SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)

[X]  Annual report  pursuant to section 13 OR 15(d) of the  Securities  Exchange
     Act of 1934

     For the fiscal year ended               June 30, 2006
                               -------------------------------------------------

                                     - or -

[ ]  Transition  Report  pursuant  to  section  13 OR  15(d)  of the  Securities
     Exchange Act of 1934

     For the transition period from ____________________ to ____________________


                           Commission Number: 0-51093

                             Kearny Financial Corp.
                             ----------------------
             (Exact name of Registrant as specified in its Charter)

               United States                                     22-3803741
---------------------------------------------                  -------------
(State or other jurisdiction of incorporation                  (IRS Employer
 or organization)                                            Identification No.)

120 Passaic Avenue, Fairfield, New Jersey                         07004
-----------------------------------------                    ---------------
(Address of principal executive offices)                        Zip Code

Registrant's telephone number, including area code:     (973) 244-4500
                                                     -------------------

Securities registered pursuant to Section 12(b) of the Act:
                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

Securities registered pursuant to Section 12(g) of the Act:     None
                                                            -------------


        Indicate  by  check  mark if the  registrant  is a  well-known  seasoned
        issuer, as defined in Rule 405 of the Securities Act.
        [ ] YES   [X] NO

        Indicate by check mark if the registrant is not required to file reports
        pursuant to Section 13 or Section 15(d) of the Act.
        [ ] YES   [X] NO

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

        Indicate  by check mark if  disclosure  of  delinquent  filers  pursuant
        to Item 405 of Regulation S-K is not contained herein,  and will not  be
        contained,  to the best of registrant's  knowledge, in definitive  proxy
        or information statements incorporated  by reference in Part III of this
        Form 10-K or any amendment to this Form 10-K. [X]

        Indicate by check mark whether the  registrant  is a  large  accelerated
        filer, an  accelerated filer, or a non-accelerated filer. See definition
        of "accelerated  filer and large accelerated filer" in Rule 12b-2 of the
        Exchange Act. (Check one):
            Large accelerated filer [ ]        Accelerated filer [X]
            Non-accelerated filer [ ]

        Indicate  by check mark whether the  registrant  is a shell  company (as
        defined in Rule 12b-2 of the Act).
         [ ] YES  [X] NO

        The  aggregate  market value of the voting and non-voting  common equity
        held by  non-affiliates  of  the Registrant  on December 31, 2005,  (the
        last day of  the  Registrant's  most  recently  completed  second fiscal
        quarter) was $236.9 million.

        As  of  September 8, 2006 there were issued and  outstanding  72,667,600
        shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

          1.   Portions of the Proxy  Statement  for the 2006 Annual  Meeting of
               Stockholders. (Part III)

<PAGE>

                                     PART I

         Kearny  Financial  Corp. (the "Company" or the  "Registrant")  may from
time to  time  make  written  or oral  "forward-looking  statements,"  including
statements  contained in the Company's  filings with the Securities and Exchange
Commission (including this Annual Report on Form 10-K and the exhibits thereto),
in its reports to stockholders and in other communications by the Company, which
are made in good faith by the Company  pursuant to the "safe harbor"  provisions
of the Private Securities Litigation Reform Act of 1995.

         These forward-looking statements involve risks and uncertainties,  such
as statements of the Company's plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economy in which the Company conducts  operations;
the effects of, and changes in,  trade,  monetary and fiscal  policies and laws,
including  interest  rate  policies  of the Board of  Governors  of the  Federal
Reserve System, inflation, interest rates, market and monetary fluctuations; the
impact of changes in financial  services laws and  regulations  (including  laws
concerning  taxes,  banking,  securities and  insurance);  changes in accounting
policies and practices,  as may be adopted by regulatory agencies, the Financial
Accounting  Standards Board or the Public Company  Accounting  Oversight  Board;
technological changes;  competition among financial services providers;  and the
success of the  Company at managing  the risks  involved  in the  foregoing  and
managing its business.

         The Company  cautions that the foregoing  list of important  factors is
not  exclusive.  The Company does not  undertake  to update any  forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Company.

Item 1.  Business
-----------------

General

         The Company is a federally-chartered  corporation that was organized on
March 30,  2001 for the purpose of being a holding  company  for Kearny  Federal
Savings Bank (the "Bank"), a federally-chartered stock savings bank. On February
23,  2005,  the  Company  completed a minority  stock  offering in which it sold
21,821,250  shares, or 30% of its outstanding common stock. The remaining 70% of
the outstanding common stock, or 50,916,250 shares, are owned by Kearny MHC (the
"MHC"). The MHC is a federally-chartered  mutual holding company, and so long as
the MHC is in existence,  it will at all times own a majority of the outstanding
common stock of the Company. The MHC and the Company are regulated by the Office
of Thrift Supervision.

         The Company is a unitary  savings and loan holding company and conducts
no  significant  business or  operations  of its own.  References in this Annual
Report on Form 10-K to the Company or Registrant  generally refer to the Company
and the Bank, unless the context indicates otherwise.  References to "we," "us,"
or "our" refer to the Bank or Company, or both, as the context indicates.

         The Bank was originally founded in 1884 as a New Jersey mutual building
and loan  association.  It obtained  federal  insurance  of accounts in 1939 and
received a federal charter in 1941. The Bank's deposits are federally insured by
the Deposit  Insurance Fund as  administered  by the Federal  Deposit  Insurance
Corporation,  and the Bank is regulated by the Office of Thrift  Supervision and
the Federal Deposit Insurance Corporation.

                                       2

<PAGE>

         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.  At June 30, 2006,  mortgage-backed  securities  and investment
securities  comprised  45.7% of our total  assets while loans  receivable,  net,
comprised 35.0% of our total assets. At June 30, 2005 mortgage-backed securities
and investment  securities  were 59.9% and loans were 26.5% of our total assets,
and at June 30, 2004 these percentages were 64.5% and 26.1%, respectively. It is
our intention to continue to increase the balance of our loan portfolio relative
to the size of our securities portfolio.

         Market Area. We operate from administrative  headquarters in Fairfield,
New  Jersey,  and as of June 30, 2006 had 26 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 these nine New Jersey  counties,  and our predominant
sources of deposits are the communities in which our offices are located as well
as the neighboring communities.

         Our primary  market  area is largely  urban and  suburban  with a broad
economic base as is typical within the New York metropolitan  area. Service jobs
represent the largest employment sector followed by wholesale/retail trade.

         Our  business of  attracting  deposits  and making  loans is  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 funds  from  investment  products  such as mutual  funds,
short-term money funds and corporate and government securities.  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.

                                       3

<PAGE>

Lending Activities

         General.   We  have   traditionally   focused  on  the  origination  of
one-to-four  family loans,  which  comprise a significant  majority of our total
loan portfolio.  Our next largest  category of lending is commercial real estate
which includes multi-family dwellings, mixed-use properties and other commercial
properties.  We also offer  consumer  loans  (primarily  composed of home equity
loans and lines of credit),  construction  loans (to builders and  developers as
well as individual  homeowners) and commercial business loans, generally secured
by real estate.

<TABLE>
<CAPTION>
                                                                             At June 30,
                                ----------------------------------------------------------------------------------------------------
                                         2006                2005                2004               2003                 2002
                                --------------------- ------------------ ------------------ -------------------- -------------------
                                   Amount    Percent    Amount  Percent     Amount  Percent   Amount    Percent    Amount    Percent
                                   ------    -------    ------  -------     ------  -------   ------    -------    ------    -------
<S>                             <C>        <C>       <C>      <C>        <C>      <C>       <C>       <C>        <C>       <C>
  Type of Loans:                                                                            (In thousands)
  -------------
  Real estate mortgage -
     One-to-four family......... $465,822     65.80%  $382,766   68.04%   $358,241   70.22%  $366,391    71.50%   $458,969    77.24%
  Real estate mortgage -
    multi-family and
    commercial..................  107,111     15.13     96,685   17.18      83,426   16.35     71,099    13.88      59,418    10.00
  Commercial business...........    3,208      0.45      2,930    0.52       5,161    1.01      2,353     0.46       6,704     1.13
  Consumer:
     Home equity loans..........   93,639     13.23     54,199    9.63      37,381    7.33     37,315     7.28      36,750     6.19
     Equity lines of credit.....   12,988      1.83     14,850    2.64      15,677    3.07     19,905     3.89      19,183     3.23
     Passbook or certificate....    2,884      0.41      2,831    0.50       2,746    0.54      2,895     0.56       3,044     0.51
     Other......................      247      0.03        264    0.05         336    0.07      1,273     0.25       1,111     0.18
  Construction..................   22,078      3.12      8,094    1.44       7,212    1.41     11,183     2.18       9,030     1.52
                                 --------    ------   --------  ------    --------  ------   --------   ------    --------   ------
       Total loans..............  707,977    100.00%   562,619  100.00%    510,180  100.00%   512,414   100.00%    594,209   100.00%
                                 --------    ======   --------  ======    --------  ======   --------   ======    --------   ======
  Less:
     Allowance for loan losses..    5,451                5,416               5,144              5,180                5,170
     Deferred loan (costs)
        and fees, net...........   (1,087)                (815)               (758)            (1,927)              (2,103)
                                 --------             --------            --------           --------             --------
                                    4,364                4,601               4,386              3,253                3,067
                                 --------             --------            --------           --------             --------
       Total loans, net......... $703,613             $558,018            $505,794           $509,161             $591,142
                                 ========             ========            ========           ========             ========
</TABLE>

                                       4

<PAGE>

         Loan Maturity Schedule.  The following table sets forth the maturity of
our loan  portfolio  at June 30,  2006.  Demand  loans,  loans  having no stated
maturity,  and overdrafts are shown as due in one year or less. Loans are stated
in the following  tables at  contractual  maturity and actual  maturities  could
differ due to prepayments.

<TABLE>
<CAPTION>
                                                                         At June 30, 2006
                            -------------------------------------------------------------------------------------------------------
                                            Real
                                           estate
                                 Real     mortgage -
                                estate     multi-                              Home
                              mortgage -   family                    Home      equity
                             one-to-four    and        Commercial    equity   lines of  Passbook or
                               family    commercial     business     loans     credit   certificate   Other  Construction    Total
                               ------    ----------     --------     -----     ------   -----------   -----  ------------    -----
                                                              (In thousands)
<S>                           <C>        <C>           <C>        <C>        <C>        <C>        <C>        <C>        <C>
Amounts Due:
Within 1 Year ..............   $    155   $    135      $  3,175   $     53   $     58   $  2,460   $    126   $ 15,215   $ 21,377
                               --------   --------      --------   --------   --------   --------   --------   --------   --------

After 1 year:
  1 to 3 years .............      3,269        638            33      4,068        242        414         28      6,863     15,555
  3 to 5 years .............     12,015      2,491             -      7,248         47          -          -          -     21,801
  5 to 10 years ............     77,974     12,118             -     29,553      2,626          -          -          -    122,271
  10 to 15 years ...........    129,230     35,252             -     37,326      9,057         10         93          -    210,968
  Over 15 years ............    243,179     56,477             -     15,391        958          -          -          -    316,005
                               --------   --------      --------   --------   --------   --------   --------   --------   --------

Total due after one year ...    465,667    106,976            33     93,586     12,930        424        121      6,863    686,600
                               --------   --------      --------   --------   --------   --------   --------   --------   --------
Total amount due ...........   $465,822   $107,111      $  3,208   $ 93,639   $ 12,988   $  2,884   $    247   $ 22,078   $707,977
                               ========   ========      ========   ========   ========   ========   ========   ========   ========
</TABLE>

                                       5

<PAGE>

         The  following  table  shows the dollar  amount of loans as of June 30,
2006 that are due after June 30, 2007 according to rate type and loan category.

<TABLE>
<CAPTION>

                                                                       Floating or
                                                    Fixed Rates     Adjustable Rates       Total
                                                    -----------     ----------------       -----
                                                                     (In thousands)
        <S>                                         <C>              <C>              <C>
        Real estate mortgage -
           one-to-four family .....................   $387,701         $ 77,966         $465,667
        Real estate mortgage -
          multi-family and commercial .............     79,987           26,989          106,976
        Commercial business .......................         33                -               33
        Consumer:
           Home equity loans ......................     93,586                -           93,586
           Home equity lines of credit ............      2,254           10,676           12,930
           Passbook or certificate ................          -              424              424
           Other ..................................        118                3              121
           Construction ...........................          -            6,863            6,863
                                                      --------         --------         --------
               Total ..............................   $563,679         $122,921         $686,600
                                                      ========         ========         ========
</TABLE>


         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 within New Jersey.

         We will  originate  a  one-to-four  family  mortgage  loan on an  owner
occupied  property  with a  principal  amount of up to 95% of the  lesser of the
appraised  value or the purchase  price of the property,  with private  mortgage
insurance  required if the loan to value ratio  exceeds  80%.  Our 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 of 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 of 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 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 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

                                       6

<PAGE>

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 and fire  insurance  and, if  applicable,  flood  insurance,  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, such as mixed-use properties combining residential
and commercial space.

         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 20 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 typically 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 normally secured by real estate,
and  we  require  personal  guarantees  on  all  commercial  loans.   Marketable
securities  may also be accepted as  collateral  on lines of credit,  but with a
loan to value limit of 50%. The loan to value limit on secured  commercial lines
of credit and term loans is  otherwise  generally  limited to 70%.  We also make
unsecured commercial loans in the form of overdraft checking authorization up to
$25,000 and unsecured lines of credit up to $25,000.

         Our commercial  term loans  generally have terms of up to fifteen years
and are mostly fixed rate loans. Our commercial lines of credit have terms of 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.

         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

                                       7

<PAGE>

carry larger  balances to single  borrowers or related  groups of borrowers than
one-to-four  family loans.  Commercial  lending 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 twenty  years.  We also offer fixed and
adjustable  rate home equity lines of credit with terms of up to fifteen  years.
Collateral  value is  determined  through an Automated  Valuation  Module (AVM),
specifically, the Freddie Mac's Home Valuation Explorer (HVE), or property value
analysis  report  (FHLMC  Form 704)  provided by a state  certified  or licensed
independent  appraiser.  In some cases, we determine  collateral value by a full
appraisal performed by a state certified or licensed independent appraiser. Home
equity loans and lines of credit do not require  title  insurance but do require
homeowner, liability and fire insurance and, if applicable, flood insurance.

         Home  equity  loans and  fixed  rate home  equity  lines of credit  are
primarily  originated in our market area and are generally made in amounts of up
to 80% of  value  on  term  loans  and of up to 75%  of  value  on  home  equity
adjustable  rate lines of credit.  We  originate  home equity  loans  secured by
either a first lien or a second lien on the property.

         Other  Consumer  Loans.  In addition to home equity  loans and lines of
credit, our consumer loan portfolio includes savings and certificates of deposit
secured  (passbook)  loans  and  unsecured  personal  overdraft  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.

         Construction  Lending.  Our  construction  lending  includes  loans  to
individuals  for  construction  of one- to-four  family  residences or for major
renovations or improvements to an existing  dwelling.  Our construction  lending
also  includes  loans to builders and  developers  for  multi-unit  buildings or
multi-house projects. 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.
The Board of Directors  reviews the Bank's business  relationship with a builder
or developer prior to accepting a loan application for processing.  We generally
do not make  construction  loans to builders on a speculative  basis,  without a
contract in place.  Financing is only provided for up to two houses at

                                       8

<PAGE>

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, 2006, our loans to one borrower limit was
approximately $55.3 million.

         At June 30, 2006,  our largest  single  borrower had an aggregate  loan
balance of approximately  $9.5 million,  representing two mortgage loans secured
by commercial  real estate.  Our second largest single borrower had an aggregate
loan balance of  approximately  $9.3 million,  representing two loans secured by
commercial real estate, one commercial line of credit secured by real estate and
one residential  mortgage loan. Our third largest borrower had an aggregate loan
balance of approximately $9.2 million, representing one loan, a participation in
a construction  loan secured by commercial real estate. At June 30, 2006, all of
these lending  relationships  were current and performing in accordance with the
terms of their loan agreements.

                                       9

<PAGE>

         Loan Originations,  Purchases,  Sales, Solicitation and Processing. The
following  table shows total loans  originated,  purchased and repaid during the
periods indicated.

<TABLE>
<CAPTION>
                                                                   For the Year Ended June 30,
                                                             -------------------------------------------
                                                                 2006           2005          2004
                                                             ------------   -----------   ------------
                                                                           (In thousands)
<S>                                                          <C>            <C>           <C>
Loan originations and purchases:
  Loan originations:
    Real estate mortgage - one-to-four family............      $118,371       $  86,026     $   69,550
    Real estate mortgage - multi-family and commercial...        23,444          24,622         26,052
    Commercial business..................................           708           1,422          5,631
    Construction.........................................        22,638           7,378          6,864
  Consumer:
    Home equity loans and lines of credit................        66,456          39,598         31,656
    Passbook or certificate..............................         1,578           1,618          1,830
    Other................................................           412             324            266
                                                               --------       ---------      ---------
  Total loan originations................................       233,607         160,988        141,849
                                                               --------       ---------      ---------
  Loan purchases:
    Real estate mortgage - one-to-four family............        24,434           1,515         14,262
    Real estate mortgage - multi-family and commercial...             -               -            762
                                                               --------       ---------      ---------
  Total loan purchases...................................        24,434           1,515         15,024
                                                               --------       ---------      ---------
  Loan principal repayments..............................      (113,786)       (111,740)      (157,906)
                                                               --------       ---------      ---------
Increase (decrease) due to other items...................         1,340           1,461         (2,334)
                                                               --------       ---------      ---------
Net increase (decrease) in loan portfolio................      $145,595       $  52,224      $  (3,367)
                                                               ========       =========      =========
</TABLE>

         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.

         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, 2006. Gross loan originations totaled $233.6 million for the year
ended June 30, 2006 and exceeded  principal  repayments by approximately  $119.8
million.

         In October  2005,  the Bank entered into a loan  purchase and servicing
agreement  with  Countrywide  Home  Loans  Inc.  located  in  Westlake  Village,
California.  The agreement with Countrywide calls for the purchase of loan pools
that  contain  mortgages  on  properties  in our  lending  area.  All loan pools
presented to the Bank must meet the Bank's underwriting requirements as outlined
in the purchase and servicing  agreement.  Countrywide services these mortgages.
During the year ended June 30, 2006, a total of $6.6 million of adjustable  rate
loans and $12.6 million of fixed rate loans were purchased from Countrywide.

         Purchase  agreements  have also been executed with a limited  number of
smaller,  local  mortgage  companies  in an effort to  maintain  the Bank's loan
production pipeline. These agreements call for the purchase, on a flow basis, of
adjustable  rate and/or 10 or 15 year fixed rate mortgage  loans with  servicing
released  to the  Bank.  During  the year  ended  June 30,  2006 a total of $2.4
million  adjustable  loans and $2.7  million of fixed rate loans were  purchased
from these companies.

         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").  Our TICIC  participations  include  multi-family and commercial real
estate  properties.

                                       10

<PAGE>

The aggregate balance of TICIC  participations at June 30, 2006 was $8.9 million
and the average balance on a single participation was approximately $256,000. At
June 30, 2006, we had a total of six non-TICIC  participations with an aggregate
balance  of  $22.7  million,  consisting  of  loans on  commercial  real  estate
properties,  including a medical  center,  a self-storage  facility,  a shopping
plaza,  commercial buildings with a combination of retail and office space and a
construction loan to build townhouses.

         Loan Approval  Procedures and Authority.  Senior management  recommends
and the Board of  Directors  approves  our lending  policies  and loan  approval
limits. Our Senior Vice President and Chief Lending Officer may approve loans up
to $500,000. Loan department personnel of Kearny Federal Savings Bank serving 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
different  levels of approval  authority as to minimum credit scores and maximum
loan to value ratios and debt ratios. Our President and Chief Executive Officer,
Senior Vice President and Chief Financial  Officer and Senior Vice President and
Treasurer each have  authorization to countersign  loans for amounts that exceed
$500,000 up to a limit of $750,000.  Our Senior Vice President and Chief Lending
Officer  must  approve  loans  between  $500,000  and $750,000 and one member of
senior  management as outlined  above.  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, 2006, we held real estate owned
totaling  $109,000,  consisting of one parcel of vacant land,  currently under a
contract of sale.

         Loans are  reviewed  on a regular  basis and are placed on  non-accrual
status when they are more than ninety days  delinquent,  with the exception of a
passbook  loan, the  outstanding  balance of which is collected from the related
passbook  account along with accrued interest and a penalty when the loan is 120
days delinquent.  Loans may be placed on a non-accrual status at any time if, in
the opinion of management,  the  collection of additional  interest is doubtful.
Interest  accrued and unpaid at the time a loan 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, 2006, we
had approximately $942,000 of loans that were held on a non-accrual basis.

                                       11

<PAGE>

         Non-Performing   Assets.  The  following  table  provides   information
regarding the Bank's 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,  2006,  the  allowance  for  loan  losses  totaled  $5.5  million,
non-performing  loans  totaled  $942,000,  and the ratio of  allowance  for loan
losses to non-performing loans was 578.7%.

<TABLE>
<CAPTION>
                                                                                       At June 30,
                                                                ---------------------------------------------------------
                                                                  2006        2005         2004      2003          2002
                                                                --------    --------    --------   --------      --------
                                                                              (Dollars in thousands)
<S>                                                            <C>         <C>         <C>        <C>           <C>
             Loans accounted for on a non-accrual basis:
               Real estate mortgage - one-to-four family...     $    329    $    846    $    771   $  1,571      $  1,152
               Real estate mortgage - multi-family and
                  commercial...............................          592       1,004       1,414        621           897
               Commercial business.........................            -          31          39          -             -
               Consumer:
                  Home equity loans........................           21          20          65        178            91
                  Home equity lines of credit..............            -          17           -          -             -
                  Other....................................            -           4           -          -            21
               Construction................................            -           -           -          -             -
                                                                --------    --------    --------   --------      --------
                   Total...................................          942       1,922       2,289      2,370         2,161
                                                                --------    --------    --------   --------      --------
             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
               Commercial business.........................            -           -           -         23            23
               Consumer:
                  Home equity loans and lines of credit....            -           -           -          -             1
                  Passbook or certificate..................            -           -          39         98             -
                  Other....................................            -           -           -          2            39
               Construction................................            -           -           -          -           469
                                                                --------    --------    --------   --------      --------
                   Total...................................            -           -          39        546         1,127
                                                                --------    --------    --------   --------      --------
             Total non-performing loans....................     $    942    $  1,922    $  2,328   $  2,916      $  3,288
                                                                ========    ========    ========   ========      ========
             Real estate owned.............................     $    109    $    209    $    209   $    209      $    209
                                                                ========    ========    ========   ========      ========
             Other non-performing assets...................     $      -    $      -    $      -   $      -      $      -
                                                                ========    ========    ========   ========      ========
             Total non-performing assets................        $  1,051    $  2,131    $  2,537   $  3,125      $  3,497
                                                                ========    ========    ========   ========      ========
             Total non-performing loans to total loans.....         0.13%       0.34%       0.46%       0.57%        0.55%
                                                                    ====        ====        ====        ====         ====
             Total non-performing loans to total assets....         0.05%       0.09%       0.12%       0.15%        0.17%
                                                                    ====        ====        ====        ====         ====
             Total non-performing assets to total assets...         0.05%       0.10%       0.13%       0.16%        0.18%
                                                                    ====        ====        ====        ====         ====
</TABLE>

         During the year ended June 30, 2006,  gross interest  income of $81,000
would have been recorded on loans accounted for on a non-accrual  basis if those
loans had been  current,  and $9,000 of interest  on such loans was  included in
income for the year ended June 30, 2006.

         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

                                       12

<PAGE>

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, 2006.
At June 30, 2006, all of the classified  assets and special  mention  designated
assets were loans.

                                                    June 30,
                                  --------------------------------------------
                                       2006           2005            2004
                                  -------------  -------------   -------------
                                                 (In thousands)

          Special Mention.....      $     236      $   3,161        $    734
          Substandard.........          1,448          2,343           6,264
          Doubtful............          2,001          1,936           1,149
          Loss................              -              6               -
                                    ---------      ---------        --------
            Total.............      $   3,685      $   7,446        $  8,147
                                    =========      =========        ========

         At June 30, 2006,  none of the loans  classified as "special  mention",
approximately  $350,000  classified as "substandard" and approximately  $592,000
classified as "doubtful" are included under  non-performing  assets, as shown in
the table on Page 12.

         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

                                       13

<PAGE>

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.

         The  following  table  sets  forth  information  with  respect  to  the
allowance for loan losses at the dates indicated.

<TABLE>
<CAPTION>
                                                                                For the Year Ended June 30,
                                                             ------------------------------------------------------------------
                                                                 2006         2005         2004         2003          2002
                                                              ---------    ---------    ---------    ---------    ---------
<S>                                                          <C>          <C>          <C>          <C>          <C>
Allowance balance (at beginning of period).............       $   5,416    $   5,144    $   5,180    $   5,170    $   5,167
                                                              ---------    ---------    ---------    ---------    ---------
Provision for loan losses..............................              72           68            -            -            3
                                                              ---------    ---------    ---------    ---------    ---------
Charge-offs:
  Real estate mortgage - one-to-four family............               -            -           12            -            -
  Commercial business..................................              30            5           24            -            -
  Other................................................              12            4            -            -            -
                                                              ---------    ---------    ---------    ---------    ---------
      Total charge-offs................................              42            9           36            -            -
                                                              ---------    ---------    ---------    ---------    ---------
Recoveries:
  Real estate mortgage - one-to-four family...........                -          213            -           10            -
  Commercial business..................................               5            -            -            -            -
                                                              ---------    ---------    ---------    ---------    ---------
      Total recoveries.................................               5          213            -           10            -
                                                              ---------    ---------    ---------    ---------    ---------
Net (charge-offs) recoveries...........................             (37)         204          (36)          10            -
                                                              ---------    ---------    ---------    ---------    ---------
Allowance balance (at end of period)...................       $   5,451    $   5,416    $   5,144    $   5,180    $   5,170
                                                              =========    =========    =========    =========    =========
Total loans outstanding................................       $ 707,977    $ 562,619    $ 510,180    $ 512,414    $ 594,209
                                                              =========    =========    =========    =========    =========
Average loans outstanding..............................       $ 628,245    $ 517,746    $ 499,510    $ 546,521    $ 603,131
                                                              =========    =========    =========    =========    =========
Allowance for loan losses as a percent
   of total loans outstanding..........................            0.77%        0.96%        1.01%        1.01%        0.87%
                                                                 ======       ======       ======       ======       ======
Net loans charged off as a percent
   of average loans outstanding........................            0.01%        0.00%        0.01%        0.00%        0.00%
                                                                 ======       ======       ======       ======       ======
Allowance for loan losses to non-performing loans......          578.66%      281.79%      220.96%      177.64%      157.24%
                                                                 ======       ======       ======       ======       ======
</TABLE>
                                       14

<PAGE>

         Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the 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.

<TABLE>
<CAPTION>
                                                                         At June 30,
                           -------------------------------------------------------------------------------------------------------
                                 2006               2005                   2004                 2003                 2002
                            ----------------    -----------------    ------------------    -----------------    ------------------
                                     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)
<S>                       <C>      <C>        <C>       <C>        <C>        <C>        <C>       <C>        <C>        <C>
At end of period
   allocated to:
Real estate mortgage -
   one-to-four family....   $1,582   65.80%     $1,514    68.04%     $1,422     70.22%     $1,980    71.50%     $2,966     77.24%
Real estate mortgage -
   multi-family and
   commercial.............   3,133   15.13       3,368    17.18       3,358     16.35       2,198    13.88       1,184     10.00
Commercial business.......      34    0.45          50     0.52          57      1.01          59     0.46          70      1.13
Consumer:
  Home equity loans.......     286   13.23         182     9.63         131      7.33         214     7.28         188      6.19
  Home equity lines                   1.83
     of credit............      39                  47     2.64          52      3.07         218     3.89         261      3.23
  Passbook or certificate.       -    0.41           -     0.50           -      0.54           -     0.56           -      0.51
  Other...................      27    0.03         120     0.05           4      0.07          10     0.25          17      0.18
Construction..............     350    3.12         135     1.44         120      1.41         501     2.18         484      1.52
                            ------ -------      ------  -------      ------   -------      ------  -------      ------   -------
     Total allowance......  $5,451  100.00%     $5,416   100.00%     $5,144    100.00%     $5,180   100.00%     $5,170    100.00%
                            ======  ======      ======   ======      ======    ======      ======   ======      ======    ======
</TABLE>

                                       15

<PAGE>

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 45.7% of our total assets at June 30, 2006. 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 and Treasurer 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.

                                       16

<PAGE>

         At June 30, 2006, 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.

         In the fiscal  year  ended June 30,  2005,  we sold  120,000  shares of
Freddie Mac common  stock,  representing  48% of our  investment  in Freddie Mac
common stock at that time,  which  resulted in a pre-tax  gain of $7.6  million.
During  the year  ended  June 30,  2006,  we sold  the rest of our  Freddie  Mac
investment,  131,088 shares,  and sold $249.1 million of government agency notes
with an average  yield of 3.22%.  This sale  included  our entire  portfolio  of
government  agency notes.  The loss on the sale of the  government  agency notes
partially  offset the gain on the remainder of our Freddie Mac shares and mutual
fund shares issued by Dryden  Government  Income Fund, Inc. The net pre-tax gain
on the fiscal 2006 securities sales was approximately $1.0 million.  We have now
sold all of our Freddie  Mac stock and at June 30,  2006,  we had no  government
agency notes remaining in our securities portfolio.

         At June 30, 2006,  we also held the following  securities:  mutual fund
shares issued by AMF  Adjustable  Mortgage Rate Fund with an aggregate  carrying
value of $7.4 million; and trust preferred securities with an aggregate carrying
value of $10.9 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,  only those issued
by U.S. government agencies or government-sponsored entities.

