 19.0%
(1) These companies completed a "second-step" mutual to stock conversion prior
to October 22, 2004 and no longer exist as mutual holding companies, so no
stock appreciation information is available for that date.
7
"First-Step" Mutual Holding Company Offerings with
Completed Closing Dates between January 1, 2004 and October 22, 2004
Price Performance from Initial Trading Date
-------------------------------------------
Transaction 1 day 1 week 1 month October 22, 2004
----------- ----- ------ ------- ----------------
PSB Holdings, Inc. (MHC) 5.0% 6.0% 5.5% 5.5%
Atlantic Coast Federal Corp. (MHC) 17.5% 23.1% 29.0% 29.0%
Naugatuck Valley Financial Corp. (MHC) 8.0% 8.1% 6.0% 6.0%
SI Financial Group, Inc. (MHC) 12.0% 10.6% 9.9% 9.9%
First Federal Financial Services (MHC) 15.0% 22.5% 35.0% 35.0%
Monadnock Community (MHC) 3.8% 0.0% -3.8% 0.0%
Wawel Savings Bank (MHC) 29.5% 25.0% 12.5% 17.0%
Osage Federal Financial, Inc. (MHC) 20.0% 22.5% 9.5% 20.0%
K-Fed Bancorp (MHC) 34.9% 29.3% 15.9% 45.0%
Citizens Community Bancorp (MHC) 23.7% 27.5% 18.0% 18.0%
Clifton Savings Bancorp, Inc. (MHC) 22.5% 40.9% 32.9% 13.1%
Cheviot Financial Corp. (MHC) 33.2% 33.5% 34.2% 13.5%
Average 18.8% 20.8% 17.1% 17.7%
Median 18.8% 22.8% 14.2% 15.3%
Data presented in the tables reflects a small number of transactions.
While stock prices of reorganizing institutions have, on average, increased for
the limited period presented, there can be no assurance that our stock price
will appreciate the same amount, if at all. There can also be no assurance that
our stock price will not trade below $10.00 per share. In addition, the
transactions from which the data are derived occurred primarily during a falling
interest rate environment, during which the market for financial institution
stocks typically increases. If interest rates rise, our net interest income and
the value of our assets likely would be reduced, negatively affecting our stock
price. See Risk Factors - An increase in interest rates is expected to adversely
affect our earnings.
The increase in any particular company's stock price is subject to
various factors, including, but not limited to, the amount of proceeds a company
raises, the company's historical and anticipated operating results, the nature
and quality of the company's assets, the company's market area, and the quality
of management and management's ability to deploy proceeds (such as through loans
and investments, the acquisition of other financial institutions or other
businesses, the payment of dividends and common stock repurchases). The
substantial proceeds raised as a percentage of pro forma stockholders' equity
may have a negative effect on our stock price performance. See Risk Factors -
After this offering, our return on equity will be low compared to other
companies. This could negatively impact the price of our stock. In addition,
stock prices may be affected by general market and economic conditions, the
interest rate environment, the market for financial institutions and merger or
takeover transactions, the presence of professional and other investors who
purchase stock on speculation, as well as other unforeseeable events not in the
control of management.
Stock Benefit Plans for Management.
In order to align our employees' and directors' interests closer to our
stockholders' interests, we intend to establish certain benefit plans that use
our stock as compensation. We intend to establish an employee stock ownership
plan for the exclusive benefit of participating employees of Kearny Federal
8
Savings Bank. We also intend to adopt a stock option plan and a restricted stock
plan for the benefit of directors and officers after the passage of at least one
year from the completion of the offering. We may, however, decide to adopt the
stock option plan and the restricted stock plan sooner than one year following
the offering, but in no event will these plans be adopted sooner than six months
subsequent to the completion of the offering. Officers, directors, and employees
will not be required to pay cash for shares received under the employee stock
ownership plan or shares received under the restricted stock plan, but will be
required to pay the exercise price to exercise stock options.
The following table presents information regarding the participants in
each plan, the percentage of total outstanding shares after the offering,
including and excluding the shares held by Kearny MHC, and the dollar value of
the stock for our employee stock ownership plan and stock-based incentive plans.
It is assumed that the value of the stock in the table is $10.00 per share.
Stock options will be granted with a per share exercise price at least equal to
the market price of our common stock on the date of grant. The value to the
recipient will be equal to the difference between the fair market value and the
exercise price. Accordingly, the value of a stock option will depend upon
changes, if any, in the price of our common stock during the period in which the
stock option may be exercised. The table below assumes that 55,000,000 shares,
the midpoint of the offering range, are outstanding, including 16,500,000 shares
held by public stockholders and 38,500,000 shares held by Kearny MHC upon
completion of the stock offering.
Percentage of Percentage
Total Shares of Shares
Estimated Number Issued, Sold to
Individuals Value of of Shares/ Including Public
Eligible Shares/Options Options at Shares Stockholders
to Receive at Midpoint of Midpoint of Held by in the
Awards Offering Range Offering Range Kearny MHC Offering
------ -------------- -------------- ---------- --------
Employee stock ownership plan...... Employees $13,200,000 1,320,000 2.4% 8.0%
Restricted stock plan awards....... Officers 10,780,000 1,078,000 1.96% 6.53%
and
Directors
Stock options...................... Officers - 2,695,000 4.9% 16.3%
and
Directors
See Management - Potential Stock Benefit Plans on page __ and Pro Forma
Data on page __ for more information about the stock benefit plans.
Proposed Stock Purchases by Management.
While no formal decisions have been made, preliminary indications are
that our directors and executive officers and their associates will purchase
approximately 580,500 shares of common stock in the offering, which represents
1.2%, 1.1% and 0.9% of the total shares to be outstanding after the offering at
the minimum, midpoint and maximum of the offering range, respectively, including
shares issued to Kearny MHC, and 4.1%, 3.5% and 3.1% of the total number of
shares to be sold to public stockholders at the minimum, midpoint and maximum of
the offering range, respectively.
Our Policy Regarding Dividends.
We intend to pay dividends but have not yet established a definitive
dividend policy or determined the amount or timing of cash dividends that Kearny
Financial Corp. may pay after the offering. The timing, amount and frequency of
dividends will be determined by the Board of Directors. There are also
restrictions on our ability to pay dividends. See Dividend Policy on page __.
9
If we pay dividends to stockholders of Kearny Financial Corp., it is
anticipated that any dividends payable to Kearny MHC would be waived. Under
Office of Thrift Supervision regulations, such dividend waivers would not result
in dilution to public stockholders in the event that Kearny MHC converts to
stock form in the future. See Regulation - Regulation of Kearny Financial Corp.
on page __.
Market for Kearny Financial Corp.'s Common Stock.
We have received approval to have our common stock listed for trading
on the Nasdaq National Market under the symbol "KRNY." Sandler O'Neill currently
intends to become a market maker in the common stock, but it is under no
obligation to do so. We cannot assure you that other market makers will be
obtained or that an active and liquid trading market for the shares of common
stock will develop or if developed, will be maintained. After shares of the
common stock begin trading, you may contact a stock broker to buy or sell
shares.
Restrictions on the Acquisition of Kearny Financial Corp. and Kearny Federal
Savings Bank.
Federal regulation, as well as provisions contained in the charter and
bylaws of Kearny Financial Corp. and Kearny Federal Savings Bank, restrict the
ability of any person, firm or entity to acquire Kearny Financial Corp., Kearny
Federal Savings Bank, or their capital stock. These restrictions include the
requirement that a potential acquirer of common stock obtain the prior approval
of the Office of Thrift Supervision before acquiring in excess of 10% of the
voting stock of Kearny Financial Corp. or Kearny Federal Savings Bank. Because a
majority of the shares of outstanding common stock of Kearny Financial Corp.
must be owned by Kearny MHC, any acquisition of Kearny Financial Corp. must be
approved by Kearny MHC, and Kearny MHC would not be required to pursue or
approve a sale of Kearny Financial Corp. even if such sale were favored by a
majority of Kearny Financial Corp.'s public stockholders. Additionally, Office
of Thrift Supervision regulations prohibit anyone from acquiring Kearny
Financial Corp. for a period of three years following the offering, unless such
prohibition is waived by the Office of Thrift Supervision.
Tax Effects of the Offering.
The minority stock offering will not be a taxable transaction for
purposes of federal or state income taxes for Kearny MHC, Kearny Financial
Corp., Kearny Federal Savings Bank or persons eligible to subscribe for stock in
the offering. See Federal and State Tax Consequences of the Offering at page __.
Possible Conversion of Kearny MHC to Stock Form.
In the future, Kearny MHC may convert from the mutual holding company
form of organization, wherein a majority of the outstanding stock is held by the
mutual holding company, to a corporation with 100% of its shares held by public
stockholders. This type of conversion transaction is commonly known as a
"second-step conversion." In a second-step conversion, members of Kearny MHC
would have subscription rights to purchase common stock of the successor full
stock corporation and the public stockholders of Kearny Financial Corp. would be
entitled to exchange their shares of common stock for an equal percentage of
shares of the successor full stock corporation. Kearny Financial Corp.'s public
stockholders, therefore, would own approximately the same percentage of the
successor resulting entity as they owned before the second-step conversion. This
percentage may be adjusted to reflect any assets owned by Kearny MHC. The Board
of Directors has no current plans to undertake a second-step conversion
transaction.
10
Risk Factors.
This investment entails various risks including the possible loss of
principal. You may not be able to sell the stock at or above the $10.00 offering
price. You should carefully read the information under Risk Factors beginning on
page __.
For assistance, please contact the stock information center at
(____) ___-____. The stock information center's hours of operation are generally
10:00 a.m. to 4:00 p.m., Eastern time, Monday through Friday. The stock
information center is closed on weekends and holidays.
11
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
An increase in interest rates is expected to adversely affect our earnings.
Our earnings largely depend on our net interest income, which could be
negatively affected by changes in interest rates. Net interest income is the
difference between:
o the interest income we earn on our interest-earning assets, such as
mortgage loans and investment securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
The rates we earn on our assets are generally fixed for a contractual
period of time. We, like many savings institutions, have liabilities that
generally have shorter contractual maturities than our assets or no contractual
maturities, such as savings and money market deposits. This imbalance can create
significant earnings volatility, because market interest rates change over time.
In addition, short-term and long-term interest rates do not necessarily change
at the same time or at the same rate.
In a period of rising interest rates, the interest income earned on our
assets may not increase as rapidly as the interest paid on our liabilities. We
are vulnerable to volatility in our earnings as a result of an increase in
interest rates because the majority of our interest-earning assets are
long-term, fixed rate assets. At June 30, 2004, 80.7% of our loans with
contractual maturities of greater than one year had fixed rates of interest, and
81.1% of our total loans had contractual 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
contractual maturities of ten or more years. In an increasing rate environment,
our cost of funds is expected to increase more rapidly than the interest earned
on our loan portfolio and securities portfolio because our primary source of
funds is deposits with generally shorter maturities than the maturities on our
loans and investment securities. Having interest-bearing liabilities that
reprice more frequently than interest-earning assets will be detrimental during
periods of rising interest rates and could cause our net interest rate spread to
shrink because the increase in the rates we would earn on our securities and
loan portfolios may be less than the increase in the rates we would pay on
deposits and borrowings.
In a period of falling interest rates, prepayments of loans and
mortgage-backed securities generally will increase as borrowers refinance their
debt in order to reduce their borrowing cost. This causes reinvestment risk,
because in a falling rate environment we are generally not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. A falling rate environment would result in a decrease in
rates we pay on deposits and borrowings, but the decrease in the cost of our
funds may not be as great as the decrease in the yields on our mortgage-backed
securities and loan portfolios. This could cause a narrowing of our net interest
rate spread and could cause a decrease in our earnings.
We are further exposed to interest rate risk due to the large portion
of our total deposits that are certificates of deposit. At June 30, 2004, $897.0
million, or 58.3%, of our total deposits were certificates of deposit, and of
that amount $188.0 million were "jumbo" certificates of $100,000 or more.
Deposit inflows are significantly influenced by general interest rates and money
market conditions. The inflow of jumbo certificates of deposit and the retention
of such deposits upon maturity are particularly sensitive to general interest
rates and money market conditions, making jumbo certificates of deposit
traditionally a more
12
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.
Kearny Federal Savings Bank monitors its interest rate sensitivity
through the use of an asset/liability management model which estimates the
change in its net portfolio value (defined as the current market value of
assets, less the current market value of liabilities, plus or minus the current
value of off-balance sheet items) in the event of a range of assumed changes in
market interest rates. Our net portfolio value analysis, as calculated by the
Office of Thrift Supervision using information as of June 30, 2004, showed that
in an immediate and permanent 2.0% increase in interest rates, our net portfolio
value would be expected to decrease by 34%. This analysis also indicated that as
of June 30, 2004 an immediate and permanent 2.0% increase in interest rates
would cause an approximately 15% decrease in our net interest income. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management of Interest Rate Risk and Market Risk on page __.
We may not be able to successfully implement our plans for growth or continue to
experience the same rate of growth that we have had in the past, and we may not
be able to successfully manage our future growth.
Over the past several years, we have experienced rapid and significant
growth. Between March 1999 and July 2003, we completed three whole bank
acquisitions and the assumption of deposits of a branch of another financial
institution. These transactions added a total of $936.0 million in assets, more
than doubling our total assets, which grew from $793.2 million at June 30, 1998
to $1.94 billion at June 30, 2004. In addition to building our core banking
business through internal growth and de novo branching in the future, we will
also actively consider expansion opportunities such as the acquisition of
branches and other financial institutions. There can be no assurance, however,
that we will continue to experience such rapid growth, or any growth, in the
future. We may have difficulty finding suitable sites for de novo branches and
identifying and successfully acquiring branches or other financial institutions.
Furthermore, there are many challenges associated with integrating
merged institutions and it requires time to adjust to expanded operations, so we
cannot assure you that we will be able to adequately and profitably manage our
possible future growth. In order to effectively manage any future growth, as
well as to comply with the additional requirements that we will be subject to as
a publicly-traded company following the offering, we may need to make changes to
our administrative and operational infrastructure, including adopting new
policies and procedures and improving our financial and management controls and
processes and reporting systems. As a result, we may need to add more staff
and/or reassign or increase the responsibilities of our existing officers and
key employees. We cannot assure you that we will be able to take the steps
necessary to effectively manage our possible future growth or that we will not
have to incur additional expenditures beyond current projections to support such
growth.
A portion of our total loan portfolio consists of multi-family and commercial
real estate loans and commercial business loans, and we intend to continue our
origination of such loans after the offering at the same level, if not higher.
The repayment risk related to these types of loans is considered to be greater
than the risk related to one- to four-family residential loans.
At June 30, 2004, our loan portfolio included $88.6 million of
multi-family and commercial real estate loans and commercial business loans, or
17.4% of our total loan portfolio. It is our intention to continue to originate
these types of loans at the same percentage level, if not higher.
13
Unlike one- to four-family residential mortgage loans, which generally
are made on the basis of the borrower's ability to make repayment from his or
her employment and other income and which are secured by real property with
values that tend to be more easily ascertainable, the repayment of multi-family
and commercial real estate loans and commercial business loans typically is
dependent on the successful operations and income stream of the borrowers'
business and the real estate securing the loan as collateral, which can be
significantly affected by economic conditions. In addition, these loans
generally carry larger balances to single borrowers or related groups of
borrowers than one- to four-family loans. Any late payments or the failure to
repay such loans would hurt our earnings. See Business of Kearny Federal Savings
Bank - Lending Activities - Multi-family, Commercial and Other Mortgage Loans on
page __.
Strong competition within our market area may limit our growth and
profitability.
Competition in the banking and financial services industry in New Jersey is
intense. In our market area, we compete with commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms operating
locally and elsewhere. Many of these competitors have substantially greater
resources and lending limits than we do and offer services that we do not or
cannot provide. This competition has made it more difficult for us to make new
loans and more difficult to retain deposits. Price competition for loans might
result in us originating fewer loans, or earning less on our loans, and price
competition for deposits might result in us reducing our total deposits or
paying more on our deposits. There are large competitors operating throughout
our total market area, including Bank of America, Commerce Bank, Wachovia Bank
and PNC Bank, and we also face strong competition from other community-based
financial institutions. Our deposit market share in New Jersey was only 0.7% at
June 30, 2004, a reduction from 0.8% at June 30, 2003, and the largest deposit
share in any county in which we have branches was 2.5% at June 30, 2004 in
Bergen County, down from 2.8% at June 30, 2003.
Our business is geographically concentrated in New Jersey and a downturn in
conditions in the state could have an adverse impact on our profitability.
A substantial majority of our loans are to individuals and businesses
in New Jersey. Any decline in the economy of the state could have an adverse
impact on our earnings. Because we have a significant amount of real estate
loans, decreases in local real estate values could adversely affect the value of
property used as collateral. Adverse changes in the economy may also have a
negative effect on the ability of our borrowers to make timely repayments of
their loans, which would have an adverse impact on our earnings.
We have recently opened a new administrative building and intend to construct
new buildings for certain new and existing branch locations. Costs related to
these buildings will negatively impact earnings in future periods.
Our 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. Furthermore, during 2005, we plan to replace
three office locations with new buildings, at an estimated cost of approximately
$1.9 million per branch. Costs for the Lacey branch and the other three branches
will be capitalized and the related amortization will impact earnings going
forward. Additional expenses related to the planned expansion of our operations
through de novo branching or the acquisition of branches or other financial
institutions could also impact earnings in future periods.
14
After this offering, our return on equity will be low compared to other
companies. This could negatively impact the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. It will take a significant period of time to prudently invest
this capital. For the year ended June 30, 2004, our return on average equity was
4.52%. On a pro forma basis assuming that 18,975,000 shares had been sold at the
beginning of the year, our return on pro forma equity for the year ended June
30, 2004 would be approximately 2.76%. As a result, our return on equity, which
is the ratio of our earnings divided by our average equity capital, will be
lower than that of many similar companies. To the extent that the stock market
values a company based in part on its return on equity, our low return on equity
relative to our peer group could negatively affect the trading price of our
stock.
At June 30, 2004, our securities portfolio was 64.5% and our loan
portfolio was 26.1% of our total assets. Because securities generally yield a
lower rate than loans, our asset composition is likely to cause our earnings to
be lower than financial institutions that have a higher proportionate amount of
their assets in loans. Although we are seeking to increase our loan
originations, it will take a significant period of time to change our relative
balances of loans versus securities.
Additional public company and annual stock employee compensation and benefit
expenses following the offering may reduce our profitability and stockholders'
equity.
Following the offering, our non-interest expense is likely to increase
as a result of the financial accounting, legal and various other additional
expenses usually associated with operating as a public company. We also will
recognize additional annual employee compensation and benefit expenses stemming
from the shares granted to employees, officers and directors under new benefit
plans. These additional expenses will adversely affect our profitability and
stockholders' equity. We cannot predict the actual amount of the new
stock-related compensation and benefit expenses because applicable accounting
standards require that they be based on the fair market value of the shares of
common stock at specific points in the future; however, we expect them to be
material. We will recognize expense for our employee stock ownership plan when
shares are committed to be released to participants' accounts and would
recognize expenses for restricted stock awards over the vesting period of awards
made to recipients. These expenses in the first year following the offering have
been estimated to be approximately $2.1 million at the maximum of the offering
as set forth in the pro forma financial information under Pro Forma Data
assuming the $10.00 per share purchase price as fair market value. Actual
expenses, however, may be higher or lower, depending on the price of our common
stock. In addition, proposed changes in accounting guidelines may require us to
recognize expenses relating to stock option grants. For further discussion of
these plans, see Management - Potential Stock Benefit Plans.
The implementation of stock-based benefit plans may dilute your ownership
interest in Kearny Financial Corp.
We intend to adopt a stock option plan and a restricted stock plan
following the stock offering. These stock benefit plans will be funded through
either open market purchases or from the issuance of authorized but unissued
shares. Stockholders would experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options and awards made under
the restricted stock plan. The use of newly issued shares of stock to fund the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.92%. The use of newly
issued shares of stock to fund exercises of options granted under the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.67%. See Management -Potential Stock
Benefit Plans on page __.
15
Persons who purchase stock in the offering will own a minority of Kearny
Financial Corp.'s common stock and will not be able to exercise voting control
over most matters put to a vote of stockholders, including any proposal
regarding the acquisition of Kearny Financial Corp.
Kearny MHC will own a majority of Kearny Financial Corp.'s common stock
after the offering. The Board of Directors of Kearny MHC is also the Board of
Directors of Kearny Financial Corp. and will be able to exercise voting control
over most matters put to a vote of stockholders. For example, Kearny MHC may
exercise its voting control to prevent a sale or merger transaction in which
stockholders could receive a premium for their shares, to elect directors or to
approve employee benefit plans.
Provisions in our charter and bylaws limit the rights of stockholders, may deter
potential takeovers and may reduce the trading price of our stock.
Provisions in our charter and bylaws may make it difficult and
expensive to pursue a change in control or takeover attempt that our Board of
Directors opposes. As a result, you may not have an opportunity to participate
in such a transaction, and the trading price of our stock may not rise to the
level of other institutions that are more vulnerable to hostile takeovers. Such
provisions include:
o the election of directors to staggered three-year terms;
o provisions restricting the calling of special meetings of
stockholders;
o the absence of cumulative voting by stockholders in elections of
directors; and
o advance notice requirements for stockholder nominations and new
business.
See Restrictions on Acquisition of Kearny Financial Corp. - Charter and Bylaws
of Kearny Financial Corp. on page __.
Office of Thrift Supervision policy on remutualization transactions could
prohibit acquisition of Kearny Financial Corp., which may adversely affect our
stock price.
Current Office of Thrift Supervision regulations permit a mutual
holding company to be acquired by a mutual institution in a remutualization
transaction. The possibility of a remutualization transaction has resulted in a
degree of takeover speculation for mutual holding companies that is reflected in
the per share price of mutual holding companies' common stocks. However, the
Office of Thrift Supervision has issued a policy statement indicating that it
views remutualization transactions as raising significant issues concerning
disparate treatment of minority stockholders and mutual members of the target
entity and raising issues concerning the effect on the mutual members of the
acquiring entity. Under certain circumstances, the Office of Thrift Supervision
intends to give these issues special scrutiny and reject applications providing
for the remutualization of a mutual holding company unless the applicant can
clearly demonstrate that the Office of Thrift Supervision's concerns are not
warranted in the particular case. Should the Office of Thrift Supervision
prohibit or otherwise restrict these transactions in the future, our stock price
may be adversely affected.
We have broad discretion in allocating the proceeds of the offering. Our failure
to effectively utilize such proceeds would reduce our profitability.
We intend to contribute approximately 50% of the net proceeds of the
offering to Kearny Federal Savings Bank. We may use the remaining net proceeds
to repurchase common stock, purchase investment securities, finance the
acquisition of other financial institutions or other businesses that are related
to banking or for other general corporate purposes. We expect to use a portion
of the net proceeds to fund the purchase by Kearny Federal Savings Bank's
employee stock ownership plan of shares in the offering. Kearny Federal Savings
Bank may use the proceeds it receives to fund new loans, purchase investment
securities, establish or acquire new branches, acquire financial institutions or
other businesses that are related to banking or for
16
general corporate purposes. We have not allocated specific amounts of proceeds
for any of these purposes, and we will have significant flexibility in
determining how much of the net proceeds we apply to different uses and the
timing of such applications. Our failure to utilize these funds effectively
would reduce our profitability.
Our stock price may decline when trading commences.
We cannot guarantee that if you purchase shares in the offering that
you will be able to sell them at or above the $10.00 purchase price. After the
shares of our common stock begin trading, the trading price of the common stock
will be determined by the marketplace, and will be influenced not only by our
results but by many factors outside of our control, including prevailing
interest rates, investor perceptions and general industry, geopolitical and
economic conditions. Publicly traded stocks, including stocks of financial
institutions, have recently experienced substantial market price volatility.
These market fluctuations might not be related to the operating performance of
particular companies whose shares are traded.
17
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and operating
strategies;
o statements regarding the quality of our loan and investment portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o changes in the interest rate environment that reduce our interest margins
or reduce the fair value of financial instruments;
o increased competitive pressures among financial services companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our business;
o adverse changes in the securities markets;
o our ability to successfully manage our growth;
o changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board or the Public
Company Accounting Oversight Board; and
o our ability to enter into new markets and/or expand product offerings
successfully and take advantage of growth opportunities.
Any of the forward-looking statements that we make in this prospectus
and in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Consequently, no
forward-looking statement can be guaranteed.
18
SELECTED FINANCIAL AND OTHER DATA
The following financial information and other data in this section for
the years ended June 30, 2004, 2003 and 2002 is derived from Kearny Financial
Corp.'s audited consolidated financial statements and should be read together
with the consolidated financial statements and the notes thereto beginning on
page F-1 of this document. The information at and for the years ended June 30,
2001 and 2000 is derived from unaudited consolidated financial statements of
Kearny Financial Corp. Kearny Financial Corp. acquired Pulaski Bancorp, Inc. in
October 2002 and West Essex Bancorp, Inc. in July 2003, and the financial
information for Kearny Financial Corp. presented in this prospectus, including
in the consolidated financial statements, is presented as if the acquisitions
had been consummated on June 30, 2001.
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
=========== =========== =========== =========== ===========
19
At or For the Year Ended June 30,
-----------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------ -------
Per Share Data:
Net income per common share outstanding - basic
and diluted.................................. $1,289.70 $889.90 $1,335.00 $1,252.80 $1,524.20
Cash dividends per share (1)..................... - $ 98.58 $ 125.93 $ 101.38 $ 82.69
Dividend payout ratio (2)........................ 0.00% 11.08% 9.43% 8.09% 5.43%
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
Non-interest expense to average assets........... 1.52 2.26 1.60 1.60 1.54
Asset Quality Ratios:(3)
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
Tangible equity to tangible assets at period end. 11.29 12.42 13.34 13.64 13.06
Number of Offices:
Offices (including offices 25 25 24 23 23
acquired in mergers)............................
(1) Cash dividends paid per share represents the aggregate of dividends paid by
Kearny Financial Corp., West Essex Bancorp, Inc., and Pulaski Bancorp, Inc.
to the minority stockholders of West Essex Bancorp, Inc. and Pulaski
Bancorp, Inc. divided by the outstanding shares of Kearny Financial Corp.
common stock (10,000 shares outstanding throughout the five-year period).
(2) Represents cash dividends declared per share divided by net income per
common share.
(3) Asset quality ratios are period end ratios.
20
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 solely of normal recurring adjustments, necessary
for a fair presentation of the results of operations for the unaudited periods
have been made. The selected operating data presented below for the three months
ended September 30, 2004 are not necessarily indicative of the results that may
be expected for the full year or any other period.
Balance Sheet Data: At At
September 30, June 30,
2004 2004
---------- ----------
(In thousands)
Assets ....................................... $1,907,700 $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, except for share
and per share amounts)
Summary of Operations:
Interest income .............................. $ 19,907 $ 19,657
Interest expense ............................. 7,262 9,318
---------- ----------
Net interest income .......................... 12,645 10,339
Provision for loan losses .................... 151 --
---------- ----------
Net interest income after provision
for loan losses ............................ 12,494 10,339
Non-interest income .......................... 500 438
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
========== ==========
Per Share Data:
Earnings per share - basic................. $379.60 $223.50
Earnings per share - diluted............... $379.60 $223.50
Weighted average number of
common shares outstanding................ 10,000 10,000
21
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 2.02
Net interest margin on average
interest-earnings assets................................ 2.84 2.27
Average interest-earning assets to average
interest-bearing liabilities............................ 114.31 112.41
Efficiency ratio (Non-interest expense divided
by the sum of net interest income and
non-interest income).................................... 58.09 70.37
Non-interest expense to average assets..................... 1.59 1.55
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
(average equity divided by average
total assets)........................................... 15.30 13.69
Equity to assets at period end............................. 15.61 14.47
Tangible equity to tangible assets at period end........... 11.71 10.56
Number of Offices:
Offices (including offices
acquired in mergers)...................................... 25 25
(1) Asset quality ratios are period end ratios.
22
Comparison of Financial Condition at September 30, 2004 and June 30, 2004
Our total assets decreased by $28.8 million, or 1.5%, to $1.91 billion
at September 30, 2004 from $1.94 billion at June 30, 2004, primarily 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 decreased $46.5
million, partially offset by growth of $9.4 million in loans receivable, net and
$9.9 million in investment securities held to maturity.
Mortgage-backed securities decreased $46.5 million, or 6.0%, to $724.9
million at September 30, 2004, from $771.4 million at June 30, 2004 as a result
of monthly principal and interest payments. This was the most significant cause
of the decrease in total assets. We used this cash flow to fund the
aforementioned deposit outflow, reduce Federal Home Loan Bank advances, fund
loans receivable and purchase investment securities held to maturity.
Loans receivable, net of deferred fees and the allowance for loan
losses, increased $9.4 million, or 1.9%, to $515.2 million at September 30,
2004, from $505.8 million at June 30, 2004. The increase came primarily in 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 $1.54 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 lower interest rates paid as
well as a movement by customers to alternative investment opportunities in the
marketplace.
Federal Home Loan Bank advances decreased $10.1 million, or 10.7%, to
$84.1 million at September 30, 2004, from $94.2 million at June 30, 2004.
Stockholders' equity increased $4.3 million, or 1.5%, to $297.8 million
at September 30, 2004, from $293.5 million at June 30, 2004. The increase
primarily reflects net income of $3.8 million for the three months ended
September 30, 2004, along with an increase in accumulated other comprehensive
income of $501,000 resulting from an increase in the unrealized gain on
available for sale securities.
Comparison of Operating Results for the Three Months Ended September 30, 2004
and 2003
General. Net income for the three months ended September 30, 2004 was
$3.8 million, an increase of $1.6 million, or 72.7%, from $2.2 million for the
three months ended September 30, 2003. The increase in net income resulted
primarily from an increase in net interest income.
Net Interest Income. Net interest income increased by $2.3 million, or
22.3%, to $12.6 million for the three months ended September 30, 2004 from $10.3
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
2.02% for the three months ended September 30, 2003. The net interest margin
increased 57 basis points to 2.84% for the three months ended September 30, 2004
compared with 2.27% for the three months ended September 30, 2003.
The net interest spread improved due to a 16 basis point increase in
the yield on average interest-earning assets to 4.47% for the three months
ending September 30, 2004, from 4.31% for the three months ending September 30,
2003. Additionally, the net interest spread improved due to a 44 basis point
23
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 112.41% for the three months ended September 30, 2003.
Interest Income. Total interest income increased $250,000, or 1.3%, to
$19.9 million for the three months ended September 30, 2004, from $19.7 million
for the three months ended September 30, 2003. Average interest-earning assets
decreased $41.9 million, or 2.3%, to $1.78 billion for the three months ended
September 30, 2004, from $1.82 billion for the three months ended September 30,
2003. However, the aforementioned 16 basis points increase in yield offset the
decline in average interest-earning assets, leading to the increase in interest
income. We attribute the increase in interest income primarily to the
reinvestment of cash and cash equivalents in higher yielding loans receivable,
investment securities held to maturity and mortgage-backed securities held to
maturity.
Interest income on loans receivable decreased $527,000, or 6.9%, to
$7.1 million for the three months ended September 30, 2004, from $7.7 million
for the three months ended September 30, 2003. The average balance of loans
receivable increased $12.5 million, or 2.5%, to $510.7 million for the three
months ended September 30, 2004, from $498.2 million for the three months ended
September 30, 2003. However, a decrease in the average yield on loans receivable
to 5.59% for the three months ended September 30, 2004, from 6.15% for the three
months ended September 30, 2003, offset the increase in the average balance of
loans outstanding. An increased marketing effort contributed to the increase in
average loans receivable. The lower yield reflects generally lower interest
rates on originations and downward rate adjustments on adjustable rate and
floating rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, increased $780,000, or 24.1%, to $4.0 million for the three
months ended September 30, 2004 from $3.2 million for the three months ended
September 30, 2003. The increase resulted from an increase of $103.5 million, or
27.3%, in the average balance of investment securities to $482.0 million for the
three months ended September 30, 2004 from $378.5 million for the three months
ended September 30, 2003. However, a decrease in the average yield on investment
securities to 3.33% for the three months ended September 30, 2004, from 3.41%
for the three months ended September 30, 2003, partially offset the increase in
the average balance of investment securities. The increased average balance
reflects the reinvestment of cash flows from mortgage-backed securities held to
maturity as well as the redeployment of cash and cash equivalents. The lower
yield resulted from principal repayments on older higher yielding securities
while new purchases occurred in a lower interest rate environment.