         At June 30, 2006, 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,  2006 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,
2006 totaled $264.7 million and $256.0 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, 2006  totaled
$382.9 million and $371.6 million,  respectively.  At June 30, 2006,  management
classified  all  mortgage-backed  securities  issued  by the  Federal  Home Loan
Mortgage  Corporation and the Federal National  Mortgage  Association as held to
maturity. Other than mortgage-backed securities issued by the U.S. government or
its  agencies,  at June 30, 2006 we did not hold  securities of any other issuer
having an aggregate book value in excess of 10% of our equity.

         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,  2006,  the
aggregate  book value and aggregate  market value of callable  securities in our
portfolio totaled $138.4 million and $136.2 million, respectively.

                                       17

<PAGE>

         Mortgage-backed   Securities.   We  only   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.  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.

         We do not  currently  invest in  mortgage-backed  securities of private
issuers  or  collateralized  mortgage  obligations.  Mortgage-backed  securities
issued  or  sponsored  by  U.S.  government  agencies  and  government-sponsored
entities  are  guaranteed  as to  the  payment  of  principal  and  interest  to
investors.  Mortgage-backed  securities  generally  yield less than the mortgage
loans underlying such securities  because of 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.

<TABLE>
<CAPTION>
                                                                                 At June 30,
                                                  -----------------------------------------------------------------------
                                                       2006          2005           2004           2003            2002
                                                       ----          ----           ----           ----            ----
                                                                               (In thousands)
<S>                                              <C>            <C>            <C>            <C>             <C>
Securities Available for Sale:
-----------------------------
Mutual funds...............................       $     7,424    $    14,140    $    13,899    $    14,196     $   13,682
Common stock...............................                 -          8,551         15,894         12,748         15,367
Trust preferred securities due
    after ten years........................            10,922         10,900         11,771         10,896         10,630
                                                  -----------    -----------    -----------    -----------     ----------
      Total securities available for sale..            18,346         33,591         41,564         37,840         39,679
                                                  -----------    -----------    -----------    -----------     ----------
Investment Securities Held to Maturity:
--------------------------------------
U.S. government obligations................             8,736        265,469        274,401        169,968         60,225
Obligations of states and political
    subdivisions...........................           200,312        204,629        161,469        117,353         79,221
                                                  -----------    -----------    -----------    -----------     ----------
      Total investment securities
           held to maturity................           209,048        470,098        435,870        287,321        139,446
                                                  -----------    -----------    -----------    -----------     ----------
Mortgage-Backed Securities Held to Maturity:
-------------------------------------------
Government National Mortgage
   Association.............................            42,323         63,399         94,499        150,699        178,220
Federal Home Loan Mortgage
   Corporation.............................           264,747        305,059        314,221        197,962        302,246
Federal National Mortgage Association......           382,892        389,663        362,633        331,061        454,552
Collateralized mortgage obligations
    issued by U.S. government agencies.....                 -              -              -          1,894         33,494
Other......................................                 -              -              -              3              4
                                                  -----------    -----------    -----------    -----------     ----------
      Total mortgage-backed securities
          held to maturity.................           689,962        758,121        771,353        681,619        968,516
                                                  -----------    -----------    -----------    -----------     ----------
 Total.....................................       $   917,356    $ 1,261,810    $ 1,248,787    $ 1,006,780     $1,147,641
                                                  ===========    ===========    ===========    ===========     ==========
</TABLE>

                                       18
<PAGE>

         The  following  table  sets forth  certain  information  regarding  the
carrying  values,  weighted  average  yields and  maturities  of our  securities
portfolio at June 30, 2006. This table shows contractual maturities and does not
reflect repricing or the effect of prepayments. Actual maturities may differ.

<TABLE>
<CAPTION>
                                                                        At June 30, 2006
                               -----------------------------------------------------------------------------------------------------
                                    One Year         One to             Five to          More than                 Total
                                    or Less        Five Years          Ten Years         Ten Years          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)
<S>                            <C>      <C>     <C>       <C>    <C>         <C>    <C>         <C>    <C>        <C>    <C>
Mutual funds................... $ 7,424  4.60%   $     -      -%  $      -       -%  $      -       -%  $  7,424   4.60%  $  7,424
Common stock...................       -     -          -      -          -       -          -       -          -      -          -
Trust preferred securities
   due after ten years.........       -     -          -      -          -       -     10,922    6.55     10,922   6.55     10,922
U.S. government obligations....       -     -          -      -        963    8.30      7,773    5.30      8,736   5.63      8,786
Obligations of states and
   political subdivisions......   4,339  3.64     17,194   3.22    120,775    3.80     58,004    3.92    200,312   3.78    195,661
Government National
   Mortgage Association........      87  7.54        461   8.97        482   11.08     41,293    5.49     42,323   5.60     42,646
Federal Home Loan
   Mortgage Corporation........       5  8.71      1,876   4.25      1,115    3.79    261,751    4.75    264,747   4.74    256,036
Federal National Mortgage
   Association.................       -     -      6,076   5.55     10,687    5.58    366,129    4.82    382,892   4.85    371,647
                                -------          -------          --------           --------           --------          --------

  Total........................ $11,855  4.27%   $25,607   3.95%  $134,022    4.00%  $745,872    4.79%  $917,356   4.64%  $893,122
                                =======          =======          ========           ========           ========          ========
</TABLE>

                                       19

<PAGE>

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, with terms of five, nine and 13
months  being the most  popular.  We may 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  represented 61.2% of total deposits at June 30, 2006. 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,  2006,  $206.0  million,  or  23.3%,  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.

                                       20

<PAGE>

         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.

<TABLE>
<CAPTION>
                                                                     For the Year Ended June 30,
                                 ---------------------------------------------------------------------------------------------------
                                               2006                             2005                             2004
                                 -------------------------------   ------------------------------   --------------------------------
                                                        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)

<S>                             <C>           <C>       <C>      <C>           <C>        <C>     <C>           <C>       <C>
 Non-interest-bearing demand..... $   56,517    3.82%     0.00%    $   55,112    3.52%      0.00%   $   49,797    3.17%     0.00%
 Interest-bearing demand.........    103,397    7.00      0.90        105,503    6.73       0.71       109,830    6.99      0.80
 Savings and club................    429,019   29.03      1.18        533,131   34.01       1.02       448,509   28.55      1.23
 Certificates of deposit.........    888,810   60.15      3.27        873,907   55.74       2.33       963,089   61.29      2.25
                                  ----------   -----               ----------  ------               ----------  ------

    Total deposits............... $1,477,743  100.00%     2.37%    $1,567,653  100.00%      1.69%   $1,571,225  100.00%     1.79%
                                  ==========  ======               ==========  ======               ==========  ======

</TABLE>

                                       21

<PAGE>

         The following table sets forth  certificates  of deposit  classified by
interest rate as of the dates indicated.

                                                  At June 30,
                               -----------------------------------------------
                                    2006            2005             2004
                               --------------  --------------   --------------
                                                (In thousands)
Interest Rate
0.00-1.99%................       $    24,638     $   189,266      $   582,665
2.00-2.99%................            46,588         343,916          173,505
3.00-3.99%................           496,755         349,320          100,138
4.00-4.99%................           162,070          32,750           25,956
5.00-5.99%................           153,047           7,223           11,957
6.00-6.99%................                 -             641            2,716
7.00-7.99%................                 -               -               82
                                 -----------     -----------      -----------
  Total...................       $   883,098     $   923,116      $   897,019
                                 ===========     ============     ===========

         The   following   table  sets  forth  the  amount  and   maturities  of
certificates of deposit at June 30, 2006.

<TABLE>
<CAPTION>
                                                                      Amount Due
                          -------------------------------------------------------------------------------------------------
                                 Within                                                              After
Interest Rate                    1 year     1-2 years     2-3 years      3-4 years     4-5 years    5 years         Total
-------------                    ------     ---------     ---------      ---------     ---------    -------         -----
                                                                    (In thousands)
<S>                       <C>            <C>            <C>           <C>            <C>           <C>           <C>
0.00-1.99%...........      $   24,637     $       1      $      -      $       -      $       -     $      -      $  24,638
2.00-2.99%...........          46,314           270             4              -              -            -         46,588
3.00-3.99%...........         403,661        72,588        18,781          1,724              -            1        496,755
4.00-4.99%...........         101,368        35,941         1,696         16,151          6,826           88        162,070
5.00-5.99%...........          82,238        70,809             -              -              -            -        153,047
6.00-6.99%...........               -             -             -              -              -            -              -
7.00-7.99%...........               -             -             -              -              -            -              -
                           ----------     ---------      --------      ---------      ---------     --------      ---------
  Total..............      $  658,218     $ 179,609      $ 20,481      $  17,875      $   6,826     $     89      $ 883,098
                           ==========     =========      ========      =========      =========     ========      =========
</TABLE>


         The  following  table  shows the amount of  certificates  of deposit of
$100,000 or more by time remaining until maturity as of the dates indicated.

                                                        At June 30, 2006
                                                        ----------------
                                                         (In thousands)
Maturity Period
Within three months................................        $   44,553
Three through six months...........................            31,125
Six through twelve months..........................            73,269
Over twelve months.................................            57,008
                                                           ----------
                                                           $  205,955

         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
consolidated financial statements.

                                       22

<PAGE>

         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 for the dates and periods indicated.

<TABLE>
<CAPTION>
                                                                At or For the
                                                             Year Ended June 30,
                                                      ------------------------------------
                                                         2006           2005          2004
                                                         ----           ----          ----
                                                             (Dollars in thousands)
<S>                                                   <C>           <C>           <C>
       Federal Home Loan Bank Advances:
       Average balance outstanding..................   $ 3,958       $17,805       $ 1,151
       Maximum amount outstanding at any
          month-end during the period...............    28,000        20,000        30,000
       Balance outstanding at end of period.........         -             -        30,000
       Weighted average interest rate during
          the period................................      4.48%         2.24%         1.43%
       Weighted average interest rate at end
          of period.................................         -%            -%         1.43%
</TABLE>

         At June 30, 2006,  long-term  Federal Home Loan Bank  advances  totaled
$61.1 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 5.46% at June 30, 2006.  Unused
overnight  lines of credit at the  Federal  Home Loan Bank at June 30, 2006 were
$200.0 million.

         As of June 30, 2006, long-term advances mature as follows:

          Twelve Months Ending June 30,                  (In thousands)
          -----------------------------
          2007...................................        $    5,618
          2008...................................            37,487
          2009...................................             8,000
          2010...................................                 -
          2011...................................            10,000
          Thereafter.............................                 -
                                                         ----------
                 Total...........................        $   61,105
                                                         ==========

Subsidiary Activity

         Kearny  Financial  Corp.  has two  wholly  owned  subsidiaries:  Kearny
Federal Savings Bank and Kearny  Financial  Securities,  Inc.  Kearny  Financial
Securities,  Inc.,  was organized in April 2005 under Delaware law as a Delaware
investment company primarily to hold investment and mortgage-backed  securities.
Kearny Financial Securities, Inc. is currently inactive.

         Kearny  Federal  Savings  Bank has two wholly owned  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.

                                       23

<PAGE>

         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, 2006, it held assets totaling $563.2 million.

Personnel

         As of June 30, 2006,  we had 268  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.

Regulation

         The Bank and the Company 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 the Bank and the Company.  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 the Company,  the Bank, and their operations.  The adoption of
regulations  or the enactment of laws that  restrict the  operations of the Bank
and/or the Company or impose  burdensome  requirements  upon one or both of them
could  reduce  their  profitability  and could  impair  the value of the  Bank's
franchise,  resulting in negative  effects on the trading price of the Company's
common stock.

Regulation of the Bank

         General.   As  a  federally   chartered,   Federal  Deposit   Insurance
Corporation-insured savings bank, the Bank is subject to extensive regulation by
the Office of Thrift Supervision and the 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.

         The 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  the  Bank  and  prepares  reports  to the  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

                                       24

<PAGE>

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.  Deposit  accounts  in Kearny  Federal
Savings Bank are insured by the Deposit  Insurance  Fund of the Federal  Deposit
Insurance  Corporation,  generally  up to a maximum  of  $100,000  for  standard
accounts and $250,000 for individual  retirement  accounts.  The Federal Deposit
Insurance Corporation maintains a risk-based deposit insurance 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 for Savings  Association
Insurance Fund member  institutions 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%.

         In addition to assessments for deposit  insurance,  all Federal Deposit
Insurance  Corporation-insured  institutions  are required to pay assessments to
the Federal  Deposit  Insurance  Corporation to fund payments on bonds issued in
the late  1980s by a  federal  agency to  recapitalize  the  predecessor  to the
Savings  Association  Insurance Fund. These  assessments will continue until the
Financing Corporation bonds mature in 2017.

         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.

         Federal Deposit  Insurance  Reform.  As a result of the Federal Deposit
Insurance  Reform  Act  of  2005,  the  Bank  Insurance  Fund  and  the  Savings
Association Insurance Fund have been merged into a new combined fund, called the
Deposit  Insurance  Fund.  The  Federal  Deposit  Insurance  Reform Act also (i)
increases deposit insurance coverage for retirement  accounts to $250,000,  (ii)
indexes the current $100,000  insurance coverage limit for standard accounts and
the new  $250,000  limit for  retirement  accounts  to reflect  inflation  (with
adjustments for inflation every five years,  commencing  January 1, 2011), (iii)
requires the Federal  Deposit  Insurance  Corporation  to assess annual  deposit
insurance premiums on all banks and savings institutions,  (iv) gives a one-time
insurance   assessment  credit  totaling  $4.7  billion  to  banks  and  savings
institutions  in  existence  on  December  31,  1996  that can be used to offset
premiums  otherwise due, (v) imposes a cap on the level of the Deposit Insurance
Fund and provide for dividends or rebates when the fund grows beyond a specified
threshold,   (vi)  adopts  a  historical  basis  concept  for  distributing  the
aforementioned one-time credit and dividends (with each institution's historical
basis  to be  determined  by a  formula  that  looks  back to the  institution's
assessment  base in 1996 and adds  premiums  paid  since  that  time)  and (vii)
authorizes  revisions to the current  risk-based system for assessing  premiums,
including  replacing the current fixed reserve ratio requirement of 1.25% with a
range of between 1.15% and 1.5% of insured deposits.

         The merger of the two deposit  insurance  funds required by the Federal
Deposit  Insurance  Reform Act was  effective as of March 31, 2006.  The Federal
Deposit  Insurance  Corporation is required to adopt final rules for the rest of
the provisions no later than 270 days after  enactment.  Such  regulations  will
result in the imposition of deposit insurance  assessments on all members of the
Deposit  Insurance  Fund,  including  Kearny  Federal  Savings  Bank,  and  such
assessments  could have an adverse  effect on operating  expenses and results of
operations.  Management cannot predict,  however, the rate of any such insurance
assessments or the effect of the assessments on operations.

         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,

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<PAGE>

(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.  For information on the Bank's compliance with these regulatory  capital
standards,  see Note 14 to 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.  The 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 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

                                       26

<PAGE>

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.

         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 the 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 the Company.  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.

         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.

         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

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<PAGE>

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.

         Community Reinvestment Act. Under the Community Reinvestment Act, every
insured  depository  institution,  including  the  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 the
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.  The 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. The Bank is a member of the Federal Home
Loan Bank of New York,  which is one of twelve regional Federal Home Loan Banks.
Each  Federal Home Loan Bank serves as a reserve or central bank for its members
within its  assigned  region.  It is funded  primarily  from funds  deposited by
financial  institutions  and  proceeds  derived  from the  sale of  consolidated
obligations  of the  Federal  Home Loan Bank  System.  It makes loans to members
pursuant to policies and procedures established by the board of directors of the
Federal Home Loan Bank.

         As a member, the 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.  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.

         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.  The  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

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<PAGE>

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.

         Among  other  requirements,  Title III of the USA  Patriot  Act and the
related  regulations  of the Office of Thrift  Supervision  impose the following
requirements with respect to financial institutions:

          o    Establishment of anti-money  laundering programs that include, at
               minimum: (i) internal policies,  procedures,  and controls;  (ii)
               specific  designation  of  an  anti-money  laundering  compliance
               officer;  (iii) ongoing employee training  programs;  and (iv) an
               independent  audit  function  to test the  anti-money  laundering
               program.

          o    Establishment  of a program  specifying  procedures for obtaining
               identifying  information  from  customers  seeking  to  open  new
               accounts,  including verifying the identity of customers within a
               reasonable period of time.

          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 the Company

         General.  The Company 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.  The Company 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 the Company 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 the Bank.  This  regulation  is intended
primarily  for the  protection  of the  depositors  and not for the  benefit  of
stockholders of the Company.

         Sarbanes-Oxley  Act of 2002. The Sarbanes-Oxley Act of 2002 implemented
various  legislative  reforms   addressing,   among  other  matters,   corporate
governance,   auditing  and  accounting.   As  directed  by  Section  302(a)  of
Sarbanes-Oxley  Act and the  implementing  rules of the  Securities and Exchange
Commission,  the Company's Chief Executive  Officer and Chief Financial  Officer
each are  required  to certify  that the  quarterly  and  annual  reports do not
contain  any  untrue  statement  of a  material  fact.  The rules  have  several
requirements, including having these officers certify that: they are responsible
for establishing,  maintaining and regularly evaluating the effectiveness of the
Company's internal controls; they have made certain disclosures to the Company's
auditors  and the audit  committee  of the  Board of  Directors  about  internal
controls; and they have included information in the quarterly and annual reports
about their  evaluation and whether there have been  significant  changes in the
internal controls or in other factors that could  significantly  affect internal
controls.  The  Company  is  subject  to other  additional  reporting  and audit
requirements as a result of the Sarbanes-Oxley Act.

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<PAGE>

         Activities Restrictions. As a savings and loan holding company and as a
subsidiary  holding company of a mutual holding company,  the Company is subject
to  statutory  and  regulatory  restrictions  on its  business  activities.  The
non-banking   activities  of  the  Company  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,  the Company 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.  The Company 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 the Company to acquire  control of a savings  institution,  the
Office of  Thrift  Supervision  would  consider  the  financial  and  managerial
resources and future  prospects of the Company 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.

         Waivers  of  Dividends  by  Kearny  MHC (the  "MHC").  Office of Thrift
Supervision  regulations  require  the  MHC  to  notify  the  Office  of  Thrift
Supervision of any proposed waiver of its receipt of dividends from the Company.
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  and (ii) the  waiver  would  not be  detrimental  to the safe and sound
operations of the subsidiary savings association.

         Conversion  of the MHC to Stock  Form.  Office  of  Thrift  Supervision
regulations  permit the 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 the Company,  the MHC's  corporate  existence  would end, and
certain  depositors  of the 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 the 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 the Company's  stockholders  own
the same  percentage of common stock in the new holding company as they owned in
the Company  immediately  prior to the second step  conversion.  Under Office of
Thrift Supervision regulations,  the Company's stockholders would not be diluted
because of any dividends  waived by the MHC (and waived  dividends  would not be
considered in determining an appropriate  exchange ratio),  in the event the MHC
converts  to stock  form.  The  total  number of  shares  held by the  Company's
stockholders  after a second  step  conversion  also would be  increased  by any
purchases by the Company's 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"

                                       30

<PAGE>

can occur upon the  acquisition  of 10% or more of the voting stock of a savings
and loan holding company or savings  institution or as otherwise  defined by the
Office of Thrift  Supervision.  Under the Change in Bank Control Act, the Office
of Thrift  Supervision  has 60 days from the filing of a complete notice to act,
taking  into  consideration   certain  factors,   including  the  financial  and
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.

Item 1A. Risk Factors
---------------------

An increase in interest rates may have an adverse effect on our earnings.

         Our earnings largely depend on our net interest income, measured as 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.

         Generally,  the  rates  we  earn  on  our  assets  remain  fixed  for a
contractual  period.  We,  like  many  community  banks  have  liabilities  that
generally have shorter contractual  maturities than our interest-earning  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  resulting  from an increase in
interest  rates  because  the  majority  of  our  interest-earning   assets  are
relatively long-term,  fixed rate assets. In an increasing rate environment,  we
can expect our cost of funds to increase  more rapidly than the yields 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.  The result may be a narrowing  of our net interest
spread and a decrease in our earnings.

         In a period  of  falling  interest  rates,  prepayments  of  loans  and
mortgage-backed  securities generally increase as borrowers refinance their debt
in order to reduce their borrowing cost. This causes prepayment risk, because in
a falling  interest rate  environment  we cannot  reinvest  prepayments at rates
comparable  to the rates earned on the prepaid  loans or  securities.  A falling
interest rate environment  results 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 portfolio. The
result  may be a  narrowing  of our net  interest  spread  and  decrease  in our
earnings.

         We face further exposure to interest rate risk due to the large portion
of our total deposits that are  certificates  of deposit,  particularly  "jumbo"
certificates  of $100,000 or more.  Interest  rates and money market  conditions
significantly  influence deposit inflows, but the presence of jumbo certificates
of deposit  and  retention  of such  deposits  upon  maturity,  make them a more
volatile  source  of  funding  than  core  deposits.  In order to  retain  jumbo
certificates, we may pay a premium rate, resulting in an increase in our cost of
funds.  If we are  unwilling or unable to pay a premium rate, to the extent that
such funds do not remain on deposit,  borrowings  may replace them,  which could
increase  our cost of funds,  narrow our net  interest  spread and  decrease our
earnings.

                                       31

<PAGE>

Strong   competition   within  our   market   area  may  limit  our  growth  and
profitability.

         Competition  is  intense  within the  banking  and  financial  services
industry in New Jersey.  In our market area, we compete with  commercial  banks,
savings   institutions,   mortgage  brokerage  firms,  credit  unions,   finance
companies,  mutual funds, insurance companies,  brokerage and investment banking
firms  operating   locally  and  elsewhere.   Many  of  these  competitors  have
substantially  greater resources,  higher lending limits and offer services that
we do not or cannot provide.  This competition makes it more difficult for us to
originate new loans and retain and attract new deposits.  Price  competition for
loans may result in originating  fewer loans, or earning less on our loans,  and
price  competition for deposits may result in a reduction of our deposit base or
paying more on our deposits.

Our  business  is  geographically  concentrated  in New Jersey and a downturn in
economic conditions within the state could adversely affect our profitability.

         A substantial  majority of our loans are to individuals  and businesses
in New  Jersey.  A decline  in the  economy  of the state  could have an adverse
impact on our earnings.  We have a significant  amount of real estate mortgages,
such that a decrease in local real estate values may adversely  affect the value
of property used as collateral.  Adverse  changes in the economy may also have a
negative  effect on the ability of our  borrowers to make timely  repayments  of
their loans, which may adversely influence our profitability.

Due to our minority stock offering, our return on equity compares unfavorably to
other companies. This could negatively influence the price of our stock.

         The net  proceeds  from our initial  public  offering in February  2005
substantially  increased  our equity  capital.  We expect to take time to invest
this capital prudently. As a result, our return on equity, which is the ratio of
earnings  divided by average  equity  capital is 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 common stock.

The costs of our stock compensation plans are a significant  expense and funding
of the plans may dilute  shareholders'  ownership  interest in Kearny  Financial
Corp.

         Effective upon completion of the Company's initial public offering, the
Bank  established  an Employee  Stock  Ownership  Plan  ("ESOP").  We  currently
recognize compensation expense for the ESOP, as shares are committed for release
to the  participants'  accounts each month based on the monthly  average  market
price  of  the  shares.  We  currently  recognize   additional  annual  employee
compensation and benefit expenses and directors'  compensation  expense stemming
from stock  options  granted  and  restricted  stock  awarded to  directors  and
officers under the 2005 Stock  Compensation  and Incentive  Plan. We expense the
fair value of all  options  over  their  vesting  periods  and the fair value of
restricted shares over the requisite service periods,  in both cases five years.
These additional  expenses  adversely affect our profitability and stockholders'
equity.

         The Company  utilized  open market  purchases  of common  stock to fund
restricted  stock awards;  however,  funding of stock options  granted will come
either  through open market  purchases or from the  issuance of  authorized  but
un-issued shares.  Existing shareholders will experience a dilution in ownership
interest  in the event the Company  uses newly  issued  shares  rather than open
market purchases to fund stock options.

Shareholders own a minority of Kearny Financial Corp.'s common stock and are not
able to exercise voting control over most matters put to a vote of stockholders.

         Kearny MHC owns a majority of Kearny  Financial  Corp.'s  common stock.
The Board of  Directors  of Kearny MHC is also the Board of  Directors of Kearny
Financial  Corp. and is able to exercise voting control

                                       32

<PAGE>

over most matters put to a vote of  shareholders.  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 by-laws  limit the rights of  stockholders,  may
deter potential takeovers and may reduce the trading price of our stock.

         Provisions  in our charter and by-laws 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.

 The Office of Thrift Supervision's policy on remutualization transactions could
 prohibit  acquisition of Kearny Financial Corp., which may adversely affect our
 stock price.

         Office of Thrift Supervision ("OTS") regulations permit the acquisition
of a  mutual  holding  company  by a  mutual  institution  in a  remutualization
transaction.  Current OTS policy, however, 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. The OTS may
give these issues  special  scrutiny and reject  applications  providing for the
remutualization  of a mutual  holding  company  unless the applicant can clearly
demonstrate  that there is no cause for OTS's concerns in the  particular  case.
Should the OTS prohibit or otherwise  restrict these transactions in the future,
our stock price may be adversely affected.

Item 1B.  Unresolved Staff Comments
-----------------------------------

         Not applicable.

Item  2.  Properties
--------------------

         At June 30, 2006, our net investment in property and equipment  totaled
$35.9 million.

Item 3.  Legal Proceedings
--------------------------

         The 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  the  Company  or the Bank at June 30,  2006 that would be
expected to have a material effect on operations or income.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

         None.

                                       33

<PAGE>

                                     PART II

Item 5. Market for Registrant's  Common Equity,  Related Stockholder Matters and
--------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------

         Upon completion of the Company's  first-step minority stock offering in
February  2005,  the  Company's  common  stock  commenced  trading on the Nasdaq
National Market under the symbol "KRNY." The table below shows the reported high
and low closing  prices of the common  stock during the periods  indicated.  The
quotations reflect inter-dealer prices,  without retail mark-up,  mark-down,  or
commission, and may not represent actual transactions.


                                                High         Low     Dividends
                                                ----         ---     ---------
      2005
      ----
      Quarter ended March 31(1).........      $11.95      $11.08             -
      Quarter ended June 30.............       11.95       10.10             -

      2006
      ----
      Quarter ended September 30........      $12.74      $11.50         $0.04
      Quarter ended December 31.........       12.79       10.97         $0.05
      Quarter ended March 31............       13.89       12.20         $0.05
      Quarter ended June 30.............       14.98       13.58         $0.05

---------------
(1)  Closing of the minority stock offering February 23, 2005. Trading commenced
     February 24, 2005.

         Declarations of dividends by the Board of Directors  depend on a number
of factors,  including investment  opportunities,  growth objectives,  financial
condition,  profitability,  tax  considerations,  minimum capital  requirements,
regulatory  limitations,  stock  market  characteristics  and  general  economic
conditions.  The timing,  frequency and amount of dividends is determined by the
Board.

         The  Company's  ability to pay dividends may also depend on the receipt
of dividends from the Bank,  which is subject to a variety of limitations  under
the regulations of the Office of Thrift Supervision on the payment of dividends.

         As of  September 8, 2006,  there were  approximately  9,019  holders of
record of the  Company's  common  stock,  including  persons  who hold  stock in
"street" name through various brokerage firms.

                                       34

<PAGE>

         Set  forth  below  is   information   regarding  the  Company's   stock
repurchases  during the fourth  quarter of the fiscal year ended June 30,  2006.
The Company's  purchases of its common stock to fund restricted stock awards are
not considered  repurchases  for purposes of the following  table as such shares
remain  outstanding  and are held by the 2005 Stock  Compensation  and Incentive
Plan.

<TABLE>
<CAPTION>
                              ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------------------------------------------------------------------------------
                                       (a)          (b)                (c)                           (d)
                                      Total                           Total
                                    Number of                     Number of Shares              Maximum Number
                                      Shares      Average       (or Units) Purchased     (or Approximate Dollar Value)
                                   (or Units)     Price Paid     as Part of Publicly     of Shares (or Units) that May
                                    Purchased     per Share      Announced Plans or        Yet Be Purchased Under the
             Period                               (or Unit)           Programs                 Plans or Programs
--------------------------------- -------------- ------------- ------------------------ ---------------------------------
<S>                                  <C>           <C>                 <C>                          <C>
  Quarter ended June 30, 2006         - 0 -           $0                - 0 -                          0
--------------------------------- -------------- ------------- ------------------------ ---------------------------------
             Total                    - 0 -           $0                - 0 -                          0
--------------------------------- -------------- ------------- ------------------------ ---------------------------------
</TABLE>

                                       35

<PAGE>

Item 6.  Selected Financial Data
--------------------------------

         The following  financial  information and other data in this section is
derived from the Company's audited consolidated  financial statements and should
be read  together  therewith.  The Company  acquired  Pulaski  Bancorp,  Inc. in
October 2002 and West Essex Bancorp, Inc. in July 2003.