Interest income on mortgage-backed securities held to maturity
increased $673,000, or 8.4%, to $8.6 million for the three months ended
September 30, 2004 from $8.0 million for the three months ended September 30,
2003. This was a result of a $95.3 million, or 14.4%, increase in the average
balance of mortgage-backed securities held to maturity to $755.0 million for the
three months ended September 30, 2004 from $659.7 million for the three months
ended September 30, 2003. The increase in the average balance 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 $676,000, or
85.4%, to $116,000 for the three months ended September 30, 2004 from $792,000
for the three months ended September 30, 2003. This was a result of a $253.3
million, or 88.0%, decrease in the average balance of other interest-earning
24
assets to $34.6 million for the three months ended September 30, 2004 from
$287.9 million for the three months ended September 30, 2003. There was a 20
basis point increase in the average yield to 1.34% for the three months ended
September 30, 2004, from 1.10% for the three months ended September 30, 2003.
The substantial decrease in the average balance was due to the use of assets in
this category to invest in higher yielding securities. We attribute the
improvement in yield to the dividend paid on Federal Home Loan Bank stock
relative to short term market interest rates.
Interest Expense. Total interest expense decreased $2.0 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 $78.4 million, or 5.1%, to $1.47 billion
for the three months ended September 30, 2004 from $1.55 billion for the three
months ended September 30, 2003. The average cost of certificates of deposit
declined to 2.19% from 2.65%, 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 $884.7 million from $984.7 million, average savings and club accounts
increased to $481.7 million from $458.6 million and average interest-bearing
demand accounts decreased to $106.6 million from $108.0 million. We believe this
shift in deposit composition reflects a movement to alternative investment
opportunities in the marketplace as well as a shift to liquidity, while awaiting
possible future interest rate increases. We expect this shift in deposit
composition may continue to the extent that interest rates continue to remain
low. In our current estimation, we do not expect that the potential deposit
run-off, as a result of depositors moving to alternative investment
opportunities and shifting their assets into more liquid deposit categories
while awaiting possible future interest rate increases, will be significant or
have a material effect on our liquidity.
Interest expense on Federal Home Loan Bank advances decreased $76,000,
or 7.1%, 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
25
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 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 increased $62,000, or 14.2%,
to $500,000 for the three months ended September 30, 2004 compared to $438,000
for the three months ended September 30, 2003. The increase was primarily the
result of a gain from the sale of a trust preferred security during the three
months ended September 30, 2004, offset by a reduction in fees and service
charge income due to the lower average balance of deposits for the three months
ended September 30, 2004 as compared to the 2003 period.
At September 30, 2004, we had a $3.9 million investment in bank owned
life insurance. The returns on the investment of the cash value of the policy
generate non-interest income. We acquired this investment in connection with our
acquisition of West Essex Bank in 2003; it covers the former president and chief
executive officer and former chief lending officer of West Essex Bank.
During the three months ending September 30, 2004, we recognized a
$71,000 gain, included in non-interest income, from the sale of a security in
our available for sale portfolio. There was no such gain recorded in the three
months ending September 30, 2003.
Non-Interest Expense. Excluding merger related expenses, non-interest
expense increased $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.
26
Management expects increased expenses in the future because of the
establishment of the employee stock ownership plan and the potential stock
benefit plans, as well as increased costs associated with being a public company
such as periodic reporting, annual meetings, retention of a transfer agent and
professional fees.
Furthermore, non-interest expense for the three months ended September
30, 2004 does not reflect the impact of our new 53,000 square feet
administrative building in Fairfield, New Jersey. We estimate the total cost of
this building will be $13.5 million, including furniture, fixtures and
equipment; capitalizing the cost of the building, net of land, with amortization
taking place over forty years. Additionally, we estimate the annual operating
expense of this new building, excluding depreciation, will be approximately
$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.
27
USE OF PROCEEDS
We are conducting this stock offering principally to raise capital to
support our anticipated future growth. The net proceeds will depend on the
expenses incurred by us in connection with the offering and the total number of
shares of stock issued in the offering, which will depend on the independent
valuation and market considerations. Although the actual net proceeds from the
sale of the common stock cannot be determined until the offering is completed,
we estimate that net proceeds from the sale of common stock will be between
$137.7 million at the minimum and $186.7 million at the maximum of the offering
range (and $214.9 million at the maximum, as adjusted, if the independent
valuation is increased by 15%).
Kearny Financial Corp. intends to use the net proceeds from the
offering as follows:
MAXIMUM,
MINIMUM MIDPOINT MAXIMUM As Adjusted
--------------------- ----------------------- ------------------------- ---------------
Percent Percent Percent Percent
of Net of Net of Net of Net
Amount Proceeds Amount Proceeds Amount Proceeds Amount Proceeds
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Gross offering proceeds......... $140,250 $165,000 $189,750 $218,213
Less offering expenses.......... (2,585) (2,813) (3,041) (3,303)
-------- -------- -------- --------
Estimated net proceeds....... 137,665 100.0% 162,187 100.0% 186,709 100.0% 214,910 100.0%
Less:
Investment in Kearny
Federal Savings Bank........ 68,833 50.0% 81,094 50.0% 93,355 50.0% 107,455 50.0%
Loan to employee
stock ownership plan....... 11,220 8.2% 13,200 8.1% 15,180 8.1% 17,457 8.1%
------ ------ ------ ------
Proceeds retained by
Kearny Financial Corp........ $57,612 41.8% $67,893 41.9% $78,174 41.9% $89,998 41.9%
====== ====== ====== ======
We will use 50% of the net proceeds from the offering to make a capital
contribution to Kearny Federal Savings Bank. We will also lend the Kearny
Federal Savings Bank's employee stock ownership plan cash to enable the plan to
buy up to 8% of the shares sold in the offering. If the employee stock ownership
plan does not purchase common stock in the offering, it may purchase shares of
common stock in the open market after the stock offering. If the purchase price
of the common stock is higher than $10 per share, the amount of proceeds
required for the purchase by the employee stock ownership plan will increase and
the resulting stockholders' equity will decrease. The balance of the net
proceeds will be retained by Kearny Financial Corp. and used for general
business purposes, which may include investment in securities, repurchasing
shares of our common stock, paying cash dividends or supporting acquisitions.
However, under current regulations of the Office of Thrift Supervision, we may
not repurchase shares of our common stock during the first year following the
offering, except where extraordinary circumstances exist and with prior
regulatory approval. We will initially invest these proceeds in short to
intermediate term investment securities.
The funds received by Kearny Federal Savings Bank will be used for
general business purposes, including originating loans and purchasing
securities. In addition to building our core banking business through internal
growth and de novo branching, we will also actively consider expansion
opportunities such as the acquisition of branches and of other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. There can be no assurance that we will be successful in
implementing this growth strategy. We may have difficulty finding suitable sites
for de novo branches and identifying and successfully acquiring branches or
other financial institutions. We may also pursue other business activities,
including possibly offering asset management services, acquiring a title
insurance company and/or acquiring a mortgage
28
banking operation. There are, however, no current understandings, arrangements
or agreements for these activities and we cannot assure you that we will
commence such activities.
The net proceeds may vary significantly because total expenses of the
stock offering may be significantly more or less than those estimated. The net
proceeds will also vary if the number of shares to be issued in the stock
offering is adjusted to reflect a change in the estimated pro forma market value
of Kearny Financial Corp. Payments for shares made through withdrawals from
existing deposit accounts at Kearny Federal Savings Bank will not result in the
receipt of new funds for investment but will result in a reduction of Kearny
Federal Savings Bank's deposits and interest expense as funds are transferred
from interest-bearing certificates or other deposit accounts.
OUR POLICY REGARDING DIVIDENDS
We intend to pay dividends but have not yet established a definitive
dividend policy or determined the amount or timing of cash dividends that Kearny
Financial Corp. may pay after the offering. Future declarations of dividends by
the Board of Directors will depend on a number of factors, including investment
opportunities, growth objectives, financial condition, profitability, tax
considerations, minimum capital requirements, regulatory limitations, stock
market characteristics and general economic conditions. The timing, frequency
and amount of dividends will be determined by the Board. There can be no
assurance that dividends will in fact be paid on the stock or that, if paid,
dividends will not be reduced or eliminated in future periods.
Kearny Financial Corp.'s ability to pay dividends may also depend on
the receipt of dividends from Kearny Federal Savings Bank, which is subject to a
variety of regulatory limitations on the payment of dividends. See Regulation -
Regulation of Kearny Federal Savings Bank - Dividend and Other Capital
Distribution Limitations on page __. 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.
29
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 Midpoint16, Maximum as adjusted
Corp. 14,025,000 500,000 18,975,000 21,821,250
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)(5).......................... 1 4,675 5,500 6,325 7,274
Additional paid-in capital(3)(4)(5)............ 499 133,490 157,187 180,884 208,136
Retained earnings.............................. 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)........... - (11,220) (13,200) (15,180) (17,457)
Common stock acquired by restricted
stock plan(7)............................. - (9,163) (10,780) (12,397) (14,257)
-------- -------- -------- -------- --------
Total stockholders' equity..................... $293,505 $410,787 $431,712 $452,637 $476,701
======== ======== ======== ======== ========
(1) As adjusted to give effect to an increase in the number of shares sold
which could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect
changes in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. Any withdrawals would reduce pro forma deposits
by an amount equal to the withdrawals.
(3) Pro forma data includes shares to be held by Kearny MHC after
completion of the stock offering. Kearny MHC is currently the sole
stockholder of Kearny Financial Corp. and holds 10,000 shares of common
stock of Kearny Financial Corp. Upon completion of the offering, Kearny
MHC will hold 70% of the total shares of Kearny Financial Corp. to be
outstanding.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plan that may be adopted by Kearny
Financial Corp. and presented for approval by the stockholders after
the offering. An amount equal to 4.9% of the total number of shares
outstanding after the offering, including the shares held by Kearny
MHC, would be reserved for issuance upon the exercise of options to be
granted under the stock option plan following the stock offering. See
Management - Potential Stock Benefit Plans - Stock Option Plan on page
__.
30
(5) The historical additional paid-in capital amount represents the initial
capitalization of the mid-tier holding company upon its formation in
2001 ($500,000 was received by Kearny Financial Corp. for the 10,000
shares issued to Kearny MHC). The pro forma additional paid-in capital
amounts include this initial $500,000 capitalization. The pro forma
additional paid-in capital amounts are net of stock offering expenses
and represent the amount paid for the shares sold in the offering at
$10.00 per share, less the par value of outstanding shares. Because
Kearny Financial Corp. is selling only 30% of the total shares to be
outstanding upon completion of the offering, the additional paid-in
capital represents the net proceeds for the sale of those shares, less
the par value of all of the shares outstanding upon completion of the
offering including the shares that will be held by Kearny MHC. For
example, at the midpoint, 55,000,000 shares will be outstanding upon
completion of the offering, 30% of which (16,500,000 shares) would have
been sold at $10.00 per share for gross proceeds of $165,000,000. With
estimated stock offering expenses of $2,813,000 at the midpoint,
estimated net proceeds are $162,187,000. The additional paid-in capital
at the midpoint represents the net proceeds of $162,187,000 plus the
existing capital of $500,000 (totaling $162,687,000) less the par value
of 55,000,000 shares, or $5,500,000, resulting in additional paid-in
capital of $157,187,000.
(6) Assumes that 8% of the shares sold in the offering will be purchased by
the employee stock ownership plan, and that the funds used to acquire
the employee stock ownership plan shares will be borrowed from Kearny
Financial Corp., concurrent with the offering. For an estimate of the
impact of the loan on earnings, see Pro Forma Data on 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 $117.3 million at the
minimum and $159.1 million at the maximum of the offering range, respectively
(or $183.2 million at the maximum, as adjusted, if the independent valuation is
increased by 15%), based on the following assumptions:
o shares sold in the offering will be sold in either the subscription
offering or the community offering, with no shares being sold in a
syndicated community offering;
o an amount equal to the cost of purchasing 8% of the shares sold in the
offering will be loaned to the employee stock ownership plan to fund its
purchase at an assumed purchase price of $10.00 per share;
o an amount equal to 1.96% of the total number of outstanding shares,
including the shares held by Kearny MHC, will be acquired by the restricted
stock plan through open market purchases at an assumed purchase price of
$10.00 per share; and
o expenses of the offering, including the fees and expenses of Sandler
O'Neill & Partners, L.P., are estimated to be approximately $2.6 million at
the minimum and $3.0 million at the maximum of the offering range ($3.3
million at the maximum, as adjusted).
The following 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 giving effect to the offering. In preparing this table
and in calculating pro forma data, we have made the following assumptions:
31
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 yield on a one-year U.S.
Treasury bill on 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. See Management -
Potential Stock Benefit Plans - Stock Option Plan on page __. Pro forma
stockholders' equity per share does not take into account the effect of
intangible assets or the impact of the bad debt allowance if Kearny Financial
Corp. were liquidated. Pro forma tangible stockholders' equity per share does
take into account the effect of intangible assets.
32
At or For the Year Ended June 30, 2004
------------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
14,025,000 16,500,000 18,975,000 21,821,250
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in thousands, except share and per share amounts)
Gross proceeds............................................... $140,250 $165,000 $189,750 $218,213
Less expenses................................................ (2,585) (2,813) (3,041) (3,303)
Estimated net proceeds.................................... 137,665 162,187 186,709 214,910
Less ESOP funded by Kearny Financial Corp.................... (11,220) (13,200) (15,180) (17,457)
Less restricted stock plan adjustment........................ (9,163) (10,780) (12,397) (14,257)
-------- -------- -------- --------
Estimated investable net proceeds......................... $117,282 $138,207 $159,132 $183,196
======== ======== ======== ========
Net Income:
Historical ............................................... $ 12,897 $ 12,897 $ 12,897 $ 12,897
Pro forma income on net proceeds.......................... 1,450 1,709 1,967 2,265
Pro forma ESOP adjustment(1).............................. (664) (781) (898) (1,033)
Pro forma restricted stock plan adjustment(2)............. (1,084) (1,275) (1,467) (1,687)
-------- -------- -------- --------
Pro forma net income(1)(3)(4)............................. $ 12,599 $ 12,550 $ 12,499 $ 12,442
======= ======= ======= =======
Per share net income:
Historical ............................................... $ 0.28 $ 0.23 $ 0.20 $ 0.18
Pro forma income on net proceeds.......................... 0.03 0.03 0.03 0.03
Pro forma ESOP adjustment(1).............................. (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan adjustment(2)............. (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net income per share............................ $ 0.28 $ 0.23 $ 0.20 $ 0.18
======== ======== ======== ========
Shares used in calculation of income per share (1)........... 45,684,100 53,746,000 61,807,900 71,079,085
Stockholders' equity:
Historical ............................................... $293,505 $293,505 $293,505 $293,505
Estimated net proceeds.................................... 137,665 162,187 186,709 214,910
Less: Common Stock acquired by the ESOP(1)................ (11,220) (13,200) (15,180) (17,457)
Less: Common Stock acquired by the restricted
stock plan(2).................................... (9,163) (10,780) (12,397) (14,257)
-------- -------- -------- --------
Pro forma stockholders' equity(3)(4)...................... 410,787 431,712 452,637 476,701
Intangible assets......................................... 84,463 84,463 84,463 84,463
-------- -------- -------- --------
Pro forma tangible stockholders' equity(3)(4)............. $326,324 $347,249 $368,174 $392,238
======== ======== ======== ========
Stockholders' equity per share:
Historical ............................................... $ 6.28 $ 5.34 $ 4.64 $ 4.04
Estimated net proceeds.................................... 2.94 2.95 2.95 2.95
Less: Common Stock acquired by the ESOP(1)................ (0.24) (0.24) (0.24) (0.24)
Less: Common stock acquired by the restricted
stock plan(2).................................... (0.20) (0.20) (0.20) (0.20)
-------- -------- -------- --------
Pro forma stockholders' equity per share(4)............... 8.78 7.85 7.15 6.55
Intangible assets......................................... 1.81 1.54 1.34 1.16
-------- -------- -------- --------
Pro forma tangible stockholders' equity per share(4)...... $ 6.97 $ 6.31 $ 5.81 $ 5.39
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share............................. 113.90% 127.39% 139.86% 152.67%
======== ======== ======== ========
Offering price as a percentage of pro forma tangible
stockholders' equity per share............................. 143.47% 158.48% 172.12% 185.53%
======== ======== ======== ========
Offering price to pro forma net income per share............. 35.71x 43.48x 50.00x 55.56x
Shares used in calculation of stockholders' equity
per share.................................................. 46,750,000 55,000,000 63,250,000 72,737,500
(Footnotes on following page)
33
(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 112,200,
132,000, 151,800 and 174,570 shares at the minimum, midpoint, maximum,
and 15% above the maximum of the range, respectively, were committed to
be released during the year ended June 30, 2004, at an average fair
value of $10.00 per share and were accounted for as a charge to
expense; 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 916,300, 1,078,000, 1,239,700 and 1,425,655 shares of stock
respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range, 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 $0.27, $0.23, $0.20 and $0.17 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
and pro forma stockholders' equity per share at June 30, 2004 would be
$8.81, $7.89, $7.21 and $6.62 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively. 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 2,290,750, 2,695,000, 3,099,250 and 3,564,138 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 instead of open market
purchases to fund exercises of options granted under the stock option
plan would dilute the voting interests of existing stockholders by
approximately 4.67%. 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 $0.26, $0.22, $0.19 and $0.17, 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 $8.84, $7.95, $7.29 and $6.71, 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 __.
34
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents Kearny Federal Savings Bank's historical
and pro forma capital position relative to its regulatory capital requirements
as of 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,
Minimum Midpoint Maximum as adjusted
14,025,000 shares 16,525,000 shares 18,975,000 shares 21,821,250 shares
Actual, at sold at sold at sold at sold at
June 30, 2004 $10.00 per share $10.00 per share $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% $340,435 17.07% $349,099 17.41% $357,763 17.74% $367,726 18.13%
Tangible Capital...... $197,514 10.76% $245,964 12.98% $254,628 13.36% $263,292 13.74% $273,255 14.17%
Tangible Capital
Requirement......... 27,534 1.50 28,429 1.50 28,589 1.50 28,748 1.50 28,932 1.50
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Excess................ $169,980 9.26% $217,535 11.48% $226,039 11.86% $234,544 12.24% $244,323 12.67%
======= ==== ======= ====== ======= ====== ======= ====== ======= ======
Core Capital.......... $197,514 10.76% $245,964 12.98% $254,628 13.36% $263,292 13.74% $273,255 14.17%
Core Capital
Requirement(4)...... 55,068 3.00 56,858 3.00 57,178 3.00 57,497 3.00 57,864 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $142,446 7.76% $189,106 9.98% $197,450 10.36% $205,795 10.74% $215,391 11.17%
======= ==== ======= ===== ======= ===== ======= ===== ======= =====
Total Risk-Based
Capital(5)(6)....... $209,569 32.56% $258,019 39.36% $266,683 40.55% $275,347 41.73% $285,310 43.08%
Risk-Based Capital
Requirement......... 51,490 8.00 52,444 8.00 52,615 8.00 52,785 8.00 52,981 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $158,079 24.56% $205,575 31.36% $214,068 32.55% $222,562 33.73% $232,329 35.08%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Reconciliation of
capital infused
into Kearny Federal
Savings Bank:
Net proceeds infused.. $ 68,833 $ 81,094 $ 93,355 $107,455
Less:
Common stock
acquired by
employee stock
ownership plan... 11,220 13,200 15,180 17,457
Common stock
acquired by
restricted
stock plan....... 9,163 10,780 12,397 14,257
-------- -------- -------- --------
Pro forma increase
in GAAP and
regulatory capital. $ 48,450 $ 57,114 $ 65,778 $ 75,741
======== ======== ======== ========
35
(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.
36
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
at June 30, 2004 while our loan portfolio comprised 26.1% of our total assets.
This was a change from 50.4% and 25.5%, respectively, at June 30, 2003. The
largest change in our interest-earning assets between June 30, 2003 and June 30,
2004 was a $286.2 million, or 87.9%, decrease in cash and cash equivalents and
corresponding increases in the investment securities held to maturity and the
mortgage-backed securities held to maturity portfolios of $148.5 million and
$89.7 million, respectively. The shift from cash and cash equivalents into
securities was the result of management's decision to move assets from
interest-bearing deposits and securities purchased under agreements to resell
into higher yielding mortgage-backed and investment securities.
Our interest-bearing liabilities consist primarily of retail deposits
and borrowings from the Federal Home Loan Bank of New York. At June 30, 2004,
our total deposits were $1.54 billion, compared to $1.61 billion at June 30,
2003, and our Federal Home Loan Bank of New York borrowings were $94.2 million
compared to $75.7 million a year earlier. The primary factor for the decrease in
deposits was the runoff of certificates of deposit due to lower interest rates
paid as well as a movement 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.
37
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.
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 the 33.6%, or $14.9 million decrease in
non-interest expense, which as discussed above was primarily due to
significantly lower merger related expenses recorded in 2004 as compared to
2003, partially offset by the 10.0%, or $5.2 million, decrease in net interest
income, which as discussed above is attributable in part to the 4.6%, or $87.3
million, decrease in average balance of interest-earning assets. In addition,
the decrease in non-interest expense was offset by a $4.8 million increase in
the amount of net income attributed to the minority stockholders of West Essex
Bancorp, Inc. and Pulaski Bancorp, Inc.
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 $274.3 million in assets and four
branch offices, giving Kearny Federal Savings Bank a total of nine branch
offices following completion of this merger. In October 2002, Kearny Financial
Corp. acquired Pulaski Bancorp, Inc., and Pulaski Savings Bank was merged into
Kearny Federal Savings Bank. This transaction added $286.7 million in assets and
seven branch offices. Additionally, we completed one deposit assumption in 1999
and opened a de novo branch in 2002. Our third whole bank acquisition was
completed in July 2003 with Kearny Financial Corp.'s acquisition of West Essex
Bancorp, Inc. and the merger of West Essex Bank into Kearny Federal Savings
Bank, adding $369.3 million in assets and eight branch offices, bringing Kearny
Federal Savings Bank's total offices to twenty-five.
The financial information for Kearny Financial Corp. presented in this
prospectus, including in the consolidated financial statements, is presented as
if the acquisitions of Pulaski Bancorp, Inc. in October 2002 and West Essex
Bancorp, Inc. in July 2003 had been consummated on June 30, 2001. This
presentation is the result of those acquisitions involving institutions that
were in the mutual holding company form of organization, with the minority of
stock held by public stockholders and the majority of stock held by the mutual
holding company. The purchases of minority interest shares were recorded as the
acquisitions of the noncontrolling interests of subsidiaries utilizing the
purchase method of accounting and the immediately following mergers of Kearny
Federal Savings Bank with Pulaski Savings Bank and West Essex Bank were recorded
as combinations of entities under common control. The amounts paid to minority
shareholders of Pulaski Bancorp, Inc. and West Essex Bancorp, Inc. in excess of
their interests
38
in such companies were recorded as goodwill. For additional information, see
Note 2 "Business Combinations" of the Notes to the Consolidated Financial
Statements.
We intend to continue to grow. In addition to building our core banking
business through internal growth, we will also actively consider expansion
opportunities such as the acquisition of branches and other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for expansion by the acquisition of any branches or other financial
institutions. Furthermore, there can be no assurance that we will continue to
experience such rapid growth, or any growth, in the future. We may have
difficulty finding suitable sites for de novo branches and identifying and
successfully acquiring branches or other financial institutions.
Business Strategy. Our current business strategy is to seek to grow and
improve our profitability by:
o increasing the volume of our loan originations and the size of
our loan portfolio relative to our securities portfolio;
o increasing the origination of multi-family and commercial real
estate loans, construction loans and commercial business loans;
o building our core banking business through internal growth and de
novo branching, as well as actively considering expansion
opportunities such as the acquisition of branches and other
financial institutions;
o developing a sales culture by training and encouraging our branch
personnel to promote our existing products and services to our
customers; and
o maintaining high asset quality.
Our deposits have traditionally exceeded our loan originations, and we
have invested these deposits primarily in mortgage-backed securities and
investment securities. Following our acquisition of South Bergen Savings Bank in
1999, we began focusing on growing the size of our loan portfolio. Prior to that
time, our operations were more focused on obtaining deposits from the
communities in which we operated our five branch offices in Bergen and Hudson
counties and investing those funds in mortgage-backed and other securities. A
primary focus of our current business strategy will be to increase our volume of
loan originations and the size of our loan portfolio. There can be no assurance,
however, that we will be successful in this effort.
In an effort to develop our commercial business, we have recently added
four experienced business development officers who will focus on commercial loan
originations, and we will soon offer internet banking and cash management
services to our commercial customers. Our residential loan originations have
traditionally been largely advertising driven, but we plan to add regional loan
originators throughout our branch network who will seek to build our residential
loan portfolio.
Critical Accounting Policies
Our accounting policies are integral to understanding the results
reported and are described in detail in Note 1 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
39
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. Our system takes into consideration, among other
things, delinquency status, size of loans, type of collateral and financial
condition of the borrowers. Specific loan loss allowances are established for
identified loans based on a review of such information and/or appraisals of the
underlying collateral. General loan loss allowances are based upon a combination
of factors including, but not limited to, actual loan loss experience,
composition of the loan portfolio, current economic conditions and management's
judgment.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions for loan losses may be necessary
in order to increase the level of the allowance for loan losses. For example,
our evaluation of the allowance includes consideration of current economic
conditions, and a change in economic conditions could reduce the ability of our
borrowers to make timely repayments of their loans. This could result in
increased delinquencies and increased non-performing loans, and thus a need to
make increased provisions to the allowance for loan losses, which would be a
charge to income during the period the provision is made, resulting in a
reduction to our earnings. A change in economic conditions could also adversely
affect the value of the properties collateralizing our real estate loans,
resulting in increased charge-offs against the allowance and reduced recoveries,
and thus a need to make increased provisions to the allowance for loan losses.
Furthermore, a change in the composition of our loan portfolio or growth of our
loan portfolio could result in the need for additional provisions.
Historically, we believe our estimates and assumptions in evaluating
the allowance for loan losses and setting the provision have been fairly
accurate. The 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
40
results in a reduction of the yield on the securities, whereas slowing the
amortization increases the yield. A reduction in the yield decreases our
interest income on mortgage-backed securities, while an increase in the yield
increases our interest income on mortgage-backed securities.
The assessment of the prepayment risks related to mortgage-backed
securities is highly dependent upon the prediction of trends in market interest
rates. A reduction in interest rates generally results in increased prepayments
of mortgage-backed securities, as borrowers refinance their debt in order to
reduce their borrowing cost. Correspondingly, an increase in interest rates
should result in decreased prepayments and fewer refinancings. Because changes
in interest rates can affect the average life of mortgage-backed securities,
this makes the estimation of the prepayment risk difficult. We address this
difficulty by adjusting the amortization speed monthly to reflect the current
average life.
Impairment Testing of Goodwill. Goodwill, representing the excess of
amounts paid over the fair value of net assets of the institutions acquired in
purchase transactions, is recorded at its fair value at the date of acquisition.
Through June 30, 2002, we amortized goodwill using the straight line method over
15 years. Effective July 1, 2002, we adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets," under
which we no longer amortize goodwill, but test it annually for impairment.
Impairment exists when the carrying value of goodwill exceeds its implied fair
value. We would also test goodwill for impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount.
At 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 $50.5 million, the amount paid to
minority stockholders of West Essex Bancorp, Inc. in excess of their interest in
the fair value of net assets of West Essex Bancorp, Inc., was recorded as
goodwill.
We have tested our goodwill and concluded that no impairment charges
were required to be recorded in the years ended June 30, 2004 and 2003. Although
the value of the goodwill was determined not to be impaired at the date of the
testing, the value of the goodwill can change in the future. The value of the
goodwill would be expected to decrease if there was a significant decrease in
the franchise value of Kearny Federal Savings Bank. If an impairment loss is
determined in the future, the loss will be reflected as an expense for the
period in which the impairment was determined, meaning that our net income for
that period would be reduced by the amount of the impairment loss. Since
beginning testing for impairment under SFAS 142 effective July 1, 2002, we have
not had any impairment loss, thus we believe that historically, our estimates
and assumptions in evaluating the value of the goodwill have been accurate.
Other-than-Temporary Impairment of Securities. We evaluate on a monthly
basis whether any securities are other-than-temporarily impaired. In making this
determination, we consider the extent and duration of the impairment, the nature
and financial health of the issuer, our ability and intent to hold securities
for a period of time sufficient to allow for any anticipated recovery in market
value and other factors relevant to specific securities, such as the credit risk
of the issuer and whether a guarantee or insurance applies to the security. This
evaluation method has not changed during the three fiscal years ended June 30,
2004. 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
41
underlying credit quality of the issuers of the securities. Additionally, we
have the intent and ability to hold these investments for the time necessary to
recover the amortized cost. Future events that would materially change this
conclusion and require an impairment loss to be charged to operations include a
change in the credit quality of the issuers. We believe that historically, our
estimates and assumptions in evaluating whether any securities are
other-than-temporarily impaired have been accurate.
Effective June 30, 2004, we adopted Emerging Issues 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. Adoption of EITF 03-01 has not changed our policies
for determining whether any securities are other-than-temporarily impaired.
Comparison of Financial Condition at June 30, 2004 and June 30, 2003
Our total assets decreased by $60.0 million, or 3.0%, to $1.94 billion
at June 30, 2004 from $2.0 billion at June 30, 2003, primarily due to a $76.2
million net outflow of deposits, partially offset by an $18.5 million increase
in Federal Home Loan Bank advances.
The decrease in total assets was most pronounced in cash and cash
equivalents, which decreased $286.2 million, or 87.9%, to $39.5 million at June
30, 2004 from $325.7 million at June 30, 2003, in order to offset the
aforementioned deposit outflow and to fund increases in the securities
portfolios. The securities portfolios, including both securities available for
sale and securities held to maturity, increased $242.0 million, or 24.0%, to
$1.25 billion at June 30, 2004, from $1.01 billion at June 30, 2003. Investment
securities held to maturity increased $148.6 million, or 51.7%, to $435.9
million at June 30, 2004, from $287.3 million at June 30, 2003. Mortgage-backed
securities held to maturity increased $89.8 million, or 13.2%, to $771.4 million
at June 30, 2004, from $681.6 million at June 30, 2003. In both cases, the
increases were the result of investing funds previously held in cash equivalents
in order to increase overall yield. We would not expect further similarly large
investments of the funds currently held in cash equivalents into the securities
portfolio since a sufficient amount of cash equivalents is necessary to maintain
sufficient liquidity.
Loans receivable decreased marginally to $505.8 million at June 30,
2004, from $509.2 million at June 30, 2003. One-to -four family residential
mortgage loans decreased by $8.2 million to $358.2 million from $366.4 million,
as repayments exceeded originations and purchases during the year ended June 30,
2004. Multi-family and commercial real estate mortgage loans increased by $12.3
million to $83.4 million, reflecting our strategy to build this part of our loan
portfolio.
The West Essex Bancorp, Inc. merger was consummated on July 1, 2003. As
a result, goodwill increased $50.6 million, or 159.6%, to $82.3 million at June
30, 2004, from $31.7 million at June 30, 2003. The $67.9 million deposit for
acquisition of West Essex Bancorp, Inc. at June 30, 2003 was paid to West Essex
stockholders.
Premises and equipment increased by $6.8 million, or 34.0%, to $26.6
million from $19.9 million. This increase resulted mainly from a $5.9 million
increase in construction in progress in connection with the construction of our
new 53,000 square feet administrative building in Fairfield, New Jersey. We
began moving management staff and administrative operations into parts of this
building in October 2004, with an anticipated final completion of the move-in
phase by December 2004.
42
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.
Net Interest Income. Net interest income decreased by $5.2 million, or
10.0%, to $46.6 million for the year ended June 30, 2004 from $51.8 million for
the year ended June 30, 2003. The net interest rate spread increased slightly to
2.37% for the year ended June 30, 2004 from 2.36% for 2003. The net interest
margin decreased 16 basis points to 2.59% for the year ended June 30, 2004
compared with 2.75% for the year ended June 30, 2003. The net interest rate
spread changed little as the 76 basis point reduction in the cost of
interest-bearing liabilities was closely matched by the 75 basis point decline
in the average yield on interest-earning assets. The decrease in the net
interest margin is largely reflective of the decrease in the ratio of
interest-earning assets to interest-bearing liabilities to 112.46% for the year
ended June 30, 2004, from 116.54% for the year ended June 30, 2003.
Interest Income. Total interest income decreased $17.8 million, or
18.5%, to $78.7 million for the year ended June 30, 2004, from $96.5 million for
the year ended June 30, 2003, due to decreases in average interest-earning
assets, which declined $87.3 million, or 4.6%, to $1.79 billion from $1.88
billion, and average yield, which declined to 4.38% from 5.13%.
Interest income on loans receivable decreased $7.8 million, or 21.3%,
to $28.9 million for the year ended June 30, 2004, from $36.7 million for the
year ended June 30, 2003. The primary factor for the decrease in interest income
on loans was a decrease in the average yield on loans to 5.79% for the year
ended June 30, 2004, from 6.71% for the year ended June 30, 2003 which was
accompanied by a $47.0 million decrease in the average balance of loans
receivable from $546.5 million for the year ended June 30, 2003, to $499.5
million for the year ended June 30, 2004. The decreased average balance reflects
the high pace of refinancing and prepayment activity which resulted from the low
interest rate environment and which exceeded origination volume. The lower yield
reflects generally lower interest rates on originations and downward rate
adjustments on adjustable rate and floating rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, increased $5.3 million, or 58.2%, to $14.4 million for the
year ended June 30, 2004 from $9.1 million for the year ended June 30, 2003. The
increase resulted from an increase of $171.6 million, or 67.6%, in the average
43
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 decline in yield resulted from
principal repayments received on older higher yielding securities while new
purchases were made in a lower interest rate environment.
Interest income on 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 and to fund deposit
outflows. The decline in yield resulted from lower short-term market interest
rates.
Interest Expense. Total interest expense decreased $12.6 million, or
28.2%, to $32.1 million for the year ended June 30, 2004 from $44.7 million for
the year ended June 30, 2003, primarily as a result of a decrease in the average
cost of interest-bearing liabilities to 2.01% during the year ended June 30,
2004 from 2.77% during the year ended June 30, 2003. The average balance of
interest-bearing liabilities declined slightly to $1.60 billion during the year
ended June 30, 2004 as compared to $1.61 billion during the year ended June 30,
2003. Average cost decreased due to lower market interest rates prevailing
during the period.
Interest expense on deposits decreased $11.8 million, or 29.6%, to
$28.1 million for the year ended June 30, 2004 from $39.9 million for the year
ended June 30, 2003, primarily due to a decrease in the average cost of
interest-bearing deposits to 1.85% during the year ended June 30, 2004 from
2.63% during the year ended June 30, 2003. The average cost of certificates of
deposit declined to 2.25% from 3.22%, the average cost of savings and club
accounts declined to 1.23% from 1.58%, and the average cost of interest-bearing
demand accounts declined to 0.80% from 1.09%. The average balance of
interest-bearing deposits remained relatively stable overall at $1.52 billion,
although a shift from certificates of deposit to savings and club and demand
accounts took place. Certificates of deposit declined to $963.1 million from
$1.0 billion, savings and club accounts increased to $448.5 million from $417.8
million, and interest-bearing demand accounts increased to $109.8 million from
$98.9 million. This shift in deposit composition reflects the impact of the
lower interest rate environment.
44
Interest expense on Federal Home Loan Bank advances decreased $769,000,
or 16.1%, to $4.0 million for the year ended June 30, 2004 from $4.8 million for
the year ended June 30, 2003, as a result of a decrease in the average balance
to $74.3 million during the year ended June 30, 2004 from $95.9 million during
the year ended June 30, 2003, which more than offset an increase in the average
cost to 5.40% during the year ended June 30, 2004 from 4.99% during the year
ended June 30, 2003. Both the decline in average balance and the increase in
average cost were the result of the repayment of lower cost short-term debt
during 2004.
Provision for Loan Losses. Provisions for loan losses are charged to
operations at a level required to reflect credit losses in the loan portfolio
that are both probable and reasonable to estimate. Management, in determining
the allowance for loan losses, considers the losses inherent in the loan
portfolio and changes in the nature and volume of our loan activities, along
with the general economic and real estate market conditions. We utilize a two
tier approach: (1) identification of impaired loans and establishment of
specific loss allowances on such loans; and (2) establishment of general
valuation allowances on the remainder of our loan portfolio. A specific loan
loss allowance is established for an impaired loan based on delinquency status,
size of loan, type of collateral and/or appraisal of the underlying collateral
and financial condition of the borrower. General loan loss allowances are based
upon a combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions and
management's judgment.
There was no provision for loan losses made during the years ended June
30, 2004 and 2003. During the year ended June 30, 2004, total loans decreased
slightly to $510.2 million at June 30, 2004 from $512.4 million at June 30,
2003. Non-performing loans were $2.3 million, or 0.46%, of total loans at June
30, 2004, as compared to $2.9 million, or 0.57%, of total loans at June 30,
2003. The allowance for loan losses as a percentage of gross loans outstanding
was 1.01% at both June 30, 2004 and 2003, reflecting balances of $5.1 million
and $5.2 million, respectively. The increase in the ratio of the allowance for
loan losses to non-performing loans to 220.96% at June 30, 2004 from 177.64% at
June 30, 2003 is a result of a $588,000 decrease in non-performing loans from
$2.9 million at June 30, 2003 to $2.3 million at June 30, 2004.
Management assesses the allowance for loan losses monthly. While
management uses available information to recognize losses on loans, future loan
loss provisions may be necessary based on changes in economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. The allowance for loan losses as of
June 30, 2004 was maintained at a level that represented management's best
estimate of losses in the loan portfolio to the extent they were both probable
and reasonably estimable.
Non-Interest Income. Non-interest income decreased $287,000, or 15.5%,
to $1.6 million for the year ended June 30, 2004 compared to $1.8 million for
the year ended June 30, 2003. The decrease was primarily a result of a reduction
in fees and service charge income due to the deposit outflow experienced during
the year.
At June 30, 2004, we had a $3.8 million investment in bank owned life
insurance. The returns on the investment of the cash value of the policy
generate non-interest income. This investment was acquired in our acquisition of
West Essex Bank in 2003 and covers the former president and chief executive
officer and former chief lending officer of West Essex Bank.
45
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.
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 30.8% for the
year ended June 30, 2004 as compared to 56.4% for the year ended June 30, 2003.
The income tax expense for the year ended June 30, 2003 was higher than usual
due to the presence of non-deductible merger related costs and excess
compensation expenses, partially offset by a tax benefit related to a former
employee benefit plan. The impact of these items was to increase income tax
expense for the year ended June 30, 2003 by approximately $1.9 million.
Excluding these items, the effective tax rate for the year ended June 30, 2003
would have been 36.2%.
46
Comparison of Financial Condition at June 30, 2003 and June 30, 2002
Our total assets increased by $90.8 million, or 4.8%, to $2.0 billion
at June 30, 2003 from $1.9 billion at June 30, 2002. The increase was reflected
in cash and cash equivalents, partially offset by an overall decrease in our
securities and loan portfolios, and was funded by growth in deposits.
Cash and cash equivalents increased by $228.7 million, or 235.8%, to
$325.7 million at June 30, 2003 from $97.0 million at June 30, 2002, as heavy
prepayments of mortgage-backed securities and loans receivable were experienced
and a significant portion of these funds received were maintained in cash
equivalents pending reinvestment in the securities portfolios.
Our securities portfolios, including both available for sale securities
and held to maturity securities, decreased by $140.9 million, or 12.3%, to $1.01
billion at June 30, 2003 from $1.15 billion at June 30, 2002. Mortgage-backed
securities held to maturity decreased $286.9 million, or 29.6%, to $681.6
million from $968.5 million due to higher prepayments in the declining interest
rate environment. Investment securities held to maturity increased $147.9
million, or 106.1%, to $287.3 million from $139.4 million as the funds received
from mortgage-backed security repayments and prepayments were partially
reinvested in this portfolio as part of a strategy to shift assets away from
securities experiencing high prepayments. Securities available for sale
decreased marginally to $37.8 million at June 30, 2003, from $39.7 million at
June 30, 2002.
Loans decreased by $81.9 million, or 13.9%, to $509.2 million at June
30, 2003 from $591.1 million at June 30, 2002. The decrease in loans primarily
resulted from higher than normal loan repayments due to the low market interest
rate environment in 2002 and the first half of 2003. The decrease in the loan
portfolio was largely experienced in the one-to-four family mortgage loan area,
which decreased $92.6 million to $366.4 million at June 30, 2003, from $459.0
million at June 30, 2002, reflecting the high pace of refinancing and prepayment
activity which resulted from the low interest rate environment and which
exceeded origination volume. Other loan types changed as follows: multi-family
and commercial real estate loans increased by $11.7 million to $71.1 million as
part of our strategy to build this part of our loan portfolio, commercial
business loans decreased by $4.4 million to $2.4 million, consumer loans
increased by $1.3 million to $61.4 million and construction loans increased by
$2.2 million to $11.2 million.
At June 30, 2003, we had an outstanding $67.9 million deposit set aside
for the buyout of the minority stockholders of West Essex Bancorp, Inc., which
was utilized when the West Essex merger transaction was consummated on July 1,
2003. No similar asset existed at June 30, 2002.
Total deposits increased by $134.0 million, or 9.1%, to $1.61 billion
at June 30, 2003 from $1.48 billion at June 30, 2002. The majority of this
growth was in certificates of deposit and savings accounts, which increased
$56.0 million, or 5.9%, and $67.5 million, or 17.2%, respectively, during the
fiscal year ended June 30, 2003. The increase was largely a result of the
opening of the Wyckoff branch in May 2002. The increased deposit growth was used
to purchase securities and repay Federal Home Loan Bank advances.
Federal Home Loan Bank advances decreased $36.4 million, or 32.5%, to
$75.7 million at June 30, 2003 from $112.1 million at June 30, 2002, as maturing
advances were repaid and not renewed using a portion of the funds provided by
deposit growth.
47
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. The increase in non-interest expense for
the year ended June 30, 2003 was partially offset by a $8.0 million decrease in
the amount of net income attributed to the minority stockholders of West Essex
Bancorp, Inc. and Pulaski Bancorp, Inc. A $2.7 million decrease in income taxes
also helped to offset the increase in non-interest expense.
Net Interest Income. Net interest income increased by $78,000, or 0.2
%, to $51.8 million for the year ended June 30, 2003, from $51.7 million for the
year ended June 30, 2002. The net interest rate spread increased slightly to
2.36% for the year ended June 30, 2003 from 2.35% for the year ended June 30,
2002, while the net interest margin decreased during the period to 2.75% from
2.95%. The net interest rate spread changed little as the 94 basis point
reduction in the cost of interest-bearing liabilities was closely matched by the
93 basis point decline in the average yield on interest-earning assets. The
decrease in the net interest margin is largely reflective of the decrease in the
ratio of interest-earning assets to interest-bearing liabilities to 116.54% for
the year ended June 30, 2003, from 119.58% for the year ended June 30, 2002.
Interest Income. Total interest income decreased by $9.7 million, or
9.1%, to $96.5 million for the year ended June 30, 2003 from $106.2 million for
the year ended June 30, 2002. The primary factor for the decrease in interest
income was a decrease in the average yield of interest-earning assets from 6.06%
for the year ended June 30, 2002 to 5.13% for the year ended June 30, 2003.
Partially offsetting the decreased yield was a $129.0 million, or 7.4%, increase
in the average balance of interest-earning assets. Average yield decreased due
to lower market interest rates prevailing during the period. The increase in
average assets was funded by an overall increase in average deposits.
Interest income on loans receivable decreased $6.6 million, or 15.2%,
to $36.7 million for the year ended June 30, 2003, from $43.3 million for the
year ended June 30, 2002. The primary factors for the decrease in loan interest
income were a decrease of $56.6 million in the average balance of loans
receivable along with a decrease in the average yield on loans receivable to
6.71% from 7.17%. The decrease in average loans was the result of the higher
than normal loan repayments which resulted from the low interest rate
environment and which exceeded origination volume. The decrease in the average
yield on loans receivable reflected decreased market rates of interest on
originations as well as downward interest rate adjustments on floating rate and
adjustable rate loans.
Interest income on investment securities, including both taxable and
tax-exempt issues, decreased $794,000, or 8.0%, to $9.1 million for the year
ended June 30, 2003, from $9.9 million for the year ended June 30, 2002. The
decrease resulted from a decrease in the average yield on investment securities
to 3.60% during the year ended June 30, 2003, from 5.25% during the year ended
June 30, 2002, which was partially offset by an increase of $64.6 million, or
34.2%, in the average balance of investment securities to $253.7 million during
the year ended June 30, 2003, from $189.1 million during the year ended June 30,
2002. The lower yield reflects $108.7 million of maturities and calls of higher
yielding issues, as well
48
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 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.
49
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.
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.
50
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.
51
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.
52
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
======== ======== ======== ======== ======== ========
53
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and
liabilities are sensitive to changes in interest rates, a significant form of
market risk for us is interest rate risk, or changes in interest rates.
Notwithstanding the unpredictability of future interest rates, management
expects that changes in interest rates may have a significant, adverse impact on
our net interest income.
Our ability to make a profit largely depends on our net interest
income, which could be negatively affected by changes in interest rates. Net
interest income is the difference between:
o the interest income we earn on our interest-earning assets, such as loans
and securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
The rates we earn on our assets are generally fixed for a contractual
period of time. We, like many savings institutions, have liabilities that
generally have shorter contractual maturities than our assets, such as
certificates of deposit, or have no stated maturity, such as savings and money
market deposits. This imbalance can create significant earnings volatility
because market interest rates change over time. In a period of rising interest
rates, the interest income earned on our assets, which consist primarily of
long-term, fixed-rate securities, may not increase as rapidly as the interest
paid on our liabilities.
We are vulnerable to volatility in our earnings as a result of an
increase in interest rates because the majority of our interest-earning assets
consist of long-term, fixed rate assets. At June 30, 2004, 80.7% of our loans
with contractual maturities of greater than one year had fixed rates of
interest, and 81.1% of our total loans had contractual 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
contractual maturities of ten or more years. In an increasing rate environment,
our cost of funds is expected to increase more rapidly than the interest earned
on our loan portfolio and securities portfolio because our primary source of
funds is deposits with generally shorter maturities than the maturities on our
loans and investment securities. Having interest-bearing liabilities that
reprice more frequently than interest-earning assets will be detrimental during
periods of rising interest rates and could cause our net interest rate spread to
shrink because the increase in the rates we would earn on our securities and
loan portfolios may be less than the increase in the rates we would pay on
deposits and borrowings.
In a period of falling interest rates, prepayments of loans and
mortgage-backed securities generally will increase as borrowers refinance their
debt in order to reduce their borrowing cost. This causes reinvestment risk,
because in a falling rate environment we are generally not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. A falling rate environment would result in a decrease in
rates we pay on deposits and borrowings, but the decrease in the cost of our
funds may not be as great as the decrease in the yields on our mortgage-backed
securities and loan portfolios. This could cause a narrowing of our net interest
rate spread and could cause a decrease in our earnings.
The Board of Directors has established an Interest Rate Risk Management
Committee, comprised of Directors Hopkins, Regan, Aanensen, Mazza and Parow,
which is responsible for monitoring interest rate risk. Our Chief Financial
Officer also participates in this committee as a management liaison. The
committee meets quarterly to address management of our assets and liabilities,
including review of our
54
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 -200bp and -300bp scenarios are not shown due to the low prevailing
interest rate environment.
This analysis also indicated that as of June 30, 2004 an immediate and
permanent 2.0% increase in interest rates would cause an approximately 15%
decrease in our net interest income.
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous 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
55
upon the availability of funds and comparative yields on investments in relation
to the return on loans. Historically, we have maintained liquid assets above
levels believed to be adequate to meet the requirements of normal operations,
including potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained.
Our liquidity, represented by cash and cash equivalents, is a product
of our operating, investing and financing activities. The largest use of cash by
investing activities during the year ended June 30, 2004 was to fund the
purchase of $425.1 million of mortgage-backed securities. At June 30, 2004, our
cash and cash equivalents totaled $39.5 million, as compared to $325.7 million
at June 30, 2003. Heavy prepayments of mortgage-backed securities and loans
receivable were experienced during the year ended June 30, 2003 and a
significant portion of these funds received were maintained in cash equivalents
pending reinvestment in the securities portfolios. Cash and cash equivalents
increased by 235.8%, to $325.7 million at June 30, 2003 from $97.0 million at
June 30, 2002. The decrease in cash and cash equivalents during 2004 also offset
a decrease in cash provided by financing activities as total deposits declined
during 2004 by $76.2 million compared to an increase in total deposits during
2003 of $134.0 million.
Our primary sources of funds are deposits, amortization, prepayments
and maturities of mortgage-backed securities and outstanding loans, maturities
of investment securities and other short-term investments and funds provided
from operations. While scheduled payments from the amortization of loans and
mortgage-backed securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
and mortgage-backed securities prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, we invest
excess funds in short-term interest-earning assets, which provide liquidity to
meet lending requirements. We also generate cash through borrowings.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. agency securities. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing 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,
56
our total Federal Home Loan Bank borrowing limit was $484.3 million and we had
the ability to pledge additional collateral to increase our collateralized
borrowing limit from $101.4 million to the full $484.3 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.
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)....................... $25,906 $ - $ 1,936 $ - $23,970
Construction loans in process............ 4,483 - 4,483 - -
Other commitments to extend credit(1).... 26,488 - - - 26,488
------ ------- -------- ------ ------
Total................................ $56,877 $ - $6,419 $ - $50,458
======= ======= ====== ====== =======
(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.
57
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in
the normal course of our business of investing in loans and securities as well
as in the normal course of maintaining and improving Kearny Federal Savings
Bank's facilities. These financial instruments include significant purchase
commitments, such as commitments related to capital expenditure plans and
commitments to purchase investment securities or mortgage-backed securities, and
commitments to extend credit to meet the financing needs of our customers. At
June 30, 2004, we had no significant off-balance sheet commitments to purchase
securities and our significant purchase commitments related to capital
expenditure plans consisted of anticipated post-June 30, 2004 expenditures of
approximately $5.0 million in connection with the completion of our new
administrative building in Fairfield, New Jersey.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance-sheet instruments. At 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. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. For
additional information regarding our outstanding lending commitments at June 30,
2003, see Note 16 of the Notes to the Consolidated Financial Statements
beginning on page F-1.
Capital
Consistent with its goals to operate a sound and profitable financial
organization, Kearny Federal Savings Bank actively seeks to maintain a well
capitalized institution in accordance with regulatory standards. As of 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 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.
58
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.
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
59
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 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
60
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.
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.
61
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.
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
62
funds from investment products such as mutual funds, short-term money funds and
corporate and government securities. Based on Federal Deposit Insurance
Corporation data as of June 30, 2004 (the most current available information),
our deposit market share in New Jersey was only 0.7% at June 30, 2004, a
reduction from 0.8% at June 30, 2003, and the largest deposit share in any
county in which we have branches was 2.5% at June 30, 2004 in Bergen County,
down from 2.8% at June 30, 2003. There are large competitors operating
throughout our total market area, including Bank of America, Commerce Bank,
Wachovia Bank and PNC Bank, and we also face strong competition from other
community-based financial institutions.
Lending Activities
General. We have traditionally focused on the origination of one- to
four-family loans, which comprise a significant majority of the total loan
portfolio. We also provide financing on multi-family dwellings, mixed-use
properties and other commercial real estate. Consumer lending is our next
largest category of lending, primarily composed of home equity loans and lines
of credit. We also originate construction loans and commercial business loans,
generally secured by real estate.
63
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
======== ======= ====== ======= ======= ====== ==== ====== ========
65
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
66
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.
67
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
68
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.
69
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 agreements for loan
purchases in the years ended June 30, 2004 and 2003, any loan purchased that
became delinquent for a period of 60 days within six months from the date of the
purchase of the loan was permitted to be returned to and repurchased by the
selling bank with a refund to Kearny Federal Savings Bank of the unamortized
portion of the premium paid for that loan. As of June 30, 2004, the recourse
period has expired for these loan purchases.
We will continue to actively consider the purchase of loans as
opportunities present themselves. Additionally, we have in the past purchased
first mortgage loans on a forward commitment basis from a
70
New Jersey located mortgage broker and may in the future enter into such
arrangements with such broker or with other parties on a forward commitment
basis.
In addition to purchasing one- to four-family loans, we also
occasionally purchase participations in loans originated by other banks and also
through the Thrift Institutions Community Investment Corporation of New Jersey
("TICIC"). At 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
71
collected from the related passbook account along with accrued interest and a
penalty when the loan is 120 days delinquent. Loans may be placed on a
non-accrual status at any time if, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At 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 allowance for loan losses totaled $5.1 million,
non-performing loans totaled $2.3 million, and 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%
====== ====== ====== ====== ======
72
During the year ended June 30, 2004, gross interest income of $177,000
would have been recorded on loans accounted for on a non-accrual basis if those
loans had been current, and $118,000 of interest on such loans was included in
income for the year ended June 30, 2004.
Classified Assets. Management, in compliance with Office of Thrift
Supervision guidelines, has instituted an internal loan review program, whereby
non-performing loans are classified as substandard, doubtful or loss. It is our
policy to review the loan portfolio, in accordance with regulatory
classification procedures, on at least a quarterly basis. When a loan is
classified as substandard or doubtful, management is required to evaluate the
loan for impairment. When management classifies a portion of a loan as loss, a
reserve equal to 100% of the loss amount is required to be established or the
loan is to be charged-off.
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, and approximately 34.6%, or $2.8 million, of the classified
and special mention loans at such date were loans originated through the Thrift
Institutions Community Investment Corporation of New Jersey ("TICIC").
At 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 __.
73
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses in our loan portfolio to the
extent they are both probable and reasonable to estimate. The allowance is
maintained through provisions for loan losses that are charged to income in the
period they are established. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely.
Recoveries on loans previously charged-off are added back to the allowance.
Management, in determining the allowance for loan losses, considers the
losses inherent in the loan portfolio and changes in the nature and volume of
our loan activities, along with general economic and real estate market
conditions. We utilize a two tier approach: (1) identification of impaired loans
and 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.
74
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%
========= ========= ======== ========= =========
75
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%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
76
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.
77
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.
78
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
========== ========== ========== ========== ==========
79
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
====== ==== ======= ==== ====== ==== ======= ==== ========= ==== =========
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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.
81
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.................................. $ 64,956
Three through six months............................. 34,882
Six through twelve months............................ 44,089
Over twelve months................................... 44,082
--------
$188,009
========
Borrowings. To supplement our deposits as a source of funds for lending
or investment, we borrow funds in the form of advances from the Federal Home
Loan Bank. We make use of Federal Home Loan Bank advances as part of our
interest rate risk management, primarily to extend the duration of funding to
match the longer term fixed rate loans held in the loan portfolio as part of our
growth strategy.
Advances from the Federal Home Loan Bank are typically secured by the
Federal Home Loan Bank stock we own and a portion of our residential mortgage
loans and may be secured by other assets, mainly securities which are
obligations of or guaranteed by the U.S. government. Additional information
regarding our Federal Home Loan Bank advances is included under Note 12 to the
consolidated financial statements beginning on page F-1.
Short-term Federal Home Loan Bank advances generally have original
maturities of less than one year. The details of these short-term advances are
presented below:
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.
84
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.
85
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
86
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
87
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
88
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
89
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 the
consolidated financial statements. In assessing an institution's capital
adequacy, the Office of Thrift Supervision takes into consideration not only
these numeric factors but also qualitative factors as well, and has the
authority to establish higher capital requirements for individual institutions
where necessary.
In addition, the Office of Thrift Supervision may require that a
savings institution that has a risk-based capital ratio of less than 8%, a ratio
of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1
capital to total adjusted assets of less than 4% (3% if the institution has
received the highest rating on its most recent examination) take certain action
to increase its capital ratios. If the savings institution's capital is
significantly below the minimum required levels of capital or if it is
unsuccessful in increasing its capital ratios, the Office of Thrift Supervision
may restrict its activities.
For purposes of the Office of Thrift Supervision capital regulations,
tangible capital is defined as core capital less all intangible assets except
for certain mortgage servicing rights. Tier 1 or core capital is defined as
common stockholders' equity, non-cumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of consolidated
subsidiaries, and certain non-withdrawable accounts and pledged deposits of
mutual savings banks. Kearny Federal Savings Bank does not have any
non-withdrawable accounts or pledged deposits. Tier 1 and core capital are
reduced by an institution's intangible assets, with limited exceptions for
certain mortgage and non-mortgage servicing rights and purchased credit card
relationships. Both core and tangible capital are further reduced by an amount
equal to the savings institution's debt and equity investments in
"non-includable" subsidiaries engaged in activities not permissible for national
banks other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The components of supplementary
capital include, among other items, cumulative perpetual preferred stock,
perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, 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
90
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's 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. Kearny Federal Savings Bank made a capital distribution to Kearny
Financial Corp. to provide the cash paid in connection with the acquisition of
West Essex Bank, and as a result it is likely that Kearny Federal Savings Bank
will be required to file an application, rather than a notice, for any capital
distributions for a period of time following the offering.
Capital distributions by Kearny Financial Corp., as a savings and loan
holding company, will not be subject to the Office of Thrift Supervision capital
distribution rules. Because Kearny Financial Corp. will retain 50% of the net
proceeds of the stock offering, the likelihood that Kearny Federal Savings Bank
must file an application rather than a notice for capital distributions is not
expected to affect the payment of cash dividends by Kearny Financial Corp. to
its stockholders or the amount of such dividends.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA,
as amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the Office of Thrift Supervision,
has adopted guidelines establishing general standards relating to internal
controls, information and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings and
compensation, fees and benefits. In 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.
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, loans made by Kearny Federal Savings Bank
to senior officers, directors and their associates totaled approximately $1.6
million and $2.5 million, respectively. During the year ended June 30, 2004, new
loans to senior officers, directors and their associates totaled $0, repayments
totaled approximately $100,000 and loans to individuals no longer associated
with the Kearny Federal Savings Bank totaled approximately $774,000.
Other than through loans with Kearny Federal Savings Bank made in the
ordinary course of business on substantially the same terms and conditions as
those of comparable transactions prevailing at the time with other persons, no
directors, officers or their immediate family members were engaged, directly or
indirectly, in transactions with Kearny Financial Corp. or any subsidiary
exceeding $60,000 during the three years ended June 30, 2004.
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
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consolidated obligations of the Federal Home Loan Bank System. It makes loans to
members pursuant to policies and procedures established by the board of
directors of the Federal Home Loan Bank.
As a member, Kearny Federal Savings Bank is required to purchase and
maintain stock in the Federal Home Loan Bank of New York in an amount equal to
the greater of 1% of our aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of each year or 5% of
our outstanding Federal Home Loan Bank advances. We are in compliance with this
requirement with an investment in Federal Home Loan Bank of New York stock at
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.
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o Establishment of a program specifying procedures for obtaining identifying
information from customers seeking to open new accounts, including
verifying the identity of customers within a reasonable period of time.
o Establishment of appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect and report
money laundering.
o Prohibitions on establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do not
have a physical presence in any country), and compliance with certain
record keeping obligations with respect to correspondent accounts of
foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Regulation of Kearny Financial Corp.
General. Kearny Financial Corp. is a savings and loan holding company
within the meaning of Section 10 of the Home Owners' Loan Act. It is required to
file reports with the Office of Thrift Supervision and is subject to regulation
and examination by the Office of Thrift Supervision. Kearny Financial Corp. must
also obtain regulatory approval from the Office of Thrift Supervision before
engaging in certain transactions, such as mergers with or acquisitions of other
financial institutions. In addition, the Office of Thrift Supervision has
enforcement authority over Kearny Financial Corp. and any non-savings
institution subsidiaries. This permits the Office of Thrift Supervision to
restrict or prohibit activities that it determines to be a serious risk to
Kearny Federal Savings Bank. This regulation is intended primarily for the
protection of the depositors and not for the benefit of stockholders of Kearny
Financial Corp.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into
law the Sarbanes-Oxley Act of 2002, or the Act, which implemented legislative
reforms intended to address corporate and accounting fraud. In addition to the
establishment of a new accounting oversight board that will enforce auditing,
quality control and independence standards and will be funded by fees from all
publicly traded companies, the Act places certain restrictions on the scope of
services that may be provided by accounting firms to their public company audit
clients. Any non-audit services being provided to a public company audit client
will require preapproval by the company's audit committee. In addition, the Act
makes certain changes to the requirements for partner rotation after a period of
time. The Act requires chief executive officers and chief financial officers, or
their equivalent, to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission, subject to civil and criminal penalties if
they knowingly or willingly violate this certification requirement. In addition,
under the Act, counsel will be required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
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
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addition, a provision of the Act directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change.
The Act also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under the Act, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements
materially misleading. The Act also requires the Securities and Exchange
Commission to prescribe rules requiring inclusion of any internal control report
and assessment by management in the annual report to stockholders. The Act
requires the company's registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls.
Activities Restrictions. As a savings and loan holding company and as a
subsidiary holding company of a mutual holding company, Kearny Financial Corp.
is subject to statutory and regulatory restrictions on its business activities.
The non-banking activities of Kearny Financial Corp. and its non-savings
institution subsidiaries are restricted to certain activities specified by
Office of Thrift Supervision regulation, which include performing services and
holding properties used by a savings institution subsidiary, activities
authorized for savings and loan holding companies as of March 5, 1987, and
non-banking activities permissible for bank holding companies pursuant to the
Bank Holding Company Act of 1956 or authorized for financial holding companies
pursuant to the Gramm-Leach-Bliley Act. Before engaging in any non-banking
activity or acquiring a company engaged in any such activities, Kearny Financial
Corp. must file with the Office of Thrift Supervision either a prior notice or
(in the case of non-banking activities permissible for bank holding companies)
an application regarding its planned activity or acquisition.
Mergers and Acquisitions. Kearny Financial Corp. must obtain approval
from the Office of Thrift Supervision before acquiring, directly or indirectly,
more than 5% of the voting stock of another savings institution or savings and
loan holding company or acquiring such an institution or holding 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
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Financial Corp. and the target institution, the effect of the acquisition on the
risk to the insurance funds, the convenience and the needs of the community and
competitive factors.
Stock Holding Company Subsidiary Regulation. The Office of Thrift
Supervision has adopted regulations governing the two-tier mutual holding
company form of organization and subsidiary stock holding companies that are
controlled by mutual holding companies. We have adopted this form of
organization and it will continue in place after the proposed offering. Kearny
Financial Corp. is the stock holding company subsidiary of Kearny MHC. Kearny
Financial Corp. is permitted to engage in activities that are permitted for
Kearny MHC subject to the same restrictions and conditions.
Waivers of Dividends by Kearny MHC. Office of Thrift Supervision
regulations require Kearny MHC to notify the Office of Thrift Supervision of any
proposed waiver of its receipt of dividends from Kearny Financial Corp. The
Office of Thrift Supervision reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is consistent
with such directors' fiduciary duties to the mutual holding company's members;
(ii) for as long as the savings association subsidiary is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company is considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with Statement of Financial Accounting Standards No.
5, where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under Office of Thrift Supervision capital distribution regulations. We
anticipate that Kearny MHC will waive dividends paid by Kearny Financial Corp.,
if any.