<TABLE>
<CAPTION>
                                                                              At June 30,
                                                -----------------------------------------------------------------------
                                                    2006           2005           2004            2003           2002
                                                    ----           ----           ----            ----           ----
                                                                            (In thousands)
<S>                                            <C>            <C>             <C>             <C>           <C>
Balance Sheet Data:
Assets..................................        $2,007,525     $2,107,005      $1,936,518      $1,996,482    $1,905,638
Loans receivable, net...................           703,613        558,018         505,794         509,161       591,142
Mortgage-backed securities
  held to maturity......................           689,962        758,121         771,353         681,619       968,516
Securities available for sale...........            18,346         33,591          41,564          37,840        39,679
Investment securities held to maturity..           209,048        470,098         435,870         287,321       139,446
Cash and cash equivalents...............           230,279        139,865          39,488         325,657        97,030
Goodwill................................            82,263         82,263          82,263          31,746        15,600
Deposits................................         1,443,738      1,528,777       1,537,510       1,613,684     1,479,729
Federal Home Loan Bank advances.........            61,105         61,687          94,234          75,749       112,080
Total stockholders' equity..............           490,886        505,482         293,505         295,669       302,454
</TABLE>

<TABLE>
<CAPTION>

                                                                      For the Year Ended June 30,
                                                    ---------------------------------------------------------------
                                                      2006          2005           2004          2003         2002
                                                    --------     ---------     ---------     ---------    ---------
                                                               (In thousands, except per share amounts)
<S>                                                <C>          <C>           <C>           <C>          <C>
Summary of Operations:
Interest income.......................              $ 89,323     $  82,441     $  78,654     $  96,492    $ 106,162
Interest expense......................                38,645        30,422        32,100        44,695       54,443
                                                    --------     ---------     ---------     ---------    ---------
Net interest income...................                50,678        52,019        46,554        51,797       51,719
Provision for loan losses.............                    72            68             -             -            3
                                                    --------     ---------     ---------     ---------    ---------
Net interest income after provision
  for loan losses.....................                50,606        51,951        46,554        51,797       51,716
Non-interest income, excluding gain on
  sale of available for sale securities                2,302         1,798         1,560         1,847        1,765
Non-interest income from gain on sale
   of available for sale securities...                 1,023         7,705             -             -            -
Merger related expenses...............                     -             -           592        14,921          619
Non-interest expense, excluding
  merger related expenses.............                42,046        34,862        28,880        29,431       28,446
                                                    --------     ---------     ---------     ---------    ---------
Income before income taxes............                11,885        26,592        18,642         9,292       24,416
Provisions for income taxes...........                 2,277         7,694         5,745         5,237        7,926
                                                    --------     ---------     ---------     ---------    ---------
Net income............................              $  9,608     $  18,898     $  12,897     $   4,055    $  16,490
                                                    ========     =========     =========     =========    =========

Net income per share - basic..........              $   0.14     $   0.33      $    0.25     $    0.08    $    0.32
Net income per share - diluted........              $   0.14     $   0.33      $    0.25     $    0.08    $    0.32
Weighted average number of common
    shares outstanding - basic........                70,904        57,963        50,916        50,916       50,916
Weighted average number of common
    shares outstanding - diluted......                71,100        57,963        50,916        50,916       50,916
Per Share Data:
  Cash dividends per share (1)........                $ 0.19        $    -       $     -       $  0.02      $  0.02
  Dividend payout ratio (2)...........                 49.30%         0.00%         0.00%        24.32%        7.63%

</TABLE>

                                       36

<PAGE>

<TABLE>
<CAPTION>
                                                           At or For the Year Ended June 30,
                                               -------------------------------------------------------------
                                                 2006          2005         2004          2003         2002
                                                 ----          ----         ----          ----         ----
<S>                                           <C>           <C>          <C>           <C>          <C>
Performance Ratios:
  Return on average assets
    (net income divided by
    average total  assets)...............        0.47%         0.94%        0.67%         0.21%        0.91%
  Return on average equity
    (net income divided by
    average equity)......................        1.91          5.40         4.52          1.38         5.55
  Net interest rate spread...............        2.10          2.51         2.37          2.36         2.35
  Net interest margin on average
    interest-earnings assets.............        2.67          2.79         2.59          2.75         2.95
  Average interest-earning
    assets to average
    interest-bearing liabilities.........      127.80        116.93       112.46        116.54       119.58
  Efficiency ratio (Non-interest
    expense divided by the sum
    of net interest income and
    non-interest income).................       77.96         56.67        61.25         82.68        54.34
  Efficiency ratio (net of gain on
    sale of available for
    sale securities).....................       79.36         64.78        61.25         82.68        54.34
  Non-interest expense to
    average assets.......................        2.04          1.73         1.52          2.26         1.60
Asset Quality Ratios:(3)
  Non-performing loans to total loans....        0.13          0.34         0.46          0.57         0.55
  Non-performing assets to total assets..        0.05          0.10         0.13          0.16         0.18
  Net charge-offs to average
   loans outstanding.....................        0.01          0.00         0.01          0.00         0.00
  Allowance for loan losses to
    total loans..........................        0.77          0.96         1.01          1.01         0.87
  Allowance for loan losses to
    non-performing loans.................      578.66        281.79       220.96        177.64       157.24
Capital Ratios:
  Average equity to average
    assets (average equity divided
    by average total assets).............       24.43         17.36        14.73         14.97        16.38
  Equity to assets at period end.........       24.45         23.99        15.16         14.81        15.87
  Tangible equity to tangible
    assets at period end.................       21.19         20.66        11.29         13.31        15.02
Number of Offices:
Offices (including offices
       acquired in mergers)..............       26            25           25            25           24
</TABLE>

----------------
(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.
(2)  Represents  cash  dividends  declared  per share  divided by net income per
     common share.
(3)  Asset quality ratios are period end ratios.

                                       37

<PAGE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
        of Operations
        -------------

General

         This  discussion  and  analysis   reflects  Kearny  Financial   Corp.'s
consolidated  financial  statements  and other  relevant  statistical  data.  We
include it 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 notes
thereto  contained in this Annual Report on Form 10-K, and the other statistical
data provided herein.

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,  including available for sale and held to
maturity,  which  comprised  45.7% of total  assets at June 30, 2006 while loans
receivable,  net, comprised 35.0% of total assets.  This was a change from 59.9%
and 26.5%,  respectively,  at June 30, 2005. The most significant  change in our
interest-earning  assets  between  June 30,  2005 and June 30, 2006 was a $145.6
million, or 26.1%, increase in loans receivable, net. During the year ended June
30,  2006,  management  stressed  growth  of the loan  portfolio  as a key goal.
Investment   securities   held  to  maturity   decreased   $261.1   million  and
mortgage-backed   securities  held  to  maturity  decreased  $68.1  million.  We
continued to invest proceeds from our initial public offering in mortgage loans.
Demand for mortgages contributed to the decrease in mortgage-backed  securities,
as  we  used  principal  and  interest  payments  to  fund  loan   originations,
supplemented by the proceeds from a restructuring of the investment portfolio in
February 2006. Cash flows from mortgage-backed securities repayments also funded
deposit  outflows.  The  decrease in  investment  securities  resulted  from the
restructuring of the investment portfolio.

         Our  interest-bearing  liabilities consist primarily of retail deposits
and  borrowings  from the Federal Home Loan Bank of New York.  At June 30, 2006,
our total  deposits  were $1.44  billion,  compared to $1.53 billion at June 30,
2005, and our Federal Home Loan Bank of New York  borrowings  were $61.1 million
compared to $61.7 million a year earlier. The primary factor for the decrease in
deposits  was a runoff of  certificates  of  deposit  and to some  degree,  core
deposits, due to a competitive market for deposits. The challenge for management
during the year ended June 30, 2006 was to balance the rate of attrition against
a  significant  increase  in the cost of  funds.  A flat  Treasury  yield  curve
throughout the year further exacerbated a difficult operating  environment.  The
nominal decrease in Federal Home Loan Bank advances resulted from a repayment of
principal on borrowings featuring a monthly amortization schedule.

         Our net interest  income  decreased by 2.5%,  to $50.7  million for the
year ended June 30, 2006 from $52.0  million  for the year ended June 30,  2005.
The net interest rate spread decreased to 2.10% for the year ended June 30, 2006
from 2.51% for 2005 as the average cost of interest-bearing  liabilities climbed
69 basis  points to 2.60% while the  average  yield on  interest-earning  assets
improved 28 basis points to 4.70%. Total interest income increased 8.4% due to a
2.2%  increase in the average  balance of  interest-earning  assets and 28 basis
point  increase in the average  yield  thereof,  while  total  interest  expense
increased 27.0%,  primarily due to a 69 basis point increase in the average cost
of interest-bearing  liabilities.  Net interest income received a boost from the
reinvestment of proceeds from the restructuring of the investment portfolio into
cash equivalents earning market short-term interest rates.

                                       38

<PAGE>

         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 the Bank's retail branch
network and operations, and income from bank owned life insurance.  Non-interest
expense includes salaries and employee  benefits,  occupancy  expenses and other
general  and  administrative  expenses.   Non-interest  expense  increased  $7.1
million,  or 20.3%, to $42.0 million for the year ended June 30, 2006,  compared
to $34.9  million  for the  year  ended  June 30,  2005.  The  increase  was due
primarily  to  increases   in  salaries   and  employee   benefits,   directors'
compensation   expense,   and  to  a  lesser  degree,   occupancy  expenses  and
miscellaneous  expenses.  The increase in salaries  and benefits and  directors'
compensation expense resulted primarily from stock compensation plans commencing
during the quarter ended December 31, 2005.

         Net  income  for the year  ended  June 30,  2006  was $9.6  million,  a
decrease of $9.3 million,  or 49.2%,  from $18.9 million for the year ended June
30, 2005. The decrease in net income resulted  primarily from lower net interest
income and higher  non-interest  expense.  There was an increase in non-interest
income from service fees and charges and miscellaneous sources and a substantial
decrease in the  contribution  from net gain on sale of securities.  In the year
ended June 30, 2006,  the pre-tax gain on sale of  securities  contributed  $1.0
million to income, compared to $7.7 million during the year ended June 30, 2005.

         Total assets decreased $99.5 million, or 4.7%, to $2.01 billion at June
30,  2006  from  $2.11  billion  at June 30,  2005.  Cash  and cash  equivalents
increased $90.4 million year-over-year, due to the reinvestment of proceeds from
the restructuring of the investment  portfolio into cash  equivalents.  Cash and
cash  equivalents  provided  funding  for both  loan  originations  and  deposit
outflows. A $15.3 million, or 45.5%, reduction in securities available for sale,
to $18.3 million at June 30, 2006 from $33.6  million at June 30, 2005,  was the
result of the sale of Freddie Mac common  stock and a  closed-end  mutual  fund.
Investment  securities held to maturity  decreased $261.1 million,  or 55.5%, to
$209.0  million  at June 30,  2006 from  $470.1  million at June 30,  2005,  due
primarily to the restructuring of the portfolio. Mortgage-backed securities held
to maturity  decreased  $68.1  million,  or 9.0%, to $690.0  million from $758.1
million  year-over-year,  utilizing  the cash flows from monthly  principal  and
interest payments to fund loan originations and deposit outflows.

         Stockholders'  equity  decreased  $14.6  million,  or 2.9%,  to  $490.9
million at June 30, 2006,  from $505.5  million at June 30,  2005.  The decrease
primarily  reflects  the  effect  of  unearned  shares  held by the  2005  Stock
Compensation  and  Incentive  Plan and  unallocated  shares held by the employee
stock  ownership  plan  totaling  $13.9  million in  aggregate.  Cash  dividends
declared of $4.7  million and a decrease of $5.6  million in  accumulated  other
comprehensive  income  resulting from the sale of available for sale  securities
also  contributed to the decrease in stockholders'  equity,  partially offset by
net income for the year of $9.6 million.

         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

                                       39

<PAGE>

          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, we focused our efforts 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 is 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 utilize  several
experienced   business   development  officers  who  focus  on  commercial  loan
originations,  and we  expect  to offer  Internet  banking  and cash  management
services to our commercial customers during the quarter ended December 31, 2006.
Our residential loan originations have  traditionally  been largely  advertising
driven,  but we  also  utilize  regional  loan  originators  who  specialize  in
residential  mortgage loan  originations  and work  throughout our retail branch
network,  meeting with prospective loan customers wherever it is most convenient
for them.

Critical Accounting Policies

         Our  accounting  policies  are  integral to  understanding  the results
reported.  We  describe  them  in  detail  in Note 1 to  consolidated  financial
statements beginning on Page F-8 of this document. In preparing the consolidated
financial  statements,  management is required to make estimates and assumptions
that affect the reported  amounts of assets and  liabilities  as of the dates of
the consolidated statements of financial condition and revenues and expenses for
the periods then ended.  Actual  results could differ  significantly  from those
estimates.  Material estimates that are particularly  susceptible to significant
changes  relate to the  determination  of the  allowance  for loan  losses,  the
assessment of prepayment risks associated with mortgage-backed  securities,  the
evaluation of securities impairment and the impairment testing of goodwill.

         Allowance for Loan Losses. The allowance for loan losses represents our
best estimate of losses known and inherent in our loan  portfolio  that are both
probable and reasonable to estimate.  In determining the amount of the 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, and type of collateral and financial
condition of the  borrowers.  We establish  specific  loan loss  allowances  for
identified loans based on a review of such information  and/or appraisals of the
underlying  collateral.  We base general loan loss allowances upon a combination
of  factors  including,  but  not  limited  to,  actual  loan  loss  experience,
composition of the loan portfolio,  current economic conditions and management's
judgment.

         Although we  establish  specific and general  loan loss  allowances  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

                                       40

<PAGE>

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.

         Prepayment Risks Associated with  Mortgage-backed  Securities.  At June
30, 2006 and June 30, 2005, net premiums of approximately  $2.5 million and $3.6
million,   respectively,   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 using the level-yield  method.  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.  We must estimate the level of prepayments in order
to estimate the average life of mortgage-backed securities.

         We evaluate the estimated average life of mortgage-backed securities on
a monthly basis and adjust the  amortization  speed to reflect any change in the
average life.  Amortizing the premium faster results in a reduction of the yield
on the  securities,  whereas  slowing the  amortization  increases the yield.  A
reduction  in  the  yield  decreases  our  interest  income  on  mortgage-backed
securities,  while an increase in the yield  increases  our  interest  income on
mortgage-backed securities.

         The  assessment  of the  prepayment  risks  related to  mortgage-backed
securities is highly  dependent upon the prediction of trends in market interest
rates. A reduction in interest rates generally results in increased  prepayments
of  mortgage-backed  securities,  as borrowers  refinance their debt in order to
reduce their  borrowing  cost.  Correspondingly,  an increase in interest  rates
should result in decreased prepayments and fewer re-financings.  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.  We record goodwill,  representing the
excess of amounts  paid over the fair  value of net  assets of the  institutions
acquired in purchase transactions, at its fair value at the date of acquisition.
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."
Goodwill  is tested and deemed  impaired  when the  carrying  value of  goodwill
exceeds its implied fair value. At June 30, 2006, we reported  goodwill of $82.3
million. The value of the goodwill can change in the future. We expect the value
of the goodwill 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,  we will  reflect  the loss as an  expense  for the  period in which the
impairment  was  determined,  leading to a reduction  of our net income for that
period by the amount of the impairment loss.

         Other-than-Temporary   Impairment  of  Securities.  We  evaluate  on  a
quarterly 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,  and our ability and
intent to hold  securities for a period  sufficient to allow for any anticipated
recovery in market value.  Other  considerations  include a review of the credit
quality  of the  issuer  and the  existence  of a  guarantee  or  insurance,  if
applicable   to   the   security.   If  a   security   is   determined   to   be
other-than-temporarily  impaired,  we will record an impairment loss as a charge
to income for the period in which the  impairment  loss was determined to exist,
resulting in a reduction to our earnings for that period.

         As of June 30, 2006,  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 were temporary in nature due
to market interest rates and not the underlying credit quality of the issuers of
the  securities.  Additionally,  we have the  intent  and  ability to hold these
investments for the time necessary to

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<PAGE>

recover the  amortized  cost.  Future events that would  materially  change this
conclusion and require a charge to operations  for an impairment  loss include a
change in the credit quality of the issuers.

         Effective June 30, 2004, we adopted Emerging Issues Task 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.
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, 2006 and June 30, 2005

         Our total assets decreased by $99.5 million,  or 4.7%, to $2.01 billion
at June 30, 2006 from $2.11 billion at June 30, 2005, primarily due to decreases
in securities  available for sale,  investment  securities  held to maturity and
mortgage-backed  securities held to maturity,  partially  offset by increases in
cash and cash equivalents and loans receivable, net.

         Cash and cash equivalents  increased $90.4 million, or 64.6%, to $230.3
million at June 30, 2006,  from $139.9  million at June 30, 2005.  Proceeds from
the Company's  restructuring  of its investment  portfolio  executed in February
2006 provided the growth in cash and cash equivalents. Management reinvested the
proceeds  from  the  restructuring  in  cash  and  cash  equivalents  at  market
short-term  interest rates, with expectations of maintaining  liquidity,  to the
extent funds are not used for loan originations, at an elevated level as long as
the Treasury yield curve remains flat.

         The carrying  value of securities  available for sale  decreased  $15.3
million, or 45.5%, to $18.3 million at June 30, 2006, from $33.6 million at June
30, 2005. As was the case during the year ended June 30, 2005, concern about the
future of  government-sponsored  enterprises  triggered the sale during the year
ended June 30,  2006 of the  Company's  remaining  shares of Freddie  Mac common
stock.  In June 2005,  we sold  130,000  shares,  which  produced a gain of $7.6
million,  before taxes. In February 2006, we sold 131,088 shares, which resulted
in a gain of $8.8  million,  before  taxes.  We also sold all of our shares of a
closed-end  mutual  fund in August  2005,  which  resulted in a gain of $86,000,
before taxes. We acquired the Dryden  Government  Income Fund in the merger with
South Bergen Savings Bank in March 1999.

         Investment  securities held to maturity  decreased  $261.1 million,  or
55.5%, to $209.0 million at June 30, 2006, from $470.1 million at June 30, 2005.
The decrease  resulted  almost  exclusively  from the sale of the Bank's  entire
portfolio of government agency notes, totaling $249.1 million, in February 2006.
The transaction  resulted in a loss of $7.8 million,  before taxes. The weighted
average yield of the portfolio was 3.22%.  Management reinvested the proceeds in
cash and cash  equivalents  at market  short-term  interest  rates.  The  Bank's
portfolio of tax-exempt  municipal  bonds  decreased  $4.3 million,  or 2.1%, to
$200.3 million at June 30, 2006, from $204.6 million at June 30, 2005. Cash flow
from matured  government  agency notes and tax-exempt  municipal bonds partially
funded deposit outflows.

         Mortgage-backed securities held to maturity decreased $68.1 million, or
9.0%,  to $690 million at June 30, 2006,  from $758.1  million at June 30, 2005.
Management  utilized the cash flows from monthly principal and interest payments
and matured  mortgage-backed  securities to fund loan  originations  and deposit
outflows.  In an attempt to provide some protection against  interest-rate risk,
during the year ended June 30,  2006,  management  purchased  $111.7  million of
mortgage-backed  securities  with most of the pools  containing  adjustable rate
mortgages.  As of June 30, 2006, $331.4 million, or 48.0% of the mortgage-backed
securities  are variable rate compared to $337.2  million,  or 44.5% at June 30,
2005.

         Loans receivable,  net,  increased $145.6 million,  or 26.1%, to $703.6
million at June 30, 2006, from $558.0 million at June 30, 2005.  During the year
ended June 30, 2006,  management  stressed growth of the

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<PAGE>

loan portfolio as a key goal. One-to-four family real estate mortgages increased
$83.0 million, or 21.7%, to $465.8 million at June 30, 2006, from $382.8 million
at June 30, 2005.  Multi-family and commercial real estate  mortgages  increased
$10.4 million,  or 10.8%, to $107.1 million at June 30, 2006, from $96.7 million
at June 30, 2005. Our strategy particularly emphasizes growth in this segment of
the loan portfolio.  Commercial business lines of credit increased $278,000,  or
9.6%,  to $3.2  million at June 30,  2006,  from $2.9  million at June 30, 2005.
Consumer  lending,  primarily  home equity loans and home equity lines of credit
increased  $37.6 million,  or 52.1%,  to $109.7  million at June 30, 2006,  from
$72.1 million at June 30, 2005.  Construction loans increased $14.0 million,  or
172.8%,  to $22.1 million at June 30, 2006,  from $8.1 million at June 30, 2005.
To supplement our own loan  originations,  management entered into agreements to
purchase mortgages from several mortgage  companies.  During the year ended June
30, 2006, we purchased $24.4 million from these sources.

         Premises and equipment increased $964,000, or 2.8%, to $35.9 million at
June 30,  2006,  from $35.0  million at June 30,  2005.  The  increase  resulted
primarily from the cost associated with completing the construction of a de novo
branch in Lacey Township, New Jersey, which opened in October 2005. The increase
also includes the cost of renovations of retail  branches  located in Old Tappan
and Northvale, New Jersey, which management expects to complete in September and
October 2006, respectively.

         Bank owned life insurance ("BOLI") increased $10.6 million,  or 265.0%,
to $14.6  million at June 30, 2006,  from $4.0 million at June 30, 2005.  During
the year, the Company purchased BOLI policies totaling $10.2 million.

         Total deposits decreased by $85.1 million, or 5.6%, to $1.44 billion at
June 30, 2006, from $1.53 billion at June 30, 2005.  Non-interest-bearing demand
deposits  increased  $5.0  million,  or 8.9%, to $61.1 million at June 30, 2006,
from $56.1  million at June 30, 2005.  Year-over-year,  interest-bearing  demand
accounts  increased  $22.8  million,  or 23.0%,  to $122.1  million  from  $99.3
million.  In the  quarter  ended March 31,  2006,  the Bank  introduced  several
products  designed to retain and attract core  deposits,  including Star Banking
and  a  tiered  money  market  account,  which  contributed  to  the  growth  in
interest-bearing  demand  deposits.  Savings and club accounts  decreased  $72.8
million,  or 16.2%,  to $377.4 million at June 30, 2006,  from $450.2 million at
June 30, 2005.  Fierce  competition  for core  deposits  within our  marketplace
contributed to the decrease in savings and club accounts as well as transfers to
our own  interest-bearing  demand  accounts.  Certificates of deposit  decreased
$40.0 million,  or 4.3%, to $883.1 million at June 30, 2006, from $923.1 million
at June 30, 2005. Management marketed special certificate of deposit maturities,
typically with terms of five, nine and 13 months and promotional interest rates,
to retain and attract new deposits. The challenge for management during the year
ended  June  30,  2006 was to  balance  the rate of  attrition  for all  deposit
categories against a significant increase in the cost of funds.

         Federal Home Bank of New York advances decreased $582,000,  or 0.9%, to
$61.1  million at June 30,  2006,  from  $61.7  million  at June 30,  2005.  The
advances  retired during the year were on a monthly  repayment  schedule.  Twice
during the year,  for short  periods,  management  utilized an overnight line of
credit with the Federal Home Loan Bank of New York to meet liquidity needs.

         Stockholders'  equity  decreased  $14.6  million,  or 2.9%,  to  $490.9
million at June 30, 2006,  from $505.5  million at June 30,  2005.  The decrease
primarily  reflects  the  effect  of  unearned  shares  held by the  2005  Stock
Compensation  and  Incentive  Plan and  unallocated  shares held by the employee
stock  ownership  plan  totaling  $13.9  million in  aggregate.  Cash  dividends
declared of $4.7  million and a decrease of $5.6  million in  accumulated  other
comprehensive  income  resulting from the sale of available for sale  securities
also  contributed to the decrease in stockholders'  equity,  partially offset by
net income for the year of $9.6  million.  During the year ended June 30,  2006,
$1.5 million in employee  stock  ownership  plan ("ESOP")  shares were released.
Paid in capital  decreased  $18.9 million during the year due to the purchase of
the Company's common stock in the open market to fund the restricted stock plan.
This reduction of equity was partially

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<PAGE>

offset by the vesting of $2.0 million in restricted stock shares, a $1.2 million
adjustment to equity for expensing stock options and $412,000  attributed to the
excess of market  over cost of ESOP shares  released.  Management  recorded  the
purchase of stock to fund the  restricted  stock plan as a reduction  of paid in
capital in  accordance  with SFAS No. 123R.  The decrease in  accumulated  other
comprehensive  income  resulted from a reduction in the carrying  value,  net of
taxes, of the Company's securities available for sale portfolio due to the sales
of Freddie Mac common stock and a closed-end mutual fund, nominally offset by an
increase in the carrying value, net of taxes, of the securities remaining in the
portfolio.

Comparison  of Operating  Results for the Years Ended June 30, 2006 and June 30,
2005

         General.  Net income for the year ended June 30, 2006 was $9.6 million,
a decrease of $9.3 million, or 49.2%, from $18.9 million for the year ended June
30, 2005. The decrease in net income resulted  primarily from lower net interest
income and higher non-interest  expenses.  There was an increase in non-interest
income from service fees and charges and miscellaneous sources and a substantial
decrease in the  contribution  from gain on sale of  securities.  An increase in
interest  income did not offset an  increase in interest  expense  resulting  in
lower net  interest  income.  The  increase  in  non-interest  expenses  was due
primarily  to  increases   in  salaries   and  employee   benefits,   directors'
compensation   expense,   and  to  a  lesser  degree,   occupancy  expenses  and
miscellaneous expenses.

         Net Interest Income. Net interest income decreased by $1.3 million,  or
2.5%, to $50.7 million for the year ended June 30, 2006,  from $52.0 million for
the year ended June 30, 2005.  Our net interest  rate spread  decreased 41 basis
points to 2.10% for the year ended June 30, 2006,  from 2.51% for 2005.  Our net
interest  margin  decreased 12 basis points to 2.67% for the year ended June 30,
2006,  compared with 2.79% for the year ended June 30, 2005.  Despite a 28 basis
point improvement in the average yield on  interest-earning  assets,  increasing
from 4.42% for the year ended June 30, 2005 to 4.70% for the year ended June 30,
2006, the net interest rate spread decreased due to a 69 basis point increase in
the average cost of  interest-bearing  liabilities  to 2.60%  compared to 1.91%,
year-over-year.  An increase in the average yield on interest-earning  assets, a
$36.5 million  increase in average  interest-earnings  assets and $106.9 million
decrease in average  interest-bearing  liabilities,  was more than offset by the
increase  in the cost of average  interest-bearing  liabilities  resulting  in a
decrease  in the net  interest  margin,  year-over-year.  The  ratio of  average
interest-earning  assets to average  interest-bearing  liabilities  increased to
127.8% for the year ended June 30,  2006,  compared to 116.9% for the year ended
June 30, 2005. Average  interest-earning assets increased 2.0%, to $1.90 billion
for the year ended June 30, 2006, from $1.86 billion for the year ended June 30,
2005. Average interest-bearing  liabilities decreased 6.7%, to $1.49 billion for
the year ended June 30,  2006,  from $1.59  billion  for the year ended June 30,
2005.

         Interest Income. Total interest income increased $6.9 million, or 8.4%,
to $89.3  million for the year ended June 30, 2006,  from $82.4  million for the
year ended June 30, 2005. The  improvement in interest income resulted from both
an  increase  in the  yield on  average  interest-earning  assets  as well as an
increase in the average balance of interest-earning assets. The average yield on
average  interest-earning  assets increased 28 basis points to 4.70% from 4.42%,
while average interest-earning assets increased $36.5 million, or 2.0%, to $1.90
billion from $1.86 billion.

         Interest income on loans receivable  increased $6.0 million,  or 20.5%,
to $35.3  million for the year ended June 30, 2006,  from $29.3  million for the
year ended June 30, 2005. The increase  resulted from an increase in the average
balance of loans receivable, net, partially offset by a reduction in the average
yield on loans. The average balance of loans receivable,  net,  increased $110.5
million,  or 21.3%,  to $628.2  million for the year ended June 30,  2006,  from
$517.7  million for the year ended June 30,  2005.  The  average  yield on loans
decreased four basis points, to 5.62% for the year ended June 30, 2006, compared
to 5.66% for 2005.  The lower yield reflects  generally  lower interest rates on
originations  compared  to  principal  repayments  on seasoned  higher  yielding
mortgages;  however, the decline in average yields year-over-year began to slow.
The average  yield for the year ended June 30, 2005 was 5.66%  compared to 5.79%
for 2004.

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<PAGE>

         Interest  income  on   mortgage-backed   securities  held  to  maturity
decreased $483,000,  or 1.4%, to $33.5 million for the year ended June 30, 2006,
compared to $34.0  million  for the year ended June 30,  2005.  The  decrease in
interest income on  mortgage-backed  securities  resulted from a decrease in the
average balance  outstanding  rather than average yield,  which was unchanged at
4.59%  for the years  ended  June 30,  2006 and 2005.  The  average  balance  of
mortgage-backed  securities  decreased $11.4 million, or 1.5%, to $729.0 million
for the year ended June 30,  2006,  from $740.4  million for the year ended June
30, 2005. The decrease in the average  balance  resulted from the utilization of
cash  flows  from  monthly   principal  and  interest   payments  to  fund  loan
originations  and deposit  outflows  rather than  reinvestment in the portfolio.
Following  a decline  in  average  yield  between  the prior two  years,  due to
principal repayments received on seasoned higher yielding securities  reinvested
in a lower interest rate  environment,  the average yield stabilized  during the
year ended June 30, 2006. The average yield for the year ended June 30, 2005 was
4.59% compared to 4.76% for 2004. Most pools purchased during the year contained
adjustable  rate  mortgages,  thus  sacrificing  higher  yields  on  fixed  rate
mortgages for interest rate risk protection in the future.

         Interest income on investment securities available for sale and held to
maturity,  both taxable and  tax-exempt,  decreased $2.3 million,  or 13.9%,  to
$14.2 million for the year ended June 30, 2006,  from $16.5 million for the year
ended June 30, 2005. The decrease resulted from a decrease of $95.6 million,  or
19.5%, in the average balance of investment securities to $394.6 million for the
year ended June 30, 2006,  from $490.2 million for the year ended June 30, 2005,
partially offset by an increase in the average yield year-over-year. The average
yield for the year ended June 30, 2006 was 3.60%, compared to 3.37% for the year
ended  June 30  2005.  The  decrease  in the  average  balance  resulted  almost
exclusively  from the sale of the Bank's entire  portfolio of government  agency
notes,  totaling $249.1  million,  in February 2006.  Management  attributes the
increase in the average  yield in part to this sale since the  weighted  average
yield on these  notes  was  3.22%.  Interest  income  on  tax-exempt  investment
securities increased $730,000, or 10.6%, to $7.6 million for the year ended June
30,  2006,  from $6.9  million for the year ended June 30,  2005.  The  increase
resulted from an increase in the average balance  partially offset by a decrease
in the average yield. The average balance increased by $21.5 million,  or 11.9%,
to $202.0 million for the year ended June 30, 2006,  from $180.5 million for the
year ended June 30,  2005,  while the average  yield  decreased to 3.78% for the
year ended June 30,  2006,  from 3.82% in 2005.  The actual  balance at June 30,
2006 of $200.3  million,  compared to $204.6  million at June 30, 2005  reflects
management's  decision  to  de-emphasize  tax-exempt  securities,  due to  lower
pre-tax  income  and lower  interest  rates on new  issues.  Interest  income on
taxable investment  securities decreased $3.0 million, or 31.3%, to $6.6 million
for the year ended June 30, 2006,  from $9.6 million for the year ended June 30,
2005,  resulting  from a decrease  in  average  balance  partially  offset by an
increase in average yield.  The average balance  decreased  $117.1  million,  or
37.8%,  to $192.6 million for the year ended June 30, 2006,  from $309.7 million
for the year ended June 30, 2005.  The average yield  increased to 3.40% for the
year ended June 30, 2006, from 3.11% for 2005. The sale of the entire government
agency notes portfolio substantially contributed to both the decrease in average
balance and increase in average yield.