Conversion of Kearny MHC to Stock Form. Office of Thrift Supervision
regulations permit Kearny MHC to convert from the mutual form of organization to
the capital stock form of organization, commonly referred to as a second step
conversion. In a second step conversion a new holding company would be formed as
the successor to Kearny Financial Corp., Kearny MHC's corporate existence would
end, and certain depositors of Kearny Federal Savings Bank would receive the
right to subscribe for shares of the new holding company. In a second step
conversion, each share of common stock held by stockholders other than Kearny
MHC would be automatically converted into a number of shares of common stock of
the new holding company determined pursuant to an exchange ratio that ensures
that Kearny Financial Corp. stockholders own the same percentage of common stock
in the new holding company as they owned in Kearny Financial Corp. immediately
prior to the second step conversion. Under Office of Thrift Supervision
regulations, Kearny Financial Corp. stockholders would not be diluted because of
any dividends waived by Kearny MHC (and waived dividends would not be considered
in determining an appropriate exchange ratio), in the event Kearny MHC converts
to stock form. The total number of shares held by Kearny Financial Corp.
stockholders after a second step conversion also would be increased by any
purchases by Kearny Financial Corp. stockholders in the stock offering of the
new holding company conducted as part of the second step conversion.
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
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Supervision. Under the Change in Bank Control Act, the Office of Thrift
Supervision has 60 days from the filing of a complete notice to act, taking into
consideration certain factors, including the financial and managerial resources
of the acquirer and the anti-trust effects of the acquisition. Any company that
so acquires control would then be subject to regulation as a savings and loan
holding company.
Federal Securities Laws
Kearny Financial Corp. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 for the
registration of the common stock to be issued pursuant to the offering. Upon
completion of the offering, Kearny Financial Corp. common stock will continue to
be registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. Kearny Financial Corp. will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934.
TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations.
All thrift institutions are now subject to the same provisions as banks
with respect to deductions for bad debts. Thrift institutions that are treated
as "small banks" (the average adjusted bases for all assets of such institution
equals $500 million or less) under the Internal Revenue Code may account for bad
debts by using the experience method for determining additions to their bad debt
reserve. Thrift institutions that are not treated as small banks must now use
the specific charge-off method.
Kearny Financial Corp. may exclude from its income 100% of dividends
received from Kearny Federal Savings Bank as a member of the same affiliated
group of corporations. A 70% dividends received deduction generally applies with
respect to dividends received from corporations that are not members of such
affiliated group.
Kearny Financial Corp. and Kearny Federal Savings Bank have previously
filed a consolidated federal tax return with Kearny MHC. Kearny MHC's
consolidated federal income tax returns have not been audited by the IRS during
the past five years. Following the stock offering, Kearny Financial Corp. and
Kearny Federal Savings Bank will file a consolidated return and Kearny MHC will
file a separate return.
State Taxation
Kearny Financial Corp. and its subsidiaries file New Jersey income tax
returns and are subject to a state income tax that is calculated based on
federal taxable income, subject to certain adjustments. In July 2002, New Jersey
eliminated the 3% tax rate formerly applicable to thrift institutions located in
New 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.
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
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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. 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
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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 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.
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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
Allan Beardslee, Senior Vice President 2003 173,000 61,610 6,007(3)
and EDP Officer
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Annual Compensation(1)
----------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ------ ------ ----- ------------
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 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
105
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
$481,000, $472,000, $416,000, $374,000, $398,000 and $328,000 for Senior Vice
Presidents Beardslee, Gossweiler, Jones, Joyce, Ledgerwood and Sacher,
respectively.
Additionally, at 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.
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
106
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 and had a current
highest five year average salary of $283,000, $159,000, $121,000, $115,000,
$104,000, $166,000 and $140,000, respectively.
107
Benefit Equalization Plan. Kearny Federal Savings Bank has adopted a
Benefit Equalization Plan (the "BEP"). The purpose of the BEP is to provide a
pension benefit based upon the actual earnings of senior officers of the Bank
(President, Executive Vice Presidents, Vice Presidents and Corporate
Secretaries) in the event that their average annual earnings exceeds the
permissible pensionable earnings level under the Pension Plan as required by the
limitations of Sections 401(a)(17) and 415 of the Internal Revenue Code. The
supplemental pension for President and Chief Executive Officer John N. Hopkins
and other senior officers whose highest five year annual earnings prior to
retirement will include years in which such earnings exceed the limits of
Sections 401(a)(17) and 415 of the Internal Revenue Code will receive a
supplemental benefit based upon the difference between their average earnings
taking into effect this maximum pensionable earnings limitation and their
average earnings without regard to such limitation, multiplied by 2% times their
years of service at retirement. The benefits payment under the BEP will be in
the form of an annual benefit payable for life and a death benefit, unless the
committee administering the BEP authorizes an alternative form of benefit.
During the year ended June 30, 2004, there was approximately $59,000 of benefits
paid to retired participants under the BEP. For the year ended June 30, 2004,
financial reporting expense accrued under the BEP totaled $207,000.
The following table sets forth the estimated annual benefits payable
under the Pension Plan and the Benefit Equalization Plan described above, upon
retirement at age 65 as of June 30, 2004, expressed in the form of a life
annuity, for the average annual earnings described above and years of service
specified. Such amounts are in addition to any benefits payable under Social
Security.
Group Term Life Insurance Plan. Kearny Federal Savings Bank has a
post-retirement group term life insurance plan covering all eligible employees.
Benefits are based on age and years of service. During the year ended June 30,
2004, there was approximately $6,000 contributed to and benefit paid under this
plan.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee during the year ended June 30, 2004, consisted of
Directors Aanensen (Chair), Mazur, Mazza and Parow. During the year ended June
30, 2004, Kearny Financial Corp. had no "interlocking" relationships in which
(i) an executive officer of Kearny Financial Corp. served as a member of the
compensation committee of another entity, one of whose executive officers served
on the compensation committee of Kearny Financial Corp.; (ii) an executive
officer of Kearny Financial Corp. served as a director of another entity, one of
whose executive officers served on the compensation committee of Kearny
Financial Corp.; and (iii) an executive officer of Kearny Financial Corp. served
as a member of the compensation committee of another entity, one of whose
executive officers served as a director of Kearny Financial Corp.
108
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 Sections 401(a)(17) and 415 of the Internal Revenue Code. Specifically,
the plan will provide benefits to officers that cannot be provided under the
employee stock ownership plan as a result of limitations imposed by Sections
401(a)(17) and 415 of the Internal Revenue Code, but that would have been
provided under the employee stock ownership plan, but for these Internal Revenue
Code limitations. For example, this plan will provide participants with a
benefit for any compensation that they may earn in excess of $205,000 (as
indexed) comparable to the benefits earned by all participants under
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the employee stock ownership plan for compensation earned below that level.
Kearny Federal Savings Bank may utilize a grantor trust in connection with this
plan in order to set aside funds that ultimately may be used to pay benefits
under the plan. The assets of the grantor trust will remain subject to the
claims of Kearny Federal Savings Bank's general creditors in the event of
insolvency, until paid to a participant following termination of employment
according to the terms of the plan. Benefits under the plan will be paid in a
lump sum in the form of common stock of Kearny Financial Corp. to the extent
permissible under applicable regulations, or in the alternative, benefits will
be paid in cash based upon the value of such common stock at the time that such
benefit payments are made. The actual value of benefits under this plan and the
annual financial reporting expense associated with this plan will be calculated
annually based upon a variety of factors, including the actual value of benefits
for participants determined under the employee stock ownership plan each year,
the applicable limitations under the Internal Revenue Code that are subject to
adjustment annually and the salary of each participant at such time. Generally,
benefits under the plan will be taxable to each participant at the time of
receipt of such payment, and Kearny Federal Savings Bank will recognize a
tax-deductible compensation expense at such time.
Stock Option Plan. We intend to adopt a stock option plan for the
benefit of directors and officers after the passage of at least 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
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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 Federal Savings 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 1.2%, 1.1% and 0.9% of the total shares to be
outstanding after the offering at the minimum, midpoint and maximum of the
offering range, respectively.
The following table sets forth for each of the directors and executive
officers of Kearny Financial Corp. (including in each case all "associates" of
the directors and executive officers) the number of shares of common stock which
each director and officer have preliminarily indicated they intend to purchase.
The table does not include purchases by the employee stock ownership plan and
does not take into account
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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 Midpoint of the Maximum of the
Name Purchased Purchased Offering Range(1) Offering Range(2) Offering Range(3)
---- --------- --------- -------------- -------------- --------------
John J. Mazur, Jr. 75,000 $ 750,000 0.160% 0.136% 0.119%
John N. Hopkins 50,000 500,000 0.107% 0.091% 0.079%
Theodore J. Aanensen 45,000 450,000 0.096% 0.082% 0.071%
Matthew T. McClane 20,000 200,000 0.043% 0.036% 0.032%
John F. McGovern 50,000 500,000 0.107% 0.091% 0.079%
Joseph P. Mazza 50,000 500,000 0.107% 0.091% 0.079%
Leopold Montanaro 75,000 750,000 0.160% 0.136% 0.119%
Henry S. Parow 75,000 750,000 0.160% 0.136% 0.119%
John F. Regan 55,000 550,000 0.118% 0.100% 0.087%
Edward T. Rushforth 5,000 50,000 0.011% 0.009% 0.008%
Albert E. Gossweiler 42,500 425,000 0.091% 0.077% 0.067%
William C. Ledgerwood 20,000 200,000 0.043% 0.036% 0.032%
Sharon Jones 10,000 100,000 0.021% 0.018% 0.016%
Patrick M. Joyce 2,000 20,000 0.004% 0.004% 0.003%
Allan Beardslee 1,000 10,000 0.002% 0.002% 0.002%
Erika Sacher 5,000 50,000 0.011% 0.009% 0.008%
------- --------- ----- ----- -----
Total 580,500 $5,805,000 1.242% 1.055% 0.918%
======= ========= ===== ===== =====
(1) Assumes the issuance of 46,750,000 shares in the offering, including shares
to be issued to Kearny MHC.
(2) Assumes the issuance of 55,000,000 shares in the offering, including shares
to be issued to Kearny MHC.
(3) Assumes the issuance of 63,250,000 shares in the offering, including shares
to be issued to Kearny MHC.
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 14,025,000 shares required to be
sold to public stockholders to complete the offering. Management may, but is not
required to, purchase additional shares in the offering to satisfy the
14,025,000 share minimum, subject to the limitation on the individual maximum
share purchase limitations and the requirement that directors, executive
officers and their associates may not purchase, in the aggregate, more than 25%
of the shares sold in the offering.
Shares of common stock purchased by directors and executive officers
cannot be sold for a period of one year following the offering, and stock
certificates issued to directors and executive officers will bear
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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 14,025,000 shares and an
anticipated maximum of 18,975,000 shares of common stock in the offering
(subject to adjustment to up to 21,821,250 shares). The minimum purchase is 25
shares of common stock (minimum investment of $250). Our common stock is being
offered at a fixed price of $10.00 per share in the offering. Interest will be
paid on subscription funds from the date the payment is received until the
offering is either completed or terminated.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
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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;
o Supplemental Eligible Account Holders (depositors at the close of business
on September 30, 2004 with deposits of at least $50.00);
o Other Members (depositors at the close of business on October 31, 2004 who
are not Eligible Account Holders or Supplemental Eligible Account Holders).
Former depositors of West Essex Bank, which was acquired by Kearny
Federal Savings Bank in July 2003, will be treated as Eligible Account Holders
if they had deposits with West Essex at the close of business on March 31, 2003
of at least $50.00.
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering. The
community offering, if any, may commence at any time during or subsequent to the
completion of the subscription offering. A syndicated community offering, if we
conduct one, would commence just prior to, or as soon as practicable after, the
termination of the subscription offering. In any community offering or
syndicated community offering, we will fill orders for our common stock in an
equitable manner as determined by the Board of Directors in order to achieve a
wide distribution of the stock.
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Any shares sold above the maximum of the offering range may be sold to
the employee stock ownership plan before satisfying remaining unfilled orders of
Eligible Account Holders to fill the plan's subscription, or the plan may
purchase some or all of the shares covered by its subscription after the
offering in the open market, subject to any required regulatory approval.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of stock
issuance to the following persons in the following order of priority:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase, subject to the overall limitations
described under The Stock Offering - Limitations on Purchases of Common Stock,
up to the greater of (i) the maximum purchase limitation in the community
offering (i.e., 50,000 shares), (ii) one-tenth of 1% of the total shares of
common stock offered in the subscription and community offering, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock offered in the
subscription and community offering by a fraction, of which the numerator is the
total amount of the qualifying deposits of the Eligible Account Holder and the
denominator is the total amount of all qualifying deposits of all Eligible
Account Holders. If there are insufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares will be allocated to Eligible
Account Holders so as to permit each subscribing Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of 100 shares or the number of shares ordered. Thereafter, unallocated
shares will be allocated to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each subscriber's
qualifying deposit bears to the total amount of qualifying deposits of all
subscribing Eligible Account Holders, in each case measured as of March 31,
2003, whose subscriptions remain unfilled. Subscription rights received by
officers and directors of Kearny Financial Corp. or Kearny Federal Savings Bank,
and such persons' associates, based on their increased deposits in Kearny
Federal Savings Bank in the one year preceding March 31, 2003 will be
subordinated to the subscription rights of all other Eligible Account Holders.
To ensure proper allocation of stock, each Eligible Account Holder must list on
his order form all accounts in which he had an ownership interest as of the
Eligibility Record Date. Failure to list an account, or providing incorrect
information, could result in the loss of all or a part of the subscriber's
allocation. The total amount of qualifying deposits of all Eligible Account
Holders as of March 31, 2003 was $1,593.3 million.
Priority 2: The Employee Plans. If there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
tax qualified employee stock benefit plans may be given the opportunity to
purchase in the aggregate up to but less than 5% of the total number of shares
of common stock issued in the offering to public stockholders and to Kearny MHC.
It is expected that Kearny Federal Savings Bank's employee stock ownership plan
will purchase up to 8% of the shares issued in the offering to persons other
than Kearny MHC. To the extent the employee stock ownership plan does not
purchase shares in the offering, the employee stock ownership plan intends to
purchase shares in the open market purchases subsequent to the closing of the
offering, subject to any required regulatory approval.
Priority 3: Supplemental Eligible Account Holders. If there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the tax qualified employee stock benefit plans, each
Supplemental Eligible Account Holder shall be given the opportunity to purchase,
subject to the overall limitations described under The Stock Offering -
Limitations on Purchases of Common Stock,
115
up to the greater of (i) the maximum purchase limitation in the community
offering (i.e., 50,000 shares), (ii) one-tenth of 1% of the total shares of
common stock offered in the subscription and community offering, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock offered in the
subscription and community offering by a fraction, of which the numerator is the
amount of the qualifying deposits of the Supplemental Eligible Account Holder
and the denominator is the total amount of all qualifying deposits of all
Supplemental Eligible Account Holders. If Supplemental Eligible Account Holders
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders and the employee stock ownership plan and other
tax-qualified employee stock benefit plans, if any, is in excess of the total
number of shares offered in the offering, the shares of common stock will be
allocated among subscribing Supplemental Eligible Account Holders first so as to
permit each subscribing Supplemental Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
100 shares or the number of shares ordered. Thereafter, unallocated shares will
be allocated to each subscribing Supplemental Eligible Account Holder whose
subscription remains unfilled in the same proportion that each subscriber's
qualifying deposit bear to the total amount of qualifying deposits of all
subscribing Supplemental Eligible Account Holders, in each case measured as of
September 30, 2004, whose subscriptions remain unfilled. To ensure proper
allocation of stock, each Supplemental Eligible Account Holder must list on his
order form all accounts in which he had an ownership interest as of the
Supplemental Eligibility Record Date. Failure to list an account, or providing
incorrect information, could result in the loss of all or a part of the
subscriber's allocation. The total amount of qualifying deposits of all
Supplemental Eligible Account Holders as of September 30, 2004 was $1,511.1
million.
Priority 4: Other Members. If there are sufficient shares remaining
after satisfaction of all subscriptions by the Eligible Account Holders, the
tax-qualified employee stock benefit plans and the Supplemental Eligible Account
Holders, each Other Member (depositors as of October 31, 2004) who is not an
Eligible Account Holder or a Supplemental Eligible Account Holder shall have the
opportunity to purchase up to the greater of 50,000 shares of common stock or
one-tenth of 1% of the total offering of shares of common stock offered in the
subscription offering, subject to the overall purchase limitations described
under The Stock Offering - Limitations on Purchases of Common Stock. If Other
Members subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, the tax-qualified employee stock
benefit plans and Supplemental Eligible Account Holders, is in excess of the
total number of shares offered in the offering, the subscriptions of Other
Members will be allocated among subscribing Other Members to permit each
subscribing Other Member to purchase a number of shares sufficient to make his
total allocation of common stock equal to the lesser of 100 shares or the number
of shares subscribed for by Other Members. Any shares remaining will be
allocated among the subscribing Other Members whose subscriptions remain
unsatisfied on a 100 shares (or whatever lesser amount is available) per order
basis until all orders have been filled or the remaining shares have been
allocated.
Restrictions on Transfer of Subscription Rights and Shares. Applicable
regulations and the plan of stock issuance prohibits any person with
subscription rights, including Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members, from transferring or entering into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights or the shares of common stock to be issued when subscription
rights are exercised. Subscription rights may be exercised only by the person to
whom they are granted and only for his account. With the exception of IRA stock
purchases, the subscription rights of a qualifying account may not be
transferred to an account that is in a different form of ownership. Adding or
deleting a name or otherwise altering the form of beneficial ownership of a
qualifying account will result in the loss of your subscription rights. Each
person subscribing for shares will be required to certify that such person is
purchasing shares solely for his own
116
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.
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
117
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 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.
118
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.
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
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percentage in excess of 5% of the offering. If we increase the
maximum purchase limitations, we are only required to resolicit
persons who subscribed for the maximum purchase amount and may,
in our sole discretion, resolicit certain other large
subscribers.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range of up to 15% (the adjusted maximum) the additional shares
will generally be issued in the following order of priority: (a)
to fill the employee stock ownership plan's subscription; (b) if
there is an oversubscription at the Eligible Account Holder
level, to fill unfilled subscriptions of Eligible Account
Holders; (c) if there is an oversubscription at the Supplemental
Eligible Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders; (d) if there is an
oversubscription at the Other Member level, to fill unfilled
subscriptions of Other Members; (e) to fill orders received in a
community offering; with preference given to persons who live in
the local community; and (f) to fill orders received in the
syndicated community offering. The employee stock ownership plan
may, however, elect to fill part or all of its stock order in the
open market, after completion of the stock offering.
8. No person will be allowed to purchase any stock if that purchase
would be illegal under any federal or state law or regulation or
would violate regulations or policies of the National Association
of Securities Dealers. We and/or our representatives may ask for
an acceptable legal opinion from any purchaser regarding the
legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
9. We have the right to reject any order submitted by a person whose
representations we believe are untrue or who we believe is
violating, circumventing or intends to violate, evade or
circumvent the terms and conditions of the plan of stock
issuance, either alone or acting in concert with others.
10. The above restrictions also apply to purchases by persons acting
in concert under applicable regulations of the Office of Thrift
Supervision. Under regulations of the Office of Thrift
Supervision, our directors are not considered to be affiliates or
a group acting in concert with other directors solely as a result
of membership on our Board of Directors.
11. In addition, in any community offering or syndicated community
offering, we must first fill orders for our common stock up to a
maximum of 2% of the total shares issued in the offering in a
manner that will achieve a wide distribution of the stock, and
thereafter any remaining shares will be allocated on an equal
number of shares per order basis, until all orders have been
filled or the shares have been exhausted.
The term "associate" of a person is defined in the plan of stock
issuance to mean:
(1) any corporation or organization of which a person is a senior
officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities;
(2) any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or
in a similar fiduciary capacity; or
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(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 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.
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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 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
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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;
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
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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 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.
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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 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.
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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 October 22, 2004, that the
estimated pro forma market value of Kearny Financial Corp. on a fully-converted
basis ranged from a minimum of $467.5 million to a maximum of $632.5 million
with a midpoint of $550.0 million. The Board of Directors of Kearny determined
that the common stock should be sold at $10.00 per share. Based on the estimated
valuation and the $10.00 per share price, the number of shares of common stock
that Kearny Financial Corp. will issue will range from a minimum of 46,750,000
shares to a maximum of 63,250,000 shares, with a midpoint of 55,000,000 shares.
The Board determined to offer for sale 30% of these shares, or between
14,025,000 shares and 18,975,000 shares, with a midpoint of 16,500,000 shares,
to depositors of Kearny, to the Kearny Federal Savings Bank Employee Stock
Ownership Plan and, if a community offering is held, to the public. The 70% of
the shares of Kearny Financial Corp. stock that are not offered for sale in the
offering will be issued to Kearny MHC.
The estimated valuation range may be amended with the approval of the
Office of Thrift Supervision or if necessitated by subsequent developments in
the financial condition of Kearny Financial Corp. and Kearny or market
conditions generally. In the event the estimated valuation range is updated to
amend the value of Kearny Financial Corp. on a fully-converted basis below
$467.5 million, which is the minimum of the estimated valuation range, or above
$727.4 million, which is the maximum of the estimated valuation range, as
adjusted by 15%, a new appraisal will be filed with the Office of Thrift
Supervision.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, if Kearny Financial Corp.
receives orders for common stock in excess of $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 18,975,000 shares will first be used, if necessary, to
fill the order of the employee stock ownership plan. There is no obligation or
understanding on the part of management to take and/or pay for any shares in
order to complete the stock offering.
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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 64.7% on a price-to-earnings basis, a
discount of 22.4% 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........................... 31.1x 67.9% 77.3%
Midpoint.......................... 35.9x 71.3% 80.1%
Maximum........................... 41.0x 75.1% 83.4%
Maximum, as adjusted.............. 47.4x 80.3% 88.6%
All fully-converted publicly-traded
thrifts as of October 22, 2004:
Average........................... 18.0x 161.7% 176.0%
Median............................ 16.7x 151.0% 163.8%
Valuation of peer group as of
October 22, 2004:
Average........................... 24.6x 100.1% 105.7%
Median............................ 24.9x 101.3% 107.5%
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing Kearny
Financial Corp.'s shares. RP Financial did not independently verify the
consolidated financial statements and other information provided by Kearny, nor
did RP Financial value independently the assets or liabilities of Kearny. The
valuation considers Kearny as a going concern and should not be considered as an
indication of the liquidation value of Kearny. Moreover, because this valuation
is necessarily based upon estimates and projections of a number of matters, all
of which are subject to change from time to time, no assurance can be given that
persons purchasing common stock in the offerings will thereafter be able to sell
such shares at prices at or above the purchase price or in the range of the
valuation described above.
No sale of shares of common stock in the stock offering may be
completed unless RP Financial confirms that nothing of a material nature has
occurred which would cause it to conclude that the aggregate value of the common
stock to be issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of Kearny Financial Corp. and Kearny. If
this confirmation is not received, we may cancel the stock offering, extend the
offering period and establish a new estimated valuation and offering range
and/or estimated price range, extend, reopen or hold a new offering or take any
other action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock to be
issued may be increased or decreased without a resolicitation
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of subscribers, provided that the product of the total number of shares issued
times the purchase price is not below the minimum or more than 15% above the
maximum of the estimated valuation range. If market or financial conditions
change so as to cause the aggregate value of the common stock to be issued to be
below the minimum of the estimated valuation range or more than 15% above the
maximum of this range, purchasers will be resolicited and be permitted to
continue their orders, in which case they will need to reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest, or be permitted to
modify or rescind their subscriptions. Any change in the estimated valuation
range must be approved by the Office of Thrift Supervision.
An increase in the number of shares of common stock to be issued as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and Kearny Financial Corp.'s pro forma
net income and stockholders' equity on a per share basis while increasing pro
forma net income and stockholders' equity on an aggregate basis. A decrease in
the number of shares of common stock to be issued would increase both a
subscriber's ownership interest and Kearny Financial Corp.'s pro forma net
income and stockholders' equity on a per share basis while decreasing pro forma
net income and stockholders' equity on an aggregate basis.
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the main
office of Kearny and the other locations specified under Where You Can Find More
Information. In addition, the appraisal report is an exhibit to the registration
statement of which this prospectus is a part. The registration statement is
available on the SEC's website (http://www.sec.gov).
Plan of Distribution/Marketing Arrangements
Offering materials have been initially distributed to certain persons
by mail, with additional copies made available through the stock information
center and Sandler O'Neill. All prospective purchasers are to send payment to
the stock information center and such funds will be deposited with Kearny
Federal Savings Bank and held in a separate account earning interest and not
released until the offering is completed or terminated. We may, at our
discretion, determine during the offering period that it is in the best interest
of Kearny Federal Savings Bank to hold subscription funds in an escrow account
at another insured financial institution instead of at Kearny Federal Savings
Bank.
We have engaged Sandler O'Neill, a broker-dealer registered with the
National Association of Securities Dealers, as a financial and marketing advisor
in connection with the offering of our common stock. In its role as financial
and marketing advisor, Sandler O'Neill will assist us in the offering as
follows:
o consulting as to the securities marketing implications of any aspect of the
plan of stock issuance;
o reviewing with our Board of Directors the securities marketing implications
of the independent appraiser's appraisal of the common stock;
o reviewing all offering documents, including the prospectus, stock order
forms and related offering materials (we are responsible for the
preparation and filing of such documents);
o assisting in the design and implementation of a marketing strategy for the
offering;
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o assisting us in scheduling and preparing for meetings with potential
investors and broker-dealers; and
o providing such other general advice and assistance we may request to
promote the successful completion of the offering.
For these services, Sandler O'Neill will receive a fee of 1.0% of the
aggregate dollar amount of the common stock sold in the subscription and
community offerings if the stock issuance is consummated, excluding in each case
shares purchased by our tax qualified employee benefit plans and shares
purchased by our directors, officers and employees and their immediate families.
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Sandler O'Neill. In such capacity, Sandler O'Neill may form a
syndicate of other broker-dealers. Neither Sandler O'Neill nor any registered
broker-dealer will have any obligation to take or purchase any shares of the
common stock in the syndicated community offering; however, Sandler O'Neill has
agreed to use its best efforts in the sale of shares in any syndicated community
offering. If there is a syndicated community offering, Sandler O'Neill will
receive a management fee of 1.0% of the aggregate dollar amount of the common
stock sold in the syndicated community offering. The total fees payable to
Sandler O'Neill and other National Association of Securities Dealers member
firms in the syndicated community offering shall not exceed 5.5% of the
aggregate dollar amount of the common stock sold in the syndicated community
offering.
We also will reimburse Sandler O'Neill for its reasonable out-of-pocket
expenses (including legal fees and expenses) associated with its marketing
effort, up to a maximum of $80,000 for which we have made an advance payment of
$25,000 to Sandler O'Neill. If the plan of stock issuance is terminated or if
Sandler O'Neill terminates its agreement with us in accordance with the
provisions of the agreement, Sandler O'Neill will only receive reimbursement of
its reasonable out-of-pocket expenses. We will indemnify Sandler O'Neill against
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the common stock, including
liabilities under the Securities Act of 1933.
In addition, we have engaged Sandler O'Neill to act as stock offering
agent in connection with the offering. In its role as stock offering agent,
Sandler O'Neill will assist us in the offering as follows: (i) consolidation of
accounts and development of a central file; (ii) preparation of order and/or
request forms; (iii) organization and supervision of the stock information
center; and (iv) subscription services. For these services, Sandler O'Neill will
receive a fee of $60,000 and reimbursement for its reasonable out-of-pocket
expenses up to a maximum of $20,000. For these services, we have made an advance
payment of $10,000 to Sandler O'Neill.
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock. Other trained employees may
participate in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or answering questions of a ministerial nature.
Other questions of prospective purchasers will be directed to executive officers
or registered representatives of Sandler O'Neill. We will rely on Rule 3a4-1 of
the Securities Exchange Act of 1934 so as to permit officers, directors and
employees to participate in the sale of our common stock. No officer, director
or employee will be compensated for his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
129
The offering will comply with the requirements of Rule 10b-9
promulgated under the Securities Exchange Act of 1934.
Restrictions on Transferability by Directors and Executive Officers
Shares of the common stock purchased by our directors or executive
officers cannot be sold for a period of one year following completion of the
offering, except for a disposition of shares after death. To ensure this
restriction is upheld, shares of the common stock issued to directors and
executive officers will bear a legend restricting their sale. Appropriate
instructions will be issued to the transfer agent with respect to applicable
restrictions on transfer of such stock. Any shares issued to directors and
executive officers as a stock dividend, stock split or otherwise with respect to
restricted stock will be subject to the same restriction.
For a period of three years following the offering, our directors and
executive officers and their associates may not, without the prior approval of
the Office of Thrift Supervision, purchase our common stock except from a broker
or dealer registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made by tax
qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual directors or executive officers.
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in the offering. This registration does not cover
the resale of the shares. Shares of common stock purchased by persons who are
not affiliates of us may be resold without registration. Shares purchased by an
affiliate of us will have resale restrictions under Rule 144 of the Securities
Act. If we meet the current public information requirements of Rule 144, each
affiliate of ours who complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of certain
other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of 1%
of our outstanding shares or the average weekly volume of trading in the shares
during the preceding four calendar weeks. We may make future provisions to
permit affiliates to have their shares registered for sale under the Securities
Act under certain circumstances.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the offering, no depositor may transfer or
enter into an agreement or understanding to transfer any subscription rights or
the legal or beneficial ownership of the shares of common stock to be purchased
in the offering. Depositors who submit an order form will be required to certify
that their purchase of common stock is solely for their own account and there is
no agreement or understanding regarding the sale or transfer of their shares. We
intend to pursue any and all legal and equitable remedies after we become aware
of any agreement or understanding, and will not honor orders we reasonably
believe to involve an agreement or understanding regarding the sale or transfer
of shares.
Effects of the Stock Offering
General. The stock offering will not have any effect on Kearny Federal
Savings Bank's present business of accepting deposits and investing its funds in
loans and other investments permitted by law. The stock offering will not result
in any change in the existing services provided to depositors and borrowers, or
in existing offices, management, and staff. After the stock offering, Kearny
Federal Savings Bank will
130
continue to be subject to regulation, supervision, and examination by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation.
Deposits and Loans. Each holder of a deposit account in Kearny Federal
Savings Bank at the time of the stock offering will continue as an account
holder in Kearny Federal Savings Bank after the stock offering, and the stock
offering will not affect the deposit balance, interest rate or other terms. Each
deposit account will be insured by the Federal Deposit Insurance Corporation to
the same extent as before the stock offering. Depositors will continue to hold
their existing certificates, savings records, checkbooks and other evidence of
their accounts. The stock offering will not affect the loans of any borrower
from Kearny Federal Savings Bank. The amount, interest rate, maturity, security
for, and obligations under each loan will remain contractually fixed as they
existed prior to the stock offering.
Voting Rights. As a federally chartered stock savings bank, all voting
rights of Kearny Federal Savings Bank are held solely by its sole stockholder,
Kearny Financial Corp. All voting rights of Kearny Financial Corp. are held
solely by its sole stockholder, Kearny MHC. All voting rights of Kearny MHC are
held by the depositors and certain borrowers of Kearny Federal Savings Bank at
the applicable record date. After the stock offering, the voting rights of
Kearny Financial Corp. will be held by its stockholders. Kearny MHC will own a
majority of the outstanding common stock of Kearny Financial Corp., and thus the
Board of Directors of Kearny MHC, which is comprised of the same individuals who
are directors of Kearny Financial Corp., will control the affairs of Kearny
Financial Corp., including the election of directors of Kearny Financial Corp.
Material Federal and State Tax Consequences. We have received an
opinion from Malizia Spidi & Fisch, PC on the material federal tax consequences
of the stock offering to Kearny Financial Corp., the purchasers of its common
stock and the recipients of subscription rights to purchase such common stock.
The opinion has been filed as an exhibit to the registration statement of which
this prospectus is a part and covers those federal tax matters that are material
to the transaction. Such opinion is made in reliance upon various statements,
representations and declarations as to matters of fact made by us, as detailed
in the opinion. The opinion provides that:
o we will recognize no gain or loss upon the receipt of money in
exchange for shares of common stock; and
o no gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members upon the
distribution to them of the nontransferable subscription rights
to purchase shares of common stock.
The opinion in the second bullet above is predicated on representations
from Kearny Federal Savings Bank, Kearny Financial Corp. and Kearny MHC that no
person shall receive any payment, whether in money or property, in lieu of the
issuance of subscription rights. The opinion in the second bullet above is also
based on the position that the subscription rights to purchase shares of common
stock received by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members have a fair market value of zero. In reaching their
opinion stated in the second bullet above, Malizia Spidi & Fisch, PC has noted
that the subscription rights will be granted at no cost to the recipients, will
be legally non-transferable and of short duration, and will provide the
recipients with the right only to purchase shares of common stock at the same
price to be paid by members of the general public in any community offering.
Malizia Spidi & Fisch, PC believes that it is more likely than not that the fair
market value of the subscription rights to purchase common stock is zero.
Malizia Spidi & Fisch, PC has noted in its opinion that they are not aware of
the Internal Revenue Service claiming in any similar transaction that
131
subscription rights have any market value. In that there are no judicial
opinions or official Internal Revenue Service positions on this issue, however,
such position related to subscription rights comes to a reasoned conclusion
instead of an absolute conclusion on these issues. Such conclusion of counsel is
supported by a letter from RP Financial furnished to us which states that the
subscription rights do not have any value when they are distributed or
exercised. If the Internal Revenue Service disagrees with this valuation of
subscription rights and determines that such subscription rights have value,
income may be recognized by recipients of these rights, in certain cases whether
or not the rights are exercised. This income may be capital gain or ordinary
income, and Kearny Financial Corp. could recognize gain on the distribution of
these rights. Based on the foregoing, Malizia Spidi & Fisch, PC believes that it
is more likely than not that the nontransferable subscription rights to purchase
our common stock have no value.
We are also subject to New Jersey income taxes and have received an
opinion from Radics & Co., LLC that the stock offering will be treated for New
Jersey state tax purposes similar to the treatment of the stock offering for
federal tax purposes.
Unlike a private letter ruling from the IRS, the federal and state tax
opinions have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the New Jersey tax authorities. Eligible
Account Holders and Supplemental Eligible Account Holders are encouraged to
consult with their own tax advisers as to the tax consequences in the event the
subscription rights are determined to have any market value.
Interpretation, Amendment or Termination of the Plan of Stock Offering
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. To the extent permitted by law,
all interpretations by us of the plan of stock issuance will be final; however,
such interpretations have no binding effect on the Office of Thrift Supervision.
The plan of stock issuance provides that, if deemed necessary or desirable, we
may substantively amend the plan of stock issuance as a result of comments from
regulatory authorities or otherwise.
Completion of the offering requires the sale of all shares of the
common stock within ninety days following approval of the plan of stock issuance
by the Office of Thrift Supervision, unless an extension is granted by the
Office of Thrift Supervision. If this condition is not satisfied, the plan of
stock issuance will be terminated and we will continue our business. We may
terminate the plan of stock issuance at any time.
Conditions to the Offering
Completion of the offering is subject to several factors, including:
1. the receipt of all the required approvals of the Office of Thrift
Supervision for the issuance of common stock in the offering, and
2. the sale of a minimum of 14,025,000 shares of common stock.
If such conditions are not met before we complete the offering, all
funds received will be promptly returned with interest and all withdrawal
authorizations will be canceled. The stock purchases of our officers and
directors will be counted for purposes of meeting the minimum number of shares.
132
RESTRICTIONS ON ACQUISITION OF KEARNY FINANCIAL CORP.
General
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Kearny Financial Corp., Kearny Federal
Savings Bank or their respective capital stock are described below. Also
discussed are certain provisions in Kearny Financial Corp.'s charter and bylaws
which may be deemed to affect the ability of a person, firm or entity to acquire
Kearny Financial Corp.
Statutory and Regulatory Restrictions on Acquisition
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or of the public to
permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Kearny Financial Corp. or Kearny Federal Savings Bank without
Office of Thrift Supervision approval.
Charter and Bylaws of Kearny Financial Corp.
The following discussion is a summary of certain provisions of the
charter and bylaws of Kearny Financial Corp. that relate to corporate
governance. The description is necessarily general and qualified by reference to
the charter and bylaws.
133
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 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.
134
DESCRIPTION OF CAPITAL STOCK
General
Kearny Financial Corp. is authorized to issue 75,000,000 shares of
common stock, par value $0.10 per share and 25,000,000 shares of serial
preferred stock, par value $0.10 per share. We currently expect to have between
46,750,000 and 63,250,000 shares of common stock, subject to an increase to
72,737,500 shares, outstanding after the stock offering, including shares that
will be held by Kearny MHC. Upon payment of the purchase price shares of common
stock issued in the offering will be fully paid and non-assessable. Each share
of common stock will have the same relative rights as, and will be identical in
all respects with, each other share of common stock. The common stock will
represent non-withdrawable capital, will not be an account of insurable type and
will not be insured by the Federal Deposit Insurance Corporation or any other
governmental agency. The Board of Directors can, without stockholder approval,
issue additional shares of common stock, although Kearny MHC, so long as it is
in existence, must own a majority of Kearny Financial Corp.'s outstanding shares
of common stock.
Common Stock
Distributions. Kearny Financial Corp. can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations which
are imposed by law. See 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.
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
135
full or limited voting rights. The issuance of preferred stock could adversely
affect the voting and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the stock offering and federal taxation will be
passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. Matters
relating to state taxation will be passed upon for us by Radics & Co., LLC, Pine
Brook, New Jersey. Certain legal matters will be passed upon for Sandler O'Neill
& Partners, L.P. by Thacher Proffitt & Wood LLP, New York.
EXPERTS
The Consolidated Financial Statements of Kearny Financial Corp. at June
30, 2004 and 2003 and for each of the years in the three year period ended June
30, 2004 have been included in this prospectus in reliance upon the report of
Radics & Co., LLC, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
RP Financial, LC has consented to the publication in this document of a
summary of its letter to Kearny Financial Corp. setting forth its conclusion as
to the estimated pro forma market value of the common stock and has also
consented to the use of its name and statements with respect to it appearing in
this document.
REGISTRATION REQUIREMENTS
Prior to completion of the offering, we will register our common stock
with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. We will be subject to the information, proxy solicitation, insider
trading restrictions, tender offer rules, periodic reporting and other
requirements of the SEC under the Securities Exchange Act of 1934. We will not
deregister the common stock under the Securities Exchange Act of 1934 for a
period of at least three years following the stock offering.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. The statements contained in this document as to the contents of any
contract or other document filed as an exhibit to the Form S-1 are, of
necessity, brief descriptions. The registration statement and exhibits can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of the registration
materials can be obtained from the SEC at prescribed rates. You may obtain
information on the operation of the Public Reference Room by calling
1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy
and information
136
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.
137
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.
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[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
Common Stock Earnings - Other
----------------- Paid in Substantially Comprehensive
Shares Amount Capital Restricted Income Total
------ ------ ------- ---------- ------ -----
(In Thousands)
Balance - June 30, 2001 $10 $ 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 10 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 10 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 $10 $ 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 - (4,056) 3,726
--------- --------- ---------
Net cash provided by operating activities 14,603 9,369 21,162
--------- --------- ---------
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)
Proceeds from issuance of common stock of West Essex Bancorp, Inc. - 344 276
Purchase of treasury stock of West Essex Bancorp, Inc. - - (2,530)
Dividends paid to minority stockholders of West Essex Bancorp, Inc. and
Pulaski Bancorp, Inc. - (1,052) (1,174)
--------- --------- ---------
Net cash (used in) provided by financing activities (57,340) 96,737 134,551
--------- --------- ---------
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. The impairment test is performed in two
phases. The first step of the goodwill impairment test compares the
fair value of the reporting unit with its carrying amount, including
goodwill. If the fair value of the reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired;
however, if the carrying amount of the reporting unit exceeds its fair
value, an additional procedure must be performed. That additional
procedure compares the implied fair value of the reporting unit's
goodwill (as defined in SFAS No. 142), with the carrying amount of
that goodwill. An impairment loss is recorded to the extent that the
carrying amount of goodwill exceeds its implied fair value. Fair value
is determined by a combination of the Comparable Transaction and
Discounted Cash Flow approaches. No impairment charges were required
to be recorded in the years ended June 30, 2004, 2003 or 2002. If an
impairment loss is determined to exist in the future, such loss will
be reflected as an expense in the consolidated statements of income in
the period in which the impairment loss is determined. Separate
intangible assets, including core deposit intangibles that are not
deemed to have indefinite lives, continue to be amortized over their
useful lives, which is estimated to be ten years.
Income taxes
The Company and its subsidiaries file consolidated federal income tax
returns. Income taxes are allocated based on the contribution of income
to the consolidated income tax returns. Separate state income tax
returns are filed.
Federal and state income taxes have been provided on the basis of the
reported income. The amounts reflected on the Company's tax returns
differ from these provisions due principally to temporary differences
in the reporting of certain items for financial reporting and income
tax reporting purposes. Deferred income taxes are recorded to recognize
such temporary differences.
Stock-based compensation plans
Entities acquired by Company had granted stock options to employees and
outside directors. See note 13 for additional information as to option
grants. The options granted were accounted for using the intrinsic
value method, in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. No compensation expense has been reflected in net
income for the options granted as all such grants had an exercise price
equal to the market price of the underlying stock at the date of grant.
The following table provides information as to net income and earnings
per share as if the fair value recognition provisions of Statement of
Financial Accounting Standards No 123, "Accounting for Stock-Based
Compensation", as amended, had been applied to all option grants.
F - 10
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Stock-based compensation plans (Cont'd.)
Year Ended June 30,
------------------------------------------
(In Thousands, Except for Per Share Amounts)
Net income as reported $ 12,897 $ 8,899 $ 13,350
Remove: Total stock-based compensation expense,
net of income taxes, included in reported
net income - - -
Include: Total stock-based compensation expense,
net of income taxes, that would have been
included in the detemrination of net income
if the fair value method had been applied to
all grants - (155) (139)
--------- -------- ----------
Pro forma net income $ 12,897 $ 8,744 $ 13,211
========= ======== ==========
Basic and diluted net income per common share:
As reported $1,289.70 $ 889.90 $ 1,335.00
pro forma 1,289.70 874.40 1,321.10
========= ======== ==========
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.
F - 25
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
Stock based compensation plans (Cont'd.)
The Stock Incentive Plan included both stock awards and stock options.
Stock awards were expensed over the vesting period based upon the fair
value of awards at the grant dates. Stock options were accounted for
using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees"; accordingly, no expense was recognized as the exercise
prices of all option grants were equal to the market value of the
underlying stock on the grant dates. The weighted average grant date
fair value of options granted during the years ended June 30, 2003 and
2002 (none were granted thereafter), estimated using the Black-Scholes
option-pricing model, and assumptions used in such valuations, were as
follows:
Year Ended June 30,
-------------------
2003 2002
---- ----
Options granted 1,000 10,829
Weighted average grant-date fair value per option $8.84 $4.72
Expected common stock dividend yield 2.93% 3.29%
Expected volatility 58.17% 38.08%
Expected option life 6.5 Years 6.5 Years
Risk-free interest rate 4.18% 4.66%
F-26
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-27
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 - 28
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 - 29
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 - 30
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 - 31
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 - 32
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 - 33
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 $23,678 $26,511
Home equity loans 4,027 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
------- -------
$62,155 $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 - 35
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 - 36
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents and interest receivable
The carrying amounts for cash and cash equivalents and interest
receivable approximate fair value because they mature in three
months or less.
Securities available for sale, investment securities held to
maturity and mortgage-backed securities held to maturity
The fair values for securities available for sale, investment
securities held to maturity and mortgage-backed securities held
to maturity are based on quoted market prices when available. If
quoted market prices are not available, fair value is estimated
using quoted market prices for similar securities.
Loans receivable
The fair value of loans receivable is estimated by discounting the
future cash flows, using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities, of such loans.
Deposits
The fair value of demand, savings and club accounts is equal to
the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated using rates currently
offered for deposits of similar remaining maturities. The fair
value estimates do not include the benefit that results from the
low-cost funding provided by deposit liabilities compared to the
cost of borrowing funds in the market.
Advances from FHLB
Fair value is estimated using rates currently offered for advances
of similar remaining maturities.
Commitments
The fair value of commitments to fund credit lines and originate
or participate in loans is estimated using fees currently charged
to enter into similar agreements taking into account the
remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loans
commitments, fair value also considers the difference between
current levels of interest and the committed rates.
F - 37
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd)
The carrying amounts and estimated fair value of financial instruments are as
follows:
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 $ 32,453 $ 32,453 $ 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 - 38
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 - 39
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 - 40
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 - 41
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 - (4,056) 3,726
-------- -------- --------
Net cash (used in) provided by operating activities (133) 95,752 2,772
-------- -------- --------
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) -
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock of West
Essex Bancorp, Inc. - 344 276
Purchase of treasury stock of West Essex Bancorp, Inc. - - (2,530)
Dividends paid to minority stockholders of West Essex
Bancorp, Inc. and Pulaski Bancorp, Inc. - (1,052) (1,174)
-------- -------- --------
Net cash used in financing activities - (708) (3,428)
-------- -------- --------
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 - 42
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 - 43
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 - 44
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 - 45
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which the offer or solicitation would be unlawful. The affairs of Kearny
Financial Corp. and its subsidiaries may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
KEARNY FINANCIAL CORP.
Holding Company for Kearny Federal Savings Bank
Up to 18,975,000 Shares of Common Stock
(Subject to Increase to up to 21,821,250 Shares)
PROSPECTUS
Sandler O'Neill & Partners, L.P.
______________, 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 November 12,
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 November 12, 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
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
November 10, 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 21,821,250 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/MALIZIA SPIDI & FISCH, PC
-------------------------------------
MALIZIA SPIDI & FISCH, PC
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, PENNSYLVANIA 16801
(202) 434-4660 (814) 272-3502
FACSIMILE: (202) 434-4661 FACSIMILE: (814) 272-3514
November 10, 2004
Board of Directors
Kearny Federal Savings Bank
614 Kearny Avenue
Kearny, New Jersey 07032
Re: Federal Income Tax Opinion
Relating to the Initial Stock Offering of
Kearny Financial Corp.
Members of the Board:
In accordance with your request, set forth herein below is the opinion
of this firm relating to the material federal income tax consequences of the
proposed initial public stock offering (the "Offering") of Kearny Financial
Corp. (the "Company"), a federal stock holding company.
We have examined such corporate records, certificates and other
documents as we have considered necessary or appropriate for this opinion. In
such examination, we have accepted, and have not independently verified, the
authenticity of all original documents, the accuracy of all copies, and the
genuineness of all signatures. Further, the capitalized terms which are used in
this opinion and are not expressly defined herein shall have the meaning
ascribed to them in the Plan of Stock Issuance (the "Plan") adopted on June 7,
2004, as amended, by the Company, Kearny MHC (the "MHC"), and Kearny Federal
Savings Bank (the "Bank").
STATEMENT OF FACTS
Pursuant to a Plan of Reorganization from a Federal Mutual Savings
Bank to a Federal Mutual Holding Company dated November 20, 2000, the Bank
converted to the mutual holding company form of organization in March 2001 with
no stock offering. Pursuant to the Mutual Holding Company Plan of
Reorganization, the Bank became a federal stock savings bank, which has all of
its stock owned by the Company, a federal stock holding company, which has all
of its stock owned by the MHC, a federal mutual holding company. Pursuant to the
Plan, the 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 Company.
MALIZIA SPIDI & FISCH, PC
Board of Directors
Kearny Federal Savings Bank
November 10, 2004
Page 2
In adopting the Plan, the Board of Directors has determined that the
Offering is advisable and in the best interest of the Bank, the Company, the MHC
and its members. The Offering will enable the Company and the Bank to increase
its capital through the issuance of capital stock without undertaking a full
conversion from the mutual to the stock form of organization. The Offering will
not foreclose the opportunity to effect a conversion of the MHC from the stock
form of organization in the future. The 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.
Based solely upon our review of such documents, and upon such
information as the Bank and the Company have provided to us (which we have not
attempted to verify in any respect), and in reliance upon such documents and
information, we understand the relevant facts with respect to the Offering to be
as follows:
As required by OTS regulations, shares of Company common stock
("Company Stock") will be offered pursuant to non-transferable subscription
rights on the basis of preference categories. The Company has established
various preference categories under which shares of Company Stock may be
purchased and a Community Offering and a Public Offering category for the sale
of shares not purchased under the preference categories. If the third preference
category is determined to be inappropriate to the Offering, then there will only
be three preference categories consisting of the first, second and fourth
preference categories set forth below, and all references herein to Supplemental
Eligible Account Holder and the Supplemental Eligibility Record Date shall not
be applicable to the Offering. To the extent that Company Stock is available, no
subscriber will be allowed to purchase less than 25 shares of Company Stock,
unless the aggregate purchase price exceeds $500.
The first preference category is reserved for the Company's Eligible
Account Holders. The Plan defines "Eligible Account Holder" as any person
holding a Qualifying Deposit. The Plan defines "Qualifying Deposit" as the
aggregate balance of all savings accounts of an Eligible Account Holder in the
Bank at the close of business on March 31, 2003, which is at least equal to
$50.00. If a savings account holder of the Bank qualifies as an Eligible Account
Holder, he or she will receive, without payment, non-transferable subscription
rights to purchase Company Stock. The number of shares that each Eligible
Account Holder may subscribe to is equal to the greater of (a) the maximum
purchase limitation established for the Community Offering or the Public
Offering; (b) one tenth of one percent of the total offering of shares; or (c)
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Company Stock to be issued by a
fraction of which the numerator is the amount of the Qualifying Deposit of the
Eligible Account Holder and the denominator is the total amount of the
Qualifying Deposits of all Eligible Account Holders. If there is an
oversubscription, shares will be allocated among subscribing Eligible Account
Holders so as to permit each account holder, to the extent possible, to purchase
a number of shares sufficient to make his or her total allocation equal to 100
shares. Any shares not then allocated shall be allocated among the subscribing
Eligible Account Holders on an
MALIZIA SPIDI & FISCH, PC
Board of Directors
Kearny Federal Savings Bank
November 10, 2004
Page 3
equitable basis, related to the amounts of their respective deposits as compared
to the total deposits of Eligible Account Holders on the Eligibility Record
Date. Non-transferable subscription rights to purchase Company Stock received by
officers and directors of the Company and their associates based on their
increased deposits in the Company in the one year period preceding the
Eligibility Record Date shall be subordinated to all other subscriptions
involving the exercise of non-transferable subscription rights to purchase
shares of Company Stock under the first preference category.
The second preference category is reserved for tax-qualified employee
stock benefit plans of the Bank. The Plan defines "tax qualified employee stock
benefit plans" as 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 of 1986, as amended (the "Code").
Under the Plan, the Bank's tax-qualified employee stock benefit plans may
subscribe for up to 8% of the shares of Company Stock to be offered in the
Offering.
The third preference category is reserved for the Bank's Supplemental
Eligible Account Holders. The Plan defines "Supplemental Eligible Account
Holder" as any person (other than officers or directors of the Company and their
associates) holding a deposit in the Bank on the last day of the calendar
quarter preceding the approval of the Plan by the OTS ("Supplemental Eligibility
Record Date"). This third preference category will only be used in the event
that the Eligibility Record Date is more than 15 months prior to the date of the
latest amendment to the Application for Approval of Offering on Form AC filed
prior to approval by the OTS. The third preference category provides that each
Supplemental Eligible Account Holder will receive, without payment,
non-transferable subscription rights to purchase Company Stock to the extent
that such shares of Company Stock are available after satisfying subscriptions
for shares in the first and second preference categories above. The number of
shares to which a Supplemental Eligible Account Holder may subscribe to is the
greater of (a) the maximum purchase limitation established for the Community
Offering; (b) one-tenth of one percent of the total offering of shares; or (c)
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the total number of the shares of Company Stock to be issued by a
fraction of which the numerator is the amount of the deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of the deposits
of all Supplemental Eligible Account Holders on the Supplemental Eligibility
Record Date. Subscription rights received pursuant to the third preference
category shall be subordinated to all rights under the first and second
preference categories. Non-transferable subscription rights to be received by a
Supplemental Eligible Account Holder in the third preference category shall be
reduced by the subscription rights received by such account holder as an
Eligible Account Holder under the first and second preference categories. In the
event of an oversubscription, shares will be allocated so as to enable each
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his total allocation, including shares
previously allocated in the first and second preference categories, equal to 100
shares or the total amount of his subscription, whichever is less. Any shares
not then allocated shall be allocated among the subscribing Supplemental
Eligible Account Holders on an equitable basis related to the amount of their
respective deposits as compared to the total deposits of Supplemental Eligible
Account Holders on the Supplemental Eligibility Record Date.
MALIZIA SPIDI & FISCH, PC
Board of Directors
Kearny Federal Savings Bank
November 10, 2004
Page 4
The fourth preference category is reserved for the Bank's Other
Members. If there are sufficient shares remaining after satisfaction of all
subscriptions by the Eligible Account Holders, the tax-qualified employee stock
benefit plans and the Supplemental Eligible Account Holders, each Other Member
(depositors as of October 31, 2004) who is not an Eligible Account Holder or a
Supplemental Eligible Account Holder shall have the opportunity to purchase up
to the greater of 50,000 shares of Company Stock or one-tenth of 1% of the total
offering of shares of Company Stock offered in the subscription offering,
subject to the overall purchase limitations described below. If Other Members
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders, the tax-qualified employee stock benefit plans and
Supplemental Eligible Account Holders, is in excess of the total number of
shares offered in the offering, the subscriptions of Other Members will be
allocated among subscribing Other Members to permit each subscribing Other
Member to purchase a number of shares sufficient to make his total allocation of
common stock equal to the lesser of 100 shares or the number of shares
subscribed for by Other Members. Any shares remaining will be allocated among
the subscribing Other Members whose subscriptions remain unsatisfied on a 100
shares (or whatever lesser amount is available) per order basis until all orders
have been filled or the remaining shares have been allocated.
The Plan further provides for limitations upon purchases of Company
Stock. Specifically, any person by himself or herself may not purchase or
subscribe more than $500,000 of Company Stock. In addition, any person with an
associate or a group of persons acting in concert may purchase or subscribe for
not more than the lesser of $750,000. However, Tax-Qualified Employee Stock
Benefit Plans may purchase up to 8% of the total shares of Company Stock issued.
The charitable foundation may purchase up to 2% of the outstanding Company
Stock. Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the Bank may increase or decrease any of the
purchase limitations set forth herein at any time. The Board of Directors of the
Bank may, in its sole discretion, increase the maximum purchase limitation up to
5.0%. Requests to purchase additional shares of Company Stock under this
provision will be allocated by the Board of Directors on a pro rata basis giving
priority in accordance with the priority rights set forth in the Plan. Officers
and directors of the Company and their associates may not purchase in the
aggregate more than 25% of the Company Stock issued pursuant to the Offering.
Directors of the Company will not be deemed associates or a group acting in
concert solely as a result of their membership on the Board of Directors of the
Bank. All of the shares of Company Stock purchased by officers and directors
will be subject to certain restrictions on sale for a period of one year.
The Plan provides that no person will be issued any subscription rights
or be permitted to purchase any Company Stock if such person resides in a
foreign country or in a state of the United States with respect to which all 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 the Company Stock in such state,
would require the Company or the Company under the securities laws of such state
to register as a broker or dealer or to register or otherwise qualify its
securities for sale in such state; and (c) such registration or qualification
would be impracticable for reasons of cost or otherwise.
MALIZIA SPIDI & FISCH, PC
Board of Directors
Kearny Federal Savings Bank
November 10, 2004
Page 5
The Company will take 50% of the net proceeds from the sale of Company
Stock and contribute it as a capital contribution to the Bank. The Bank will pay
expenses of the Offering solely attributable to them, if any. Further, the
Company will pay its own expenses of the Offering and will not pay any expenses
solely attributable to the purchasers of Company Stock.
REPRESENTATIONS BY MANAGEMENT
In connection with the Offering, the following statements,
representations and declarations as to matters of fact have been made to us by
management of the Company:
1. The Offering will be implemented in accordance with the terms of the
Plan and all conditions precedent contained in the Plan shall be performed prior
to the consummation of the Offering.
2. The Bank, the Company and the MHC are not currently in bankruptcy or
involved in a bankruptcy proceeding. The proposed transaction does not involve a
receivership, foreclosure, or similar proceeding before a federal or state
agency involving a financial institution.
3. The Company, the MHC and the Bank will pay their own expenses of the
Offering and will not pay any expenses solely attributable to the Company
stockholders.
4. There will be no purchase price advantage for the Bank's deposit
account holders who purchase Company Stock in the Offering.
5. No creditors of the Bank have taken any steps to enforce their
claims against the Bank by instituting bankruptcy or other legal proceedings, in
either a court or appropriate regulatory agency, that would eliminate the
proprietary interests of the members of the Company prior to the Offering.
6. On a per share basis, the purchase price of the Company Stock in the
Offering will be equal to the fair market value of such stock at the time of the
completion of the proposed transaction.
7. No cash or property will be given to any member of the Bank in lieu
of subscription rights.
OPINION OF COUNSEL
Based solely upon the foregoing information and our analysis and
examination of current applicable federal income tax laws, rulings, regulations,
judicial precedents and provided the Offering is undertaken in accordance with
the above assumptions, we render the following opinion of counsel:
1. The Company will recognize no gain or loss upon its receipt of money
in exchange for shares of Company Stock. (Section 1032(a) of the Code).
2. It is more likely than not that the fair market value of the
subscription rights to purchase Company Stock is zero. Accordingly, no gain or
loss will be recognized by Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members upon the distribution to them of the
MALIZIA SPIDI & FISCH, PC
Board of Directors
Kearny Federal Savings Bank
November 10, 2004
Page 6
nontransferable subscription rights to purchase shares of Company Stock. Gain
realized, if any, by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members on the distribution to them of nontransferable
subscription rights to purchase shares of Company Stock will be recognized but
only in an amount not in excess of the fair market value of such subscription
rights (Code Section 356(a)). Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription rights (Rev.
Rul. 56-572, 1956-2 C.B. 182).
Our opinion under paragraph 2 above is predicated on the representation
that no person shall receive any payment, whether in money or property, in lieu
of the issuance of subscription rights. Our opinion under paragraph 2 is based
on the conclusion that the subscription rights to purchase shares of Company
Stock received by Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members have a fair market value of zero. We note 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 recipient
with the right only to purchase shares of Company Stock at the same price to be
paid by members of the general public in any Community Offering. We note that we
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, our opinion related to subscription rights comes to a reasoned
conclusion instead of an absolute conclusion on these issues. Our conclusion is
supported by a letter from RP Financial, LC, 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
the Company could recognize gain on the distribution of these rights. Based on
the foregoing, we believe it is more likely than not that the nontransferable
subscription rights to purchase Company Stock have no value.
SCOPE OF OPINION
Our opinion is limited to the material federal income tax matters of
the transaction proposed as it relates to the Company and the recipients of
subscription rights to purchase the Company Stock as described above and does
not address any other federal income tax considerations or any state, local,
foreign, or other tax considerations. If any of the information on which we have
relied is incorrect, or if changes in the relevant facts occur after the date
hereof, our opinion could be affected thereby. Moreover, our opinion is based on
the Code, applicable Treasury regulations promulgated thereunder, and Internal
Revenue Service rulings, procedures, and other pronouncements published by the
Internal Revenue Service. These authorities are all subject to change, and such
change may be made with retroactive effect. We can give no assurance that, after
such change, our opinion would not be different. We undertake no responsibility
to update or supplement our opinion. This opinion is not binding on the Internal
Revenue Service, and there can be no assurance, and none is hereby given, that
the Internal Revenue Service will not take a position contrary to one or more of
the positions reflected in the foregoing opinion, or that our opinion will be
upheld by the courts if challenged by the Internal Revenue Service.
MALIZIA SPIDI & FISCH, PC
Board of Directors
Kearny Federal Savings Bank
November 10, 2004
Page 7
USE OF OPINION
This opinion is given solely for the benefit of the parties to the
Plan, the Eligible Account Holders, Supplemental Eligible Account Holders, and
Other Members and those who purchase stock pursuant to the Plan, and may not be
relied upon by any other party or entity or referred to in any document without
our express written consent.
CONSENT
We hereby consent to the filing of this opinion as an exhibit to the
Form MHC-2 of the Bank filed with the OTS, and the Registration Statement on
Form S-1 of the Company filed under the Securities Act of 1933, as amended, and
to the reference of our firm in the prospectus related to this opinion.
Very truly yours,
/s/MALIZIA SPIDI & FISCH, PC
MALIZIA SPIDI & FISCH, PC
Kearny MHC
Kearny Financial Corp.
Kearny Federal Savings Bank
614 Kearny Avenue
Post Office Box 604
Kearny, New Jersey 07032
Dear Members:
You have requested our opinion regarding certain New Jersey tax consequences of
the proposed initial public stock offering (the "Offering") of Kearny Financial
Corp. (the "Company"), a federal stock holding company.
We have examined such corporate records, certificates and other documents as we
have considered necessary or appropriate for this opinion. In such examination,
we have accepted, and have not independently verified, the authenticity of all
original documents, the accuracy of all copies, and the genuineness of all
signatures. Further, the capitalized terms which are used in this opinion and
are not expressly defined herein shall have the meaning ascribed to them in the
Plan of Stock Issuance (the "Plan") adopted on June 7, 2004, by the Company,
Kearny MHC (the "MHC"), and Kearny Federal Savings Bank (the "Bank").
Pursuant to a Plan of Reorganization from a Federal Mutual Savings Bank to a
Federal Mutual Holding Company dated November 20, 2000, the Bank converted to
the mutual holding company form of organization in March 2001 with no stock
offering. Pursuant to the Mutual Holding Company Plan of Reorganization, the
Bank became a federal stock savings bank, which has all of its stock owned by
the Company, a federal stock holding company, which has all of its stock owned
by the MHC, a federal mutual holding company. Pursuant to the Plan, the 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 Company.
The proposed transaction and its federal income tax consequences are described
in an opinion letter dated November 10, 2004, from Malizia Spidi & Fisch, PC
(the "Federal Opinion Letter") stating that:
1. The Company will recognize no gain or loss upon its receipt of money in
exchange for shares of Company Stock (Section 1032(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
Kearny MHC 2.
Kearny Financial Corp.
Kearny Federal Savings Bank
2. Gain realized, if any, by the Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members on the distribution to them of
nontransferable subscription rights to purchase shares of Company Stock
will be recognized but only in an amount not in excess of the fair market
value of such subscription rights (Code Section 356(a)). Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members will not
realize any taxable income as a result of the exercise by them of the
nontransferable subscription rights (Rev. Rul. 56-572, 1956-2 C.B. 182). It
is more likely than not that the fair market value of the subscription
rights to purchase Company Stock is zero. Accordingly, no gain or loss will
be recognized by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members upon the distribution to them of the
nontransferable subscription rights to purchase shares of Company Stock.
The facts, assumptions and representations and the federal tax consequences set
forth in the Federal Opinion Letter are incorporated in this opinion letter by
reference as if fully set forth herein. References and abbreviations used in the
Federal Opinion Letter are also used herein.
SUPPLEMENTAL REPRESENTATIONS
In addition to the facts, assumptions and representations set forth in the
Federal Opinion Letter, you have provided the following additional
representations concerning the Reorganization:
The MHC, the Company and the Bank are subject to and have been filing
returns and paying tax under the New Jersey Corporation Business Tax
Reform Act, N.J.S. C54:10A-2, et seq. (the "CBT").
OPINION
Based solely on the facts, assumptions and representations set forth in the
Federal Opinion Letter and the foregoing supplemental representations and
assuming the initial stock issuance occurs in accordance with the Plan, it is
our opinion that:
To the extent that consummation of the Plan will not result in the
recognition of gain or loss by the Company and will otherwise qualify
as "tax free" under the Code, all as more fully described in the
Federal Opinion Letter, consummation of the Plan will not result in any
additional tax liabilities under the CBT.
Except for certain state adjustment under the CBT which are not
impacted by consummation of the Plan, the CBT is imposed on a
taxpayer's net income, which is deemed to be federal taxable income
before net operating loss deduction and special deductions
N.J.S.C54:10A-4. Accordingly, since the CBT is based on federal taxable
income, the nonrecognition events, carryovers, and tax free exchanges
under federal income tax law resulting from the Plan, all as more fully
described in the Federal Opinion Letter, will be afforded the same
treatment for purposes of the CBT.