         Interest  income  on  other  interest-earning   assets  increased  $3.7
million,  or 142.3%, to $6.3 million for the year ended June 30, 2006, from $2.6
million for the year ended June 30, 2005. The  composition of interest income on
other  interest-earning  assets  during the year ended  June 30,  2006  included
interest  received from deposits at other banks,  specifically  the Federal Home
Loan Bank of New York and Bank of America,  and  dividends  paid on Federal Home
Loan Bank of New York capital stock.  The increase in interest  income  resulted
from an  increase  in average  yield and  average  balance.  The  average  yield
increased to 4.28% for the year ended June 30,  2006,  from 2.30% for 2005 while
the average balance increased $33.0 million, or 28.7%, to $147.9 million for the
year ended June 30, 2006,  from $114.9 million for the year ended June 30, 2005.
Management  reinvested the proceeds from the investment portfolio  restructuring
in cash and cash  equivalents  to take advantage of market  short-term  interest
rates.

         Interest  Expense.  Total interest expense  increased $8.2 million,  or
27.0%, to $38.6 million for the year ended June 30, 2006, from $30.4 million for
year ended June 30, 2005. The increase  resulted from an

                                       45

<PAGE>

increase in the average cost of interest-bearing  liabilities,  partially offset
by a decrease  in the  average  balance  of  interest-bearing  liabilities.  The
average cost increased 69 basis points to 2.60% in the year ended June 30, 2006,
from  1.91%  for 2005.  The  average  balance  of  interest-bearing  liabilities
declined  $106.9  million,  or 6.7%, to $1.49 billion during the year ended June
30,  2006,  as compared to $1.59  billion  during the year ended June 30,  2005.
Management increased rates to match the competition's rate offerings in the face
of rising short-term interest rates in an effort to stem the outflow of deposits
triggered by the competitive market for deposits.

         Interest expense on deposits increased $8.6 million, or 32.5%, to $35.1
million for the year ended June 30, 2006,  from $26.5 million for the year ended
June 30, 2005. The average cost of interest-bearing  deposits increased to 2.47%
for the year  ended  June 30,  2006,  from 1.75% in 2005.  The  average  cost of
certificates of deposit increased to 3.27% from 2.33%, while the average cost of
savings and club accounts  increased to 1.18% from 1.02% and the average cost of
interest-bearing demand accounts increased to 0.90% from 0.71%. Management found
it  necessary  to  market  special   certificate  of  deposit   maturities  with
promotional interest rates, typically with terms of five, nine and 13 months, to
retain and  attract  new  deposits.  The  average  balance  of  interest-bearing
deposits  decreased $91.3 million,  or 6.0%, to $1.42 billion for the year ended
June 30, 2006,  from $1.51 billion for the prior year.  Average  certificates of
deposit  increased to $888.8 million from $873.9  million,  average  savings and
club  accounts  decreased  to $429.0  million  from  $533.1  million and average
interest-bearing  demand  deposits  decreased  to  $103.4  million  from  $105.5
million.  The Bank introduced  several  products  designed to retain and attract
core  deposits,  including Star Banking and a tiered money market  account.  The
challenge for management  during the year ended June 30, 2006 was to balance the
rate of attrition for all deposit categories  against a significant  increase in
the cost of funds.

         Interest expense on Federal Home Loan Bank advances decreased $314,000,
or 8.1%, to $3.6 million for the year ended June 30, 2006, from $3.9 million for
the year ended June 30, 2005. The decrease in interest  expense  resulted from a
decrease in the average balance of advances  outstanding  partially offset by an
increase  in the  average  cost of  advances.  The  average  balance of advances
outstanding  decreased  $15.7 million,  or 19.4%,  to $65.3 million for the year
ended June 30, 2006  compared to $81.0 million for the year ended June 30, 2005.
The average cost of  borrowings  increased to 5.47% from 4.80%,  year-over-year.
The decrease in the average balance resulted from short-term  advances  obtained
and  subsequently  paid off during the year  ended  June 30,  2005,  to fund the
purchase of  securities.  The same situation did not occur during the year ended
June 30, 2006.  The average  cost of borrowed  money  increased  during the year
ended June 30, 2006,  due to  management's  utilization  of an overnight line of
credit  with the  Federal  Home Loan Bank of New York to meet  liquidity  needs.
Overnight  borrowings  were  particularly  expensive  due to the  high  cost  of
short-term interest rates relative to rates on longer-term advances.

         Provision  for Loan  Losses.  We charge  provisions  for loan losses 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.  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.  Management  bases general loan loss
allowances upon a combination of factors  including,  but not limited to, actual
loan  loss  experience,  composition  of the loan  portfolio,  current  economic
conditions and management's judgment.

         There was a $72,000  provision  for loan losses  recorded  for the year
ended June 30, 2006 compared to a $68,000 provision for loan losses recorded for
the year ended June 30, 2005.  During the year ended June 30, 2006,  total loans
increased to $708.0  million at June 30, 2006,  from $562.6  million at June 30,
2005.

                                       46

<PAGE>

Non-performing  loans were $942,000,  or 0.13%, of total loans at June 30, 2006,
as compared to $1.9  million,  or 0.34%,  of total loans at June 30,  2005.  The
allowance for loan losses as a percentage of total loans  outstanding  was 0.77%
at June 30,  2006,  compared to 0.96% at June 30, 2005,  reflecting  balances of
$5.5 million and $5.4 million, respectively. The ratio of the allowance for loan
losses to non-performing loans increased to 578.7% at June 30, 2006, from 281.8%
at June 30, 2005.  The increase in the ratio is a result of a $980,000  decrease
in  non-performing  loans from  approximately  $1.9 million at June 30, 2005, to
$942,000 at June 30, 2006.

         Management  assesses  the  allowance  for loan  losses  monthly.  While
management uses available  information to recognize losses on loans,  additional
loan loss provisions in the future 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.

         Non-interest  Income.  Non-interest  income attributed to fees, service
charges and  miscellaneous  income and excluding gains on the sale of securities
increased $504,000,  or 28.0%, to $2.3 million for the year ended June 30, 2006,
from $1.8  million for the year ended June 30,  2005.  Fees and service  charges
increased  $68,000  year-over-year,  primarily  due to an increase in prepayment
charges on loans and a nominal  increase in fee income  attributed to the Bank's
retail branch network,  partially offset by lower other loan fees. Miscellaneous
income  increased  $436,000  primarily due to an increase in the cash  surrender
value of bank owned life insurance and other fees from  operations.  At June 30,
2006, we had a $14.6 million  investment in bank owned life insurance,  compared
to $4.0 million at June 30, 2005.

         Non-interest  income  attributed  to net gain on the sale of securities
was $1.0  million in the year ended June 30,  2006,  resulting  from the sale of
131,088  shares of Freddie Mac common  stock,  a closed-end  mutual fund and the
Bank's entire  portfolio of  government  agency  notes.  The three  transactions
produced  pre-tax  gains of $8.8  million and $86,000 and a pre-tax loss of $7.8
million,  respectively.  Non-interest  income attributed to gains on the sale of
securities was $7.7 million in the year ended June 30, 2005,  resulting from the
sale of  120,000  shares of  Freddie  Mac  common  stock  and a  trust-preferred
security. Concern about the future of government-sponsored enterprises triggered
the sale of the Company's Freddie Mac common stock investment. The common stock,
trust-preferred  security and closed-end  mutual fund were part of the Company's
available for sale investment  portfolio and the government agency notes were in
the Bank's held-to-maturity portfolio.

         Non-interest  Expense.  Non-interest expense increased $7.1 million, or
20.3%, to $42.0 million for the year ended June 30, 2006, from $34.9 million for
the year ended June 30, 2005.  The  increase in  non-interest  expense  resulted
primarily  from  increases  in  salaries  and  employee   benefits,   directors'
compensation expense,  miscellaneous expense,  equipment expense and to a lesser
degree, advertising expense and net occupancy expense of premises.

         Salaries and employee  benefits  increased $4.3 million,  or 20.7%,  to
$25.1  million in the year ended June 30, 2006,  from $20.8  million in the year
ended June 30, 2005. The compensation  expense component increased $372,000,  or
2.8%, to $13.4 million for the year ended June 30, 2006,  from $13.1 million for
the year ended June 30, 2005. The increase resulted from normal salary increases
and hiring of  additional  employees to staff our newest retail branch opened in
Lacy Township,  New Jersey during October 2005.  Pension plan expense  decreased
$699,000  to $2.6  million for the year ended June 30,  2006,  compared to 2005.
Pension  plan  expense  in the year  ended  June 30,  2005  included  additional
contributions to compensate for lower than expected  investment  returns on plan
assets  during  prior  periods.  Benefits  expense  increased  $905,000  to $3.8
million, year-over-year, resulting from higher health insurance premiums as well
as additional employees enrolled in the benefit plans.  Employee stock ownership
plan  ("ESOP")  compensation  expense  increased  $1.4 million to $1.9  million,
compared to 2005. ESOP compensation expense began

                                       47

<PAGE>

accruing immediately following the initial public offering completed in February
2005,  therefore,  there was only four months' expense  recorded during the year
ended June 30,  2005.  Stock  compensation  plan expense  attributed  to a stock
benefit plan approved at the 2005 Annual Meeting was $2.3 million.  There was no
such expense  recorded in 2005.  Payroll tax expense  increased  $82,000 to $1.1
million compared to the previous year.

         Net occupancy expense of premises increased $119,000,  or 3.7%, to $3.3
million for the year ended June 30,  2006,  from $3.2 million for the year ended
June 30,  2005.  Decreases  in rent  expense,  net,  and  lower  property  taxes
partially  offset  increases in repairs and  maintenance  expense,  depreciation
expense and  utilities  expense.  During the year ended June 30, 2006,  the Bank
leased space at two  locations  vacated by management  staff and  administrative
operations upon their move to the Company's  headquarters in late 2004.  Another
tenant will move into Bank property in November 2006 and additional vacant space
is being  prepared  for  lease.  The rental  income  will  partially  offset the
occupancy expense of such premises in the future.

         Equipment expense increased $470,000, or 11.8%, to $4.4 million for the
year ended June 30, 2006, from $4.0 million during the year ended June 30, 2005.
The largest  increase  was  attributed  to the data  processing  expense,  which
increased  $255,000 to $2.5 million,  year-over-year.  A significant part of the
increase  resulted  from  additional  security  enhancements  to the Bank's data
processing infrastructure.

         Advertising expense increased  $289,000,  or 24.1%, to $1.5 million for
the year  ended June 30,  2006,  from $1.2  million  for the year ended June 30,
2005. The increase in  advertising  expense  resulted from a publicity  campaign
connected  to  the  grand  opening  of  the  Lacy  Township  branch,  and  media
advertising launching our Star Banking product and promoting special certificate
of deposit offerings. These were in addition to extensive campaigns to advertise
residential  and  commercial  loan  products and retail and  commercial  deposit
products.

         Directors'  compensation  expense increased $1.2 million, or 135.4%, to
$2.1 million for the year ended June 30, 2006,  from $886,000 for the year ended
June 30, 2005.  Stock  compensation  plan expense  attributed to a stock benefit
plan  approved at the 2005 Annual  Meeting was $1.1  million.  There was no such
expense  recorded in 2005.  Directors'  fees remained  unchanged at $676,000 and
advisory board fees decreased  $89,000 to $123,000,  year-over-year.  Other fees
including an incentive bonus plan were $225,000 for 2006.

         Miscellaneous expense increased $744,000, or 20.1%, to $4.4 million for
the year  ended June 30,  2006,  from $3.7  million  for the year ended June 30,
2005.  Audit and accounting  services  expense and costs associated with being a
public company,  including annual meeting expense produced the largest increases
in the  miscellaneous  expense category.  Audit and accounting  services expense
increased  $184,000 to $535,000,  compared to 2005. A  significant  part of that
increase,  approximately $124,000,  resulted from professional services rendered
to assist management in complying with  Sarbanes-Oxley  Section 404. The Company
recorded expense of approximately $10,000 in 2005 to begin the compliance effort
for Section 404.  Annual meeting expense was $201,000 during the year ended June
30, 2006,  which  includes a provision for the estimated cost of the 2006 annual
meeting. There was no such expense recorded in 2005.

         Provision  for Income Taxes.  The provision for income taxes  decreased
$5.4 million,  or 70.1%,  to $2.3 million for the year ended June 30, 2006, from
$7.7  million  for the year  ended June 30,  2005.  The  decrease  in income tax
expense  resulted from a decrease in pre-tax income of $14.7 million,  or 55.3%,
to $11.9  million in the year ended June 30,  2006,  from $26.6  million for the
year ended June 30, 2005. The effective income tax rates were 19.2% for the year
ended June 30, 2006, as compared to 28.9% for the year ended June 30, 2005.  Due
to the Bank's significant  investment in tax-exempt municipal bonds,  tax-exempt
interest  reduced the Company's  federal  income expense by  approximately  $2.4
million  during  the year  ended  June 30,  2006,  compared  to a  reduction  of
approximately $2.2 million in the year ended June 30, 2005.

                                       48

<PAGE>

Comparison  of Operating  Results for the Years Ended June 30, 2005 and June 30,
2004

         General. Net income for the year ended June 30, 2005 was $18.9 million,
an increase of $6.0 million, or 46.5%, from $12.9 million for 2004. The increase
in net income  resulted from the gain on sale of available  for sale  securities
recorded in 2005.  Without the gain on sale,  net income for the year ended June
30, 2005 remained virtually unchanged from a year earlier,  since an increase in
non-interest expense offset a comparable increase in net interest income.

         Net Interest Income. Net interest income increased by $5.4 million,  or
11.6%, to $52.0 million for the year ended June 30, 2005, from $46.6 million for
the year ended June 30, 2004.  The net interest  rate spread  increased to 2.51%
for the year ended June 30, 2005,  from 2.37% for 2004. The net interest  margin
increased 20 basis  points to 2.79% for the year ended June 30,  2005,  compared
with  2.59% for the year ended  June 30,  2004.  The net  interest  rate  spread
improved  due  to  a  four  basis  point   increase  in  the  average  yield  on
interest-earning  assets  complemented  by a decrease of 10 basis  points in the
average  cost of  interest-bearing  liabilities.  The  increase in net  interest
margin  resulted from the  improvement in the ratio of average  interest-earning
assets to average interest-bearing liabilities,  116.93% for the year ended June
30,  2005,  compared  to  112.46%  for the year  ended  June 30,  2004.  Average
interest-earning  assets increased $68.8 million,  or 3.9%, to $1.86 billion for
the year ended June 30,  2005,  from $1.79  billion  for the year ended June 30,
2004.  Average   interest-bearing   liabilities  remained  virtually  unchanged,
decreasing by $2.3 million for the year ended June 30, 2005.

         Interest Income. Total interest income increased $3.7 million, or 4.7%,
to $82.4  million for the year ended June 30, 2005,  from $78.7  million for the
year ended June 30, 2004. The  improvement in interest income resulted from both
the  increase  in the yield on  average  interest-earning  assets as well as the
increase  in  average  interest-earning  assets.  The  average  yield on average
interest-earning  assets increased four basis points to 4.42% from 4.38%,  while
average  interest-earning  assets  increased  $68.8  million,  or 3.9%, to $1.86
billion from $1.79 billion.

         Interest income on loans  receivable  increased  $392,000,  or 1.4%, to
$29.3 million for the year ended June 30, 2005,  from $28.9 million for the year
ended June 30,  2004.  The  increase  resulted  from an  increase in the average
balance of loans receivable, net, partially offset by a reduction in the average
yield on loans. The average balance of loans  receivable,  net,  increased $18.2
million,  or 3.6%,  to $517.7  million  for the year ended June 30,  2005,  from
$499.5  million for the year ended June 30,  2004.  The  average  yield on loans
decreased 13 basis points,  to 5.66% for the year ended June 30, 2005,  compared
to 5.79% for 2004. The increased  average balance  reflects an effort to improve
the ratio of loans to deposits. Net loans receivable increased $52.2 million, or
10.3%, to $558.0 million at June 30, 2005, from $505.8 million at June 30, 2004.
The lower yield reflects  generally  lower interest  rates on  originations  and
downward rate adjustments on adjustable rate and floating rate loans.

         Interest income on mortgage-backed securities held to maturity deceased
$26,000  and was $34.0  million  for the year  ended  June 30,  2005,  virtually
unchanged  from 2004.  Interest  income on  mortgage-backed  securities  did not
change  as an  increase  in the  average  balance  outstanding  was  offset by a
decrease in the average yield. The average balance of mortgage-backed securities
increased $27.0 million,  or 3.8%, to $740.4 million for the year ended June 30,
2005,  from $713.4  million for the year ended June 30, 2004.  At the same time,
the average yield decreased 17 basis points to 4.59% for the year ended June 30,
2005,  compared to 4.76% for 2004. The increase in average balance resulted from
the  substitution of  mortgage-backed  securities for loans earlier in the year,
while  management  launched an  advertising  campaign  designed to increase loan
originations.  Mortgage-backed  securities  actually decreased $13.3 million, or
1.7%, to $758.1 million at June 30, 2005,  from $771.4 million at June 30, 2004.
The decline in yield resulted from principal repayments received on older higher
yielding   securities   subsequently   reinvested  in  a  lower   interest  rate
environment.  Additionally, most mortgage-backed securities purchased during the
year were adjustable rate,  sacrificing

                                       49

<PAGE>

higher yields on fixed rate  mortgages in the  short-term for some interest rate
risk protection in the future.

         Interest income on investment securities available for sale and held to
maturity,  both taxable and  tax-exempt,  increased $2.1 million,  or 14.6%,  to
$16.5 million for the year ended June 30, 2005,  from $14.4 million for the year
ended June 30, 2004. The increase resulted from an increase of $64.9 million, or
15.3%, in the average balance of investment securities to $490.2 million for the
year ended June 30, 2005,  from $425.3 million for the year ended June 30, 2004.
A two basis point  reduction  in the average  yield,  declining to 3.37% for the
year ended June 30, 2005 from 3.39% for 2004,  nominally  offset the increase in
the  average  balance.  Interest  income  on  tax-exempt  investment  securities
increased  $1.2 million,  or 21.1%,  to $6.9 million for the year ended June 30,
2005, from $5.7 million for the year ended June 30, 2004. The increase  resulted
from an increase in the average  balance  partially  offset by a decrease in the
average yield.  The average  balance  increased by $38.9 million,  or 27.5%,  to
$180.5  million for the year ended June 30,  2005,  from $141.6  million for the
year ended June 30, 2004,  while the average yield decreased by 21 basis points,
to 3.82% for the year ended June 30, 2005,  from 4.03% in 2004.  Interest income
on taxable investment  securities increased $908,000,  or 10.4%, to $9.6 million
for the year ended June 30, 2005,  from $8.7 million for the year ended June 30,
2004,  resulting from increases in both average  balance and average yield.  The
average balance increased $26.0 million, or 9.2%, to $309.7 million for the year
ended June 30, 2005,  from $283.7  million for the year ended June 30, 2004. The
average yield increased four basis points,  to 3.11% for the year ended June 30,
2005,  from 3.07% for 2004.  There has been steady growth in both the tax-exempt
and taxable  portfolios  over the  previous  three years.  Management  gradually
shifted assets from those vulnerable to high prepayments such as mortgage-backed
securities,  or with  low  yields,  including  cash  and  cash  equivalents  and
securities   purchased  under   agreements  to  resell,   into  higher  yielding
investments,  particularly tax-exempt securities, which were offering higher tax
equivalent yields.

         Interest  income  on  other  interest-earning   assets  increased  $1.3
million,  or 100.0%, to $2.6 million for the year ended June 30, 2005, from $1.3
million for the year ended June 30,  2004.  There were no  securities  purchased
under agreements to resell during the year ended June 30, 2005,  therefore,  the
composition  of  interest  income  on  other  interest-earning  assets  for 2005
included only interest  received from deposits at other banks,  specifically the
Federal Home Loan Bank of New York, and dividends paid on Federal Home Loan Bank
of New York capital  stock.  The increase in interest  income  resulted  from an
increase  in  average  yield,  partially  offset by a  decrease  in the  average
balance. The average yield increased 1.45%, to 2.30% for the year ended June 30,
2005, from 0.85% for 2004 while the average balance decreased $41.4 million,  or
26.5%,  to $114.9 million for the year ended June 30, 2005,  from $156.3 million
for the year ended June 30, 2004.  The  investment  of funds  received  from the
purchase of the Company's common stock, including over-subscriptions held during
the subscription period, contributed to the increase in interest income on other
interest-earning assets, particularly the ability to invest those funds during a
period of rising short-term interest rates.

         Interest  Expense.  Total interest expense  decreased $1.7 million,  or
5.3%, to $30.4 million for the year ended June 30, 2005,  from $32.1 million for
year ended June 30, 2004.  The decrease  resulted from a decrease in the average
cost of  interest-bearing  liabilities,  with virtually no change in the average
balance of  interest-bearing  liabilities.  The average cost decreased ten basis
points to 1.91% in the year  ended  June 30,  2005,  from  2.01%  for 2004.  The
average  balance of  interest-bearing  liabilities  declined  slightly  to $1.59
billion during the year ended June 30, 2005, as compared to $1.60 billion during
the year ended June 30, 2004.  Average cost  decreased due to  historically  low
market interest rates  prevailing  during the period,  though  short-term  rates
started  climbing as the  Federal  Reserve  raised the federal  funds rate by 25
basis point increments.

         Interest expense on deposits decreased $1.6 million,  or 5.7%, to $26.5
million for the year ended June 30, 2005,  from $28.1 million for the year ended
June 30, 2004. Interest expense included $491,000, paid on funds received during
the  subscription  period of the initial public  offering  completed in February
2005.   The  decrease   resulted   from  a  decrease  in  the  average  cost  of
interest-bearing  deposits  and a slight  decrease  in the

                                       50

<PAGE>

average   balance   of   interest-bearing   deposits.   The   average   cost  of
interest-bearing deposits decreased ten basis points to 1.75% for the year ended
June 30, 2005,  from 1.85% in 2004. The average cost of  certificates of deposit
increased  to 2.33% from  2.25%,  while the  average  cost of  savings  and club
accounts decreased to 1.02% from 1.23% and the average cost of  interest-bearing
demand accounts decreased to 0.71% from 0.80%.  Management found it necessary to
begin  raising  certificate  of  deposit  interest  rates,  reacting  to  rising
short-term interest rates during the second half of the year in order to reverse
earlier  deposit  outflows.  The average  balance of  interest-bearing  deposits
decreased  $8.9 million to $1.51 billion for the year ended June 30, 2005,  from
$1.52 billion for the prior year.  The nominal  decrease in the average  balance
partially resulted from the temporary  increase in deposits  attributed to funds
received during the subscription period of the initial public offering completed
in February 2005  substantially  offsetting an overall deposit outflow.  Average
certificates of deposit declined to $873.9 million from $963.1 million,  average
savings and club accounts  increased to $533.1  million from $448.5  million and
average interest-bearing demand deposits decreased to $105.5 million from $109.8
million.  The  increase  in  average  savings  and club  accounts  reflects  the
aforementioned temporary increase in deposits associated with the initial public
offering.

         Interest expense on Federal Home Loan Bank advances decreased $128,000,
or 3.2%, to $3.9 million for the year ended June 30, 2005, from $4.0 million for
the year ended June 30, 2004. The decrease in interest  expense  resulted from a
decrease in the average cost of advances  partially offset by an increase in the
average  balance of advances.  The average cost of advances fell 60 basis points
to 4.80% for the year  ended  June 30,  2005,  from  5.40%  for 2004,  while the
average balance  increased $6.7 million,  or 9.0%, to $81.0 million for the year
ended June 30, 2005,  from $74.3  million for the year ended June 30, 2004.  The
increase in the average  balance  resulted  from  short-term  advances  obtained
earlier in the year to fund the purchase of  securities,  subsequently  paid off
with proceeds from the initial stock  offering  completed in February  2005. The
relatively low interest  rates  associated  with those  advances  contributed to
lowering the average cost of borrowed money.

         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 a $68,000  provision  for loan losses  recorded  for the year
ended June 30, 2005,  but no provision for loan losses in 2004.  During the year
ended June 30, 2005,  total loans  increased to $562.6 million at June 30, 2005,
from $510.2 million at June 30, 2004. Non-performing loans were $1.9 million, or
0.34%,  of total loans at June 30, 2005, 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 0.96% at June 30, 2005, compared to 1.01% at June
30, 2004,  reflecting  balances of $5.4 million and $5.1 million,  respectively.
The ratio of the allowance for loan losses to non-performing  loans increased to
281.79% at June 30,  2005,  from  220.96% at June 30,  2004.  The  increase is a
result of a $406,000 decrease in non-performing  loans from $2.3 million at June
30, 2004, to $1.9 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

                                       51

<PAGE>

losses  as  of  June  30,  2005  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 attributed to fees, service
charges and  miscellaneous  income and excluding gains on the sale of securities
increased $238,000,  or 14.9%, to $1.8 million for the year ended June 30, 2005,
from $1.6  million  for the year  ended June 30,  2004.  The  increase  resulted
primarily from an increase in fee income from the Bank's retail branch  network,
an increase  in the cash value of bank owned life  insurance  and  non-recurring
loan fee income.  At June 30,  2005,  we had a $4.0 million  investment  in bank
owned life insurance, compared to $3.8 million at June 30, 2004.

         Non-interest  income  attributed to gains on the sale of securities was
$7.7 million in the year ended June 30, 2005, resulting from the sale of 120,000
shares of  Freddie  Mac  common  stock and a trust-  preferred  security  with a
carrying value of $1.0 million.  There were no sales of securities  during 2004.
Concern about the future of government-sponsored  enterprises triggered the sale
of approximately 48% of the Company's Freddie Mac common stock investment.  Both
the  common  stock  and  trust-preferred  security  were  part of the  Company's
available for sale investment portfolio.

         Non-interest  Expense.  Non-interest expense increased $5.4 million, or
18.3%, to $34.9 million for the year ended June 30, 2005, from $29.5 million for
the year ended June 30, 2004.  The increase in  non-interest  expenses  resulted
from  increases in salaries  and employee  benefits,  net  occupancy  expense of
premises and equipment,  advertising and miscellaneous expenses. These increases
were  offset by the  absence of merger  related  expenses in 2005 as compared to
$592,000 of such expense during 2004.

         Salaries and employee  benefits  increased $4.3 million,  or 26.1%,  to
$20.8  million in the year ended June 30, 2005,  from $16.5  million in the year
ended June 30, 2004.  The  compensation  component  increased  $1.4 million,  or
12.5%, to $12.6 million for the year ended June 30, 2005, from $11.2 million for
the year ended June 30, 2004. The increase resulted from normal salary increases
plus additional employees,  including several business development personnel and
mortgage  solicitors  hired  during the year.  Pension plan expense and employee
benefits expense increased $1.7 million and $574,000, respectively, for the year
ended June 30, 2005  compared to 2004.  The  increase  in pension  plan  expense
resulted from lower than expected  investment  returns on plan assets and higher
contributions due to the incremental  effect of normal salary increases.  During
the period  March  through  June 2005,  we recorded  $466,000 in employee  stock
ownership plan ("ESOP")  compensation  expense.  The ESOP commenced  immediately
following the initial public  offering  completed in February  2005,  therefore,
there was no such expense recorded in 2004.

         Net occupancy  expense of premises and equipment expense increased $1.1
million,  or 18.3%,  to $7.1 million for the year ended June 30, 2005, from $6.0
million for the year ended June 30, 2004. Net occupancy  expense of premises and
equipment expense increased  $640,000 and $478,000,  respectively,  for the year
ended June 30, 2005 compared to 2004.  The increase in net occupancy  expense of
premises  reflects  the  impact of our new  53,000  square  foot  administrative
headquarters   building  in  Fairfield,   New  Jersey.   Management   staff  and
administrative  operations  began  occupying the building in late  September and
continued to move in until December 2004. Approximately nine months of operating
expenses  and six months of  depreciation  expense is included in the year ended
June  30,  2005.  The  increase  in  equipment   expense  resulted  from  higher
depreciation expense and increased costs related to data processing, ATM support
and Internet banking, all of which are outsourced.

         Advertising expense increased  $315,000,  or 36.6%, to $1.2 million for
the year ended June 30,  2005,  from  $861,000 for the year ended June 30, 2004.
The increase in advertising  expense resulted from greater media  advertising in
an  attempt to  increase  loan  originations,  publicize  the Bank's  retail and
commercial  products and refine the Bank's branding.  Also,  rather than relying
exclusively  on the large  circulation  newspapers,  management  began  focusing
specifically  on the  counties in which we operate,  through  advertisements  in
smaller local newspapers.

                                       52

<PAGE>

         All other elements of  non-interest  expenses  increased  $281,000,  or
5.4%, to $5.8 million for the year ended June 30, 2005,  from $5.5 million,  net
of merger related expenses of $592,000 for the year ended June 30, 2004. Most of
the increase in miscellaneous  expenses is due to the increased costs associated
with being a public company, such as periodic reporting, retention of a transfer
agent and professional  fees.  Professional fees consisting of legal expense and
audit  and  accounting   services  expense   increased   $43,000  and  $161,000,
respectively, for the year ended June 30, 2005, compared to 2004.