Kearny, MHC 3.
Kearny Financial Corp.
Kearny Federal Savings Bank
* * * * *
Since this letter is provided in advance of the closing of the transactions
contemplated by the Plan, we have assumed that such transactions will be
consummated in accordance with the Plan, as well as the information and
representations referred to herein. Any change in the Plan could cause us to
modify the opinions expressed herein.
The opinions expressed herein are based solely on current New Jersey tax law,
including applicable regulations thereunder, and current judicial and
administrative authority. Any future amendments to the tax statutes cited herein
or applicable regulations, or new judicial decisions or administrative
interpretations, many of which could be retroactive in effect, could cause us to
modify the opinions expressed herein.
We express no opinion with respect to the tax treatment of the Plan under the
Code or any other law of the State of New Jersey not specifically addressed
herein or the law of any other state or locality, or to the tax treatment of any
conditions existing at the time of, or effects resulting from, the
Reorganization which are not specifically covered by the items set forth in this
opining letter.
This opinion is given solely for the benefit of the parties to the Plan,
Eligible Account Holders, Supplemental Eligible Account Holders, Other Members
and other investors who purchase shares pursuant to the Plan, and may not be (a)
relied upon by any other party or entity or (b) referred to in any document
without our express written consent.
We hereby consent to the filing, in connection with the Plan, of this opinion
letter as an exhibit to (a) the Form MHC-2 filed by the Bank with the OTS and
(b) the Registration Statement on Form S-1 filed by the Company with the
Securities and Exchange Commission, and to the reference thereto in the
prospectus included in the registration statement on Form S-1 related to this
opinion. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended.
/s/Radics & Co., LLC
November 10, 2004
Pine Brook, New Jersey
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 1st day of July, 2004, ("Effective
Date") by and between Kearny Federal Savings Bank, Kearny, New Jersey (the
"Bank") and John N. Hopkins (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as the
President and Chief Executive Officer and is experienced in all phases of the
business of the Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship between the Bank and the Executive;
NOW THEREFORE, in consideration of the covenants and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
President and Chief Executive Officer. The Executive hereby accepts said
employment and agrees to render such administrative and management services to
the Bank and Kearny Financial Corp., its parent holding company and any
successor thereto ("Parent") as are currently rendered and as are customarily
performed by persons situated in a similar executive capacity. The Executive
shall promote the business of the Bank and Parent. The Executive's other duties
shall be such as the Board of Directors for the Bank (the "Board of Directors"
or "Board") may from time to time reasonably direct, including normal duties as
an officer of the Bank. The Executive's employment shall be for no definite
period of time, and the Executive or the Bank may terminate such employment
relationship at any time for any reason or no reason. The employment at-will
relationship remains in full force and effect regardless of any statements to
the contrary made by company personnel or set forth in any documents other than
those explicitly made to the contrary and signed by an authorized representative
of the Board.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending thirty-six (36) months
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of this Agreement shall be extended for up to
an additional period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Executive has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended. If a determination is made by the
Board to not renew such Term at the time of such
renewal interval, the Board shall furnish the Executive of written notice of
such determination not to renew the Term and the reason for such action or
failure to take such action by the Board within 10 calendar days of such Board
action. References herein to the Term of this Agreement shall refer both to the
initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the Term of this Agreement a minimum base salary at the rate of $450,000
per annum ("Base Salary"), payable in cash not less frequently than monthly;
provided, that the rate of such salary shall be reviewed by the Board of
Directors not less often than annually, and the Executive shall be entitled to
receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
Additionally, Executive's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
five weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate
2
unused vacation or sick leave from one year to the next; provided, however, such
Executive may carry forward from year to year a maximum of ten days of unused
vacation leave.
(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses, subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If such
expenses are paid in the first instance by the Executive, the Bank shall
reimburse the Executive therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(h) Post-Retirement Medical Coverage. Upon the termination of
employment with the Bank at any time on or after attainment of age 62, the
Executive shall be eligible to maintain participation in the group medical
insurance plan sponsored by the Bank from time to time for the benefit of the
Executive and Executive's dependent family at the Bank's expense, until such
time that the Executive and Executive's spouse shall be eligible for coverage
under the Federal Medicare System, or any successor program. The provisions of
this Section shall survive the termination of this Agreement.
(i) Deferral of Non-Deductible Compensation. In the event that
the Executive's aggregate compensation (including compensatory benefits which
are deemed remuneration for purposes of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code")) from the Bank and other consolidated
filers with the Bank for any calendar year exceeds the greater of (i)
$1,000,000, or (ii) the maximum amount of compensation deductible by the Bank
combined with any other consolidated filers in any calendar year under Section
162(m) of the Code (the "maximum allowable amount"), then any such amount in
excess of the maximum allowable amount shall be mandatorily deferred with
interest thereon at the then "prime rate" plus 300 basis points per annum,
compounded annually, to a calendar year such that the amount to be paid to the
Executive in such calendar year, including deferred amounts and interest
thereon, does not exceed the maximum allowable amount. Subject to the foregoing,
deferred amounts including interest thereon shall be payable at the earliest
time permissible. All unpaid deferred amounts shall be paid to the Executive not
later than his date of termination of employment, unless his date of termination
is on a December 31st, in which case, the unpaid deferred amounts shall be paid
to the Executive on the first business day of the next succeeding
3
calendar year. The provisions of this Section shall survive any termination of
the Executive's employment and any termination of this Agreement.
4. Loyalty.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Bank's Board of Directors may terminate the Executive's
employment at any time, but any termination by the Bank's Board of Directors
other than termination for Cause shall not prejudice the Executive's right to
compensation or benefits under the Agreement. The Executive shall have no right
to receive compensation or other benefits for any period after termination for
Cause. Termination for "Cause" shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of the Agreement. The Bank's Board of Directors may
within its sole discretion, acting in good faith, terminate the Executive for
Cause and shall notify such Executive accordingly; provided that any such
determination shall not be effective unless it is adopted by an affirmative vote
of not less than a majority of the members of the full Board of Directors at a
meeting of the Board called and held for such purpose (after reasonable written
notice has been delivered to the Executive of such meeting, the purpose of such
meeting and the preliminary basis for such Cause termination and an opportunity
for such Executive, together with personal counsel, to be heard before the Board
on the matter prior to such vote by the Board).
4
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Bank without
Cause, the Bank shall be obligated to continue to pay the Executive the salary
provided pursuant to Section 3(a) herein, up to the date of termination of the
remaining Term of this Agreement and the cost of Executive obtaining all health,
life, disability, and other benefits which the Executive would be eligible to
participate in through such date based upon the benefit levels substantially
equal to those being provided Executive at the date of termination of
employment. The provisions of this Section 6(c) shall survive the expiration of
this Agreement.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Bank may in its discretion (i) pay
the Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of Federal
Deposit Insurance Act) all obligations under this Agreement shall terminate as
of the date of default, but this paragraph shall not affect any vested rights of
the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of Federal Deposit Insurance Act; or (ii) by the Director of the
OTS, or his or her designee, at the time that the Director of the OTS, or his or
her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by
5
the Director of the OTS to be in an unsafe or unsound condition. Any rights of
the parties that have already vested, however, shall not be affected by such
action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and FDIC Regulation 12
CFR Part 359, Golden Parachute Indemnification Payments promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Executive returns
to active employment on other than a full-time basis, then his compensation (as
set forth in Section 3(a) of this Agreement) shall be reduced in proportion to
the time spent in said employment, or as shall otherwise be agreed to by the
parties.
9. Change in Control Severance Protection.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Bank or Parent, or
within 24 months thereafter of such Change in Control, absent Cause, Executive
shall be paid an amount equal to the product of 2.999 times the Executive's
"base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Code") and regulations promulgated thereunder. Said sum
shall be paid in one (1) lump sum not later than the date of such termination of
service, and such payments shall be in lieu of any other future payments which
the Executive would be otherwise entitled to receive under Section 6 of this
Agreement. Additionally, the Executive and his or her dependents shall remain
eligible to participate in the medical and dental insurance programs offered by
the Bank to its employees for a period of not less than through the remaining
term of the Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to: (i) the sale of all, or substantially all, of the assets of the Bank
or the Parent; (ii) the merger or recapitalization of
6
the Bank or the Parent whereby the Bank or the Parent is not the surviving
entity; (iii) a change in control of the Bank or the Parent, as otherwise
defined or determined by the Office of Thrift Supervision or regulations
promulgated by it; or (iv) the acquisition, directly or indirectly, of the
beneficial ownership (within the meaning of that term as it is used in Section
13(d) of the Securities Exchange Act of 1934 and the rules and regulations
promulgated thereunder) of twenty-five percent (25%) or more of the outstanding
voting securities of the Bank or the Parent by any person, trust, entity or
group. The term "person" means an individual other than the Executive, or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The reorganization of the Bank from its mutual
holding company form to a parent holding company form whereby such parent
company shall own 100% of the stock of the Bank and public stockholders shall
own 100% of the parent company common stock shall not be deemed a Change in
Control. The provisions of this Section 9(a) shall survive the expiration of
this Agreement occurring after a Change in Control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Bank or Parent, or within
twenty-four months following such Change in Control, and upon the occurrence, or
within 120 days thereafter, of any of the following events enumerated
hereinafter, which have not been consented to in advance by the Executive in
writing: (i) if Executive would be required to move his personal residence or
perform his principal executive functions more than thirty-five (35) miles from
the Executive's primary office as of the signing of this Agreement; (ii) if in
the organizational structure of the Bank, Executive would be required to report
to a person or persons other than the Board of Directors of the Bank; (iii) if
the Bank should fail to maintain Executive's base compensation in effect as of
the date of the Change in Control and the existing employee benefits plans,
including material fringe benefit, stock option and retirement plans, except to
the extent that such reduction in benefit programs is part of an overall
adjustment in benefits applicable to all employees of the Bank and does not
disproportionately adversely impact the Executive; (iv) if Executive would be
assigned duties and responsibilities other than those normally associated with
his position as referenced at Section 1, herein; (v) if Executive's
responsibilities or authority have in any way been materially diminished or
reduced; or (vi) if Executive would not be reelected to the Board of Directors
of the Bank. Upon such voluntary termination of employment by the Executive in
accordance with this subsection, Executive shall thereupon be entitled to
receive the payments described in Section 9(a) of this Agreement. The provisions
of this Section 9(b) shall survive the expiration of this Agreement occurring
after a Change in Control.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
7
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New
Jersey.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Executive acquires a right to
receive benefits from the Bank hereunder, such right shall be no greater than
the right of any unsecured general creditor of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled exclusively by
arbitration in accordance with the rules then in effect of the district office
of the American Arbitration Association ("AAA") nearest to the home office of
the Bank, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof, except to the extent that the parties may otherwise
reach a mutual settlement of such issue. The provisions of this Section 17 shall
survive the expiration of this Agreement.
8
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Executive agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or the Parent
consents to such disclosure or use, or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Bank, the Parent, or any subsidiaries
or affiliates, or to any of the businesses operated by them, and the Executive
confirms that such information constitutes the exclusive property of the Bank
and the Parent. The Executive shall not otherwise knowingly act or conduct
himself (a) to the material detriment of the Bank or the Parent, or its
subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to
the interests of the Bank or the Parent. Executive acknowledges and agrees that
the existence of this Agreement and its terms and conditions constitutes
Confidential Information of the Bank, and the Executive agrees not to disclose
the Agreement or its contents without the prior written consent of the Bank;
provided, however, the Executive may disclose this Agreement to his personal
attorney and personal tax advisor without prior consent from the Bank.
Notwithstanding the foregoing, the Bank reserves the right in its sole
discretion to make disclosure of this Agreement as it deems necessary or
appropriate in compliance with its regulatory reporting requirements.
Notwithstanding anything herein to the contrary, failure by the Executive to
comply with the provisions of this Section may result in the immediate
termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Executive taken by the Bank, including but not
limited to the termination of employment of the Executive for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity. The provisions of this Section shall survive the
expiration of this Agreement.
19. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Executive
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Executive in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Bank or any of its subsidiaries, whether or
not the Executive is a director or officer of the Bank at the time of incurring
any such expenses or liabilities. Such expenses and liabilities shall include,
but shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The Executive shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of the
Bank has approved such settlement. Notwithstanding anything herein to the
contrary, (i) indemnification for expenses shall not extend to matters for which
the Executive's employment or service has been terminated, and (ii) the
obligations of this Section 19 shall survive the termination of this Agreement.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
9
(b) Insurance. During the Term of the Agreement, the Bank shall
provide the Executive (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
(c) Compliance with Regulatory Limitations. Notwithstanding
anything herein to the contrary, the provisions of this Section 19 shall be
subject to the limitations and restrictions provided at 12 CFR 545.121 as it may
be amended from time to time.
20. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto. This Agreement shall supersede
any prior employment agreements and/or change in control severance agreements
between the Executive and the Bank.
10
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first hereinabove written.
Kearny Federal Savings Bank
By: /s/ John J. Mazur, Jr.
------------------------------------
John J. Mazur, Jr.
Chairman of the Board of Directors
ATTEST:
/s/ Sharon Jones
------------------------------------
Secretary
WITNESS:
Kimberly T. Manfredo /s/ John N. Hopkins
------------------------------------ ------------------------------------
John N. Hopkins, Executive
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 1st day of July, 2004, ("Effective
Date") by and between Kearny Federal Savings Bank, Kearny, New Jersey (the
"Bank") and Allan Beardslee (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as a
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship between the Bank and the Executive;
NOW THEREFORE, in consideration of the covenants and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
Senior Vice President. The Executive hereby accepts said employment and agrees
to render such administrative and management services to the Bank and Kearny
Financial Corp., its parent holding company and any successor thereto ("Parent")
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Executive shall promote the business of the
Bank and Parent. The Executive's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors" or "Board") may from time to
time reasonably direct, including normal duties as an officer of the Bank. The
Executive's employment shall be for no definite period of time, and the
Executive or the Bank may terminate such employment relationship at any time for
any reason or no reason. The employment at-will relationship remains in full
force and effect regardless of any statements to the contrary made by company
personnel or set forth in any documents other than those explicitly made to the
contrary and signed by an authorized representative of the Board.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending twenty-four (24) months
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of this Agreement shall be extended for up to
an additional period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Executive has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended. If a determination is made by the
Board to not renew such Term at the time of such renewal interval, the Board
shall furnish the Executive of written notice of such determination not to renew
the Term and the reason for such action or failure to take such action by the
Board within
10 calendar days of such Board action. References herein to the Term of this
Agreement shall refer both to the initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the Term of this Agreement a minimum base salary at the rate of
$183,000 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
Additionally, Executive's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate unused vacation or sick leave from one year to the next; provided,
however, such Executive may carry forward from year to year a maximum of ten
days of unused vacation leave.
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(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses, subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If such
expenses are paid in the first instance by the Executive, the Bank shall
reimburse the Executive therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(h) Post-Retirement Medical Coverage. Upon the termination of
employment with the Bank at any time on or after attainment of age 62, the
Executive shall be eligible to maintain participation in the group medical
insurance plan sponsored by the Bank from time to time for the benefit of the
Executive and Executive's dependent family at the Bank's expense, until such
time that the Executive and Executive's spouse shall be eligible for coverage
under the Federal Medicare System, or any successor program. The provisions of
this Section shall survive the termination of this Agreement.
4. Loyalty.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
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(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Bank may terminate the Executive's employment at any time
with or without Cause within its sole discretion. This Agreement shall not be
deemed to give Executive any right to be retained in the employment or service
of the Bank, or to interfere with the right of the Bank to terminate the
employment of the Executive at any time, but any termination by the Bank other
than termination for Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Cause. The Bank may within its sole discretion, acting in good faith,
terminate the Executive for Cause and shall notify such Executive accordingly;
provided that any such determination shall not be effective unless it is adopted
by an affirmative vote of not less than three-fourths (3/4) of the members of
the full Board of Directors at a meeting of the Board called and held for such
purpose (after reasonable written notice has been delivered to the Executive of
such meeting, the purpose of such meeting and the preliminary basis for such
Cause termination and an opportunity for such Executive, together with personal
counsel, to be heard before the Board on the matter prior to such vote by the
Board). Termination for "Cause" shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Bank without
Cause, the Bank shall be obligated to continue to pay the Executive the salary
provided pursuant to Section 3(a) herein, up to the date of termination of the
remaining Term of this Agreement, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment. The provisions of this Section 6(c) shall survive the expiration
of this Agreement.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as
4
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and FDIC Regulation 12
CFR 359, Golden Parachute Indemnification Payments promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event
5
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Section 3(a) of this Agreement) shall be
reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control Severance Protection.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Bank or Parent, or
within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal to the product of two times the total
compensation paid to the Executive or accrued by the Bank (including amounts
attributable to salary, bonus, deferred compensation and retirement plans) with
respect to the Executive for the most recently completed calendar year ending on
or prior to such date of termination of employment of such Executive . Said sum
shall be paid in one (1) lump sum not later than the date of such termination of
service, and such payments shall be in lieu of any other future payments which
the Executive would be otherwise entitled to receive under Section 6 of this
Agreement. Additionally, the Executive and his or her dependents shall remain
eligible to participate in the medical and dental insurance programs offered by
the Bank to its employees for a period of not less than through the remaining
term of the Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to: (i) the sale of all, or substantially all, of the assets of the Bank
or the Parent; (ii) the merger or recapitalization of the Bank or the Parent
whereby the Bank or the Parent is not the surviving entity; (iii) a change in
control of the Bank or the Parent, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Parent by any person, trust, entity or group. The term "person" means an
individual other than the Executive, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
reorganization of the Bank from its mutual holding company form to a parent
holding company form whereby such parent company shall own 100% of the stock of
the Bank and public stockholders shall own 100% of the parent company common
stock shall not be deemed a Change in Control. The provisions of this Section
9(a) shall survive the expiration of this Agreement occurring after a Change in
Control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Bank or Parent, or within
twenty-four months following such Change in Control, and upon the occurrence, or
within 120 days thereafter, of any of the following events enumerated
hereinafter, which have not been consented to in advance by the Executive in
writing: (i) if
6
Executive would be required to move his personal residence or perform his
principal executive functions more than thirty-five (35) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the Bank
should fail to maintain Executive's base compensation in effect as of the date
of the Change in Control and the existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits applicable to all employees of the Bank and does not disproportionately
adversely impact the Executive; (iii) if Executive would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (iv) if Executive's responsibilities or
authority have in any way been materially diminished or reduced. Upon such
voluntary termination of employment by the Executive in accordance with this
subsection, Executive shall thereupon be entitled to receive the payments
described in Section 9(a) of this Agreement. The provisions of this Section 9(b)
shall survive the expiration of this Agreement occurring after a Change in
Control.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New
Jersey.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent
7
that the Executive acquires a right to receive benefits from the Bank hereunder,
such right shall be no greater than the right of any unsecured general creditor
of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled exclusively by
arbitration in accordance with the rules then in effect of the district office
of the American Arbitration Association ("AAA") nearest to the home office of
the Bank, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof, except to the extent that the parties may otherwise
reach a mutual settlement of such issue. The provisions of this Section 17 shall
survive the expiration of this Agreement.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Executive agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or the Parent
consents to such disclosure or use, or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Bank, the Parent, or any subsidiaries
or affiliates, or to any of the businesses operated by them, and the Executive
confirms that such information constitutes the exclusive property of the Bank
and the Parent. The Executive shall not otherwise knowingly act or conduct
himself (a) to the material detriment of the Bank or the Parent, or its
subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to
the interests of the Bank or the Parent. Executive acknowledges and agrees that
the existence of this Agreement and its terms and conditions constitutes
Confidential Information of the Bank, and the Executive agrees not to disclose
the Agreement or its contents without the prior written consent of the Bank;
provided, however, the Executive may disclose this Agreement to his personal
attorney and personal tax advisor without prior consent from the Bank.
Notwithstanding the foregoing, the Bank reserves the right in its sole
discretion to make disclosure of this Agreement as it deems necessary or
appropriate in compliance with its regulatory reporting requirements.
Notwithstanding anything herein to the contrary, failure by the Executive to
comply with the provisions of this Section may result in the immediate
termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Executive taken by the Bank, including but not
limited to the termination of employment of the Executive for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity. The provisions of this Section shall survive the
expiration of this Agreement.
8
19. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Executive
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Executive in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Bank or any of its subsidiaries, whether or
not the Executive is a director or officer of the Bank at the time of incurring
any such expenses or liabilities. Such expenses and liabilities shall include,
but shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The Executive shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of the
Bank has approved such settlement. Notwithstanding anything herein to the
contrary, (i) indemnification for expenses shall not extend to matters for which
the Executive's employment or service has been terminated, and (ii) the
obligations of this Section 19 shall survive the termination of this Agreement.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
(b) Insurance. During the Term of the Agreement, the Bank shall
provide the Executive (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
(c) Compliance with Regulatory Limitations. Notwithstanding
anything herein to the contrary, the provisions of this Section 19 shall be
subject to the limitations and restrictions provided at 12 CFR 545.121 as it may
be amended from time to time.
20. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto. This Agreement shall supersede
any prior employment agreements and/or change in control severance agreements
between the Executive and the Bank.
9
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first hereinabove written.
Kearny Federal Savings Bank
ATTEST: By: /s/John N. Hopkins
----------------------------------------
John N. Hopkins
President
/s/Sharon Jones
------------------------
Secretary
WITNESS:
/s/Kimberly T. Manfredo /s/Allan Beardslee
------------------------ ----------------------------------------
Allan Beardslee
Senior Vice President
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 1st day of July, 2004, ("Effective
Date") by and between Kearny Federal Savings Bank, Kearny, New Jersey (the
"Bank") and Albert E. Gossweiler (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as a
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship between the Bank and the Executive;
NOW THEREFORE, in consideration of the covenants and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
Senior Vice President. The Executive hereby accepts said employment and agrees
to render such administrative and management services to the Bank and Kearny
Financial Corp., its parent holding company and any successor thereto ("Parent")
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Executive shall promote the business of the
Bank and Parent. The Executive's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors" or "Board") may from time to
time reasonably direct, including normal duties as an officer of the Bank. The
Executive's employment shall be for no definite period of time, and the
Executive or the Bank may terminate such employment relationship at any time for
any reason or no reason. The employment at-will relationship remains in full
force and effect regardless of any statements to the contrary made by company
personnel or set forth in any documents other than those explicitly made to the
contrary and signed by an authorized representative of the Board.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending twenty-four (24) months
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of this Agreement shall be extended for up to
an additional period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Executive has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended. If a determination is made by the
Board to not renew such Term at the time of such renewal interval, the Board
shall furnish the Executive of written notice of such determination not to renew
the Term and the reason for such action or failure to take such action by the
Board within
10 calendar days of such Board action. References herein to the Term of this
Agreement shall refer both to the initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the Term of this Agreement a minimum base salary at the rate of
$183,000 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
Additionally, Executive's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate unused vacation or sick leave from one year to the next; provided,
however, such Executive may carry forward from year to year a maximum of ten
days of unused vacation leave.
2
(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses, subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If such
expenses are paid in the first instance by the Executive, the Bank shall
reimburse the Executive therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(h) Post-Retirement Medical Coverage. Upon the termination of
employment with the Bank at any time on or after attainment of age 62, the
Executive shall be eligible to maintain participation in the group medical
insurance plan sponsored by the Bank from time to time for the benefit of the
Executive and Executive's dependent family at the Bank's expense, until such
time that the Executive and Executive's spouse shall be eligible for coverage
under the Federal Medicare System, or any successor program. The provisions of
this Section shall survive the termination of this Agreement.
4. Loyalty.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
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(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Bank may terminate the Executive's employment at any time
with or without Cause within its sole discretion. This Agreement shall not be
deemed to give Executive any right to be retained in the employment or service
of the Bank, or to interfere with the right of the Bank to terminate the
employment of the Executive at any time, but any termination by the Bank other
than termination for Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Cause. The Bank may within its sole discretion, acting in good faith,
terminate the Executive for Cause and shall notify such Executive accordingly;
provided that any such determination shall not be effective unless it is adopted
by an affirmative vote of not less than three-fourths (3/4) of the members of
the full Board of Directors at a meeting of the Board called and held for such
purpose (after reasonable written notice has been delivered to the Executive of
such meeting, the purpose of such meeting and the preliminary basis for such
Cause termination and an opportunity for such Executive, together with personal
counsel, to be heard before the Board on the matter prior to such vote by the
Board). Termination for "Cause" shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Bank without
Cause, the Bank shall be obligated to continue to pay the Executive the salary
provided pursuant to Section 3(a) herein, up to the date of termination of the
remaining Term of this Agreement, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment. The provisions of this Section 6(c) shall survive the expiration
of this Agreement.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as
4
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and FDIC Regulation 12
CFR 359, Golden Parachute Indemnification Payments promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event
5
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Section 3(a) of this Agreement) shall be
reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control Severance Protection.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Bank or Parent, or
within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal to the product of two times the total
compensation paid to the Executive or accrued by the Bank (including amounts
attributable to salary, bonus, deferred compensation and retirement plans) with
respect to the Executive for the most recently completed calendar year ending on
or prior to such date of termination of employment of such Executive . Said sum
shall be paid in one (1) lump sum not later than the date of such termination of
service, and such payments shall be in lieu of any other future payments which
the Executive would be otherwise entitled to receive under Section 6 of this
Agreement. Additionally, the Executive and his or her dependents shall remain
eligible to participate in the medical and dental insurance programs offered by
the Bank to its employees for a period of not less than through the remaining
term of the Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to: (i) the sale of all, or substantially all, of the assets of the Bank
or the Parent; (ii) the merger or recapitalization of the Bank or the Parent
whereby the Bank or the Parent is not the surviving entity; (iii) a change in
control of the Bank or the Parent, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Parent by any person, trust, entity or group. The term "person" means an
individual other than the Executive, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
reorganization of the Bank from its mutual holding company form to a parent
holding company form whereby such parent company shall own 100% of the stock of
the Bank and public stockholders shall own 100% of the parent company common
stock shall not be deemed a Change in Control. The provisions of this Section
9(a) shall survive the expiration of this Agreement occurring after a Change in
Control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Bank or Parent, or within
twenty-four months following such Change in Control, and upon the occurrence, or
within 120 days thereafter, of any of the following events enumerated
hereinafter, which have not been consented to in advance by the Executive in
writing: (i) if
6
Executive would be required to move his personal residence or perform his
principal executive functions more than thirty-five (35) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the Bank
should fail to maintain Executive's base compensation in effect as of the date
of the Change in Control and the existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits applicable to all employees of the Bank and does not disproportionately
adversely impact the Executive; (iii) if Executive would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (iv) if Executive's responsibilities or
authority have in any way been materially diminished or reduced. Upon such
voluntary termination of employment by the Executive in accordance with this
subsection, Executive shall thereupon be entitled to receive the payments
described in Section 9(a) of this Agreement. The provisions of this Section 9(b)
shall survive the expiration of this Agreement occurring after a Change in
Control.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New
Jersey.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent
7
that the Executive acquires a right to receive benefits from the Bank hereunder,
such right shall be no greater than the right of any unsecured general creditor
of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled exclusively by
arbitration in accordance with the rules then in effect of the district office
of the American Arbitration Association ("AAA") nearest to the home office of
the Bank, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof, except to the extent that the parties may otherwise
reach a mutual settlement of such issue. The provisions of this Section 17 shall
survive the expiration of this Agreement.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Executive agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or the Parent
consents to such disclosure or use, or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Bank, the Parent, or any subsidiaries
or affiliates, or to any of the businesses operated by them, and the Executive
confirms that such information constitutes the exclusive property of the Bank
and the Parent. The Executive shall not otherwise knowingly act or conduct
himself (a) to the material detriment of the Bank or the Parent, or its
subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to
the interests of the Bank or the Parent. Executive acknowledges and agrees that
the existence of this Agreement and its terms and conditions constitutes
Confidential Information of the Bank, and the Executive agrees not to disclose
the Agreement or its contents without the prior written consent of the Bank;
provided, however, the Executive may disclose this Agreement to his personal
attorney and personal tax advisor without prior consent from the Bank.
Notwithstanding the foregoing, the Bank reserves the right in its sole
discretion to make disclosure of this Agreement as it deems necessary or
appropriate in compliance with its regulatory reporting requirements.
Notwithstanding anything herein to the contrary, failure by the Executive to
comply with the provisions of this Section may result in the immediate
termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Executive taken by the Bank, including but not
limited to the termination of employment of the Executive for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity. The provisions of this Section shall survive the
expiration of this Agreement.
8
19. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Executive
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Executive in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Bank or any of its subsidiaries, whether or
not the Executive is a director or officer of the Bank at the time of incurring
any such expenses or liabilities. Such expenses and liabilities shall include,
but shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The Executive shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of the
Bank has approved such settlement. Notwithstanding anything herein to the
contrary, (i) indemnification for expenses shall not extend to matters for which
the Executive's employment or service has been terminated, and (ii) the
obligations of this Section 19 shall survive the termination of this Agreement.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
(b) Insurance. During the Term of the Agreement, the Bank shall
provide the Executive (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
(c) Compliance with Regulatory Limitations. Notwithstanding
anything herein to the contrary, the provisions of this Section 19 shall be
subject to the limitations and restrictions provided at 12 CFR 545.121 as it may
be amended from time to time.
20. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto. This Agreement shall supersede
any prior employment agreements and/or change in control severance agreements
between the Executive and the Bank.
9
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first hereinabove written.
Kearny Federal Savings Bank
ATTEST: By: /s/John N. Hopkins
----------------------------------------
John N. Hopkins
President
/s/Sharon Jones
------------------------
Secretary
WITNESS:
/s/Kimberly T. Manfredo /s/Albert E. Gossweiler
------------------------ ----------------------------------------
Albert E. Gossweiler
Senior Vice President
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 1st day of July, 2004, ("Effective
Date") by and between Kearny Federal Savings Bank, Kearny, New Jersey (the
"Bank") and Sharon Jones (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as a
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship between the Bank and the Executive;
NOW THEREFORE, in consideration of the covenants and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
Senior Vice President. The Executive hereby accepts said employment and agrees
to render such administrative and management services to the Bank and Kearny
Financial Corp., its parent holding company and any successor thereto ("Parent")
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Executive shall promote the business of the
Bank and Parent. The Executive's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors" or "Board") may from time to
time reasonably direct, including normal duties as an officer of the Bank. The
Executive's employment shall be for no definite period of time, and the
Executive or the Bank may terminate such employment relationship at any time for
any reason or no reason. The employment at-will relationship remains in full
force and effect regardless of any statements to the contrary made by company
personnel or set forth in any documents other than those explicitly made to the
contrary and signed by an authorized representative of the Board.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending twenty-four (24) months
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of this Agreement shall be extended for up to
an additional period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Executive has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended. If a determination is made by the
Board to not renew such Term at the time of such renewal interval, the Board
shall furnish the Executive of written notice of such determination not to renew
the Term and the reason for such action or failure to take such action by the
Board within
10 calendar days of such Board action. References herein to the Term of this
Agreement shall refer both to the initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the Term of this Agreement a minimum base salary at the rate of
$156,500 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
Additionally, Executive's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate unused vacation or sick leave from one year to the next; provided,
however, such Executive may carry forward from year to year a maximum of ten
days of unused vacation leave.
2
(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses, subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If such
expenses are paid in the first instance by the Executive, the Bank shall
reimburse the Executive therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(h) Post-Retirement Medical Coverage. Upon the termination of
employment with the Bank at any time on or after attainment of age 62, the
Executive shall be eligible to maintain participation in the group medical
insurance plan sponsored by the Bank from time to time for the benefit of the
Executive and Executive's dependent family at the Bank's expense, until such
time that the Executive and Executive's spouse shall be eligible for coverage
under the Federal Medicare System, or any successor program. The provisions of
this Section shall survive the termination of this Agreement.