         Provision  for Income Taxes.  The provision for income taxes  increased
$2.0 million,  or 35.1%,  to $7.7 million for the year ended June 30, 2005, from
$5.7  million  for the year  ended June 30,  2004.  The  increase  in income tax
expense  resulted from an increase in pre-tax income of $8.0 million,  or 43.0%,
to $26.6  million in the year ended June 30,  2005,  from $18.6  million for the
year ended June 30, 2004. The effective income tax rates were 28.9% for the year
ended June 30,  2005,  as  compared  to 30.8% for the year ended June 30,  2004.
Management  attributes  the lower  effective  income tax rate to tax  management
strategies, including investing in bank-qualified tax-exempt municipal bonds and
transferring   investment   securities  held  to  maturity  and  mortgage-backed
securities  held to  maturity  to a New  Jersey  investment  subsidiary,  Kearny
Federal Investment Corp., a wholly-owned subsidiary of the Bank, which commenced
operations in July 2004. Of particular  significance,  tax-exempt municipal bond
interest  reduced the Company's  federal  income expense by  approximately  $2.2
million.

                                       53

<PAGE>

         Average   Balance  Sheet.   The  following  table  sets  forth  certain
information relating to Kearny Financial Corp. at and for the periods indicated.
We derived  the average  yields and costs by  dividing  income or expense by the
average  balance  of  assets  or  liabilities,  respectively,  for  the  periods
presented with daily balances used to derive average balances with the exception
of the year ended June 30,  2004.  Management  does not believe  that the use of
weekly or monthly  balances for the year ended June 30, 2004 caused any material
differences in the information presented.

<TABLE>
<CAPTION>
                                                                             For the Year Ended June 30,
                                  At June 30,     ----------------------------------------------------------------------------------
                                     2006                    2006                           2005                       2004
                             ------------------    ----------------   ------------------- ----------------  ------------------------
                                          Actual                      Average                      Average                   Average
                              Actual      Yield/   Average             Yield/    Average           Yield/   Average           Yield/
                             Balance       Cost    Balance Interest     Cost     Balance  Interest  Cost    Balance  Interest  Cost
                             -------       ----    ------- --------     ----     -------  --------  ----    -------  --------  ----
                                                                    (Dollars in thousands)
<S>                       <C>             <C>    <C>         <C>        <C>    <C>         <C>      <C>   <C>         <C>      <C>
Interest-earning assets:
 Loans receivable,
   net(1)................ $  703,613      5.68%  $  628,245  $35,338    5.62%  $  517,746  $29,311  5.66% $  499,510  $28,919  5.79%
 Mortgage-backed
   securities
   held to maturity......    689,962      4.85      728,960   33,471    4.59      740,417   33,954  4.59     713,422   33,980  4.76
 Investment securities:(2)
   Tax-exempt............    200,312      3.78      202,042    7,634    3.78      180,513    6,904  3.82     141,630    5,702  4.03
   Taxable...............     27,082      5.72      192,561    6,554    3.40      309,740    9,632  3.11     283,708    8,724  3.07
 Securities purchased
   under agreements
   to resell.............          -      0.00            -        -    0.00            -        -  0.00      95,385      982  1.03
 Other interest-
   earning assets(3).....    213,122      5.13      147,949    6,326    4.28      114,916    2,640  2.30      60,885      347  0.57
                          ----------             ----------  -------           ----------  -------        ----------  -------
  Total interest-
    earning assets.......  1,834,091      5.10    1,899,757   89,323    4.70    1,863,332   82,441  4.42   1,794,540   78,654  4.38
                                                             -------                       -------                    -------
Non-interest-earning
  assets.................    173,434                161,423                       151,055                    144,698
                          ----------             ----------                    ----------                 ----------
  Total assets........... $2,007,525             $2,061,180                    $2,014,387                 $1,939,238
                          ==========             ==========                    ==========                 ==========
Interest-bearing
liabilities:
 Interest-bearing
   demand................ $  122,129      1.56   $  103,397      931    0.90   $  105,503      752  0.71  $  109,830      882  0.80
 Savings and club........    377,431      1.15      429,019    5,064    1.18      533,131    5,422  1.02     448,509    5,508  1.23
 Certificates of
   deposit...............    883,098      3.83      888,809   29,074    3.27      873,907   20,358  2.33     963,089   21,692  2.25
 Federal Home Loan Bank
   advances..............     61,105      5.46       65,333    3,576    5.47       80,990    3,890  4.80      74,340    4,018  5.40
                          ----------             ----------  -------           ----------  ---------      ----------  -------
  Total interest-
    bearing liabilities..  1,443,763      3.01    1,486,558   38,645    2.60    1,593,531   30,422  1.91   1,595,768   32,100  2.01
                                                             -------                       -------                    -------

Non-interest-bearing
  liabilities............     72,876                 71,089                        71,119                     57,846
                          ----------             ----------                    ----------                 ----------
 Total liabilities.......  1,516,639              1,557,647                     1,664,650                  1,653,614
Stockholders' equity.....    490,886                503,533                       349,737                    285,624
                          ----------             ----------                    ----------                 ----------
 Total liabilities and
   stockholders' equity.. $2,007,525             $2,061,180                    $2,014,387                 $1,939,238
                          ==========             ==========                    ==========                 ==========
Net interest income......                                    $50,678                       $52,019                    $46,554
                                                             =======                       =======                    =======
Interest rate spread(4)..                 2.09%                         2.10%                       2.51%                      2.37%
                                          ====                          ====                        ====                       ====
Net yield on interest-
  earning assets(5)......                                               2.67%                       2.79%                      2.59%
                                                                        ====                        ====                       ====
Ratio of average
  interest-earning
  assets to average
  interest- bearing
  liabilities............       1.27x                   1.28x                        1.17x                       1.12x
                           ==========             ===========                   ==========                 ===========
</TABLE>
-----------------
(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.

                                       54

<PAGE>

         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.

<TABLE>
<CAPTION>
                                                                  Year Ended June 30,                Year Ended June 30,
                                                          ------------------------------------ ------------------------------------
                                                                      2006 vs. 2005                       2005 vs. 2004
                                                          ------------------------------------ ------------------------------------
                                                                   Increase (Decrease)                   Increase (Decrease)
                                                                          Due to                                 Due to
                                                          ------------------------------------ ------------------------------------
                                                            Volume       Rate         Net        Volume        Rate          Net
                                                          ----------- ------------ ----------- ------------ ------------ ----------
                                                                                         (In thousands)
<S>                                                       <C>         <C>           <C>        <C>          <C>           <C>
Interest and dividend income:
 Loans receivable.....................................     $  6,235    $   (208)     $  6,027   $  1,047     $   (655)     $    392
 Mortgage-backed securities held to maturity..........         (483)          -          (483)     1,234       (1,260)          (26)
 Investment securities:
   Tax-exempt.........................................          804         (74)          730      1,510         (308)        1,202
   Taxable............................................       (3,911)        833        (3,078)       795          113           908
 Securities purchased under agreements to resell......            -           -             -       (491)        (491)         (982)
 Other interest-earning assets........................          923       2,763         3,686        519        1,774         2,293
                                                           --------    --------      --------   --------     --------      --------
  Total interest-earning assets.......................     $  3,568    $  3,314      $  6,882   $  4,614     $   (827)     $  3,787
                                                           ========    ========      ========   ========     ========      ========

Interest expense:
 Interest-bearing demand..............................     $    (15)   $    194      $    179   $    (34)    $    (96)     $   (130)
 Savings and club.....................................       (1,145)        787          (358)       944       (1,030)          (86)
 Certificates of deposit..............................          353       8,363         8,716     (2,077)         743        (1,334)
 Advances from Federal Home Loan Bank.................         (813)        499          (314)       341         (469)         (128)
                                                           ---------   --------      ---------  --------     --------      --------
   Total interest-bearing liabilities.................     $ (1,620)   $  9,843      $  8,223   $   (826)    $   (852)     $ (1,678)
                                                           =========   ========      ========   ========     ========      ========

Change in net interest income.........................     $  5,188    $ (6,529)     $ (1,341)  $  5,440     $     25      $  5,465
                                                           ========    ========      ========   ========     ========      ========
</TABLE>

                                       55

<PAGE>

Liquidity and Commitments

         Our liquidity,  represented by cash and cash equivalents,  is a product
of our operating,  investing and financing  activities.  Our primary  sources of
funds are deposits, amortization,  prepayments and maturities of mortgage-backed
securities and outstanding loans,  maturities of investment securities and funds
provided  from  operations.  In addition,  we invest  excess funds in short-term
interest-earning  assets such as overnight  deposits or U.S. agency  securities,
which provide liquidity to meet lending  requirements.  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,  general interest rates,  economic  conditions and competition
greatly  influence  deposit flows and  prepayments on loans and  mortgage-backed
securities.

         The Bank is required to have enough  investments that qualify as liquid
assets in order to maintain  sufficient  liquidity  to ensure a safe  operation.
Liquidity may increase or decrease  depending upon the availability of funds and
comparative yields on investments in relation to the return on loans. We attempt
to maintain adequate but not excessive  liquidity,  and liquidity  management is
both a daily and long-term function of business management.

         We review cash flow  projections  regularly and update them in order to
maintain  liquid assets at levels  believed to meet the  requirements  of normal
operations,  including  loan  commitments  and potential  deposit  outflows from
maturing certificates of deposit and savings withdrawals.  At June 30, 2006, the
Bank  had   outstanding   commitments  to  originate  loans  of  $44.4  million,
construction  loans in process of $11.4  million  and unused  lines of credit of
$25.5 million.

         Certificates  of deposit  increased  during the quarter  ended June 30,
2005,  due to a  promotional  short-term  rate  offered  by the Bank.  Deposits,
primarily certificates of deposit, decreased in the quarters ended September 30,
2005 and December  31, 2005 as the Bank  intentionally  slowed  increases in the
rates it pays on deposits  relative to the pace of rising market interest rates.
Certificates of deposit continued to decrease, as well as core deposits,  during
the quarter ended March 31, 2006.  Management's goal to slow the increase in the
cost of funds was not sustainable. In the quarter ended March 31, 2006, the Bank
introduced several deposit products designed to build core deposits and adjusted
interest rates on  certificates of deposit to stabilize their rate of attrition.
During the quarter ended June 30, 2006, management introduced  promotional rates
for terms of five, nine and 13 months to retain and attract new  certificates of
deposit. Certificates of deposit scheduled to mature in one year or less at June
30, 2006, totaled $658.2 million.

         While deposits are the Bank's  primary  source of funds,  the Bank also
generates  cash through  borrowings  from the Federal Home Loan Bank of New York
(the  "FHLB").  At June 30,  2006,  advances  from the  FHLB  amounted  to $61.1
million.  The Bank has the  capacity to borrow  additional  funds from the FHLB,
through  an  overnight  line of  credit  or by taking  additional  long-term  or
short-term  advances.  Because of  continued  strong loan  demand and  continued
deposit  outflows,  the Bank began  utilizing the FHLB  overnight line of credit
during the quarter  ended March 31,  2006.  Management  used  proceeds  from the
restructuring of the securities portfolio in February 2006 to repay the borrowed
money. No further borrowing occurred during the year ended June 30, 2006, due to
adequate liquidity.

         As noted above,  loan  prepayments  are greatly  influenced  by general
interest rates. At June 30, 2006, 79.6% 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, 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.

                                       56

<PAGE>

         The  following  table   discloses  our   contractual   obligations  and
commitments as of June 30, 2006.

<TABLE>
<CAPTION>
                                                                Less Than                                  After
                                                       Total      1 Year      1-3 Years    4-5 Years     5 Years
                                                    ---------   ---------     ---------    ---------     -------
                                                                          (In thousands)
<S>                                                 <C>         <C>          <C>           <C>         <C>
Operating lease obligations................          $  1,728    $    271     $    443      $   373     $    641
Certificates of deposit....................           883,098     658,218      200,090       24,701           89
Federal Home Loan Bank advances............            61,105       5,618       45,487       10,000            -
                                                     --------    --------     --------      -------     --------
    Total..................................          $945,931    $664,107     $246,020      $35,074     $    730
                                                     ========    ========     ========      =======     ========
</TABLE>

<TABLE>
<CAPTION>
                                                        Total
                                                      Amounts   Less Than                                   Over
                                                    Committed     1 Year      1-3 Years    4-5 Years     5 Years
                                                    ---------   ---------     ---------    ---------     -------
                                                                          (In thousands)
<S>                                                 <C>         <C>          <C>           <C>         <C>
Undisbursed funds from approved lines of
   credit(1)...............................           $25,556     $   534       $    -     $     -       $25,022
Construction loans in process..............            11,368       8,395        2,973           -             -
Other commitments to extend credit(1)......            44,424      44,424            -           -             -
                                                      -------     -------       ------     -------       -------
    Total..................................           $81,348     $53,353       $2,973     $     -       $25,022
                                                      =======     =======       ======     =======       =======
</TABLE>

-------------------
(1)  Represents amounts committed to customers.


         Our  material  capital  expenditure  plans  relate to  renovations  and
significant  improvements to six branch offices,  which includes the replacement
of  one  office  location  with a new  building.  We  expect  to  complete  such
renovations, improvements and construction by the end of calendar year 2007, and
we anticipate approximately $3.6 million in funds will be required for the plans
related to these six offices.  Furthermore,  in December of 2004,  we acquired a
3.7 acre parcel of land in West Caldwell,  New Jersey.  We intend to construct a
branch  office at this  location and  subdivide  and lease to third  parties the
portion of land not used for the branch building.  Engineering  studies continue
at  this  location,  while  we  attempt  to  develop  a plan  acceptable  to the
municipality.

         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.

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, 2006, we had no significant  off-balance  sheet commitments to purchase
securities.  Our significant purchase commitments as of June 30, 2006 related to
capital   expenditure   plans  consisted  of  anticipated   post-June  30,  2006
expenditures  of  approximately  $281,000  connection  with  the  completion  of
renovations of existing branches in Old Tappan and Northvale, 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

                                       57

<PAGE>

commitments   and  conditional   obligations  as  we  do  for   on-balance-sheet
instruments.  At June 30, 2006, the total approved loan origination  commitments
outstanding amounted to $44.4 million and commitments to purchase  participation
interests  in loans  totaled $0. At the same date,  unused  lines of credit were
$25.5 million and construction  loans in process were $11.4 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,
2006, see Note 16 to consolidated  financial statements contained in this Annual
Report on Form 10-K.

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,
2006,  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, 2006 were as follows:  core capital 19.41%; Tier I risk-based
capital 48.19%;  and total  risk-based  capital 48.90%.  The regulatory  capital
requirements  to be  considered  well  capitalized  are  5.0%,  6.0% and  10.0%,
respectively.  For additional  information  regarding regulatory capital at June
30, 2006, see Note 14 to  consolidated  financial  statements  contained in this
Annual Report on Form 10-K.

Impact of Inflation

         The financial  statements  included in this document have been prepared
in accordance with accounting principles generally accepted in the United States
of America.  These principles  require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.

         Our primary assets and liabilities are monetary in nature. As a result,
interest  rates  have a more  significant  impact  on our  performance  than the
effects  of  general  levels  of  inflation.  Interest  rates,  however,  do not
necessarily  move in the same  direction or with the same magnitude as the price
of goods and services,  since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities of our assets and
liabilities are critical to the maintenance of acceptable performance levels.

         The principal effect of inflation on earnings,  as distinct from levels
of interest rates, is in the area of non-interest expense. Expense items such as
employee  compensation,  employee benefits and occupancy and equipment costs may
be  subject to  increases  as a result of  inflation.  An  additional  effect of
inflation  is the  possible  increase  in the  dollar  value  of the  collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which  properties  securing our loans have appreciated in dollar value due to
inflation.

Recent Accounting Pronouncements

         Management  believes that there were no significant  recent  accounting
pronouncements requiring disclosure at June 30, 2006.

                                       58

<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------

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, 2006,  82.1% of our loans
with  contractual  maturities  of  greater  than  one year  had  fixed  rates of
interest, and 74.4% of our total loans had contractual maturities of ten or more
years. At June 30, 2006, we held $690.0 million of  mortgage-backed  securities,
representing  34.4% of our assets. We invest generally in fixed-rate  securities
and 97.0% of our  mortgage-backed  securities  at June 30, 2006 had  contractual
maturities of greater than ten 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 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 short term liquidity  position;  loan and deposit  pricing and production
volumes and alternative  funding sources;  current

                                       59

<PAGE>

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, 2006.  The Office of Thrift
Supervision,  based on  information  provided by Kearny  Federal  Savings  Bank,
calculated the net portfolio values shown in this table.

                                        At June 30, 2006
              ------------------------------------------------------------------
                                                  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        274,160     -135,558        -33%         15.39%       -581 bp
+200 bp        318,540      -91,178        -22%         17.40%       -380 bp
+100 bp        364,082      -45,637        -11%         19.35%       -185 bp
   0 bp        409,718                                  21.20%
-100 bp        451,685       41,966        +10%         22.80%       +160 bp
-200 bp        482,117       72,398        +18%         23.88%       +268 bp

----------
(1)  The-300bp  scenario is not shown due to the low  prevailing  interest  rate
     environment.

         This analysis also  indicated that as of June 30, 2006 an immediate and
permanent  2.00% increase in interest rates would cause an  approximately  6.41%
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 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 quantitative  interest rate
analysis presented above indicates that a rapid increase in interest rates would
adversely affect our net interest margin and earnings.

Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

         The Company's financial  statements are contained in this Annual Report
on Form 10-K immediately following Item 15.

                                       60

<PAGE>

Item 9.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
--------------------------------------------------------------------------------
         Financial Disclosure
         --------------------

         There were no disagreements  or reportable  events as described in Item
304 of  Regulation  S-K in connection  with the merger of the  Company's  former
independent auditors,  Radics & Co., LLC, into the Company's current independent
auditors, Beard Miller Company LLP.

Item 9A.  Controls and Procedures
---------------------------------

(a)      Disclosure Controls and Procedures

         Based on their  evaluation  of the  Company's  disclosure  controls and
procedures  (as defined in Rules  13a-15(e) and 15d-15(e)  under the  Securities
Exchange Act of 1934 (the "Exchange Act")),  the Company's  principal  executive
officer and principal financial officer have concluded that as of the end of the
period covered by this Annual Report on Form 10-K such  disclosure  controls and
procedures are effective to ensure that information  required to be disclosed by
the  Company  in  reports  that it files or submits  under the  Exchange  Act is
recorded,  processed,  summarized and reported within the time periods specified
in Securities and Exchange  Commission  rules and forms and is  accumulated  and
communicated to the Company's management,  including the principal executive and
principal  financial officer, as appropriate to allow timely decisions regarding
required disclosures.

(b)      Internal Control over Financial Reporting

         1.  Management's  Annual  Report on  Internal  Control  Over  Financial
Reporting.

         Management's  report on the Company's  internal  control over financial
reporting  appears in the Company's  financial  statements that are contained in
this Annual Report on Form 10-K  immediately  following  Item 15. Such report is
incorporated herein by reference.

         2. Attestation Report of Independent Public Accounting Firm.

         The  attestation  report of Beard  Miller  Company LLP on  management's
assessment of the Company's internal control over financial reporting appears in
the Company's  financial  statements that are contained in this Annual Report on
Form 10-K immediately  following Item 15. Such report is incorporated  herein by
reference.

         3. Changes in Internal Control Over Financial Reporting.

         During the last quarter of the year under  report,  there was no change
in the Company's  internal control over financial  reporting that has materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.

Item 9B.  Other Information
---------------------------

         None.

                                       61

<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

         The  information  that  appears  under  the  headings   "Section  16(a)
Beneficial Ownership Reporting Compliance" and "Information  Regarding Directors
and Executive  Officers" in the Registrant's  definitive proxy statement for the
Registrant's  2006 Annual  Meeting of  Stockholders  (the "Proxy  Statement") is
incorporated herein by reference.

         The Company has adopted a code of ethics that applies to its  principal
executive officer, principal financial officer and principal accounting officer.
A copy of the code of ethics is  available  without  charge upon  request to the
Corporate Secretary,  Kearny Financial Corp., 120 Passaic Avenue, Fairfield, New
Jersey 07004.

Item 11.  Executive Compensation
--------------------------------

         The information that appears under the headings "Board of Directors and
Executive Officer Compensation" and "Compensation  Committee Report on Executive
Compensation" in the Proxy Statement is incorporated herein by reference.

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
--------------------------------------------------------------------------------
          Related Stockholder Matters
          ---------------------------

         (a)       Security Ownership of Certain Beneficial Owners.  Information
                   required by this item is incorporated  herein by reference to
                   the  section  captioned  "Voting   Securities  and  Principal
                   Holders Thereof" in the Proxy Statement.

         (b)       Security  Ownership of  Management.  Information  required by
                   this item is incorporated  herein by reference to the section
                   captioned  "Information  Regarding  Directors  and  Executive
                   Officers" in the Proxy Statement.

         (c)       Changes in Control.  Management  of the  Company  knows of no
                   arrangements,   including   any   pledge  by  any  person  of
                   securities  of the Company,  the  operation of which may at a
                   subsequent  date  result  in  a  change  in  control  of  the
                   registrant.

         (d)       Securities  Authorized for Issuance Under Equity Compensation
                   Plans.  Set forth  below is  information  as of June 30, 2006
                   with  respect  to  compensation   plans  under  which  equity
                   securities of the Registrant are authorized for issuance.

                                       62

<PAGE>

<TABLE>
<CAPTION>
                                                         Equity Compensation Plan Information
                                                         ------------------------------------

                                           (A)                         (B)                      (C)
                                                                                           Number of Securities
                                  Number of Securities                                    Remaining Available for
                                    to be Issued Upon            Weighted-average          Future Issuance Under
                                       Exercise of               Exercise Price of          Equity Compensation
                                  Outstanding Options,          Outstanding Options,     Plans (Excluding Securities
                                   Warrants and Rights          Warrants and Rights       Reflected in Column (A))
                                   -------------------          -------------------       ------------------------
<S>                                    <C>                      <C>                            <C>
Equity compensation plans
   approved by shareholders:
2005 Stock Compensation
    and Incentive Plan (1)............    3,374,240                $  12.34                       277,856
Equity compensation plans not
   approved by stockholders:
   None...............................            -                       -                             -
                                        -----------                --------                    ----------
          Total.......................    3,374,240                $  12.34                       277,856
                                        ===========                ========                    ==========
</TABLE>

-----------------
(1)  In addition to 3,374,240 options outstanding under this plan as of June 30,
     2006,  restricted stock awards of 1,337,696  shares were outstanding  under
     this plan as of June 30,  2006.  Such  awards are earned at the rate of 20%
     one year  after the date of the grant and 20%  annually  thereafter.  As of
     June 30, 2006, there were 189,897 shares remaining available for restricted
     share  awards under this plan,  and these shares are included  under column
     (C) as securities  remaining  available for future issuance under this plan
     along with 87,959 options remaining available for award.

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The   information   that   appears   under  the   subheading   "Certain
Relationships and Related Transactions" under the heading "Information Regarding
Directors and Executive  Officers" in the Proxy Statement is incorporated herein
by reference.

Item 14.  Principal Accountant Fees and Services
------------------------------------------------

         The  information  relating  to this  item  is  incorporated  herein  by
reference to the information contained under the section captioned  "Information
Regarding Independent Auditor" in the Proxy Statement.

                                     PART IV

Item 15.  Exhibits and Financial Statement Schedules
----------------------------------------------------

         (1) The following  financial  statements and the independent  auditors'
report appear in this Annual Report on Form 10-K immediately after this Item 15:

Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of
    June 30, 2006 and 2005
Consolidated Statements of Income For the Years Ended
    June 30, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders' Equity
    for the Years Ended June 30, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended
    June 30, 2006, 2005 and 2004
Notes to Consolidated Financial Statements

                                       63

<PAGE>


         (2)  All  schedules  are  omitted  because  they  are not  required  or
applicable,  or the required information is shown in the consolidated  financial
statements or the notes thereto.

         (3) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
<S>               <C>   <C>
                  3.1      Charter of Kearny Financial Corp.*
                  3.2      Bylaws of Kearny Financial Corp.*
                  4        Stock Certificate of Kearny Financial Corp*
                  10.1     Employment Agreement with John N. Hopkins*+
                  10.2     Employment Agreement with Allan Beardslee*+
                  10.3     Employment Agreement with Albert E. Gossweiler*+
                  10.4     Employment Agreement with Sharon Jones*+
                  10.5     Employment Agreement with William C. Ledgerwood*+
                  10.6     Employment Agreement with Erika Sacher Parisi*+
                  10.7     Employment Agreement with Patrick M. Joyce*+
                  10.8     Employment Agreement with Craig Montanaro**+
                  10.9     Directors Consultation and Retirement Plan*+
                  10.10    Benefit Equalization Plan*+
                  10.11    Benefit Equalization Plan for Employee Stock Ownership Plan*+
                  10.12    Stock Option Plan ***+
                  10.13    Restricted Stock Plan ***+
                  10.14    Kearny Federal Savings Bank Director Life Insurance Agreement****+
                  10.15    Kearny Federal Savings Bank Executive Life Insurance Agreement****+
                  11       Statement regarding computation of earnings per share
                  21       Subsidiaries of the Registrant (see "Item 1. Business - Subsidiary Activity" herein)
                  23       Consent of Beard Miller Company LLP
                  31       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                  32       Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

         ----------
         *        Incorporated by reference to the exhibits to the Registrant's Registration Statement on Form S-1
                  (File No. 333-118815).
         **       Incorporated by reference to the exhibit to the Registrant's Form 8-K filed on July 21, 2005.
                  (File No. 000-51093).
         ***      Incorporated by reference to the appendices to the Registrant's definitive proxy statement for the
                  2005 Annual Meeting filed on September 30, 2005 (File No. 000-51093).
         ****     Incorporated by reference to the exhibits to the Registrant's Form 8-K filed on August 18, 2005.
                  (File No. 000-51093).
         +        Management or compensatory plan required to be filed as an exhibit.
</TABLE>

                                       64

<PAGE>
September 1, 2006



Beard Miller Company LLP
55 US Highway 46 East
PO Box 676
Pine Brook, NJ 07058-0676

         Management Report on Internal Control over Financial Reporting
         --------------------------------------------------------------


The management of Kearny  Financial  Corp. and  Subsidiaries  (collectively  the
"Company") is responsible for  establishing  and maintaining  adequate  internal
control over financial  reporting.  The Company's  internal  control system is a
process designed to provide reasonable  assurance to the management and board of
directors   regarding  the  preparation  and  fair   presentation  of  published
consolidated financial statements.

Our internal control over financial  reporting  includes policies and procedures
that  pertain  to  the  maintenance  of  records  that,  in  reasonable  detail,
accurately and fairly reflect  transactions and dispositions of assets;  provide
reasonable  assurances  that  transactions  are  recorded as necessary to permit
preparation  of  consolidated  financial  statements  in  accordance  with  U.S.
generally accepted accounting principles, and that receipts and expenditures are
being  made  only  in  accordance  with  authorizations  of  management  and the
directors of the Company;  and provide reasonable assurance regarding prevention
or timely  detection of  unauthorized  acquisition,  use or  disposition  of the
Company's assets that could have a material effect on our consolidated financial
statements.

All  internal  control  systems,  no matter  how well  designed,  have  inherent
limitations.  Therefore,  even those  systems  determined  to be  effective  can
provide  only  reasonable  assurance  with  respect  to  consolidated  financial
statement preparation and presentation.  Also,  projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to changes in conditions,  or that the degree of compliance  with
the policies or procedures may deteriorate.

The Company's  management  assessed the  effectiveness  of internal control over
financial reporting as of June 30, 2006. In making this assessment,  we used the
criteria set forth by The Committee of Sponsoring  Organizations of the Treadway
Commission in Internal Control-Integrated Framework. Based on our assessment, we
believe that, as of June 30, 2006, the Company's internal control over financial
reporting is effective based on those criteria.

<PAGE>

Page 2
Beard Miller Company LLP
Management Report
September 1, 2006


The Company's  independent  registered  public  accounting firm that audited the
consolidated  financial  statements has issued an audit report on our assessment
of,  and the  effective  operation  of,  the  Company's  internal  control  over
financial reporting as of June 30, 2006.

/s/John N. Hopkins
-------------------------------------
John N. Hopkins
President and Chief Executive Officer


/s/Albert E. Gossweiler
-------------------------------------
Albert E. Gossweiler
Senior Vice President and Chief Financial Officer



<PAGE>

[BMC LOGO]



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
Kearny Financial Corp.

            We  have   audited   management's   assessment,   included   in  the
accompanying  Management  Report on Internal  Control Over Financial  Reporting,
that  Kearny  Financial  Corp.  (the  "Company")  and  Subsidiaries   maintained
effective  internal control over financial  reporting as of June 30, 2006, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee  of  Sponsoring  Organizations  of the Treadway  Commission  (the COSO
criteria).  Management of the Company is responsible for  maintaining  effective
internal  control  over  financial  reporting  and  for  its  assessment  of the
effectiveness of internal control over financial  reporting.  Our responsibility
is to  express  an  opinion  on  management's  assessment  and an opinion on the
effectiveness of the Company's  internal control over financial  reporting based
on our audit.

            We  conducted  our audit in  accordance  with the  standards  of the
Public Company  Accounting  Oversight  Board (United  States).  Those  standards
require that we plan and perform the audit to obtain reasonable  assurance about
whether  effective  internal control over financial  reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting,  evaluating management's  assessment,  testing
and evaluating the design and operating  effectiveness of internal control,  and
performing   such  other   procedures   as  we   considered   necessary  in  the
circumstances.  We believe that our audit  provides a  reasonable  basis for our
opinion.

            A company's  internal control over financial  reporting is a process
designed to provide reasonable  assurance regarding the reliability of financial
reporting and the preparation of financial  statements for external  purposes in
accordance with generally accepted accounting  principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the  transactions  and dispositions of the assets of the company;
(2) provide reasonable  assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

<PAGE>

To the Board of Directors and Stockholders                                    2.
Kearny Financial Corp.



            Because of its inherent limitations, internal control over financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

            In our opinion,  management's assessment that Kearny Financial Corp.
and Subsidiaries  maintained effective internal control over financial reporting
as of June 30, 2006, is fairly stated,  in all material  respects,  based on the
COSO criteria.  Also, in our opinion,  Kearny  Financial Corp. and  Subsidiaries
maintained, in all material respects,  effective internal control over financial
reporting as of June 30, 2006, based on the COSO criteria.