4. Loyalty.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
3
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Bank may terminate the Executive's employment at any time
with or without Cause within its sole discretion. This Agreement shall not be
deemed to give Executive any right to be retained in the employment or service
of the Bank, or to interfere with the right of the Bank to terminate the
employment of the Executive at any time, but any termination by the Bank other
than termination for Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Cause. The Bank may within its sole discretion, acting in good faith,
terminate the Executive for Cause and shall notify such Executive accordingly;
provided that any such determination shall not be effective unless it is adopted
by an affirmative vote of not less than three-fourths (3/4) of the members of
the full Board of Directors at a meeting of the Board called and held for such
purpose (after reasonable written notice has been delivered to the Executive of
such meeting, the purpose of such meeting and the preliminary basis for such
Cause termination and an opportunity for such Executive, together with personal
counsel, to be heard before the Board on the matter prior to such vote by the
Board). Termination for "Cause" shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Bank without
Cause, the Bank shall be obligated to continue to pay the Executive the salary
provided pursuant to Section 3(a) herein, up to the date of termination of the
remaining Term of this Agreement, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment. The provisions of this Section 6(c) shall survive the expiration
of this Agreement.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as
4
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and FDIC Regulation 12
CFR 359, Golden Parachute Indemnification Payments promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event
5
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Section 3(a) of this Agreement) shall be
reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control Severance Protection.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Bank or Parent, or
within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal to the product of two times the total
compensation paid to the Executive or accrued by the Bank (including amounts
attributable to salary, bonus, deferred compensation and retirement plans) with
respect to the Executive for the most recently completed calendar year ending on
or prior to such date of termination of employment of such Executive . Said sum
shall be paid in one (1) lump sum not later than the date of such termination of
service, and such payments shall be in lieu of any other future payments which
the Executive would be otherwise entitled to receive under Section 6 of this
Agreement. Additionally, the Executive and his or her dependents shall remain
eligible to participate in the medical and dental insurance programs offered by
the Bank to its employees for a period of not less than through the remaining
term of the Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to: (i) the sale of all, or substantially all, of the assets of the Bank
or the Parent; (ii) the merger or recapitalization of the Bank or the Parent
whereby the Bank or the Parent is not the surviving entity; (iii) a change in
control of the Bank or the Parent, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Parent by any person, trust, entity or group. The term "person" means an
individual other than the Executive, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
reorganization of the Bank from its mutual holding company form to a parent
holding company form whereby such parent company shall own 100% of the stock of
the Bank and public stockholders shall own 100% of the parent company common
stock shall not be deemed a Change in Control. The provisions of this Section
9(a) shall survive the expiration of this Agreement occurring after a Change in
Control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Bank or Parent, or within
twenty-four months following such Change in Control, and upon the occurrence, or
within 120 days thereafter, of any of the following events enumerated
hereinafter, which have not been consented to in advance by the Executive in
writing: (i) if
6
Executive would be required to move his personal residence or perform his
principal executive functions more than thirty-five (35) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the Bank
should fail to maintain Executive's base compensation in effect as of the date
of the Change in Control and the existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits applicable to all employees of the Bank and does not disproportionately
adversely impact the Executive; (iii) if Executive would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (iv) if Executive's responsibilities or
authority have in any way been materially diminished or reduced. Upon such
voluntary termination of employment by the Executive in accordance with this
subsection, Executive shall thereupon be entitled to receive the payments
described in Section 9(a) of this Agreement. The provisions of this Section 9(b)
shall survive the expiration of this Agreement occurring after a Change in
Control.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New
Jersey.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent
7
that the Executive acquires a right to receive benefits from the Bank hereunder,
such right shall be no greater than the right of any unsecured general creditor
of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled exclusively by
arbitration in accordance with the rules then in effect of the district office
of the American Arbitration Association ("AAA") nearest to the home office of
the Bank, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof, except to the extent that the parties may otherwise
reach a mutual settlement of such issue. The provisions of this Section 17 shall
survive the expiration of this Agreement.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Executive agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or the Parent
consents to such disclosure or use, or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Bank, the Parent, or any subsidiaries
or affiliates, or to any of the businesses operated by them, and the Executive
confirms that such information constitutes the exclusive property of the Bank
and the Parent. The Executive shall not otherwise knowingly act or conduct
himself (a) to the material detriment of the Bank or the Parent, or its
subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to
the interests of the Bank or the Parent. Executive acknowledges and agrees that
the existence of this Agreement and its terms and conditions constitutes
Confidential Information of the Bank, and the Executive agrees not to disclose
the Agreement or its contents without the prior written consent of the Bank;
provided, however, the Executive may disclose this Agreement to his personal
attorney and personal tax advisor without prior consent from the Bank.
Notwithstanding the foregoing, the Bank reserves the right in its sole
discretion to make disclosure of this Agreement as it deems necessary or
appropriate in compliance with its regulatory reporting requirements.
Notwithstanding anything herein to the contrary, failure by the Executive to
comply with the provisions of this Section may result in the immediate
termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Executive taken by the Bank, including but not
limited to the termination of employment of the Executive for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity. The provisions of this Section shall survive the
expiration of this Agreement.
8
19. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Executive
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Executive in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Bank or any of its subsidiaries, whether or
not the Executive is a director or officer of the Bank at the time of incurring
any such expenses or liabilities. Such expenses and liabilities shall include,
but shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The Executive shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of the
Bank has approved such settlement. Notwithstanding anything herein to the
contrary, (i) indemnification for expenses shall not extend to matters for which
the Executive's employment or service has been terminated, and (ii) the
obligations of this Section 19 shall survive the termination of this Agreement.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
(b) Insurance. During the Term of the Agreement, the Bank shall
provide the Executive (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
(c) Compliance with Regulatory Limitations. Notwithstanding
anything herein to the contrary, the provisions of this Section 19 shall be
subject to the limitations and restrictions provided at 12 CFR 545.121 as it may
be amended from time to time.
20. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto. This Agreement shall supersede
any prior employment agreements and/or change in control severance agreements
between the Executive and the Bank.
9
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first hereinabove written.
Kearny Federal Savings Bank
ATTEST: By: /s/John N. Hopkins
----------------------------------------
John N. Hopkins
President
/s/Kimberly T. Manfredo
-----------------------
Asst. Secretary
WITNESS:
/s/Erika Sacher /s/Sharon Jones
------------------------ ----------------------------------------
Sharon Jones
Senior Vice President
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 1st day of July, 2004, ("Effective
Date") by and between Kearny Federal Savings Bank, Kearny, New Jersey (the
"Bank") and William C. Ledgerwood (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as a
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship between the Bank and the Executive;
NOW THEREFORE, in consideration of the covenants and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
Senior Vice President. The Executive hereby accepts said employment and agrees
to render such administrative and management services to the Bank and Kearny
Financial Corp., its parent holding company and any successor thereto ("Parent")
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Executive shall promote the business of the
Bank and Parent. The Executive's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors" or "Board") may from time to
time reasonably direct, including normal duties as an officer of the Bank. The
Executive's employment shall be for no definite period of time, and the
Executive or the Bank may terminate such employment relationship at any time for
any reason or no reason. The employment at-will relationship remains in full
force and effect regardless of any statements to the contrary made by company
personnel or set forth in any documents other than those explicitly made to the
contrary and signed by an authorized representative of the Board.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending twenty-four (24) months
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of this Agreement shall be extended for up to
an additional period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Executive has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended. If a determination is made by the
Board to not renew such Term at the time of such renewal interval, the Board
shall furnish the Executive of written notice of such determination not to renew
the Term and the reason for such action or failure to take such action by the
Board within
10 calendar days of such Board action. References herein to the Term of this
Agreement shall refer both to the initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the Term of this Agreement a minimum base salary at the rate of
$170,000 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
Additionally, Executive's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate unused vacation or sick leave from one year to the next; provided,
however, such Executive may carry forward from year to year a maximum of ten
days of unused vacation leave.
2
(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses, subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If such
expenses are paid in the first instance by the Executive, the Bank shall
reimburse the Executive therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(h) Post-Retirement Medical Coverage. Upon the termination of
employment with the Bank at any time on or after attainment of age 62, the
Executive shall be eligible to maintain participation in the group medical
insurance plan sponsored by the Bank from time to time for the benefit of the
Executive and Executive's dependent family at the Bank's expense, until such
time that the Executive and Executive's spouse shall be eligible for coverage
under the Federal Medicare System, or any successor program. The provisions of
this Section shall survive the termination of this Agreement.
4. Loyalty.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
3
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Bank may terminate the Executive's employment at any time
with or without Cause within its sole discretion. This Agreement shall not be
deemed to give Executive any right to be retained in the employment or service
of the Bank, or to interfere with the right of the Bank to terminate the
employment of the Executive at any time, but any termination by the Bank other
than termination for Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Cause. The Bank may within its sole discretion, acting in good faith,
terminate the Executive for Cause and shall notify such Executive accordingly;
provided that any such determination shall not be effective unless it is adopted
by an affirmative vote of not less than three-fourths (3/4) of the members of
the full Board of Directors at a meeting of the Board called and held for such
purpose (after reasonable written notice has been delivered to the Executive of
such meeting, the purpose of such meeting and the preliminary basis for such
Cause termination and an opportunity for such Executive, together with personal
counsel, to be heard before the Board on the matter prior to such vote by the
Board). Termination for "Cause" shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Bank without
Cause, the Bank shall be obligated to continue to pay the Executive the salary
provided pursuant to Section 3(a) herein, up to the date of termination of the
remaining Term of this Agreement, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment. The provisions of this Section 6(c) shall survive the expiration
of this Agreement.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as
4
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and FDIC Regulation 12
CFR 359, Golden Parachute Indemnification Payments promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event
5
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Section 3(a) of this Agreement) shall be
reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control Severance Protection.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Bank or Parent, or
within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal to the product of two times the total
compensation paid to the Executive or accrued by the Bank (including amounts
attributable to salary, bonus, deferred compensation and retirement plans) with
respect to the Executive for the most recently completed calendar year ending on
or prior to such date of termination of employment of such Executive . Said sum
shall be paid in one (1) lump sum not later than the date of such termination of
service, and such payments shall be in lieu of any other future payments which
the Executive would be otherwise entitled to receive under Section 6 of this
Agreement. Additionally, the Executive and his or her dependents shall remain
eligible to participate in the medical and dental insurance programs offered by
the Bank to its employees for a period of not less than through the remaining
term of the Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to: (i) the sale of all, or substantially all, of the assets of the Bank
or the Parent; (ii) the merger or recapitalization of the Bank or the Parent
whereby the Bank or the Parent is not the surviving entity; (iii) a change in
control of the Bank or the Parent, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Parent by any person, trust, entity or group. The term "person" means an
individual other than the Executive, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
reorganization of the Bank from its mutual holding company form to a parent
holding company form whereby such parent company shall own 100% of the stock of
the Bank and public stockholders shall own 100% of the parent company common
stock shall not be deemed a Change in Control. The provisions of this Section
9(a) shall survive the expiration of this Agreement occurring after a Change in
Control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Bank or Parent, or within
twenty-four months following such Change in Control, and upon the occurrence, or
within 120 days thereafter, of any of the following events enumerated
hereinafter, which have not been consented to in advance by the Executive in
writing: (i) if
6
Executive would be required to move his personal residence or perform his
principal executive functions more than thirty-five (35) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the Bank
should fail to maintain Executive's base compensation in effect as of the date
of the Change in Control and the existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits applicable to all employees of the Bank and does not disproportionately
adversely impact the Executive; (iii) if Executive would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (iv) if Executive's responsibilities or
authority have in any way been materially diminished or reduced. Upon such
voluntary termination of employment by the Executive in accordance with this
subsection, Executive shall thereupon be entitled to receive the payments
described in Section 9(a) of this Agreement. The provisions of this Section 9(b)
shall survive the expiration of this Agreement occurring after a Change in
Control.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New
Jersey.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent
7
that the Executive acquires a right to receive benefits from the Bank hereunder,
such right shall be no greater than the right of any unsecured general creditor
of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled exclusively by
arbitration in accordance with the rules then in effect of the district office
of the American Arbitration Association ("AAA") nearest to the home office of
the Bank, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof, except to the extent that the parties may otherwise
reach a mutual settlement of such issue. The provisions of this Section 17 shall
survive the expiration of this Agreement.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Executive agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or the Parent
consents to such disclosure or use, or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Bank, the Parent, or any subsidiaries
or affiliates, or to any of the businesses operated by them, and the Executive
confirms that such information constitutes the exclusive property of the Bank
and the Parent. The Executive shall not otherwise knowingly act or conduct
himself (a) to the material detriment of the Bank or the Parent, or its
subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to
the interests of the Bank or the Parent. Executive acknowledges and agrees that
the existence of this Agreement and its terms and conditions constitutes
Confidential Information of the Bank, and the Executive agrees not to disclose
the Agreement or its contents without the prior written consent of the Bank;
provided, however, the Executive may disclose this Agreement to his personal
attorney and personal tax advisor without prior consent from the Bank.
Notwithstanding the foregoing, the Bank reserves the right in its sole
discretion to make disclosure of this Agreement as it deems necessary or
appropriate in compliance with its regulatory reporting requirements.
Notwithstanding anything herein to the contrary, failure by the Executive to
comply with the provisions of this Section may result in the immediate
termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Executive taken by the Bank, including but not
limited to the termination of employment of the Executive for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity. The provisions of this Section shall survive the
expiration of this Agreement.
8
19. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Executive
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Executive in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Bank or any of its subsidiaries, whether or
not the Executive is a director or officer of the Bank at the time of incurring
any such expenses or liabilities. Such expenses and liabilities shall include,
but shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The Executive shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of the
Bank has approved such settlement. Notwithstanding anything herein to the
contrary, (i) indemnification for expenses shall not extend to matters for which
the Executive's employment or service has been terminated, and (ii) the
obligations of this Section 19 shall survive the termination of this Agreement.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
(b) Insurance. During the Term of the Agreement, the Bank shall
provide the Executive (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
(c) Compliance with Regulatory Limitations. Notwithstanding
anything herein to the contrary, the provisions of this Section 19 shall be
subject to the limitations and restrictions provided at 12 CFR 545.121 as it may
be amended from time to time.
20. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto. This Agreement shall supersede
any prior employment agreements and/or change in control severance agreements
between the Executive and the Bank.
9
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first hereinabove written.
Kearny Federal Savings Bank
ATTEST: By: /s/John N. Hopkins
----------------------------------------
John N. Hopkins
President
/s/Sharon Jones
------------------------
Secretary
WITNESS:
/s/Kimberly T. Manfredo /s/William C. Ledgerwood
------------------------ ----------------------------------------
William C. Ledgerwood
Senior Vice President
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 1st day of July, 2004, ("Effective
Date") by and between Kearny Federal Savings Bank, Kearny, New Jersey (the
"Bank") and Patrick M. Joyce (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as a
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship between the Bank and the Executive;
NOW THEREFORE, in consideration of the covenants and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
Senior Vice President. The Executive hereby accepts said employment and agrees
to render such administrative and management services to the Bank and Kearny
Financial Corp., its parent holding company and any successor thereto ("Parent")
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Executive shall promote the business of the
Bank and Parent. The Executive's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors" or "Board") may from time to
time reasonably direct, including normal duties as an officer of the Bank. The
Executive's employment shall be for no definite period of time, and the
Executive or the Bank may terminate such employment relationship at any time for
any reason or no reason. The employment at-will relationship remains in full
force and effect regardless of any statements to the contrary made by company
personnel or set forth in any documents other than those explicitly made to the
contrary and signed by an authorized representative of the Board.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending twenty-four (24) months
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of this Agreement shall be extended for up to
an additional period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Executive has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended. If a determination is made by the
Board to not renew such Term at the time of such renewal interval, the Board
shall furnish the Executive of written notice of such determination not to renew
the Term and the reason for such action or failure to take such action by the
Board within
10 calendar days of such Board action. References herein to the Term of this
Agreement shall refer both to the initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the Term of this Agreement a minimum base salary at the rate of
$165,000 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
Additionally, Executive's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate unused vacation or sick leave from one year to the next; provided,
however, such Executive may carry forward from year to year a maximum of ten
days of unused vacation leave.
2
(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses, subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If such
expenses are paid in the first instance by the Executive, the Bank shall
reimburse the Executive therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(h) Post-Retirement Medical Coverage. Upon the termination of
employment with the Bank at any time on or after attainment of age 62, the
Executive shall be eligible to maintain participation in the group medical
insurance plan sponsored by the Bank from time to time for the benefit of the
Executive and Executive's dependent family at the Bank's expense, until such
time that the Executive and Executive's spouse shall be eligible for coverage
under the Federal Medicare System, or any successor program. The provisions of
this Section shall survive the termination of this Agreement.
4. Loyalty.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
3
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Bank may terminate the Executive's employment at any time
with or without Cause within its sole discretion. This Agreement shall not be
deemed to give Executive any right to be retained in the employment or service
of the Bank, or to interfere with the right of the Bank to terminate the
employment of the Executive at any time, but any termination by the Bank other
than termination for Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Cause. The Bank may within its sole discretion, acting in good faith,
terminate the Executive for Cause and shall notify such Executive accordingly;
provided that any such determination shall not be effective unless it is adopted
by an affirmative vote of not less than three-fourths (3/4) of the members of
the full Board of Directors at a meeting of the Board called and held for such
purpose (after reasonable written notice has been delivered to the Executive of
such meeting, the purpose of such meeting and the preliminary basis for such
Cause termination and an opportunity for such Executive, together with personal
counsel, to be heard before the Board on the matter prior to such vote by the
Board). Termination for "Cause" shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Bank without
Cause, the Bank shall be obligated to continue to pay the Executive the salary
provided pursuant to Section 3(a) herein, up to the date of termination of the
remaining Term of this Agreement, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment. The provisions of this Section 6(c) shall survive the expiration
of this Agreement.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as
4
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and FDIC Regulation 12
CFR 359, Golden Parachute Indemnification Payments promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event
5
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Section 3(a) of this Agreement) shall be
reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control Severance Protection.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Bank or Parent, or
within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal to the product of two times the total
compensation paid to the Executive or accrued by the Bank (including amounts
attributable to salary, bonus, deferred compensation and retirement plans) with
respect to the Executive for the most recently completed calendar year ending on
or prior to such date of termination of employment of such Executive . Said sum
shall be paid in one (1) lump sum not later than the date of such termination of
service, and such payments shall be in lieu of any other future payments which
the Executive would be otherwise entitled to receive under Section 6 of this
Agreement. Additionally, the Executive and his or her dependents shall remain
eligible to participate in the medical and dental insurance programs offered by
the Bank to its employees for a period of not less than through the remaining
term of the Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to: (i) the sale of all, or substantially all, of the assets of the Bank
or the Parent; (ii) the merger or recapitalization of the Bank or the Parent
whereby the Bank or the Parent is not the surviving entity; (iii) a change in
control of the Bank or the Parent, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Parent by any person, trust, entity or group. The term "person" means an
individual other than the Executive, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
reorganization of the Bank from its mutual holding company form to a parent
holding company form whereby such parent company shall own 100% of the stock of
the Bank and public stockholders shall own 100% of the parent company common
stock shall not be deemed a Change in Control. The provisions of this Section
9(a) shall survive the expiration of this Agreement occurring after a Change in
Control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Bank or Parent, or within
twenty-four months following such Change in Control, and upon the occurrence, or
within 120 days thereafter, of any of the following events enumerated
hereinafter, which have not been consented to in advance by the Executive in
writing: (i) if
6
Executive would be required to move his personal residence or perform his
principal executive functions more than thirty-five (35) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the Bank
should fail to maintain Executive's base compensation in effect as of the date
of the Change in Control and the existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits applicable to all employees of the Bank and does not disproportionately
adversely impact the Executive; (iii) if Executive would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (iv) if Executive's responsibilities or
authority have in any way been materially diminished or reduced. Upon such
voluntary termination of employment by the Executive in accordance with this
subsection, Executive shall thereupon be entitled to receive the payments
described in Section 9(a) of this Agreement. The provisions of this Section 9(b)
shall survive the expiration of this Agreement occurring after a Change in
Control.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New
Jersey.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent
7
that the Executive acquires a right to receive benefits from the Bank hereunder,
such right shall be no greater than the right of any unsecured general creditor
of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled exclusively by
arbitration in accordance with the rules then in effect of the district office
of the American Arbitration Association ("AAA") nearest to the home office of
the Bank, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof, except to the extent that the parties may otherwise
reach a mutual settlement of such issue. The provisions of this Section 17 shall
survive the expiration of this Agreement.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Executive agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or the Parent
consents to such disclosure or use, or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Bank, the Parent, or any subsidiaries
or affiliates, or to any of the businesses operated by them, and the Executive
confirms that such information constitutes the exclusive property of the Bank
and the Parent. The Executive shall not otherwise knowingly act or conduct
himself (a) to the material detriment of the Bank or the Parent, or its
subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to
the interests of the Bank or the Parent. Executive acknowledges and agrees that
the existence of this Agreement and its terms and conditions constitutes
Confidential Information of the Bank, and the Executive agrees not to disclose
the Agreement or its contents without the prior written consent of the Bank;
provided, however, the Executive may disclose this Agreement to his personal
attorney and personal tax advisor without prior consent from the Bank.
Notwithstanding the foregoing, the Bank reserves the right in its sole
discretion to make disclosure of this Agreement as it deems necessary or
appropriate in compliance with its regulatory reporting requirements.
Notwithstanding anything herein to the contrary, failure by the Executive to
comply with the provisions of this Section may result in the immediate
termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Executive taken by the Bank, including but not
limited to the termination of employment of the Executive for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity. The provisions of this Section shall survive the
expiration of this Agreement.
8
19. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Executive
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Executive in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Bank or any of its subsidiaries, whether or
not the Executive is a director or officer of the Bank at the time of incurring
any such expenses or liabilities. Such expenses and liabilities shall include,
but shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The Executive shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of the
Bank has approved such settlement. Notwithstanding anything herein to the
contrary, (i) indemnification for expenses shall not extend to matters for which
the Executive's employment or service has been terminated, and (ii) the
obligations of this Section 19 shall survive the termination of this Agreement.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
(b) Insurance. During the Term of the Agreement, the Bank shall
provide the Executive (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
(c) Compliance with Regulatory Limitations. Notwithstanding
anything herein to the contrary, the provisions of this Section 19 shall be
subject to the limitations and restrictions provided at 12 CFR 545.121 as it may
be amended from time to time.
20. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto. This Agreement shall supersede
any prior employment agreements and/or change in control severance agreements
between the Executive and the Bank.
9
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first hereinabove written.
Kearny Federal Savings Bank
ATTEST: By: /s/John N. Hopkins
----------------------------------------
John N. Hopkins
President
/s/Sharon Jones
------------------------
Secretary
WITNESS:
/s/Kimberly T. Manfredo /s/Patrick M. Joyce
------------------------ ----------------------------------------
Patrick M. Joyce
Senior Vice President
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 1st day of July, 2004, ("Effective
Date") by and between Kearny Federal Savings Bank, Kearny, New Jersey (the
"Bank") and Erika K. Sacher (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Bank as a
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the continuing employment
relationship between the Bank and the Executive;
NOW THEREFORE, in consideration of the covenants and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Bank hereby employs the Executive in the capacity of
Senior Vice President. The Executive hereby accepts said employment and agrees
to render such administrative and management services to the Bank and Kearny
Financial Corp., its parent holding company and any successor thereto ("Parent")
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Executive shall promote the business of the
Bank and Parent. The Executive's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors" or "Board") may from time to
time reasonably direct, including normal duties as an officer of the Bank. The
Executive's employment shall be for no definite period of time, and the
Executive or the Bank may terminate such employment relationship at any time for
any reason or no reason. The employment at-will relationship remains in full
force and effect regardless of any statements to the contrary made by company
personnel or set forth in any documents other than those explicitly made to the
contrary and signed by an authorized representative of the Board.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending twenty-four (24) months
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of this Agreement shall be extended for up to
an additional period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Executive has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended. If a determination is made by the
Board to not renew such Term at the time of such renewal interval, the Board
shall furnish the Executive of written notice of such determination not to renew
the Term and the reason for such action or failure to take such action by the
Board within
10 calendar days of such Board action. References herein to the Term of this
Agreement shall refer both to the initial term and successive terms.
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Bank shall compensate and pay the Executive
during the Term of this Agreement a minimum base salary at the rate of
$170,000 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Bank in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Bank which may be or may become applicable to senior management relating to
pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Bank which may be or may become applicable to senior
management relating to life insurance, short and long term disability, medical,
dental, eye-care, prescription drugs or medical reimbursement plans.
Additionally, Executive's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Bank. The Executive shall not be entitled to receive any additional compensation
from the Bank for failure to take a vacation or sick leave, nor shall he be able
to accumulate unused vacation or sick leave from one year to the next; provided,
however, such Executive may carry forward from year to year a maximum of ten
days of unused vacation leave.
2
(f) Expenses. The Bank shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of, or in connection with the business of the Bank, including, but
not by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses, subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If such
expenses are paid in the first instance by the Executive, the Bank shall
reimburse the Executive therefor.
(g) Changes in Benefits. The Bank shall not make any changes in
such plans, benefits or privileges previously described in Section 3(c), (d) and
(e) which would adversely affect the Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Bank and does not result in a proportionately greater adverse
change in the rights of, or benefits to, the Executive as compared with any
other executive officer of the Bank. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(h) Post-Retirement Medical Coverage. Upon the termination of
employment with the Bank at any time on or after attainment of age 62, the
Executive shall be eligible to maintain participation in the group medical
insurance plan sponsored by the Bank from time to time for the benefit of the
Executive and Executive's dependent family at the Bank's expense, until such
time that the Executive and Executive's spouse shall be eligible for coverage
under the Federal Medicare System, or any successor program. The provisions of
this Section shall survive the termination of this Agreement.
4. Loyalty.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Bank or Parent, or,
solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
3
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Bank may terminate the Executive's employment at any time
with or without Cause within its sole discretion. This Agreement shall not be
deemed to give Executive any right to be retained in the employment or service
of the Bank, or to interfere with the right of the Bank to terminate the
employment of the Executive at any time, but any termination by the Bank other
than termination for Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Cause. The Bank may within its sole discretion, acting in good faith,
terminate the Executive for Cause and shall notify such Executive accordingly;
provided that any such determination shall not be effective unless it is adopted
by an affirmative vote of not less than three-fourths (3/4) of the members of
the full Board of Directors at a meeting of the Board called and held for such
purpose (after reasonable written notice has been delivered to the Executive of
such meeting, the purpose of such meeting and the preliminary basis for such
Cause termination and an opportunity for such Executive, together with personal
counsel, to be heard before the Board on the matter prior to such vote by the
Board). Termination for "Cause" shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Bank without
Cause, the Bank shall be obligated to continue to pay the Executive the salary
provided pursuant to Section 3(a) herein, up to the date of termination of the
remaining Term of this Agreement, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment. The provisions of this Section 6(c) shall survive the expiration
of this Agreement.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as
4
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and FDIC Regulation 12
CFR 359, Golden Parachute Indemnification Payments promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Executive during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Executive shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Executive's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event
5
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Section 3(a) of this Agreement) shall be
reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control Severance Protection.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Bank or Parent, or
within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal to the product of two times the total
compensation paid to the Executive or accrued by the Bank (including amounts
attributable to salary, bonus, deferred compensation and retirement plans) with
respect to the Executive for the most recently completed calendar year ending on
or prior to such date of termination of employment of such Executive . Said sum
shall be paid in one (1) lump sum not later than the date of such termination of
service, and such payments shall be in lieu of any other future payments which
the Executive would be otherwise entitled to receive under Section 6 of this
Agreement. Additionally, the Executive and his or her dependents shall remain
eligible to participate in the medical and dental insurance programs offered by
the Bank to its employees for a period of not less than through the remaining
term of the Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to: (i) the sale of all, or substantially all, of the assets of the Bank
or the Parent; (ii) the merger or recapitalization of the Bank or the Parent
whereby the Bank or the Parent is not the surviving entity; (iii) a change in
control of the Bank or the Parent, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Parent by any person, trust, entity or group. The term "person" means an
individual other than the Executive, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
reorganization of the Bank from its mutual holding company form to a parent
holding company form whereby such parent company shall own 100% of the stock of
the Bank and public stockholders shall own 100% of the parent company common
stock shall not be deemed a Change in Control. The provisions of this Section
9(a) shall survive the expiration of this Agreement occurring after a Change in
Control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Bank or Parent, or within
twenty-four months following such Change in Control, and upon the occurrence, or
within 120 days thereafter, of any of the following events enumerated
hereinafter, which have not been consented to in advance by the Executive in
writing: (i) if
6
Executive would be required to move his personal residence or perform his
principal executive functions more than thirty-five (35) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the Bank
should fail to maintain Executive's base compensation in effect as of the date
of the Change in Control and the existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits applicable to all employees of the Bank and does not disproportionately
adversely impact the Executive; (iii) if Executive would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (iv) if Executive's responsibilities or
authority have in any way been materially diminished or reduced. Upon such
voluntary termination of employment by the Executive in accordance with this
subsection, Executive shall thereupon be entitled to receive the payments
described in Section 9(a) of this Agreement. The provisions of this Section 9(b)
shall survive the expiration of this Agreement occurring after a Change in
Control.
10. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal
skills of the Executive, the Executive shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New
Jersey.
14. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent
7
that the Executive acquires a right to receive benefits from the Bank hereunder,
such right shall be no greater than the right of any unsecured general creditor
of the Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled exclusively by
arbitration in accordance with the rules then in effect of the district office
of the American Arbitration Association ("AAA") nearest to the home office of
the Bank, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof, except to the extent that the parties may otherwise
reach a mutual settlement of such issue. The provisions of this Section 17 shall
survive the expiration of this Agreement.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Executive agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or the Parent
consents to such disclosure or use, or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Bank, the Parent, or any subsidiaries
or affiliates, or to any of the businesses operated by them, and the Executive
confirms that such information constitutes the exclusive property of the Bank
and the Parent. The Executive shall not otherwise knowingly act or conduct
himself (a) to the material detriment of the Bank or the Parent, or its
subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to
the interests of the Bank or the Parent. Executive acknowledges and agrees that
the existence of this Agreement and its terms and conditions constitutes
Confidential Information of the Bank, and the Executive agrees not to disclose
the Agreement or its contents without the prior written consent of the Bank;
provided, however, the Executive may disclose this Agreement to his personal
attorney and personal tax advisor without prior consent from the Bank.
Notwithstanding the foregoing, the Bank reserves the right in its sole
discretion to make disclosure of this Agreement as it deems necessary or
appropriate in compliance with its regulatory reporting requirements.
Notwithstanding anything herein to the contrary, failure by the Executive to
comply with the provisions of this Section may result in the immediate
termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Executive taken by the Bank, including but not
limited to the termination of employment of the Executive for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity. The provisions of this Section shall survive the
expiration of this Agreement.
8
19. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Executive
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Executive in connection with or arising out of any action, suit
or proceeding in which the Executive may be involved by reason of his having
been a director or officer of the Bank or any of its subsidiaries, whether or
not the Executive is a director or officer of the Bank at the time of incurring
any such expenses or liabilities. Such expenses and liabilities shall include,
but shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The Executive shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of the
Bank has approved such settlement. Notwithstanding anything herein to the
contrary, (i) indemnification for expenses shall not extend to matters for which
the Executive's employment or service has been terminated, and (ii) the
obligations of this Section 19 shall survive the termination of this Agreement.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
(b) Insurance. During the Term of the Agreement, the Bank shall
provide the Executive (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
(c) Compliance with Regulatory Limitations. Notwithstanding
anything herein to the contrary, the provisions of this Section 19 shall be
subject to the limitations and restrictions provided at 12 CFR 545.121 as it may
be amended from time to time.
20. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto. This Agreement shall supersede
any prior employment agreements and/or change in control severance agreements
between the Executive and the Bank.
9
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first hereinabove written.
Kearny Federal Savings Bank
ATTEST: By: /s/John N. Hopkins
----------------------------------------
John N. Hopkins
President
/s/Sharon Jones
------------------------
Secretary
WITNESS:
/s/Kimberly T. Manfredo /s/Erika K. Sacher
------------------------ ----------------------------------------
Erika K. Sacher
Senior Vice President
/s/Erika K. Parisi
----------------------------------------
(/a/k/a Erika K. Parisi)
Senior Vice President
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. 2 to the Registration Statement and Prospectus on
Form S-1 to be filed with the Securities and Exchange and as contained in
Amendment No. 2 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
November 12, 2004
PRO FORMA VALUATION UPDATE REPORT
MUTUAL HOLDING COMPANY
STOCK OFFERING
Kearny Financial Corp.
Kearny, New Jersey
Dated As Of:
October 22, 2004
Prepared By:
RP Financial, LC.
1700 North Moore Street
Suite
2210
Arlington, Virginia 22209
[LOGO] RP FINANCIAL, LC.
Financial Services Industry Consultants
October 22, 2004
Board of Directors
Kearny MHC
Kearny Financial Corp.
Kearny Federal Savings Bank
614 Kearny Avenue
Kearny, New Jersey 07032
Members of the Board of Directors:
We have completed and hereby provide an updated independent 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 updated appraisal is furnished pursuant to the conversion
regulations promulgated by the Office of Thrift Supervision ("OTS").
Specifically, this updated 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. Our original
appraisal report, dated August 20, 2004 (the "original appraisal") is
incorporated herein by reference. As in the preparation of our original
appraisal, we believe the data and information used herein is reliable; however,
we cannot guarantee the accuracy and completeness of such information.
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 activities will include 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
Rosslyn Center Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210 Fax No.: (703) 528-1788
Arlington, VA 22209 Toll-Free No.: (866) 723-0594
www.rpfinancial.com E-Mail: mail@rpfinancial.com
RP Financial, LC.
Board of Directors
October 22, 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).
This updated appraisal reflects the following noteworthy items: (1) a
review of recent developments in Kearny Financial's financial condition,
including financial data through September 30, 2004; (2) an updated comparison
of Kearny Financial's financial condition and operating results versus the Peer
Group companies identified in the original appraisal; and (3) a review of stock
market conditions since the date of the original appraisal.
The estimated pro forma market value is defined as the price at which
the Company's common stock, immediately upon completion of the public stock
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.
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 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.
Discussion of Relevant Considerations
1. Financial Results
Table 1 presents summary balance sheet and income statement
details for the twelve months ended June 30, 2004 and updated financial
information through September 30, 2004. Kearny Financial's assets declined by
$30.9 million or 1.6% from June 30, 2004 to September 30, 2004. Asset shrinkage
during the quarter was mostly attributable to a decline in mortgage-backed
securities, which declined from $771.4 million or 39.8% of assets at June 30,
2004 to $724.9 million or 38.0% of assets at September 30, 2004. The decline in
mortgage-backed securities was partially offset by loan growth and purchases of
investment securities. Loans receivable increased from $505.8 million or 26.1%
of assets at June 30, 2004 to $515.2 million of 27.0% of assets at September 30,
2004. Investment securities increased from $477.4 million or 24.7% of assets at
June 30, 2004 to $487.1 million or 25.6% of assets at September 30, 2004.
RP Financial, LC.
Board of Directors
October 22, 2004
Page 3
Table 1
Kearny Financial Corp.
Recent Financial Data
12 Months Ended 12 Months Ended
June 30, 2004 September 30, 2004
------------- ------------------
Amount Avg. Assets Amount Avg. Assets
------- ----------- ------- -----------
($000) (%) ($000) (%)
Summary Income Statement
------------------------
Interest income $78,654 4.09% $79,080 4.11%
Interest expense (32,100) (1.67) (30,044) (1.56)
------- ---- ------- ----
Net interest income 46,554 2.42 49,036 2.55
Provisions for loan losses --- (0.00) (151) (0.01)
------- ---- ------- ----
Net interest income after provision 46,554 2.42 48,885 2.54
Non-interest operating income 1,560 0.08 1,446 0.07
Amortization of intangibles (636) (0.03) (636) (0.03)
Non-interest operating expense (28,244) (1.47) (28,888) (1.50)
------- ---- ------- ----
Net operating income 19,234 1.00 20,807 1.08
Non-operating income
--------------------
Merger expenses (592) (0.03) --- 0.00
------- ---- ------- ----
Net non-operating income (592) (0.03) 0 0.00
Income before taxes 18,642 0.97 20,807 1.08
Income taxes (5,745) (0.30) (6,349) (0.33)
------- ---- ------- ----
Net income $12,897 0.67% $14,458 0.75%
Sources: Kearny Financial's prospectus, audited and unaudited financial
statements, and RP Financial calculations.
RP Financial, LC.
Board of Directors
October 22, 2004
Page 4
Updated credit quality measures indicated no material change
in the Company's credit quality during the quarter, as non-performing assets
increased from 0.13% of assets at June 30, 2004 to 0.14% of assets at September
30, 2004. The increase in the non-performing assets ratio resulted from a slight
increase in non-performing loans. In total, the Company's non-performing assets
balance increased from $2.5 million at June 30, 2004 to $2.7 million at
September 30, 2004.
Asset shrinkage and retained earnings funded net deposit
outflows and the pay down of borrowings during the quarter ended September 30,
2004. Deposits declined from $1.538 billion at June 30, 2004 to $1.514 billion
at September 30, 2004, while the deposits-to-assets ratio remained constant at
79.4%. Borrowings declined from $94.2 million or 4.9% of assets at June 30, 2004
to $84.1 million or 4.4% of assets at September 30, 2004. FHLB advances remained
the only source of borrowings utilized by the Company. Capital growth combined
with asset shrinkage served to increase the Company's equity-to-assets ratio
from 15.2% at June 30, 2004 to 15.6% at September 30, 2004. Kearny Financial's
tangible equity-to-assets ratio equaled 11.2% at September 30, 2004, which was
also slightly higher than the 10.8% ratio maintained at June 30, 2004.
Kearny Financial's operating results for the twelve months
ended June 30, 2004 and September 30, 2004 are also set forth in Table 1. The
Company's reported earnings increased from $12.9 million or 0.67% of average
assets for the twelve months ended June 30, 2004 to $14.5 million or 0.75% of
average assets for the twelve months ended September 30, 2004. The increase in
the Company's updated earnings was supported by higher net interest income.
The increase in the Company's net interest income to average
assets ratio was facilitated by a wider yield-cost spread, which was the result
of both a higher yield on interest-earning assets and a lower cost of
interest-bearing liabilities. Overall, Kearny Financial's net interest income to
average assets ratio increased from 2.42% for the twelve months ended June 30,
2004 to 2.55% for the twelve months ended September 30, 2004.
Operating expenses as a percent of average assets increased
from 1.50% for the twelve months ended June 30, 2004 to 1.53% for the twelve
months ended September 30, 2004. Most of the increase in operating expenses was
related to higher compensation costs, as the result of normal salary increases,
increased benefit costs and staff expansion. Overall, Kearny Financial's higher
net interest income ratio and higher operating expense ratio provided for a
slightly higher updated expense coverage ratio (net interest income divided by
operating expenses) of 1.67x for the twelve months ended September 30, 2004,
versus a comparable ratio of 1.61x for the twelve months ended June 30, 2004.
Non-interest operating income remained a very modest
contributor to the Company's updated earnings, with such income declining from
0.08% of average assets for the twelve months ended June 30, 2004 to 0.07% of
average assets for the twelve months ended September 30, 2004. Most of the
decline in non-interest operating income was attributable to a
RP Financial, LC.
Board of Directors
October 22, 2004
Page 5
decline in service fees and charges. Overall, when factoring non-interest
operating income into core earnings, the Company's updated efficiency ratio of
57.3% (operating expenses, net of goodwill amortization, as a percent of net
interest income and non-interest operating income) was slightly more favorable
than the 58.8% efficiency ratio recorded for the twelve months ended June 30,
2004.
As the result of $151,000 of loan loss provisions established
during the quarter ended September 30, 2004, the provision for loan losses
increased from zero for the twelve months ended June 30, 2004 to $151,000 or
0.01% of average assets for the twelve months ended September 30, 2004. As of
September 30, 2004, the Company maintained valuation allowances of $5.3 million,
equal to 1.03% of net loans receivable and 213.6% of non-performing loans.
Non-operating income and expenses were not a factor in the
Company's updated earnings. Comparatively, for the twelve months ended June 30,
2004, the Company's earnings included non-recurring merger expenses of $592,000
or 0.03% of average assets.
2. Peer Group Financial Comparisons
Tables 2 and 3 present the financial characteristics and
operating results for Kearny Financial, the Peer Group and all publicly-traded
thrifts. The Company's and the Peer Group's ratios are based on financial
results through September 30, 2004 and June 30, 2004, respectively.
In general, the comparative balance sheet ratios for the
Company and the Peer Group did not vary significantly from the ratios exhibited
in the original appraisal. Consistent with the original appraisal, the Company's
updated interest-earning asset composition reflected a lower concentration of
loans and a higher concentration of cash and investments. Overall, the Company
continued to maintain a lower level of interest-earning assets compared to the
Peer Group, as updated interest-earning assets-to-assets ratios equaled 93.3%
and 94.9% for the Company and the Peer Group, respectively. The Company's lower
ratio continued to be primarily attributable to the larger impact of goodwill
and intangibles on its balance sheet (4.4% of assets versus 0.9% of assets for
the Peer Group).
The updated mix of deposits and borrowings maintained by
Kearny Financial and the Peer Group also did not change significantly from the
original appraisal. Kearny Financial's funding composition continued to reflect
a higher concentration of deposits and a lower concentration of borrowings,
relative to the comparable Peer Group measures. Updated interest-bearing
liabilities-to-assets ratios equaled 83.8% and 87.1% for the Company and the
Peer Group, respectively. Kearny Financial posted an updated tangible
equity-to-assets ratio of 11.2%, which remained above the comparable Peer Group
ratio of 10.1%. Overall, Kearny Financial's updated interest-earning
assets-to-interest-bearing liabilities ("IEA/IBL") ratio equaled 111.3%, which
remained slightly above the comparable Peer Group ratio of 109.0%. As
RP Financial, LC.
Board of Directors
October 22, 2004
Page 6
[TABLE 2 GRAPHIC OMITTED]
RP Financial, LC.
Board of Directors
October 22, 2004
Page 7
[TABLE 3 GRAPHIC OMITTED]
RP Financial, LC.
Board of Directors
October 22, 2004
Page 8
discussed in the original appraisal, the additional capital
realized from stock proceeds should serve to increase Kearny Financial's IEA/IBL
ratio, as it will reduce the level of liabilities funding assets and the cash
proceeds will primarily be deployed into interest-earning assets.
Updated growth rates for Kearny Financial are based on
annualized growth for the 15 months ended September 30, 2004, while the Peer
Group's growth rates are based on growth for the twelve months ended June 30,
2004. Updated asset growth rates continued to reflect stronger asset growth for
the Peer Group, as the Company recorded a 3.7% decline in assets compared to a
4.7% growth rate for the Peer Group. The decline in Kearny Financial's assets
was mostly related to a 5.0% decline in cash and investments, which was
partially negated by a 1.0% increase in loans. Comparatively, the Peer Group's
asset growth was realized through loan growth of 4.4% supplemented with cash and
investment growth of 5.2%.
Asset shrinkage combined with a slight increase in borrowings
funded a 5.0% decline in the Company's deposits. Comparatively, asset growth for
the Peer Group was funded by deposit growth of 4.3% and borrowings growth of
14.5%. Consistent with the original appraisal, the Company posted a slightly
stronger capital growth rate than the Peer Group (5.6% growth rate versus a 2.4%
growth rate for the Peer Group). As set forth in the original appraisal, factors
contributing to the Company's higher capital growth rate included earning a
higher return on assets and retention of all of its earnings. Comparatively, in
addition to recording a lower return on assets than the Company, the Peer
Group's capital growth rate was slowed by dividend payments as well as stock
repurchases. 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. As the result of the
goodwill and intangibles created by the acquisition of West Essex Bancorp, the
Company's tangible capital declined by 10.1% compared to a tangible capital
growth rate for the Peer Group of 0.9%.
Table 3 displays comparative operating results for Kearny
Financial and the Peer Group, based on their respective earnings for the twelve
months ended September 30, 2004 and June 30, 2004. Earnings for the Company and
the Peer Group equaled 0.75% and 0.59% of average assets, respectively. Lower
levels of operating expenses and loan loss provisions continued to support the
Company's higher return. The Peer Group continued to maintain earnings
advantages with respect to net interest income, non-interest operating income
and net gains.
In terms of core earnings strength, updated expense coverage
ratios posted by Kearny Financial and the Peer Group equaled 1.67x and 1.05x,
respectively. The Company's stronger expense coverage ratio continued to be
realized through maintenance of a lower operating expense to average assets
ratio (1.53% versus 2.54% for the Peer Group), which was partially offset by the
Peer Group's higher net interest income to average assets ratio (2.66% versus
2.55% for the Company). A higher interest income ratio accounted for the Peer
Group's higher net interest income ratio, which was partially offset by the
Company's lower interest expense ratio.
RP Financial, LC.
Board of Directors
October 22, 2004
Page 9
Non-interest operating income remained a significantly larger
source of earnings for the Peer Group, as such income amounted to 0.68% and
0.07% of the Peer Group's and the Company's average assets, respectively.
Accordingly, taking non-interest operating income into account in assessing
Kearny Financial's core earnings strength relative to the Peer Group's, the
Company's updated efficiency ratio of 57.3% continued to compare favorably to
the Peer Group's efficiency ratio of 75.4%.
Loan loss provisions remained a larger factor in the Peer
Group's earnings. Updated loan loss provisions established by the Company and
the Peer Group equaled 0.01% and 0.11% of average assets, respectively.
Net gains equal to 0.11% of average assets remained a larger
factor in the Peer Group's earnings, as the Company's updated earnings continued
to reflect no gains or losses from the sale of assets. As discussed in the
original appraisal, given the less predictable and more non-recurring nature of
gains and losses resulting from the sale of loans and investments, the impact of
net gains on the Peer Group's earnings have been somewhat discounted in
evaluating the relative strengths and weaknesses of the Company's and the Peer
Group's earnings.
Consistent with the original appraisal, the Company maintained
a higher effective tax rate than the Peer Group. Updated effective tax rates for
the Company and the Peer Group equaled 30.51% and 25.00%, respectively.
The Company's updated credit quality measures remained more
favorable than the Peer Group's updated measures. As shown in Table 4, the
Company's non-performing assets/assets and non-performing loans/loans ratios of
0.14% and 0.48%, respectively, were lower than the comparable Peer Group ratios
of 0.64% and 0.92%. The Company's updated reserve coverage ratios continued to
reflect higher levels of reserves as a percent of non-performing assets and
accruing loans that are more than 90 days past due and as a percent of
non-performing loans, while reserves as a percent of loans remained comparable
for the Company and the Peer Group. Net loan charge-offs remained a more
significant factor in the Peer Group's updated credit quality measures, as the
Peer Group's ratio of net loan charge-offs as a percent of loan increased
slightly compared to no change in the Company's ratio.
3. Stock Market Conditions
Since the date of the original appraisal, the performance of
the overall stock market has been mixed. The Dow Jones Industrial Average
("DJIA") hit a six week high in late-August, which was supported by a drop in
oil prices. After the DJIA closed at a two month high in early-September on
hopes for favorable employment numbers for August, the broader stock market
traded in a narrow range through mid-September. Concerns that rising oil prices
would hurt the economy and reduce corporate earnings pressured stocks lower in
late-September. Stocks rallied at the start of the fourth quarter, largely on
the basis of a rebound in technology stocks due to an upbeat outlook for third
quarter earnings. Higher oil prices and allegations of
RP Financial, LC.
Board of Directors
October 22, 2004
Page 10
[TABLE 4 GRAPHIC OMITTED]
RP Financial, LC.
Board of Directors
October 22, 2004
Page 11
improprieties in the insurance industry pressured the DJIA to its lowest level
of the year in late-October. On October 22, 2004, the DJIA closed at 9757.81 or
3.5% lower since the date of the original appraisal and the NASDAQ closed at
1915.14 or 4.2% higher since the date of the original appraisal.
Stock market activity for thrift issues has also been mixed
since the date of the original appraisal. Thrift stocks sustained a positive
trend in late-August, which was fueled by lower interest rates and strength in
the broader stock market. The upward trend in thrift prices continued through
mid-September, as September employment data matched expectations and inflation
remained low. Thrift stocks edged lower at the close of the third quarter, which
was largely attributable to weakness in the broader stock market. Thrift issues
also rebounded in conjunction with the broader stock market rally at the start
of the fourth quarter. After trading in a narrow range into mid-October, thrift
stocks moved lower on some disappointing third quarter earnings and lower
guidance on future earnings due to margin compression resulting from a flatter
yield curve. On October 22, 2004, the SNL Index for all publicly-traded thrifts
closed at 1,465.9, an increase of 0.9% since the date of the original appraisal.
The SNL MHC Index closed at 2,733.5 on October 22, 2004, an increase of 5.6%
since the date of the original appraisal.
Similar to the performance of the SNL MHC Index and the SNL
Index for all publicly-traded thrifts, the updated pricing measures for the Peer
Group and all publicly-traded thrifts increased since the date of the original
appraisal. The 2.1% decline reflected in the Peer Group's updated P/E multiple
was the result of Westfield Financial's P/E multiple going from 31.49 times as
of the original appraisal date to a not meaningful multiple as of the date of
this update. The Peer Group's updated fully-converted pricing measures continued
to reflect higher P/E multiples and lower P/B ratios than indicated for the
comparable averages for all publicly-traded thrifts. Since the date of the
original appraisal, nine out of the ten Peer Group companies were trading at
higher prices as of October 22, 2004. A comparative pricing analysis of all
publicly-traded thrifts, the Peer Group and recent conversions is shown in the
following table, based on market prices as of August 20, 2004 and October 22,
2004. The Peer Group's pricing measures reflect implied pricing ratios on a
fully-converted basis.
RP Financial, LC.
Board of Directors
October 22, 2004
Page 12
Average Pricing Characteristics(continued)
At Aug. 20, At Oct. 22, %
2004 2004 Change
-------- ------- ------
All Publicly-Traded Thrifts
---------------------------
Price/Earnings (x) 17.37x 18.04x 3.9%
Price/Core Earnings (x) 19.27 19.92 3.4
Price/Book (%) 156.40% 161.66% 3.4
Price/Tangible Book(%) 170.19 176.01 3.4
Price/Assets (%) 16.58 17.36 4.7
Avg. Mkt. Capitalization ($Mil) $446.17 $458.76 2.8
Recent Conversions(2)
---------------------
Price/Core Earnings (x) 16.91x NA NA
Price/Tangible Book (%) 185.44% NA NA
(1) Pricing ratios for the Peer Group are on a fully converted basis.
(2) Ratios are based on conversions completed for prior three months.
As set forth in the original appraisal, the "new issue" market
is separate and distinct from the market for seasoned issues like the Peer Group
companies 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 the pricing of converting and existing issues is perhaps most evident 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.
As shown in Table 5, two second-step conversions and four
mutual holding company offerings were completed during the past three months.
The mutual holding company offerings are considered to be more relevant for
purposes of our analysis. All four of the mutual holding company offerings were
closed at the top of their superranges. On a fully-converted basis, the average
closing pro forma price/tangible book ratio of the recent MHC offerings equaled
87.7%. On average, the four recent MHC offerings reflected price appreciation of
12.0% after the first week of trading.
There have been no standard conversion offerings completed
during the past three months and the two second-step offerings completed during
the past three months are traded on
RP Financial, LC.
Board of Directors
October 22, 2004
Page 13
[TABLE 5 GRAPHIC OMITTED]
RP Financial, LC.
Board of Directors
October 22, 2004
Page 14
the OTC Bulletin Board. Accordingly, there are no current pricing multiples for
fully-converted companies that trade on NASDAQ or an Exchange.
Summary of Adjustments
In the original appraisal, we made the following adjustments
to Kearny Financial's pro forma value based upon our comparative
analysis to the Peer Group:
Previous Valuation
Key Valuation Parameters: 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
The factors concerning the valuation parameters of primary
market area, dividends, management and effect of government regulations and
regulatory reform did not change since the original appraisal.
In terms of financial condition, the slight upward valuation
adjustment applied for the Company's financial condition in the original
appraisal remained appropriate, which was supported by a moderate upward
adjustment for the Company's credit quality and slight upward adjustments for
the Company's balance sheet liquidity, funding composition and stronger pro
forma capital position. No adjustment remained appropriate for the Company's
updated asset growth, as the Company's less favorable historical asset growth
rate continued to be offset by its greater pro forma leverage capacity that will
be facilitated by maintenance of a higher pro forma equity-to-assets ratio. The
Company's updated earnings continued to warrant a slight upward adjustment,
largely on the basis of Kearny Financial's slightly stronger core earnings and
lower exposure to credit risk, which was somewhat negated by the Company's lower
pro forma return on equity. A slight upward adjustment was applied for liquidity
of the shares, which took into consideration the increase in the Company's
offering range.
The general market for thrift stocks was higher compared to
the date of the original appraisal, as indicated by the increases recorded in
the SNL MHC Index and the SNL Index for all publicly-traded thrifts. The pricing
measures for the Peer Group and all publicly-traded thrifts increased as well
from the date of the original appraisal. Recent thrift offerings
RP Financial, LC.
Board of Directors
October 22, 2004
Page 15
have generally been well received, as all four of the recent MHC offerings were
closed at the top of their respective superranges and traded higher in initial
trading activity. However, the new issue market appears to haves pulled back
somewhat from more speculative levels experienced earlier in the year, based on
the less significant price appreciation that has occurred in the recent MHC
offerings. Accordingly, taking into account the market performance of
all-publicly traded thrifts and the Peer Group since the date of the original
appraisal, as well as the market for recent thrift offerings, the adjustment for
marketing of the issue was revised from no adjustment to a slight upward
valuation adjustment.
Overall, taking into account the foregoing factors, we believe
that an increase in the Company's estimated pro market value as set forth in the
original appraisal is appropriate.
Basis of Valuation. Fully-Converted Pricing Ratios
Consistent with the original appraisal, to calculate the
fully-converted pricing information for MHCs, the reported financial information
for the Peer Group companies has been adjusted as follows: (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 are 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 an after-tax 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 Peer Group companies are
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 6 on the following page shows the calculation of
per share financial data (fully-converted basis) for each of the public MHC
institutions that form the Peer Group.
Valuation Approaches
In applying the accepted valuation methodology promulgated by the
regulatory agencies, i.e., the pro forma market value approach, 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 offering
proceeds.
In computing the pro forma impact of the offering and the related
pricing ratios, the valuation parameters utilized in the original appraisal did
not change in this update, except the reinvestment rate was updated to equal the
yield on one-year U.S. Government securities at September 30, 2004 (2.16%). In
the original appraisal, the reinvestment rate was equal to the yield on one-year
U.S. Government securities at June 30, 2004 (2.09%). Offering expenses for the
MHC offering were revised to be consistent with the offering expenses set forth
in the
RP Financial, LC.
Board of Directors
October 22, 2004
Page 16
[TABLE 6 GRAPHIC OMITTED]
RP Financial, LC.
Board of Directors
October 22, 2004
Page 17
prospectus, which increased from the original appraisal due to the increase in
the valuation range and resulting higher selling commission. The amount shares
to be purchased by the RRP was revised from 6.67% of the MHC offering to 6.53%
of the MHC offering, as reflected in the Company's prospectus.
Consistent with the original appraisal, this updated appraisal
continues to be based primarily on fundamental analysis techniques applied to
the Peer Group, including the P/E approach, the P/B approach and the P/A
approach. Also consistent with the original appraisal, this updated appraisal
incorporates a "technical" analysis of recently completed thrift offerings,
including principally the P/B approach which (as discussed in the original
appraisal) is the most meaningful pricing ratio as the pro forma P/E ratios
reflect an assumed reinvestment rate and do not yet reflect the actual use of
proceeds.
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 shares owned by an ESOP where there is not a commitment to
release such shares. For the purpose of preparing the pro forma pricing tables
and exhibits, we have reflected all shares issued in the offering including
shares purchased by the ESOP as outstanding to capture the full dilutive impact
of such stock to the Company's shareholders. However, we have considered the
impact of the Company's adoption of SOP 93-6 in the determination of pro forma
market value.
Based on the foregoing, we have concluded that an increase in Kearny
Financial's value is appropriate. Therefore, as of October 22, 2004, the forma
market value of Kearny Financial's full conversion offering equaled $550,000,000
at the midpoint, equal to 55,000,000 shares at $10.00 per share.
1. P/E Approach. In applying the P/E approach, RP Financial's
valuation conclusions considered both reported earnings and a recurring or
"core" earnings base, that is, earnings adjusted to exclude any one time
non-operating and extraordinary items, plus the estimated after tax-earnings
benefit from reinvestment of net stock proceeds. The Company's reported
earnings, incorporating the reinvestment of $595,000 of MHC assets at an
after-tax reinvestment rate of 1.28%, equaled $14.466 million for the twelve
months ended September 30, 2004. The Company's reported earnings were considered
to be representative of its core earnings for the twelve month period ended
September 30, 2004. (Note: see Exhibit 2 for the adjustments applied to the Peer
Group's earnings in the calculation of core earnings).
Based on Kearny Financial's earnings for the twelve months
ended September 30, 2004, 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 updated midpoint value of $550.0
million equaled 35.94 times. The Company's updated reported and core P/E
multiples provided for premiums of 46.3% and 31.2% relative to the Peer Group's
average reported and core P/E multiples of 24.57 times and 27.39 times,
respectively (versus premiums of 40.7% and 29.8% relative to the Peer Group's
average reported and core P/E multiples as indicated in the original appraisal).
The Company's implied conversion pricing
RP Financial, LC.
Board of Directors
October 22, 2004
Page 18
ratios relative to the Peer Group's pricing ratios are indicated in Table 7, and
the pro forma calculations are detailed in Exhibits 3 and 4.
On an MHC reported basis, the Company's reported and core P/E
multiples at the updated midpoint value of $550.0 million equaled 38.82 times.
The Company's updated reported and core P/E multiples provided for premiums of
51.8% and 48.4% relative to the Peer Group's average reported and core P/E
multiples of 25.57 times and 26.16 times, respectively (versus premiums of 53.6%
and 42.6% relative to the Peer Group's average reported and core P/E multiples
as indicated in the original appraisal). The Company's implied MHC pricing
ratios relative to the MHC pricing ratios for the Peer Group are indicated in
Table 8, and the pro forma calculations are detailed in Exhibits 5 and 6.
2. P/B Approach. P/B ratios have generally served as a useful
benchmark in the valuation of thrift stocks, with the greater determinant of
long term value being earnings. In applying the P/B approach, we considered both
reported book value and tangible book value. Based on the $550.0 million updated
midpoint value, the Company's P/B and P/TB ratios (fully-converted basis)
equaled 71.30% and 80.05%, respectively. In comparison to the average P/B and
P/TB ratios indicated for the Peer Group of 100.06% and 105.65%, respectively,
Kearny Financial's updated ratios were discounted by 28.7% on a P/B basis and
24.2% on a P/TB basis (versus discounts of 30.1% and 24.9% from the Peer Group's
P/B and P/TB ratios as indicated in the original appraisal). At the new
superrange value of $727.4 million, the Company's P/B and P/TB ratios equaled
80.31% and 88.55%, respectively. In comparison to the Peer Group's average P/B
and P/TB ratios, the Company's P/B and P/TB ratios at the top of the superrange
reflected discounts of 19.7% and 16.2%, respectively.
On an MHC reported basis, the Company's P/B and P/TB ratios at
the $550.0 million updated midpoint value equaled 126.14% and 156.49%,
respectively. In comparison to the average P/B and P/TB ratios indicated for the
Peer Group of 228.83% and 256.22%, respectively, Kearny Financial's updated
ratios were discounted by 44.9% on a P/B basis and 38.9% on a P/TB basis (versus
discounts of 46.2% and 39.4% from the Peer Group's P/B and P/TB ratios as
indicated in the original appraisal). At the new superrange value of $727.4
million, the Company's P/B and P/TB ratios on an MHC reported basis equaled
151.29% and 183.49%, respectively. In comparison to the Peer Group's average P/B
and P/TB ratios, the Company's P/B and P/TB ratios at the top of the superrange
reflected discounts of 33.9% and 28.4%, respectively.
In addition to the fundamental analysis applied to the Peer
Group, RP Financial utilized a technical analysis of recent conversion and
mutual holding company offerings As indicated in the original appraisal, the
pricing characteristics of recent conversion and mutual holding company
offerings are not the primary determinate of value. Consistent with the original
appraisal, particular focus was placed on the P/TB approach in this analysis,
since the P/E multiples do not reflect the actual impact of reinvestment and the
source of the conversion funds (i.e., external funds versus deposit
withdrawals). The four recently completed MHC offerings had an average pro forma
price/tangible book ratio of 87.7% (fully-converted basis)
RP Financial, LC.
Board of Directors
October 22, 2004
Page 19
[TABLE 7 GRAPHIC OMITTED]
RP Financial, LC.
Board of Directors
October 22, 2004
Page 20
[TABLE 8 GRAPHIC OMITTED]
RP Financial, LC.
Board of Directors
October 22, 2004
Page 16
and, on average, appreciated 12.0% during the first week of trading. In
comparison, the Company's P/TB ratio of 80.1% at the updated midpoint value
reflects an implied discount of 8.7% relative to the average pro forma P/TB
ratio of the recent MHC offerings. At the new superrange, the Company's P/TB
ratio of 88.6% reflects an implied premium of 1.0% relative to the average pro
forma P/TB ratio of the recent MHC offerings. The current average
fully-converted P/TB ratio of the four recent MHC offerings, which are all
quoted on NASDAQ, equaled 92.2%, based on closing market prices as of October 22
2004. In comparison to the current P/TB ratio of the publicly-traded MHC
offerings, the Company's P/TB ratio at the updated midpoint value reflects an
implied discount of 13.1% and at the top of the new superrange the discount
narrows to 3.9%.
3. P/A Approach. P/A ratios are generally not as a reliable
indicator of market value, as investors do not place significant weight on total
assets as a determinant of market value. Investors place significantly greater
weight on book value and earnings -- which have received greater weight in our
valuation analysis. At the $550.0 million updated midpoint value, Kearny
Financial's full conversion pro forma P/A ratio equaled 23.12%. In comparison to
the Peer Group's average P/A ratio (fully-converted basis) of 21.49%, Kearny
Financial's P/A ratio indicated a premium of 7.6% (versus a discount of 0.6% at
the midpoint valuation in the original appraisal).
On an MHC reported basis, Kearny Financial's pro forma P/A
ratio at the $550.0 million updated midpoint value equaled 26.91%. In comparison
to the Peer Group's average P/A ratio of 25.53%, Kearny Financial's P/A ratio
indicated a premium of 5.4% (versus a discount of 3.9% at the midpoint valuation
in the original appraisal).
Valuation Conclusion
Our analysis indicates that the Company's estimated pro forma
market value should be increased from the midpoint value as set forth in the
original appraisal. Accordingly, it is our opinion that, as of October 22, 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 $550,000,000 at the midpoint, equal to 55,000,000 shares
offered at a per share value of $10.00. Pursuant to conversion guidelines, the
15% offering range indicates a minimum value of $467.5 million and a maximum
value of $632.5 million. Based on the $10.00 per share offering price determined
by the Board, this valuation range equates to total shares outstanding of
46,750,000 at the minimum and 63,250,000 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 $727.4 million without a
resolicitation. Based on the $10.00 per share offering price, the supermaximum
value would result in total shares outstanding of 72,737,500. 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 $140.3 million at the
minimum, $165.0 million at the midpoint, $189.8 million at the maximum and
$218.2 million at the supermaximum of the
RP Financial, LC.
Board of Directors
October 22, 2004
Page 22
valuation range. The pro forma valuation calculations relative to the Peer Group
(fully-converted basis) are shown in Table 7 and are detailed in Exhibit 3 and
Exhibit 4; the pro forma valuation calculations relative to the Peer Group based
on reported financials are shown in Table 8 and are detailed in Exhibits 5 and
6.
Respectfully submitted,
RP FINANCIAL, LC.
/s/Ronald S. Riggins
Ronald S. Riggins
President and Managing Director
/s/Gregory E. Dunn
Gregory E. Dunn
Senior Vice President
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