            We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated  statements
of  financial  condition  of the Company as of June 30,  2006 and 2005,  and the
related consolidated  statements of income, changes in stockholders' equity, and
cash flows of the Company for each of the years in the  three-year  period ended
June 30, 2006, and our report dated September 1, 2006,  expressed an unqualified
opinion.


                                        /s/Beard Miller Company, LLP

Beard Miller Company, LLP
Pine Brook, New Jersey
September 1, 2006

<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
Kearny Financial Corp.
Kearny, New Jersey


         We have audited the accompanying  consolidated  statements of financial
condition of Kearny  Financial Corp. (the "Company") and Subsidiaries as of June
30, 2006 and 2005, and the related consolidated statements of income, changes in
stockholders'  equity  and cash  flows for each of the  years in the  three-year
period ended June 30, 2006.  These  consolidated  financial  statements  are the
responsibility of the Company's 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 Kearny Financial Corp. and Subsidiaries as of
June 30, 2006 and 2005,  and the  consolidated  results of their  operations and
cash flows for each of the years in the  three-year  period ended June 30, 2006,
in conformity with accounting principles generally accepted in the United States
of America.

         We also have audited,  in  accordance  with the standards of the Public
Company Accounting  Oversight Board (United States), the effectiveness of Kearny
Financial Corp.'s internal control over financial reporting as of June 30, 2006,
based on the criteria  established  in Internal  Control - Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
(COSO), and our report dated September 1, 2006 expressed an unqualified  opinion
on management's  assessment of internal control over financial  reporting and an
unqualified  opinion on the effectiveness of the Company's internal control over
financial reporting.





                                                    /s/ Beard Miller Company LLP




Beard Miller Company LLP
Pine Brook, New Jersey
September 1, 2006

                                      F-1

<PAGE>
<TABLE>
<CAPTION>
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                                                                                          June 30,
                                                                                                     2006          2005
                                                                                                 -----------    -----------
                                                                                                 (In Thousands, Except Share
                                                                                                     and Per Share Data)
                                     ASSETS
<S>                                                                                   <C>                  <C>
   Cash and amounts due from depository institutions                                             $    22,563    $    16,683
   Interest-bearing deposits in other banks                                                          207,716        123,182
                                                                                                 -----------    -----------

       Cash and Cash Equivalents                                                                     230,279        139,865

   Securities available for sale (amortized cost 2006 $18,550; 2005 $25,153)                          18,346         33,591
   Securities held to maturity (estimated fair value 2006 $204,447; 2005 $469,221)                   209,048        470,098
   Loans receivable, including net deferred loan costs 2006 $1,087; 2005 $815                        709,064        563,434
      Less allowance for loan losses                                                                  (5,451)        (5,416)
                                                                                                 -----------    -----------

       Net Loans Receivable                                                                          703,613        558,018

   Mortgage-backed securities held to maturity (estimated fair value 2006 $670,329;
      2005 $762,730)                                                                                 689,962        758,121
   Premises and equipment                                                                             35,941         34,977
   Federal Home Loan Bank of New York ("FHLB") stock                                                   5,406         11,361
   Interest receivable                                                                                 8,836         10,430
   Goodwill                                                                                           82,263         82,263
   Bank owned life insurance                                                                          14,628          3,981
   Other assets                                                                                        9,203          4,300
                                                                                                 -----------    -----------

       Total Assets                                                                              $ 2,007,525    $ 2,107,005
                                                                                                 ===========    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES

   Deposits:
      Non-interest bearing                                                                       $    61,080    $    56,142
      Interest-bearing                                                                             1,382,658      1,472,635
                                                                                                 -----------    -----------

       Total Deposits                                                                              1,443,738      1,528,777

   Advances from FHLB                                                                                 61,105         61,687
   Advance payments by borrowers for taxes                                                             5,232          4,627
   Other liabilities                                                                                   6,564          6,432
                                                                                                 -----------    -----------

       Total Liabilities                                                                           1,516,639      1,601,523
                                                                                                 -----------    -----------

STOCKHOLDERS' EQUITY
   Preferred stock, $0.10 par value; 25,000,000 shares authorized; none issued and outstanding             -              -
   Common stock, $0.10 par value; 75,000,000 shares authorized; 2006 72,737,500 shares and
      2005 72,737,500 shares issued and outstanding                                                    7,274          7,274
   Paid-in capital                                                                                   192,534        207,838
   Retained earnings                                                                                 306,728        301,857
   Unearned Employee Stock Ownership Plan shares                                                     (15,517)       (16,972)
   Accumulated other comprehensive income (loss)                                                        (133)         5,485
                                                                                                 -----------    -----------

       Total Stockholders' Equity                                                                    490,886        505,482
                                                                                                 -----------    -----------

       Total Liabilities and Stockholders' Equity                                                $ 2,007,525    $ 2,107,005
                                                                                                 ===========    ===========
</TABLE>

See notes to consolidated  financial statements.
--------------------------------------------------------------------------------
                                      F-2
<PAGE>


<TABLE>
<CAPTION>
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME

                                                                Years Ended June 30,
                                                             ---------------------------
                                                               2006      2005     2004
                                                             -------   -------   -------
                                                         (In Thousands, Except Per Share Data)
----------------------------------------------------------------------------------------------
<S>                                                        <C>       <C>       <C>
INTEREST INCOME
   Loans                                                     $35,338   $29,311   $28,919
   Mortgage-backed securities                                 33,471    33,954    33,980
   Securities:
      Taxable                                                  6,554     9,632     8,724
      Tax-exempt                                               7,634     6,904     5,702
   Other interest-earning assets                               6,326     2,640     1,329
                                                             -------   -------   -------

       Total Interest Income                                  89,323    82,441    78,654
                                                             -------   -------   -------
INTEREST EXPENSE
   Deposits                                                   35,069    26,532    28,082
   Borrowings                                                  3,576     3,890     4,018
                                                             -------   -------   -------

       Total Interest Expense                                 38,645    30,422    32,100
                                                             -------   -------   -------

       Net Interest Income                                    50,678    52,019    46,554

PROVISION FOR LOAN LOSSES                                         72        68      --
                                                             -------   -------   -------

       Net Interest Income after Provision for Loan Losses    50,606    51,951    46,554
                                                             -------   -------   -------
NON-INTEREST  INCOME
   Fees and service charges                                    1,016       948       824
   Gain on sale of securities                                  1,023     7,705      --
   Miscellaneous                                               1,286       850       736
                                                             -------   -------   -------

       Total Non-Interest Income                               3,325     9,503     1,560
                                                             -------   -------   -------
NON-INTEREST EXPENSES
   Salaries and employee benefits                             25,145    20,790    16,522
   Net occupancy expense of premises                           3,282     3,163     2,523
   Equipment                                                   4,423     3,953     3,470
   Advertising                                                 1,465     1,176       861
   Federal insurance premium                                     548       554       587
   Amortization of intangible assets                             636       636       636
   Directors' compensation                                     2,099       886       827
   Merger related expenses                                      --        --         592
   Miscellaneous                                               4,448     3,704     3,454
                                                             -------   -------   -------

       Total Non-Interest Expenses                            42,046    34,862    29,472
                                                             -------   -------   -------

       Income before Income Taxes                             11,885    26,592    18,642

INCOME TAXES                                                   2,277     7,694     5,745
                                                             -------   -------   -------

       Net Income                                            $ 9,608   $18,898   $12,897
                                                             =======   =======   =======

NET INCOME PER COMMON SHARE
   Basic                                                     $  0.14   $  0.33   $  0.25
                                                             =======   =======   =======

   Diluted                                                   $  0.14   $  0.33   $  0.25
                                                             =======   =======   =======

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
   Basic                                                      70,904    57,963    50,916
                                                             =======   =======   =======

   Diluted                                                    71,100    57,963    50,916
                                                             =======   =======   =======
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
                                      F-3
<PAGE>


<TABLE>
<CAPTION>
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2006, 2005, and 2004

                                                                                                                Accumulated
                                     Common Stock                                        Unearned                  Other
                                    ---------------   Paid-In   Retained    Unearned     Incentive   Treasury  Comprehensive
                                    Shares   Amount   Capital   Earnings   ESOP Shares  Plan Shares   Stock    Income (Loss)   Total
                                    ------   ------   -------   --------   -----------  -----------   -----    -------------   -----
                                                                          (In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>  <C>      <C>        <C>         <C>             <C>      <C>         <C>      <C>
BALANCE - JUNE 30, 2003                 12   $   1    $19,066    $273,970    $   (663)       $(193)   $(4,283)     $ 7,771 $295,669
                                                                                                                           --------

   Comprehensive income:
      Net income                         -       -          -      12,897           -            -          -            -   12,897
      Unrealized gain on
      securities
        available for sale, net
      of
        deferred income tax
        expense of $1,296                -       -          -           -           -            -          -        2,275    2,275
                                                                                                                           --------
     Total Comprehensive Income                                                                                              15,172
                                                                                                                           --------
   Acquisition of West Essex
      Bancorp, Inc.                     (2)      -    (18,567)     (3,908)        663          193      4,283            -  (17,336)
                                     -----   -----   --------    --------    --------         ----    -------      ------- --------

BALANCE - JUNE 30, 2004                 10       1        499     282,959           -            -          -       10,046  293,505
                                                                                                                           --------

   Comprehensive income:
      Net income                         -       -          -      18,898           -            -          -            -   18,898
      Realized gain on securities
        available for sale, net
      of
        income tax of $2,697             -       -          -           -           -            -          -       (5,008)  (5,008)
      Unrealized gain on
      securities
        available for sale, net
      of
        deferred income tax
        expense of $240                  -       -          -           -           -            -          -          447      447
                                                                                                                           --------
     Total Comprehensive Income                                                                                              14,337
                                                                                                                           --------

   Initial capitalization from
      establishment of mutual
      holding company                  (10)     (1)         1           -           -            -          -            -        -
   Proceeds from common stock
      offering                      72,738   7,274    207,293           -           -            -          -            -  214,567

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-4
<PAGE>

<TABLE>
<CAPTION>
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2006, 2005, and 2004

                                                                                                                Accumulated
                                     Common Stock                                        Unearned                  Other
                                    ---------------   Paid-In   Retained    Unearned     Incentive   Treasury  Comprehensive
                                    Shares   Amount   Capital   Earnings   ESOP Shares  Plan Shares   Stock    Income (Loss)   Total
                                    ------   ------   -------   --------   -----------  -----------   -----    -------------   -----
                                                                          (In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>     <C>         <C>        <C>       <C>          <C>         <C>        <C>       <C>
   Unearned ESOP shares (1,746                             $
      shares)                            -  $    -             -   $      -  $(17,457)    $    -      $     -    $     -   $(17,457)
   ESOP shares committed to be
      released (48 shares)               -       -            45          -       485          -            -          -        530
                                   -------  ------   -----------   -------- ---------     ------      -------    --------  ---------

BALANCE - JUNE 30, 2005             72,738   7,274       207,838    301,857   (16,972)         -            -      5,485    505,482
                                                                                                                           ---------

   Comprehensive income:
      Net income                         -       -             -      9,608         -          -            -          -      9,608
      Realized gain on securities
        available for sale, net
      of
        income tax of $3,095             -       -             -          -         -          -            -     (5,749)    (5,749)
      Unrealized gain on
      securities
        available for sale, net
      of
        deferred income tax
        expense of $71                   -       -             -          -         -          -            -        131        131
                                                                                                                           --------
     Total Comprehensive Income                                                                                               3,990
                                                                                                                           --------
   Refund of common stock
      offering expense                   -       -             3          -         -          -            -          -          3
   ESOP shares committed to be
      released (144 shares)              -       -           412          -     1,455          -            -          -      1,867
   Stock option transactions             -       -         1,211          -         -          -            -          -      1,211
   Treasury stock purchases           (178)      -             -          -         -          -       (2,268)         -     (2,268)
   Treasury stock reissued to
      restricted stock plan            178       -        (2,268)         -         -          -        2,268          -          -
   Restricted stock plan shares
      purchased (1,194 shares)           -       -       (16,673)         -         -          -            -          -    (16,673)
   Restricted stock plan shares
      earned (164 shares)                -       -         2,011          -         -          -            -          -      2,011
   Cash dividends declared
      ($0.24/share)                      -       -             -     (4,737)        -          -            -          -     (4,737)
                                   -------  ------   -----------   --------  --------     ------      -------    -------   --------

BALANCE - JUNE 30, 2006             72,738  $7,274      $192,534   $306,728  $(15,517)    $    -      $     -    $  (133)  $490,886
                                   =======  ======   ===========   ========  ========     ======      =======    =======   ========
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
                                      F-5
<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                               Years Ended June 30,
                                                                       -----------------------------------
                                                                          2006         2005         2004
                                                                       ---------    ---------    ---------
                                                                                 (In Thousands)
<S>                                                                  <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                          $   9,608    $  18,898    $  12,897
   Adjustments to reconcile net income to net cash provided by
      operating activities:
         Depreciation and amortization of premises and equipment           1,898        1,549        1,314
         Net amortization of premiums, discounts and loan fees
              and costs                                                    1,033        1,035        2,679
         Deferred income taxes                                                (9)         343          556
         Amortization of intangible assets                                   636          636          636
         Provision for loan losses                                            72           68            -
         Realized gains on sale of securities available for sale          (8,844)      (7,705)           -
         Realized loss on sale of securities held to maturity              7,821            -            -
         (Increase) in cash surrender value of bank owned life
              insurance                                                     (439)        (145)        (149)
         ESOP stock option plan and restricted stock plan expenses         5,089          530            -
         Realized loss on sale of real estate owned                           35            -            -
         (Increase) decrease in interest receivable                        1,594         (569)      (1,381)
         (Increase) decrease in other assets                              (2,964)       4,006          132
         Increase (decrease) in interest payable                              53          (57)        (376)
         Increase (decrease) in other liabilities                           (446)       1,045       (1,705)
                                                                       ---------    ---------    ---------

         Net Cash Provided by Operating Activities                        15,137       19,634       14,603
                                                                       ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of securities available for sale                               (298)        (202)        (152)
   Proceeds from sale of securities available for sale                    15,750        8,866            -
   Proceeds from sale of securities held to maturity                     241,206            -            -
   Purchases of securities held to maturity                               (4,000)     (54,387)    (263,187)
   Proceeds from calls and maturities of securities held to maturity      11,199       15,387      111,189
   Proceeds from repayments of securities held to maturity                 4,836        4,797        3,612
   Purchase of loans                                                     (24,434)      (1,515)     (15,024)
   Net (increase) decrease in loans receivable                          (121,373)     (50,913)      16,922
   Proceeds from sale of real estate owned                                    65            -            -
   Purchases of mortgage-backed securities held to maturity             (111,670)    (163,607)    (425,124)
   Principal repayments on mortgage-backed securities held to
      maturity                                                           178,918      175,911      334,016
   Additions to premises and equipment                                    (2,862)      (9,877)      (8,079)
   Purchase of FHLB stock                                                 (3,322)           -         (592)
   Redemption of FHLB stock                                                9,277           31        2,987
   Purchase of bank owned life insurance                                 (10,208)           -            -
                                                                       ---------    ---------    ---------

         Net Cash Provided by (Used in) Investing Activities             183,084      (75,509)    (243,432)
                                                                       ---------    ---------    ---------

See notes to consolidated financial statements
-----------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-6
<PAGE>
<TABLE>
<CAPTION>
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                          Years Ended June 30,
                                                                                   -----------------------------------
                                                                                     2006         2005         2004
                                                                                   ---------    ---------    ---------
                                                                                              (In Thousands)
<S>                                                                              <C>          <C>          <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Net decrease in deposits                                                        $ (85,097)   $  (8,714)   $ (75,836)
   Repayment of FHLB advances                                                           (582)      (2,547)     (11,515)
   Net change in short-term borrowings from FHLB                                           -      (30,000)      30,000
   Increase in advance payments by borrowers for taxes                                   605          403           11
   Proceeds from issuance of common stock of Kearny
      Financial Corp.                                                                      -      197,110            -
   Refund of common stock offering expense                                                 3            -            -
   Dividends paid to minority stockholders of Kearny Financial Corp.                  (3,795)           -            -
   Purchase of common stock of Kearny Financial Corp. for treasury                    (2,268)           -            -
   Purchase of common stock of Kearny Financial Corp. for restricted
      stock plan                                                                     (16,673)           -            -
                                                                                   ---------    ---------    ---------

         Net Cash Provided by (Used in) Financing Activities                        (107,807)     156,252      (57,340)
                                                                                   ---------    ---------    ---------

         Net Increase (Decrease) in Cash and Cash Equivalents                         90,414      100,377     (286,169)

CASH AND CASH EQUIVALENTS - BEGINNING                                                139,865       39,488      325,657
                                                                                   ---------    ---------    ---------

CASH AND CASH EQUIVALENTS - ENDING                                                 $ 230,279    $ 139,865    $  39,488
                                                                                   =========    =========    =========

SUPPLEMENTAL  DISCLOSURES  OF CASH FLOWS  INFORMATION  Cash paid during the year
   for:
      Income taxes, net of refunds                                                 $   6,154    $   2,090    $   5,956
                                                                                   =========    =========    =========

      Interest                                                                     $  38,592    $  30,479    $  32,476
                                                                                   =========    =========    =========

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
   Cash dividend declared                                                          $     942    $       -    $       -
                                                                                   =========    =========    =========

   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
----------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-7

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidated Financial Statement Presentation

     The consolidated  financial statements include the accounts of the Company,
     its wholly-owned subsidiaries, Kearny Federal Savings Bank (the "Bank") and
     Kearny   Financial   Securities,   Inc.,   and  the   Bank's   wholly-owned
     subsidiaries,  KFS Financial  Services,  Inc. and Kearny Federal Investment
     Corp.,  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.

Business of the Company and Subsidiaries

     The Company's  primary business is the ownership and operation of the Bank.
     The Bank is principally engaged in the business of attracting deposits from
     the  general  public at its 26  locations  in New  Jersey  and using  these
     deposits,  together with other funds,  to invest in securities  and to make
     loans  collateralized  by residential  and commercial real estate and, to a
     lesser extent,  consumer  loans.  The Company's  other  subsidiary,  Kearny
     Financial Securities,  Inc., was organized in April 2005 under Delaware law
     as  a  Delaware   Investment  Company  primarily  to  hold  investment  and
     mortgage-backed   securities.   The  Bank's   subsidiary,   Kearny  Federal
     Investment  Corp.  was organized in July 2004 under New Jersey law as a New
     Jersey Investment Company primarily to hold investment and  mortgage-backed
     securities.

Cash and Cash Equivalents

     Cash and cash  equivalents  include  cash and amounts  due from  depository
     institutions  and  interest-bearing  deposits  in  other  banks,  all  with
     original maturities of three months or less.

--------------------------------------------------------------------------------
                                      F-8


<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Securities

     Investments in debt securities that we have the positive intent and ability
     to hold to maturity  are  classified  as  held-to-maturity  securities  and
     reported at amortized cost. Debt and equity  securities that are bought and
     held  principally  for the  purpose  of  selling  them in the near term are
     classified  as  trading   securities  and  reported  at  fair  value,  with
     unrealized  holding gains and losses included in earnings.  Debt and equity
     securities  not  classified as trading  securities  or as  held-to-maturity
     securities are classified as available for sale  securities and reported at
     fair value, with unrealized holding gains or losses, net of deferred income
     taxes,  reported in the accumulated other comprehensive income component of
     stockholders' equity.

     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 our ability and intent to hold  securities for a
     period of time sufficient to allow for any  anticipated  recovery in market
     value. If a security is determined to be  other-than-temporarily  impaired,
     an impairment loss is charged to 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

     Financial  instruments  which  potentially  subject  the  Company  and  its
     subsidiaries  to  concentrations  of credit  risk  consist of cash and cash
     equivalents,  investment and mortgage-backed securities and loans. Cash and
     cash  equivalents  include  amounts  placed  with  highly  rated  financial
     institutions.  Investment  securities include securities backed by the U.S.
     Government and other highly rated instruments.  The Bank's lending activity
     is primarily  concentrated  in loans  collateralized  by real estate in the
     State of New Jersey.  As a result,  credit risk is broadly dependent on the
     real estate market and general economic conditions in the state.

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 collectibility no longer exist.

--------------------------------------------------------------------------------
                                      F-9

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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:

                                                           Years
                                                           -----

                     Building and improvements            10 - 50
                     Furnishings and equipment            4 - 20
                     Leasehold improvements          Shorter of useful
                                                    lives or lease term

     Construction in progress primarily represents facilities under construction
     for future use in our  business  and includes all costs to acquire land and
     construct   buildings,   as  well  as  capitalized   interest   during  the
     construction period.  Interest is capitalized at the 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-10

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Federal Home Loan Bank Stock

     Federal law  requires a member  institution  of the Federal  Home Loan Bank
     system to hold  restricted  stock of its  district  Federal  Home Loan Bank
     according to a predetermined  formula.  The restricted  stock is carried at
     cost.

Goodwill and Other Intangible Assets

     Goodwill and other intangible assets principally  represent the excess cost
     over the fair  value of the net  assets  of the  institutions  acquired  in
     purchase transactions. Goodwill is evaluated annually by reporting unit and
     an impairment loss recorded if indicated.  The impairment test is performed
     in two phases. The first step of the goodwill  impairment test compares the
     fair  value of the  reporting  unit  with its  carrying  amount,  including
     goodwill.  If the fair value of the  reporting  unit  exceeds its  carrying
     amount, goodwill of the reporting unit is considered not impaired; however,
     if the carrying  amount of the  reporting  unit exceeds its fair value,  an
     additional 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, 2006, 2005
     or 2004. 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.

Bank Owned Life Insurance

     Bank owned life insurance is accounted for using the cash  surrender  value
     method and is recorded at its realizable value. The change in the net asset
     value is recorded as a component of non-interest income.

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 our 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.

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.

--------------------------------------------------------------------------------
                                      F-11

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Net Income per Common Share

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

     The 10,000  shares  issued to Kearny MHC in  connection  with the Company's
     reorganization  in 2001 were "replaced" with 50,916,250  shares,  or 70% of
     the  shares  issued  in  the  Company's   initial  public  offering.   This
     transaction  is analogous to a stock split or significant  stock  dividend,
     therefore,  net  income  per  common  share  for  those  shares  have  been
     retroactively restated for all periods presented.

Reclassification

     Certain  amounts as of and for the years  ended June 30, 2005 and 2004 have
     been reclassified to conform to the current year's presentation.


NOTE 2 - BUSINESS COMBINATIONS

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 and West Essex,
and the Bank and WESB,  were 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, which included legal, professional and filing
fees and other expenses, were $592,000 for the year ended June 30, 2004.


NOTE 3 - 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  subsequently  sold common
stock  representing a minority ownership of the estimated pro forma market value
of the Company to eligible  depositors  of the Bank.  On February 23, 2005,  the
Company  completed  the  minority  stock  offering  in which it sold  21,821,250
shares,  valued at $10.00 per share,  representing 30% of its outstanding common
stock.  Kearny MHC (the "MHC") owns the remaining 70% of the outstanding  common
stock, or 50,916,250  shares.  The MHC is a  federally-chartered  mutual holding
company  organized on March 30, 2001, and is subject to regulation by the Office
of Thrift Supervision.  So long as the MHC is in existence,  it will continue to
own a majority of the  outstanding  common stock of the  Company.  The Office of
Thrift Supervision also regulates the Company and the Bank.

--------------------------------------------------------------------------------
                                      F-12

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 - STOCK OFFERING (CONTINUED)

Following  the sale of  common  stock,  all  depositors  who had  membership  or
liquidation  rights  with  respect to the Bank as of the  effective  date of the
transaction  continue to have such rights solely with respect to the MHC as long
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  have such  membership  and  liquidation  rights with respect to the
holding  company.  Borrowers of the Bank as of the date of the transaction  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  borrowings
remain outstanding.

The minority stock offering  resulted in net proceeds of $214.6  million,  after
expenses of $3.6  million.  The Company  used 50% of the net  proceeds to make a
capital  contribution  to the Bank. The Company also provided a term loan to the
Bank's  Employee  Stock  Ownership  Plan (the  "ESOP") to enable it to  purchase
1,745,700 shares of the Company's common stock for the plan.

On November 9, 2005, the Company announced that it received  regulatory approval
to begin the  purchase  of up to  1,425,655  shares or  approximately  2% of the
outstanding  shares of its common stock in open market  transactions  for use in
funding the Company's  2005 Stock  Compensation  and Incentive  Plan  previously
approved  by  stockholders.  During the year ended June 30,  2006,  the  Company
purchased  1,371,341  shares at a total cost of  $18,941,000,  or  approximately
$13.81 per share.

On July 18, 2006, the Company announced that the Board of Directors authorized a
stock repurchase plan to acquire up to 1,091,063  shares, or 5% of the Company's
outstanding  common  stock held by persons  other than  Kearny  MHC.  This stock
repurchase plan commences after the Company  completes its purchase of shares in
the open market to fund the  Company's  2005 Stock  Compensation  and  Incentive
Plan.

During the year ended June 30, 2006,  the  federally  chartered  mutual  holding
company of the Company,  Kearny MHC, waived its right, upon  non-objection  from
the Office of Thrift  Supervision,  to receive cash dividends of $9,674,000 paid
during the year.


NOTE 4 - SECURITIES AVAILABLE FOR SALE

<TABLE>
<CAPTION>
                                                                     June 30, 2006
                                                 --------------------------------------------------------
                                                                   Gross         Gross
                                                 Amortized      Unrealized     Unrealized        Carrying
                                                   Cost            Gains         Losses           Value
                                                 ---------      ----------     ----------        --------
                                                                     (In Thousands)
<S>                                            <C>             <C>             <C>             <C>
Mutual funds                                     $ 7,654         $     -         $   230         $ 7,424
Trust preferred securities due after ten years    10,896             134             108          10,922
                                                 -------         -------         -------         -------

                                                 $18,550         $   134         $   338         $18,346
                                                 =======         =======         =======         =======
</TABLE>

--------------------------------------------------------------------------------
                                      F-13

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - SECURITIES AVAILABLE FOR SALE

<TABLE>
<CAPTION>
                                                                     June 30, 2005
                                                 --------------------------------------------------------
                                                                   Gross         Gross
                                                 Amortized      Unrealized     Unrealized        Carrying
                                                   Cost            Gains         Losses           Value
                                                 ---------      ----------     ----------        --------
                                                                     (In Thousands)
<S>                                            <C>                 <C>                <C>             <C>
Common stock                                      $    128        $8,423          $  -           $ 8,551
Mutual funds                                        14,134           161           155            14,140
Trust preferred securities due after ten years      10,891           200           191            10,900
                                                  --------        -------         -----          -------

                                                   $25,153        $8,784          $346           $33,591
                                                  ========       =======         =====           =======
</TABLE>

During the years ended June 30, 2006 and 2005, proceeds from sales of securities
available  for sale totaled  $15,750,000  and  $8,866,000  and resulted in gross
gains  of  $8,844,000  and  $7,705,000,  respectively.  There  were no  sales of
securities  available  for sale during the year ended June 30, 2004. At June 30,
2006,  securities  available for sale with a carrying  value of  $9,859,000  are
callable within one year.

The age of unrealized losses and fair value of related securities  available for
sale at June 30, 2006 and 2005 were as follows:

<TABLE>
<CAPTION>
                                       Less than 12 Months              12 Months or More                  Total
                                     -----------------------        ------------------------     --------------------------
                                     Fair         Unrealized        Fair          Unrealized       Fair         Unrealized
                                     Value          Losses          Value           Losses         Value          Losses
                                     -----         ------           -----           ------         -----          ------
                                                                        (In Thousands)

<S>                                <C>              <C>          <C>                 <C>         <C>                <C>
June 30, 2006:
     Mutual funds                   $    -           $   -        $  7,424            $230        $  7,424           $230
     Trust preferred
     securities                          -               -           4,341             108           4,341            108
                                     -----           -----         -------            ----         -------           ----
      Total                         $    -           $   -         $11,765            $338         $11,765           $338
                                     =====           =====         =======            ====         =======           ====

June 30, 2005:
     Mutual funds                   $    -          $    -        $  7,201            $155        $  7,201           $155
     Trust preferred
     securities                          -               -           5,210             191           5,210            191
                                     -----           -----         -------            ----         -------           ----
       Total                        $    -          $    -         $12,411            $346         $12,411           $346
                                    ======          ======         =======            ====         =======           ====
</TABLE>

As of June 30,  2006 and 2005,  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,  we have the  intent  and  ability to hold these
investments  for a time necessary to recover the amortized  cost. As of June 30,
2006, there was one mutual fund and two trust preferred securities in unrealized
loss  positions  compared to one and three,  respectively,  in  unrealized  loss
positions as of June 30, 2005.

--------------------------------------------------------------------------------
                                      F-14

<PAGE>
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 - SECURITIES HELD TO MATURITY

<TABLE>
<CAPTION>
                                                                     June 30, 2006
                                                   -------------------------------------------
                                                                Gross      Gross     Estimated
                                                   Carrying   Unrealized Unrealized    Fair
                                                     Cost       Gains      Losses      Value
                                                   ---------  ---------- ----------  ---------
                                                                  (In Thousands)
<S>                                               <C>        <C>        <C>        <C>
Government agencies:
     After five years but within ten years          $    963   $     38   $      1   $  1,000
     After ten years                                   7,773         14          1      7,786
                                                    --------   --------   --------   --------

                                                       8,736         52          2      8,786
                                                    --------   --------   --------   --------

Obligations of states and political subdivisions:
     Within one year                                   4,339          5         21      4,323
     After one year but within five years             17,194         76        430     16,840
     After five years but within ten years           120,775        672      3,043    118,404
     After ten years                                  58,004         56      1,966     56,094
                                                    --------   --------   --------   --------

                                                     200,312        809      5,460    195,661
                                                    --------   --------   --------   --------

                                                    $209,048   $    861   $  5,462   $204,447
                                                    ========   ========   ========   ========

                                                                 June 30, 2005
                                                    -----------------------------------------
Government agencies:
     Within one year                                $ 17,000   $      -   $    152   $ 16,848
     After one year but within five years            235,019          4      4,065    230,958
     After five years but within ten years               494         81          -        575
     After ten years                                  12,956          -        112     12,844
                                                    --------   --------   --------   --------

                                                     265,469         85      4,329    261,225
                                                    --------   --------   --------   --------

Obligations of states and political subdivisions:
     Within one year                                   4,202         11          3      4,210
     After one year but within five years             16,139        216         78     16,277
     After five years but within ten years            99,841      2,453        261    102,033
     After ten years                                  84,447      1,327        298     85,476
                                                    --------   --------   --------   --------

                                                     204,629      4,007        640    207,996
                                                    --------   --------   --------   --------

                                                    $470,098   $  4,092   $  4,969   $469,221
                                                    ========   ========   ========   ========
</TABLE>

--------------------------------------------------------------------------------
                                      F-15

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 - SECURITIES HELD TO MATURITY (CONTINUED)

During the year ended June 30, 2006,  securities  held to maturity  with a total
aggregate  carrying  value of  $249,027,000  were  sold for  total  proceeds  of
$241,206,000  and resulted in gross losses of  $7,821,000.  The Company sold its
entire  portfolio of  government  agency  notes to  restructure  the  securities
portfolio  by  reinvesting  the  proceeds at current  market  interest  rates to
improve the  Company's  net interest  margin.  There were no sales of securities
held to maturity during the years ended June 30, 2005 and 2004. During the years
ended June 30, 2006,  2005 and 2004,  proceeds from calls of securities  totaled
$-0-,  $10,000,000,  and  $103,749,000,  respectively,  resulting in no gains or
losses.  At June 30, 2006,  securities held to maturity with a carrying value of
$3,467,000 are callable within one year.

At June 30, 2006 and 2005,  securities  held to maturity with carrying  value of
approximately $294,000 and $293,000,  respectively, was pledged to secure public
funds on deposit.

At June 30, 2006 and 2005, all obligations of states and political  subdivisions
were guaranteed by insurance policies issued by various insurance companies.

The age of  unrealized  losses  and fair  value of  related  securities  held to
maturity at June 30, 2006 and 2005 were as follows:

<TABLE>
<CAPTION>
                                       Less than 12 Months              12 Months or More                  Total
                                     -----------------------        ------------------------     --------------------------
                                     Fair         Unrealized        Fair          Unrealized       Fair         Unrealized
                                     Value          Losses          Value           Losses         Value          Losses
                                     -----         ------           -----           ------         -----          ------
                                                                         (In Thousands)

<S>                                <C>              <C>          <C>                 <C>         <C>                <C>
June 30, 2006:
     Government agencies           $      -       $      -       $    809          $      2     $    809         $      2
     Obligations of states
     and
        political subdivisions       89,281          2,747         49,700             2,713      138,981            5,460
                                   --------       --------       --------          --------     --------         --------

       Total                       $ 89,281       $  2,747       $ 50,509          $  2,715     $139,790         $  5,462
                                   ========       ========       ========          ========     ========         ========

June 30, 2005:
     Government agencies           $    754       $      6       $254,116          $  4,323     $254,870         $  4,329
     Obligations of states
     and
        political subdivisions       19,469            221         32,923               419       52,392              640
                                   --------       --------       --------          --------     --------         --------

       Total                       $ 20,223       $    227       $287,039          $  4,742     $307,262         $  4,969
                                   ========       ========       ========          ========     ========         ========
</TABLE>

As of June 30,  2006 and 2005,  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,  we have the intent and ability to hold these
investments for the time necessary to recover the amortized cost. As of June 30,
2006,  there were two  Government  agencies  and 304  obligations  of states and
political  subdivisions  in unrealized  loss  positions  compared to 37 and 113,
respectively, in unrealized loss positions as of June 30, 2005.

--------------------------------------------------------------------------------
                                      F-16

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - LOANS RECEIVABLE

                                                                June 30,
                                                         ---------------------
                                                            2006        2005
                                                         ---------   ---------

                                                            (In Thousands)

    Real estate mortgage                                 $ 572,933   $ 479,451
                                                         ---------   ---------

    Commercial business                                      3,208       2,930
                                                         ---------   ---------

    Consumer:
         Home equity loans                                  93,639      54,199
         Home equity lines of credit                        12,988      14,850
         Passbook or certificate                             2,884       2,831
         Other                                                 247         264
                                                         ---------   ---------

                                                           109,758      72,144
                                                         ---------   ---------

    Construction                                            22,078       8,094
                                                         ---------   ---------

           Total Loans                                     707,977     562,619

    Unamortized premium (discounts) on purchased loans          73         (65)
    Deferred loan costs and fees, net                        1,014         880
                                                         ---------   ---------

                                                         $ 709,064   $ 563,434
                                                         =========   =========

At June 30, 2006 and 2005, real estate mortgage loans included  $465,822,000 and
$382,766,000,  respectively, of loans secured by one-to-four-family  residential
properties.

The Bank has granted  loans to  officers  and  directors  of the Company and its
Subsidiaries  and  to  their  associates.   Related  party  loans  are  made  on
substantially the same terms, including interest rates and collateral,  as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve  more than normal  risk of  collectibility.  As of June 30, 2006 and
2005 such loans totaled approximately  $3,732,000 and $3,188,000,  respectively.
During the year  ended  June 30,  2006,  new loans to  related  parties  totaled
$775,000 and repayments totaled approximately $231,000.

The activity in the allowance for loan losses is as follows:

                                                    Years Ended June 30,
                                           -----------------------------------
                                             2006          2005          2004
                                           -------       -------       -------
                                                     (In Thousands)

Balance - beginning                        $ 5,416       $ 5,144       $ 5,180
     Provisions charged to operations           72            68             -
     Loans charged off                         (42)           (9)          (36)
     Loans recovered                             5           213             -
                                           -------       -------       -------

Balance - ending                           $ 5,451       $ 5,416       $ 5,144
                                           =======       =======       =======

--------------------------------------------------------------------------------
                                      F-17

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - LOANS RECEIVABLE (CONTINUED)

At June 30,  2006 and 2005,  nonaccrual  loans for which the accrual of interest
had  been   discontinued   totaled   approximately   $942,000  and   $1,922,000,
respectively.  Had these loans been performing in accordance with their original
terms,  the interest  income  recognized for the years ended June 30, 2006, 2005
and 2004,  would  have  been  $81,000,  $162,000,  and  $177,000,  respectively.
Interest  income  recognized  on such loans was $9,000,  $69,000,  and $118,000,
respectively.

There  were no  impaired  loans at the end of June  30,  2006  and  2005.  $-0-,
$88,000,  and $-0- was received  and  recognized  for impaired  loans during the
years ended June 30, 2006, 2005 and 2004,  respectively.  The average balance of
impaired  loans  impaired  during the years ended June 30,  2006,  2005 and 2004
approximated $-0-, $235,000, and $243,000, respectively.


NOTE 7 - MORTGAGE-BACKED SECURITIES HELD TO MATURITY

<TABLE>
<CAPTION>
                                                            June 30, 2006
                                          -------------------------------------------
                                                       Gross      Gross     Estimated
                                          Carrying   Unrealized Unrealized    Fair
                                            Cost       Gains      Losses      Value
                                          ---------  ---------- ----------  ---------
                                                         (In Thousands)
<S>                                       <C>        <C>        <C>        <C>
Government National Mortgage Association   $ 42,323   $    717   $    394   $ 42,646
Federal Home Loan Mortgage Corporation      264,747        301      9,012    256,036
Federal National Mortgage Association       382,892        253     11,498    371,647
                                           --------   --------   --------   --------

                                           $689,962   $  1,271   $ 20,904   $670,329
                                           ========   ========   ========   ========

                                                        June 30, 2005
                                           -----------------------------------------

Government National Mortgage Association   $ 63,399   $  1,767   $    196   $ 64,970
Federal Home Loan Mortgage Corporation      305,059      2,465      1,712    305,812
Federal National Mortgage Association       389,663      3,985      1,700    391,948
                                           --------   --------   --------   --------

                                           $758,121   $  8,217   $  3,608   $762,730
                                           ========   ========   ========   ========
</TABLE>

Net premiums of  approximately  $2,538,000  and  $3,613,000 at June 30, 2006 and
2005,  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,  2006,  2005  and  2004.  At June  30,  2006  and  2005,
mortgage-backed  securities  with carrying value of  approximately  $283,000 and
$426,000, respectively, was pledged to secure public funds on deposit.

--------------------------------------------------------------------------------
                                      F-18

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - MORTGAGE-BACKED SECURITIES HELD TO MATURITY (CONTINUED)

The  age  of  unrealized  losses  and  fair  value  of  related  mortgage-backed
securities held to maturity at June 30, 2006 and 2005 were as follows:

<TABLE>
<CAPTION>
                       Less than 12 Months              12 Months or More                  Total
                     -----------------------        ------------------------     --------------------------
                     Fair         Unrealized        Fair          Unrealized       Fair         Unrealized
                     Value          Losses          Value           Losses         Value          Losses
                     -----         ------           -----           ------         -----          ------
                                                         (In Thousands)

<S>                <C>              <C>          <C>                 <C>         <C>                <C>
June 30, 2006       $314,766        $8,352        $279,931           $12,552      $594,697        $20,904
                    ========        ======        ========           =======      ========       ========

June 30, 2005       $143,550        $  986        $230,786           $ 2,622      $374,336       $  3,608
                    ========        ======        ========           =======      ========       ========
</TABLE>

As of June 30,  2006 and 2005,  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,  we have the intent and ability to hold these
investments for the time necessary to recover the amortized cost. As of June 30,
2006,  there were 320  mortgage-backed  securities in unrealized  loss positions
compared to 117 in unrealized loss positions as of June 30, 2005.

NOTE 8 - PREMISES AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                     June 30,
                                                                            ---------------------------
                                                                              2006                2005
                                                                            --------            -------
                                                                                 (In Thousands)

<S>                                                                        <C>                 <C>
          Land                                                              $ 8,968             $ 8,984
          Buildings and improvements                                         29,760              27,288
          Leasehold improvements                                                505                 490
          Furnishings and equipment                                          10,242               9,455
          Construction in progress                                                -                 516
                                                                            -------             -------

                                                                             49,475              46,733
          Less accumulated depreciation and amortization                     13,534              11,756
                                                                            -------             -------

                                                                            $35,941             $34,977
                                                                            =======             =======
</TABLE>

NOTE 9 - INTEREST RECEIVABLE

<TABLE>
<CAPTION>
                                                                                    June 30,
                                                                            ---------------------------
                                                                              2006                2005
                                                                            --------            -------
                                                                                 (In Thousands)

<S>                                                                        <C>               <C>
          Loans                                                              $3,038            $  2,266
          Mortgage-backed securities                                          3,267               3,481
          Investments                                                         2,531               4,683
                                                                            -------             -------

                                                                             $8,836             $10,430
                                                                             ======             =======
</TABLE>
--------------------------------------------------------------------------------
                                      F-19
<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS

<TABLE>
<CAPTION>
                                                                                         Core Deposit
                                                                       Goodwill          Intangibles
                                                                       --------          -----------
                                                                         (In Thousands)

<S>                                                                  <C>                  <C>
          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
               Amortization                                                  -                (636)
                                                                       -------              ------

          Balance at June 30, 2005                                      82,263               1,564
               Amortization                                                  -                (636)
                                                                       -------              ------

          Balance at June 30, 2006                                     $82,263              $  928
                                                                       =======              ======
</TABLE>

The gross  carrying  amount of core deposit  intangibles  was $5,987,000 at both
June 30, 2006 and 2005, while accumulated  amortization  totaled  $5,059,000 and
$4,423,000 at June 30, 2006 and 2005, respectively.  Amortization is expected to
total  $636,000 in the year ending  June 30,  2007,  $241,000 in the year ending
June 30, 2008, and $43,000 in the year ending June 30, 2009.


NOTE 11 - DEPOSITS

<TABLE>
<CAPTION>
                                                                     June 30,
                                              --------------------------------------------------------
                                                     2006                             2005
                                              --------------------           -------------------------
                                                          Weighted                            Weighted
                                                          Average                             Average
                                                          Interest                            Interest
                                              Amount        Rate               Amount           Rate
                                              ------        ----               ------           ----
                                                              (Dollars In Thousands)
<S>                                     <C>                <C>             <C>                <C>
          Non-interest bearing demand     $   61,080            - %          $   56,142            - %
          Interest-bearing demand            122,129         1.56                99,308         0.78
          Savings and club                   377,431         1.15               450,211         1.12
          Certificates of deposit            883,098         3.83               923,116         2.81
                                          ----------                         ----------

                                          $1,443,738         2.78 %          $1,528,777         2.08 %
                                          ==========                         ==========
</TABLE>

--------------------------------------------------------------------------------
                                      F-20

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - DEPOSITS (CONTINUED)

Certificates  of deposit with  balances of $100,000 or more at June 30, 2006 and
2005,  totaled  approximately   $205,955,000  and  $209,552,000,   respectively.
Deposits in excess of $100,000 are not insured by the Federal Deposit  Insurance
Corporation.

A summary of certificates of deposit by maturity follows:

<TABLE>
<CAPTION>
                                                                          June 30,
                                                                 -----------------------------
                                                                   2006                2005
                                                                 --------            --------
                                                                        (In Thousands)
<S>                                                            <C>                 <C>
          One year or less                                       $658,218            $701,710
          After one to two years                                  179,609             148,557
          After two to three years                                 20,481              43,275
          After three to four years                                17,875               9,367
          After four to five years                                  6,826              20,019
          After five years                                             89                 188
                                                                 --------            --------

                                                                 $883,098            $923,116
                                                                 ========            ========
</TABLE>

Interest expense on deposits consists of the following:

<TABLE>
<CAPTION>
                                                          Years Ended June 30,
                                           --------------------------------------------------
                                             2006                  2005                2004
                                           -------               -------              -------
                                                             (In Thousands)
<S>                                       <C>                   <C>                  <C>
          Demand                           $   931               $   752              $   882
          Savings and clubs                  5,065                 5,422                5,508
          Certificates of deposits          29,073                20,358               21,692
                                           -------               -------              -------

                                           $35,069               $26,532              $28,082
                                           =======               =======              =======
</TABLE>

--------------------------------------------------------------------------------
                                      F-21

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 - ADVANCES FROM FHLB

Fixed rate  advances from the Federal Home Loan Bank ("FHLB") of New York mature
as follows:

<TABLE>
<CAPTION>
                                                                     June 30,
                                              --------------------------------------------------------
                                                     2006                             2005
                                              --------------------           -------------------------
                                                          Weighted                            Weighted
                                                          Average                             Average
                                                          Interest                            Interest
                                              Amount        Rate               Amount           Rate
                                              ------        ----               ------           ----
                                                              (Dollars In Thousands)
<S>                                         <C>          <C>              <C>               <C>
          Twelve months ending June 30:
               2006                           $     -      -    %            $    582           6.03 %
               2007                             5,618      5.91 %               5,618           5.91 %
               2008                            37,487      5.41 %              37,487           5.41 %
               2009                             8,000      5.47 %               8,000           5.47 %
               2010                                 -         - %                   -              - %
               2011                            10,000      5.40 %              10,000           5.40 %
                                              -------                         -------

                                              $61,105      5.46 %             $61,687           5.47 %
                                              =======                         =======
</TABLE>

At June 30, 2006, of the $55,487,000 in advances due after one year, $42,000,000
are callable, all of which are callable within one year.

FHLB advances at June 30, 2006 and 2005 are  collateralized  by the FHLB capital
stock  owned  by  the  Bank,   investment   securities   held  to  maturity  and
mortgage-backed   securities   held  to  maturity  with  fair  values   totaling
approximately   $97,249,000  and   $106,716,000  and  carrying  values  totaling
approximately $103,748,000 and $100,806,000, respectively.


NOTE 13 - BENEFIT PLANS

Employee Stock Ownership Plan

     Effective  upon  completion of the  Company's  initial  public  offering in
     February  2005,  the Bank  established  an Employee  Stock  Ownership  Plan
     ("ESOP") for all eligible  employees who complete a twelve-month  period of
     employment with the Bank, have attained the age of 21 and complete at least
     1,000  hours of  service  in a plan  year.  The ESOP  used  $17,457,000  in
     proceeds from a term loan  obtained from the Company to purchase  1,745,700
     shares of Company common stock. The term loan principal is payable over 144
     equal  installments  through March 31, 2017.  The interest rate on the term
     loan  is  5.50%.  Each  year,  the  Bank  intends  to  make   discretionary
     contributions  to the ESOP,  which will be equal to principal  and interest
     payments  required on the term loan. The Bank may further pay down the loan
     with dividends paid, if any, on the Company common stock owned by the ESOP.

     Shares  purchased  with the loan proceeds  provide  collateral for the term
     loan  and are held in a  suspense  account  for  future  allocations  among
     participants.  Contributions  to the  ESOP  and  shares  released  from the
     suspense account are to be allocated among the participants on the basis of
     compensation, as described by the Plan, in the year of allocation.

--------------------------------------------------------------------------------
                                      F-22

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS

Employee Stock Ownership Plan (Continued)

     The ESOP is accounted for in accordance  with  Statement of Position  93-6,
     "Accounting  for Employee Stock  Ownership  Plans," which was issued by the
     American  Institute  of Certified  Public  Accountants.  Accordingly,  ESOP
     shares  pledged as  collateral  were  initially  recorded as unearned  ESOP
     shares in the consolidated  statements of financial condition.  Thereafter,
     on  a  monthly   basis,   12,123  shares  are  committed  to  be  released,
     compensation expense is recorded equal to the number of shares committed to
     be released times the monthly  average market price of the shares,  and the
     committed  shares become  outstanding for basic net income per common share
     computations.  ESOP compensation  expense was approximately  $1,867,000 and
     $530,000 for the years ended June 30, 2006 and 2005, respectively.

     At June 30, 2006 and 2005, the ESOP shares were as follows:

                                                          June 30,
                                               -------------------------------
                                                    2006                2005
                                               -----------         -----------

          Allocated shares                         110,202                   -
          Shares committed to be released           83,766              48,492
          Unearned shares                        1,551,732           1,697,208
                                               -----------         -----------

                 Total ESOP Shares               1,745,700           1,745,700
                                               ===========         ===========

          Fair value of unearned shares        $22,965,634         $20,027,054
                                               ===========         ===========

Employee Stock Ownership Plan Benefit Equalization Plan ("BEP")

     The Bank has a non-qualified plan to compensate senior officers of the bank
     who  participate  in the Bank's ESOP for certain  benefits  lost under such
     plan by reason of benefit limitations imposed by the Internal Revenue Code.
     The  plan  expense  for the year  ended  June  30,  2006 was  approximately
     $76,000. The liability totaled approximately $25,000 at June 30, 2006.

Thrift Plan

     The Bank sponsors the Employees'  Savings and Profit Sharing Plan and Trust
     (the "Plan"),  pursuant to Section 401(k) of the Internal Revenue Code, for
     all  eligible  employees.  Employees  may  elect to save up to 20% of their
     compensation.  The Bank will contribute a matching contribution up to 3% of
     the  employee   annual   compensation.   The  Plan   expense   amounted  to
     approximately  $330,000,  $281,000,  and $264,000, for the years ended June
     30, 2006, 2005 and 2004, 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 7.75%,
     8.25%,  and  8.25%,  for the  years  ended  June 30,  2006,  2005 and 2004,
     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, 2006, 2005 and 2004, total
     pension  plan  expense  and  contributions  to the plan were  approximately
     $2,172,000, $2,538,000, and $1,193,000, respectively.

--------------------------------------------------------------------------------
                                      F-23

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

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 in contributions made to and benefits paid under the
     BEP during each of the years ended June 30, 2006, 2005 and 2004.

     The following  table sets forth the BEP's funded  status and  components of
net periodic pension cost:

<TABLE>
<CAPTION>
                                                                   June 30,
                                                               2006        2005
                                                             -------     -------
                                                               (In Thousands)

<S>                                                         <C>         <C>
Change in benefit obligation:
     Benefit obligation - beginning                          $ 1,949     $ 1,831
         Service cost                                             59          42
         Interest cost                                           176         135
         Actuarial loss                                          421           -
         Benefit payments                                        (59)        (59)
         Increase due to the decrease in the discount rate       342           -
                                                             -------     -------

     Benefit obligation - ending                             $ 2,888     $ 1,949
                                                             =======     =======

Change in plan assets:
     Fair value of assets - beginning                        $     -     $     -
         Settlements                                              59          59
         Contributions                                           (59)        (59)
                                                             -------     -------

     Fair value of assets - ending                           $     -     $     -
                                                             =======     =======

Reconciliation of funded status:
     Accumulated benefit obligation                          $(1,850)    $(1,209)
                                                             =======     =======

     Projected benefit obligation                            $(2,888)    $(1,949)
     Fair value of assets                                          -           -
                                                             -------     -------

     Funded status                                            (2,888)     (1,949)
     Unrecognized prior service cost                             (47)        (58)
     Unrecognized net actuarial loss                           1,493         913
                                                             -------     -------

     Accrued pension cost included in other liabilities      $(1,442)    $(1,094)
                                                             =======     =======

Value assumptions:
     Discount rate                                              6.25%       7.50%
     Salary increase rate                                       5.50%       5.50%

</TABLE>
--------------------------------------------------------------------------------
                                      F-24

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

Benefit Equalization Plan ("BEP") (Continued)

                                                         Years Ended June 30,
                                                         --------------------
                                                         2006    2005    2004
                                                         ----    ----    ----
                                                            (In Thousands)

   Net periodic pension expense:
        Service cost                                    $ 59     $ 42    $ 24
        Interest cost                                    176      135      98
        Amortization of unrecognized past service
        costs                                            (12)       8       8
        Amortization of unrecognized net actuarial loss  182      122      77
                                                        ----     ----    ----

                                                        $405     $307    $207
                                                        ====     ====    ====

   Valuation assumptions:
        Discount rate                                   6.25%    7.50%   7.50%
        Salary increase rate                            5.50%    5.50%   5.50%

     It is estimated that  contributions of  approximately  $81,000 will be made
during the year ending June 30, 2007.

     The following benefit payments,  which reflect expected future service,  as
appropriate, are expected to be paid:

                            2007                       $   81,000
                            2008                          105,000
                            2009                          117,000
                            2010                          123,000
                            2011-2015                     972,000

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.  During the years  ended June 30,  2006,  2005 and 2004,
     contributions  and  benefits  paid  totaled  $5,000,  $7,000,  and  $6,000,
     respectively.  The valuation  measurement date has been changed from July 1
     to April 1 effective April 1, 2006.

--------------------------------------------------------------------------------
                                      F-25

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

Postretirement Welfare Plan (Continued)

     The  following  table sets  forth the  accrued  accumulated  postretirement
     benefit obligation and the net periodic postretirement benefit cost:

                                                                   June 30,
                                                             ------------------
                                                               2006      2005
                                                               ----      ----

                                                               (In Thousands)

          Change in benefit obligation:
               Benefit obligation - beginning                 $ 451     $ 409
                   Service cost                                  25        20
                   Interest cost                                 25        27
                   Actuarial (gain) loss                        (32)        2
                   Premiums/claims paid                          (5)       (7)
                                                              -----     -----

               Benefit obligation - ending                    $ 464     $ 451
                                                              =====     =====

          Change in plan assets:
               Fair value of assets - beginning               $   -     $   -
                   Premiums/claims paid                           5         7
                   Contributions                                 (5)       (7)
                                                              -----     -----

               Fair value of assets - ending                  $   -     $   -
                                                              =====     =====

          Reconciliation of funded status:
               Accumulated benefit obligation                 $(464)    $(451)
               Fair value of assets                               -         -
                                                              -----     -----

               Funded status                                   (464)     (451)
               Unrecognized net actuarial gain                  (38)       (7)
               Unrecognized prior service cost                   54        63
                                                              -----     -----

               Accrued postretirement benefit cost included
                   in other liabilities                       $(448)    $(395)
                                                              =====     =====

          Value assumptions:
               Discount rate                                   6.25%     5.63%
               Salary increase rate                            3.25%     3.00%


--------------------------------------------------------------------------------
                                      F-26

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

Postretirement Welfare Plan (Continued)


                                                            Years Ended June 30,
                                                            --------------------
                                                            2006    2005   2004
                                                            ----    ----   ----
                                                              (In Thousands)

          Net periodic postretirement benefit cost:
               Service cost                                  $25     $20    $18
               Interest cost                                  25      27     22
               Amortization of unrecognized past service
                   liability                                  10      11      9
                                                             ---     ---    ---

                                                             $60     $58    $49
                                                             ===     ===    ===

          Valuation assumptions:
               Discount rate                                5.63%   6.63%  5.75%
               Salary increase rate                         3.00%   4.00%  3.25%

     It is estimated that  contributions  of  approximately  $8,000 will be made
during the year ending June 30, 2007.

     The following benefit payments,  which reflect expected future service,  as
appropriate, are expected to be paid:

                            2007                       $    8,000
                            2008                           10,000
                            2009                           14,000
                            2010                           16,000
                            2011                           19,000
                            2012-2016                     109,000

Directors' Consultation and Retirement Plan ("DCRP")

     The Bank has an unfunded  retirement plan for non-employee  directors.  The
     benefits are payable based on term of service as a director. During each of
     the years ended June 30, 2006,  2005 and 2004,  contributions  and benefits
     paid totaled $89,000. The valuation  measurement date has been changed from
     July 1 to April 1 effective April 1, 2006.

--------------------------------------------------------------------------------
                                      F-27

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

Directors' Consultation and Retirement Plan ("DCRP") (Continued)

     The following  table sets forth the DCRP's funded status and  components of
net periodic cost:

                                                                   June 30,
                                                            -------------------
                                                              2006        2005
                                                            -------     -------
                                                              (In Thousands)

          Change in benefit obligation:
               Projected benefit obligation - beginning     $ 2,149     $ 1,561
                   Service cost                                 128          86
                   Interest cost                                116          99
                   Actuarial (gain) loss                        (51)        157
                   Annuity payments                             (89)        (89)
                   Plan amendments                                -         335
                                                            -------     -------

               Projected benefit obligation - ending        $ 2,253     $ 2,149
                                                            =======     =======

          Change in plan assets:
               Fair value of assets - beginning             $     -     $     -
                   Settlements                                   89          89
                   Contributions                                (89)        (89)
                                                            -------     -------

               Fair value of assets - ending                $     -     $     -
                                                            =======     =======

          Reconciliation of funded status:
               Accumulated benefit obligation               $(1,965)    $(1,879)
                                                            =======     =======

               Projected benefit obligation                 $(2,253)    $(2,149)
               Fair value of assets                               -           -
                                                            -------     -------

               Funded status                                 (2,253)     (2,149)
               Unrecognized transition obligation               132         175
               Unrealized net actuarial loss                     98         150
               Unrecognized prior service cost                  583         643
                                                            -------     -------

               Accrued cost included in other liabilities   $(1,440)    $(1,181)
                                                            =======     =======

          Value assumptions:
               Discount rate                                   6.25%       5.63%
               Fee increase rate                               3.25%       3.00%


--------------------------------------------------------------------------------
                                      F-28

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

Directors' Consultation and Retirement Plan ("DCRP") (Continued)


                                                          Years Ended June 30,
                                                          --------------------
                                                          2006     2005   2004
                                                          ----     ----   ----
                                                             (In Thousands)

          Net periodic plan cost:
               Service cost                               $128     $ 86   $ 78
               Interest cost                               116       99     83
               Amortization of unrecognized transition
                   obligation                               44       44     44
               Amortization of unrecognized past service
                   liability                                61       33     33
                                                          -----    ----   ----

                                                          $349     $262   $238
                                                          =====    ====   ====

          Valuation assumptions:
               Discount rate                              5.63%    6.63%  5.75%
               Fee increase rate                          3.00%    4.00%  3.25%

     It is estimated that  contributions of approximately  $172,000 will be made
during the year ending June 30, 2007.

     The following benefit payments,  which reflect expected future service,  as
appropriate, are expected to be paid:

                            2007                      $   172,000
                            2008                          183,000
                            2009                          194,000
                            2010                          204,000
                            2011                          212,000
                            2012-2016                   1,071,000

--------------------------------------------------------------------------------
                                      F-29

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - BENEFIT PLANS (CONTINUED)

Stock Compensation Plans

     The Company has two  stock-related  compensation  plans:  stock options and
     restricted  stock awards.  At the annual  meeting held on October 24, 2005,
     stockholders of the Company  approved the Kearny Financial Corp. 2005 Stock
     Compensation  and Incentive  Plan.  The plan  authorizes the award of up to
     3,564,137  shares as stock options and 1,425,655 shares as restricted stock
     awards. On October 24, 2005,  non-employee  directors received in aggregate
     1,069,240  options and 427,696 shares of restricted  stock.  On December 5,
     2005,  certain  officers  of the Company  and Bank  received  in  aggregate
     2,305,000  options  and 910,000  shares of  restricted  stock.  The Company
     adopted SFAS No. 123R upon  approval of the Plan,  and began to expense the
     fair value of all options over their  vesting  periods and began to expense
     the fair value of all share-based  compensation  granted over the requisite
     service periods.

     SFAS No. 123R also requires the Company to realize as a financing cash flow
     rather than an operating cash flow, as previously required, the benefits of
     realized tax deductions in excess of previously  recognized tax benefits on
     compensation  expense  (which was $-0- for the twelve months ended June 30,
     2006). In accordance with Staff  Accounting  Bulletin  ("SAB") No. 107, the
     Company classified  share-based  compensation for employees within salaries
     and  employee  benefits to  correspond  with the same line item as the cash
     compensation  paid  to  employees.   The  Company  classified   share-based
     compensation for non-employee  directors within directors'  compensation to
     correspond  with  the  same  line  item as the  cash  compensation  paid to
     non-employee directors.

     Employee  options and non-employee  director options  generally vest over a
     five-year service period.  Management  recognizes  compensation expense for
     all option grants over the awards'  respective  requisite  service periods.
     Management  estimated the fair values relating to all of fiscal 2006 option
     grants  using the  Black-Scholes  option-pricing  model.  Since there is no
     historical  information  on the volatility of our stock,  management  based
     expectations about future volatility on the average volatilities of similar
     entities for an appropriate period following their initial public offering.
     Thus,  calculations  to determine the stock  volatility  of mutual  holding
     companies converted since 1995, and a subset of the first group, all mutual
     holding  companies that converted  after 2000,  were used to derive the one
     and  three-year  Beta for purposes of  identifying a reasonable  volatility
     factor. Management estimated the expected life of the options assuming that
     they must be no less than the vesting  period,  five years,  and no greater
     than their  contractual  life, ten years, in conjunction with an evaluation
     of the grantees ages and lengths of service.  The 10-year Treasury yield in
     effect at the time of the grant  provides  the  risk-free  rate for periods
     within  the  contractual   life  of  the  option.   Management   recognizes
     compensation expense for the fair values of these awards, which have graded
     vesting,  on a straight-line basis over the requisite service period of the
     awards.

     Management  used the following  assumptions  to estimate the fair values of
     options granted:

<TABLE>
<CAPTION>
                                                                               Year Ended
                                                                                June 30,
                                                                                  2006
                                                                                  ----

<S>                                                                        <C>
    Weighted average risk-free interest rate                                       4.53%
    Expected dividend yield                                                        1.62%
    Weighted average volatility factor of the expected market price of the
         Company's common stock                                                   18.00%
    Weighted average expected life of the options                             6.50 years

</TABLE>

--------------------------------------------------------------------------------
                                      F-30

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

Stock Compensation Plans (Continued)

     Restricted  shares  generally vest in full after five years. The product of
     the  number  of  shares  granted  and the grant  date  market  price of the
     Company's common stock determine the fair value of restricted  shares under
     the Company's restricted stock plans.  Management  recognizes  compensation
     expense for the fair value of restricted  shares on a  straight-line  basis
     over the requisite service period of five years.

     During the year ended June 30, 2006,  the Company  recorded $3.2 million of
     share-based compensation expense, comprised of stock option expense of $1.2
     million and restricted stock expense of $2.0 million.

     The  following  is a summary of the  Company's  stock  option  activity and
     related information for its option plans for the year ended June 30, 2006:

<TABLE>
<CAPTION>
                                                                                 Weighted
                                                              Weighted            Average
                                                              Average            Remaining
                                                              Exercise          Contractual       Aggregate
                                                Options        Price               Term        Intrinsic Value
                                                -------        -----               ----        ---------------
                                                                   (In Thousands)

<S>                                          <C>             <C>              <C>               <C>
          Outstanding at June 30, 2005                 -          -
               Granted                             3,374        $12.34
               Exercised                               -          -
               Forfeited                               -          -
                                             ------------

          Outstanding at June 30, 2006             3,374        $12.34           9.4 years          $8,292
                                             ============

          Exercisable at June 30, 2006                 -          -                    N/A             N/A
</TABLE>

     The weighted  average fair value of stock options  granted  during the year
     ended June 30, 2006 was $2.95.

     The following is a summary of the status of the Company' non-vested options
     as of June 30, 2006 and changes during the year ended June 30, 2006:

<TABLE>
<CAPTION>
                                                                                Weighted
                                                                              Average Grant
                                                                 Options      Date Fair Value
                                                                 -------      ---------------
                                                                     (In Thousands)

<S>                                                             <C>                <C>
          Non-vested at June 30, 2005                                 -              $   -
               Granted                                            3,374               2.95
               Exercised                                              -                  -
               Forfeited                                              -                  -
                                                                  -----              -----

          Non-vested at June 30, 2006                             3,374              $2.95
                                                                  =====              =====
</TABLE>

--------------------------------------------------------------------------------
                                      F-31

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - BENEFIT PLANS (CONTINUED)

Stock Compensation Plans (Continued)

     Expected future compensation expense relating to the 3.4 million non-vested
     options  outstanding  as of June 30, 2006 is $8.7  million  over a weighted
     average period of 4.4 years.

     Upon  exercise of vested  options,  management  expects to draw on treasury
     stock as the source of the shares.  In July 2006,  the Company  announced a
     stock  repurchase  plan to acquire up to 1,091,063  shares  during the next
     twelve months for general corporate purposes.

     The following is a summary of the status of the Company's restricted shares
     as of 2006 and changes during the year ended June 30, 2006:

                                                                    Weighted
                                                   Restricted     Average Grant
                                                     Shares      Date Fair Value
                                                     ------      ---------------
                                                       (In Thousands)

          Non-vested at June 30, 2005                     -             $    -
               Granted                                1,338              12.34
               Exercised                                  -                  -
               Forfeited                                  -                  -
                                                      -----             ------

          Non-vested at June 30, 2006                 1,338             $12.34
                                                      =====             ======

     Expected future compensation expense relating to the 1.3 million restricted
     shares at June 30, 2006 is $14.5 million over a weighted  average period of
     4.4 years.


NOTE 14 - STOCKHOLDERS' 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.

--------------------------------------------------------------------------------
                                      F-32

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 14 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL (CONTINUED)

The Bank is subject to various regulatory capital  requirements  administered by
Federal  banking  agencies.  Failure to meet minimum  capital  requirements  can
initiate certain mandatory - and possibly additional  discretionary - actions by
regulators  that,  if  undertaken,  could have a direct  material  effect on the
Bank's consolidated financial statements.  Under capital adequacy guidelines and
the  regulatory  framework  for  prompt  corrective  action,  the Bank must meet
specific  capital  guidelines that involve  quantitative  measures of the Bank's
assets,  liabilities,  and certain  off-balance-sheet  items as calculated under
regulatory accounting  practices.  The Bank's capital amounts and classification
are also subject to qualitative  judgments by the regulators  about  components,
risk weighting, and other factors.

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 accounting  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,
                                                         --------------------
                                                           2006       2005
                                                         --------    --------
                                                           (In Thousands)

   GAAP capital:
        Consolidated capital                             $490,886    $505,482
        Less:  Unconsolidated capital of the Company      (38,948)   (109,653)
                                                         --------    --------

        Bank capital                                      451,938     395,829

   Less:  Unrealized (gain) loss on securities                133      (5,485)
            Goodwill                                      (82,263)    (82,263)
            Intangible assets                                (928)     (1,564)
                                                         --------    --------

   Core and tangible capital                              368,880     306,517
   Add:  General valuation allowance                        5,451       5,416
            Unrealized gain on equity securities                -       3,467
                                                         --------    --------

          Total Regulatory Capital                       $374,331    $315,400
                                                         ========    ========

--------------------------------------------------------------------------------
                                      F-33

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 14 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                        To be Well
                                                                                                    Capitalized under
                                                                         For Capital Adequacy       Prompt Corrective
                                                       Actual                    Purposes             Action Provisions
                                               ---------------------       --------------------      -------------------
                                               Amount          Ratio       Amount         Ratio      Amount        Ratio
                                               ------          -----       ------         -----      ------        -----
                                                                       (Dollars in Thousands)

<S>                                         <C>              <C>      <C>                <C>    <C>               <C>
As of June 30, 2006:
     Total capital (to risk-weighted
         assets)                              $374,331         48.90%   $=>61,235        =>8.00%  $=>76,544       =>10.00%
     Tier 1 capital (to risk-weighted
         assets)                               368,880         48.19     =>     -        =>   -    =>45,926       => 6.00
     Core (Tier 1) capital (to adjusted
         total assets                          368,880         19.41     =>57,001        =>3.00    =>95,002       => 5.00
     Tangible capital (to adjusted total
         assets)                               368,880         19.41     =>28,501        =>1.50    =>     -       =>    -

As of June 30, 2005:
     Total capital (to risk-weighted
         assets)                              $315,400         45.19%   $=>55,833        =>8.00%  $=>69,791       =>10.00%
     Tier 1 capital (to risk-weighted
         assets)                               306,517         43.92     =>     -        =>   -    =>41,875       => 6.00
     Core (Tier 1) capital (to adjusted
         total assets                          306,517         15.94     =>57,672        =>3.00    =>96,119       => 5.00
     Tangible capital (to adjusted total
         assets)                               306,517         15.94     =>28,836        =>1.50    =>     -      =>     -
</TABLE>

On February 6, 2006,  the most recent  notification  from the OTS,  the Bank was
categorized as well  capitalized  as of December 31, 2005,  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.


NOTE 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,  2006,  includes
approximately  $30.5  million of bad debt  allowance,  pursuant to the IRC,  for
which income taxes have not been  provided.  If such amount is used for purposes
other than to absorb bad debts, including distributions in liquidation,  it will
be subject to income tax at the then current rate.

--------------------------------------------------------------------------------
                                      F-34

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 15 - INCOME TAXES (CONTINUED)

The components of income taxes are as follows:

<TABLE>
<CAPTION>
                                                                                         Years Ended June 30,
                                                                           -------------------------------------------------
                                                                            2006                  2005                 2004
                                                                           ------                ------               ------
                                                                                             (In Thousands)

<S>                                                                      <C>                   <C>                  <C>
          Current tax expense:
               Federal income                                              $1,312                $6,125               $3,600
               State income                                                   974                 1,226                1,589
                                                                           ------                ------               ------

                                                                            2,286                 7,351                5,189
                                                                           ------                ------               ------

          Deferred tax (benefit):
               Federal income                                                  (7)                  325                  470
               State income                                                    (2)                   18                   86
                                                                           ------                ------               ------

                                                                               (9)                  343                  556
                                                                           ------                ------               ------

                                                                           $2,277                $7,694               $5,745
                                                                           ======                ======               ======
</TABLE>

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:

<TABLE>
<CAPTION>
                                                                                         Years Ended June 30,
                                                                           -------------------------------------------------
                                                                            2006                  2005                 2004
                                                                           ------                ------               ------
                                                                                             (In Thousands)

<S>                                                                      <C>                   <C>                  <C>
          Federal income tax expense                                       $4,160                $9,307               $6,525
          Increases (reductions) in income taxes resulting from:
                 Tax exempt interest                                       (2,392)               (2,223)              (1,780)
                 New Jersey state tax, net of federal income
                     tax effect                                               632                   809                1,106
                 Nondeductible merger expenses                                  -                     -                  207
                 Other items, net                                            (123)                 (199)                (313)
                                                                           ------                ------               ------

          Total income tax expense                                         $2,277                $7,694               $5,745
                                                                           ======                ======               ======

          Effective income tax rate                                        19.16%                 28.93%               30.82%
                                                                           =====                  =====                =====
</TABLE>

The effective  income tax rate  represents  total income tax expense  divided by
income before income taxes.

--------------------------------------------------------------------------------
                                      F-35


<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 15 - INCOME TAXES (CONTINUED)

The tax effects of  existing  temporary  differences  that give rise to deferred
income tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                               June 30,
                                                                       --------------------------
                                                                        2006                2005
                                                                       ------              ------
                                                                             (In Thousands)
<S>                                                                  <C>                 <C>
          Deferred income tax assets:
               Allowance for loan losses                               $2,227              $2,212
               Goodwill                                                     -                 453
               Benefit plans                                            1,449               1,184
               Compensation                                             1,355                 167
               Other                                                       71                  61
                                                                       ------              ------

                                                                        5,102               4,077
                                                                       ------              ------

          Deferred income tax liabilities:
               Unrealized gain on securities available for sale            71               2,953
               Depreciation                                             1,164                 541
               Goodwill                                                   392                   -
               Other                                                       90                  89
                                                                       ------              ------

                                                                        1,717               3,583
                                                                       ------              ------

          Net deferred income tax assets                               $3,385              $  494
                                                                       ======              ======
</TABLE>

NOTE 16 - COMMITMENTS

The Bank has non-cancelable  operating leases for branch offices.  The following
is a  schedule  by  years of  future  minimum  rental  payments  required  under
operating  leases that have initial or remaining  non-cancelable  lease terms in
excess of one year as of June 30, 2006:

                   Year Ended June 30:
                        2007                                       $  271,000
                        2008                                          240,000
                        2009                                          203,000
                        2010                                          188,000
                        2011                                          185,000
                        Thereafter                                    641,000
                                                                   ----------

                          Total Minimum Payments Required          $1,728,000
                                                                   ==========

--------------------------------------------------------------------------------
                                      F-36

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 - COMMITMENTS (CONTINUED)

The following  schedule  shows the  composition  of total rental expense for all
operating leases:

                                                     June 30,
                                       ------------------------------------
                                         2006          2005          2004
                                       --------      --------      --------
                                                  (In Thousands)

          Minimum rentals              $353,000      $372,000      $371,000
          Rental income                 (40,000)      (45,000)      (28,000)
                                       --------      --------      --------

                                       $313,000      $327,000      $343,000
                                       ========      ========      ========

The Bank is a party to financial instruments with  off-balance-sheet risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments include commitments to extend credit. The Bank's exposure
to  credit  loss in the  event  of  nonperformance  by the  other  party  to the
financial  instrument  for  commitments  to extend credit is  represented by the
contractual notional amount of those instruments.  The Bank uses the same credit
policies  in  making  commitments  and  conditional  obligations  as it does for
on-balance-sheet instruments.

The outstanding loan commitments are as follows:

                                                               June 30,
                                                           ------------------
                                                             2006       2005
                                                           -------    -------
                                                            (In Thousands)

          Mortgage loans                                   $37,698    $30,594
          Home equity loans                                  2,819      3,089
          Construction loans                                 3,907      2,300
          Construction loans in process                     11,368      6,489
          Undisbursed funds from approved lines of credit   25,556     27,707
                                                           -------    -------

                                                           $81,348    $70,179
                                                           =======    =======

At June 30, 2006, the outstanding  mortgage loan commitments include $32,052,000
for fixed  rate loans  with  interest  rates  ranging  from  4.625% to 6.80% and
$5,646,000 for  adjustable  rate loans with initial rates ranging from 4.125% to
6.60%. Home equity loan commitments include $2,369,000 for fixed rate loans with
interest  rates  ranging from 5.625% to 6.50% and $450,000 for  adjustable  rate
loans with an initial rate of 7.00%. Construction loan commitments are for loans
with  interest  rates  1.00% above the prime rate  published  in the Wall Street
Journal.  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, 2005, the outstanding  mortgage loan commitments include $23,673,000
for fixed  rate  loans  with  interest  rates  ranging  from  4.50% to 6.75% and
$6,921,000 for adjustable rate loans with an initial rates ranging from 4.00% to
6.13%. Home equity loan commitments  include $2,979,000 of fixed rate loans with
interest  rates  ranging from 4.38% to 7.00% and $110,000  for  adjustable  rate
loans with an initial rate of 5.50%. 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.  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.

--------------------------------------------------------------------------------
                                      F-37

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 - COMMITMENTS (CONTINUED)

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 $100,000,000,  with the Federal Home Loan Bank
of New York,  which expire on July 31, 2006.  As of June 30, 2006, no funds were
drawn against these credit lines.

At June 30, 2006,  the Bank has  commitments  for building  improvements  in the
amount of  $281,000.  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.


NOTE 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, Interest Receivable and Interest Payable

     The carrying amounts for cash and cash equivalents, interest receivable and
     interest payable approximate fair value because they mature in three months
     or less.

Securities  Available for Sale,  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.

--------------------------------------------------------------------------------
                                      F-38

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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.  The carrying
     value,  represented  by the net deferred fee arising from the  unrecognized
     commitment,  and the fair value,  determined by  discounting  the remaining
     contractual  fee over  the  term of the  commitment  using  fees  currently
     charged to enter into similar  agreements with similar credit risk, are not
     considered  material for disclosure.  The  contractual  amounts of unfunded
     commitments are presented in Note 16.

     The carrying amounts and estimated fair values of financial instruments are
as follows:

<TABLE>
<CAPTION>
                                                                                  June 30,
                                                      -------------------------------------------------------------
                                                                2006                               2005
                                                      ----------------------------       --------------------------
                                                                       Estimated                          Estimated
                                                      Carrying           Fair            Carrying            Fair
                                                       Amount            Value            Amount             Value
                                                       ------            -----            ------             -----
                                                                         (In Thousands)
<S>                                              <C>              <C>               <C>               <C>
Financial assets:
     Cash and cash equivalents                     $   230,279      $   230,279       $   139,865       $   139,865
     Securities available for sale                      18,346           18,346            33,591            33,591
     Securities held to maturity                       209,048          204,447           470,098           469,221
     Loans receivable                                  703,613          664,672           558,018           550,655
     Mortgage-backed securities held to maturity       689,962          670,329           758,121           762,730
     Interest receivable                                 8,836            8,836            10,430            10,430

Financial liabilities:
     Deposits (A)                                    1,443,738        1,439,141         1,528,777         1,528,203
     Advances from FHLB                                 61,105           61,073            61,687            63,814
     Interest payable on advances                          445              445               392               392
</TABLE>

(A) Includes accrued interest payable on deposits

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-39

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Limitations (Continued)

     The fair value  estimates  are based on existing  on-and-off  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.


NOTE 18 - PARENT ONLY FINANCIAL INFORMATION

Kearny Financial Corp. operates its wholly owned subsidiaries,  Kearny Financial
Securities,   Inc.  and  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, 2006 and
2005, and for each of the years in the three-year period ended June 30, 2006.

                   CONDENSED STATEMENTS OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                                                                             June 30,
                                                                       ------------------
                                                                         2006       2005
                                                                       --------   -------
                                                                          (In Thousands)

<S>                                                                   <C>        <C>
                                            ASSETS
          Cash and amounts due from depository institutions            $ 22,535   $ 92,305
          ESOP loan receivable                                           15,796     17,198
          Accrued interest receivable                                        72         79
          Investment in subsidiaries                                    451,945    395,831
          Due from subsidiaries                                           2,241          -
          Other assets                                                      225        241
                                                                       --------   --------

                                                                       $492,814   $505,654
                                                                       ========   ========

                             LIABILITIES AND STOCKHOLDERS' EQUITY
          Due to subsidiaries                                          $      -   $    105
          Other liabilities                                               1,928         67
          Stockholders' equity                                          490,886    505,482
                                                                       --------   --------

                                                                       $492,814   $505,654
                                                                       ========   ========
</TABLE>

--------------------------------------------------------------------------------
                                      F-40
<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 18 - PARENT ONLY FINANCIAL INFORMATION (CONTINUED)

                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                      Years Ended June 30,
                                                                              ----------------------------------------------
                                                                                2006               2005                2004
                                                                              -------            -------             -------
                                                                                         (In Thousands)

<S>                                                                         <C>                <C>                 <C>
          Net interest income                                                 $ 2,702            $ 1,723             $   110
          Gain on sale of securities available for sale                             -                 71                   -
          Loss on sale of real estate owned                                       (35)                 -                   -
          Equity in undistributed earnings of subsidiaries                      8,639             17,988              13,442
                                                                              -------            -------             -------

                                                                               11,306             19,782              13,552
                                                                              -------            -------             -------

          Directors' compensation                                                 188                125                  67
          Merger expense                                                            -                  -                 592
          Other expenses                                                          844                126                   -
                                                                              -------            -------             -------

                                                                                1,032                251                 659
                                                                              -------            -------             -------

                 Income before Income Taxes                                    10,274             19,531              12,893

          Income tax expense (benefit)                                            666                633                  (4)
                                                                              -------            -------             -------

                 Net income                                                   $ 9,608            $18,898             $12,897
                                                                              =======            =======             =======
</TABLE>

                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                      Years Ended June 30,
                                                                              ----------------------------------------------
                                                                                2006               2005                2004
                                                                              -------            -------             -------
                                                                                         (In Thousands)

<S>                                                                         <C>                <C>                 <C>
          CASH FLOWS FROM OPERATING ACTIVITIES
               Net income                                                     $ 9,608            $18,898             $12,897
               Adjustments to reconcile net income to net
                   cash provided by (used in) operating
                   activities:
                   Equity in undistributed earnings of the
                        subsidiaries                                           (8,639)           (17,988)            (13,442)
                   Amortization of premiums                                         -                  -                   2
                   Realized gain on sale of securities
                        available for sale                                          -                (71)                  -
                   Realized loss on sale of real estate owned                      35                  -                   -
                   (Increase) decrease in accrued interest
                        receivable                                                  7                (76)                  -
                   (Increase) in intercompany accounts                             (9)                 -                   -
                   (Increase) decrease in other assets                            (84)                63                 394
                   Increase (decrease) in other liabilities                       919               (932)                 16
                                                                              -------            -------             -------

                 Net Cash Provided by (Used in) Operating
                     Activities                                                 1,837               (106)               (133)
                                                                              -------            -------             -------
</TABLE>

--------------------------------------------------------------------------------
                                      F-41

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 18 - PARENT ONLY FINANCIAL INFORMATION (CONTINUED)

                 CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
                                                                                      Years Ended June 30,
                                                                              ----------------------------------------------
                                                                                2006               2005                2004
                                                                              -------            -------             -------
                                                                                         (In Thousands)
<S>                                                                         <C>               <C>                  <C>
          CASH FLOWS FROM INVESTING ACTIVITIES
               Proceeds from sale of securities available
                   for sale                                                  $      -          $   1,115            $      -
               Proceeds from sale of real estate owned                             65                  -                   -
               Loan to ESOP                                                         -            (17,457)                  -
               Repayment of loan to ESOP                                        1,402                259                   -
               Cash dividends paid on unallocated ESOP
                   shares used to repay loan receivable from
                   Bank                                                          (326)                 -                   -
               Capital contributions to subsidiaries                          (50,015)          (107,307)                  -
                                                                             --------          ---------            --------

                 Net Cash Used in Investing Activities                        (48,874)          (123,390)                  -
                                                                             --------          ---------            --------

          CASH FLOWS FROM FINANCING ACTIVITIES
               Proceeds from issuance of common stock of
                   Kearny Financial Corp.                                           -            214,567                   -
               Refund of common stock offering expense                              3                  -                   -
               Purchase of common stock of Kearny
                   Financial Corp. for treasury                                (2,268)                 -                   -
               Purchase of common stock of Kearny
                   Financial Corp. for restricted stock plan                  (16,673)                 -                   -
               Dividends paid to minority stockholders of
                   Kearny Financial Corp.                                      (3,795)                 -                   -
                                                                             --------          ---------            --------

                 Net Cash Provided by (Used in) Financing
                     Activities                                               (22,733)           214,567                   -
                                                                             --------          ---------            --------

                 Net Increase (Decrease) in Cash and Cash
                     Equivalents                                              (69,770)            91,071                (133)

          CASH AND CASH EQUIVALENTS - BEGINNING                                92,305              1,234               1,367
                                                                             --------          ---------            --------

          CASH AND CASH EQUIVALENTS - ENDING                                 $ 22,535          $  92,305            $  1,234
                                                                             ========          =========            ========

          SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS
               Cash dividend declared                                        $    942          $       -            $      -
                                                                             ========          =========            ========

               Minority interest in consolidated subsidiaries                $      -          $       -            $ 17,336
                                                                             ========          =========            ========

               Goodwill - West Essex acquisition                             $      -          $       -            $ 50,517
                                                                             ========          =========            ========

               Deposit for acquisition of West Essex                         $      -          $       -            $(67,853)
                                                                             ========          =========            ========
</TABLE>

--------------------------------------------------------------------------------
                                      F-42

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 19 - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                                        Year Ended June 30, 2006
                                                                              ------------------------------------------------------
                                                                               Income            Shares             Per Share
                                                                             (Numerator)      (Denominator)          Amount
                                                                             -----------      -------------          ------
                                                                              (In Thousands, Except Per Share Data)

<S>                                                                           <C>                <C>                 <C>
          Net income                                                           $9,608
                                                                               ======

          Basic earnings per share, income available to common
               stockholders                                                    $9,608             70,904              $0.14
                                                                                                                      =====

          Effect of dilutive securities:
               Stock options                                                        -                142
               Restricted stock awards                                              -                 54
                                                                               ------             ------

                                                                               $9,608             71,100              $0.14
                                                                               ======             ======              =====
</TABLE>

<TABLE>
<CAPTION>
                                                                                        Year Ended June 30, 2005
                                                                              ------------------------------------------------------
<S>                                                                         <C>                 <C>                 <C>
          Net income                                                          $18,898
                                                                              =======

          Basic earnings per share, income available to common
               stockholders                                                   $18,898             57,963              $0.33
                                                                                                                      =====

          Effect of dilutive securities:
               Stock options                                                        -                  -
               Restricted stock awards                                              -                  -
                                                                              -------             ------

                                                                              $18,898             57,963              $0.33
                                                                              =======             ======              =====
</TABLE>

<TABLE>
<CAPTION>
                                                                                        Year Ended June 30, 2004
                                                                              ------------------------------------------------------

<S>                                                                           <C>                <C>                 <C>
          Net income                                                          $12,897
                                                                              =======

          Basic earnings per share, income available to common
               stockholders                                                   $12,897             50,916              $0.25
                                                                                                                      =====

          Effect of dilutive securities:
               Stock options                                                        -                  -
               Restricted stock awards                                              -                  -
                                                                              -------             ------

                                                                              $12,897             50,916              $0.25
                                                                              =======             ======              =====
</TABLE>

--------------------------------------------------------------------------------
                                      F-43

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a condensed  summary of quarterly results of operations for the
years ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                          Year Ended June 30, 2006
                                                  ----------------------------------------
                                                   First     Second      Third     Fourth
                                                  Quarter    Quarter    Quarter    Quarter
                                                  -------    -------    -------    -------
                                                   (In Thousands, Except Per Share Data)

<S>                                            <C>        <C>        <C>        <C>
Interest income                                  $ 21,971   $ 21,995   $ 22,456   $ 22,901
Interest expense                                    9,158      9,507      9,764     10,216
                                                 --------   --------   --------   --------

       Net Interest Income                         12,813     12,488     12,692     12,685

Provision for loan losses                              75         64        106       (173)
                                                 --------   --------   --------   --------

       Net Interest Income after Provision for
           Loan Losses                             12,738     12,424     12,586     12,858

Noninterest income                                    593        617      1,529        586
Noninterest expenses                                9,378     10,138     11,419     11,111
                                                 --------   --------   --------   --------

       Income before Income Taxes                   3,953      2,903      2,696      2,333

Income taxes                                          989        577        250        461
                                                 --------   --------   --------   --------

       Net Income                                $  2,964   $  2,326   $  2,446   $  1,872
                                                 ========   ========   ========   ========

Net income per common share:
     Basic                                       $   0.04   $   0.03   $   0.03   $   0.03
                                                 ========   ========   ========   ========

     Diluted                                     $   0.04   $   0.03   $   0.03   $   0.03
                                                 ========   ========   ========   ========

     Dividends declared per common share         $   0.09   $   0.05   $   0.05   $   0.05
                                                 ========   ========   ========   ========
</TABLE>

--------------------------------------------------------------------------------
                                      F-44

<PAGE>

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                          Year Ended June 30, 2005
                                                  ----------------------------------------
                                                   First     Second      Third     Fourth
                                                  Quarter    Quarter    Quarter    Quarter
                                                  -------    -------    -------    -------
                                                   (In Thousands, Except Per Share Data)

<S>                                            <C>        <C>        <C>        <C>

Interest income                                  $ 19,907   $ 19,832    $ 21,078    $ 21,624
Interest expense                                    7,103      7,174       7,764       8,381
                                                 --------   --------    --------    --------

       Net Interest Income                         12,804     12,658      13,314      13,243

Provision for loan losses                             151        (34)       (110)         61
                                                 --------   --------    --------    --------

       Net Interest Income after Provision for
           Loan Losses                             12,653     12,692      13,424      13,182

Noninterest income                                    494        410         492       8,107
Noninterest expenses                                7,789      8,767       8,811       9,495
                                                 --------   --------    --------    --------

       Income before Income Taxes                   5,358      4,335       5,105      11,794

Income taxes                                        1,562      1,143       1,279       3,710
                                                 --------   --------    --------    --------

       Net Income                                $  3,796   $  3,192    $  3,826    $  8,084
                                                 ========   ========    ========    ========

Net income per common share:
     Basic                                       $   0.07   $   0.06    $   0.06    $   0.11
                                                 ========   ========    ========    ========

     Diluted                                     $   0.07   $   0.06    $   0.06    $   0.11
                                                 ========   ========    ========    ========
</TABLE>

--------------------------------------------------------------------------------
                                      F-45

<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      KEARNY FINANCIAL CORP.


Dated: September 5, 2006              By:  /s/John N. Hopkins
                                           -------------------------------------
                                           John N. Hopkins
                                           President and Chief Executive Officer
                                           (Duly Authorized Officer)

         Pursuant to the  requirement  of the  Securities  Exchange Act of 1934,
this Report has been signed below by the following  persons on September 5, 2006
on behalf of the Registrant and in the capacities indicated.

<TABLE>
<CAPTION>
<S>                                                       <C>
By:      /s/John N. Hopkins                                   By:      /s/Albert E. Gossweiler
         --------------------------------------------                  --------------------------------------------
         John N. Hopkins                                               Albert E. Gossweiler
         President and Chief Executive Officer                         Senior Vice President and Chief
         (Principal Executive Officer)                                 Financial Officer
                                                                       (Principal Financial Officer)


By:      /s/William C. Ledgerwood                             By:      /s/Theodore J. Aanensen
         --------------------------------------------                  --------------------------------------------
         William C. Ledgerwood                                         Theodore J. Aanensen
         Senior Vice President and Treasurer,                          Director
           Chief Accounting Officer
         (Principal Accounting Officer)


By:      /s/John J. Mazur, Jr.                                By:      /s/Joseph P. Mazza
         --------------------------------------------                  --------------------------------------------
         John J. Mazur Jr.                                             Joseph P. Mazza
         Chairman                                                      Director


By:      /s/Matthew T. McClane                                By:      /s/John F. McGovern
         --------------------------------------------                  --------------------------------------------
         Matthew T. McClane                                            John F. McGovern
         Director                                                      Director


By:      /s/Leopold W. Montanaro                              By:      /s/John F. Regan
         --------------------------------------------                  --------------------------------------------
         Leopold W. Montanaro                                          John F. Regan
         Director                                                      Director


By:      /s/Henry S. Parow
         --------------------------------------------
         Henry S. Parow
         Director
</TABLE>