SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

 

FORM            10-Q

 

| (Mark One)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| X                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                            SECURITIES |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | EXCHANGE ACT OF 1934 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| For the quarterly period ended                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | September 30, 2007 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| OR                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                            SECURITIES |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | EXCHANGE ACT OF 1934 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| For the transition period from                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | to |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| Commission File Number000-51093                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| KEARNY FINANCIAL CORP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (Exact name of registrant as specified in its                            charter)                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| UNITED STATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 22-3803741 |
| (State or other jurisdiction of                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (I.R.S. Employer |
| incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Identification Number) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 120 Passaic Ave., Fairfield, New Jersey                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 07004-3510 |
| (Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (Zip Code) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| Registrant’s telephone number, including area                            code                                                                                                                                                                                                                                                                                                                                                                                                                     | 973-244-4500 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| Indicate by check markwhether the registrant (1) has                            filed all reports required to be filed by Section 13 or 15(d) of the                            Securities Exchange Act of 1934 during the preceding 12 months (or for                            such shorter period that the registrant was required to file such                            reports), and (2) has been subject to such filing requirements for the                            past 90 days. Yes X No |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Indicate by check mark whether the registrant is a large                            accelerated filer, an accelerated filer, or a non-accelerated filer.                            See definition of “accelerated filer” and “large                            accelerated filer” in Rule 12b-2 of the Exchange Act (Check                            one):                                                                                                                    |
| Large accelerated filer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Accelerated filer X | Non-accelerated filer |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Indicate by check mark whether the registrant is a shell                            company (as defined in Rule 12b-2 of the Exchange Act). Yes No                            X                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| The number of shares outstanding of each of the                            issuer’s classes of common stock, as of the latest practicable                            date: November 1, 2007.                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| $0.10 par value common stock - 71,113,937 shares                            outstanding                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

 

INDEX

 

 

|                           |                                                                                                      | Page   |
|--------------------------------|-----------------------------------------------------------------------------------------------------------|--------|
|                           |                                                                                                      | Number |
| PART I - FINANCIAL INFORMATION |                                                                                                      |   |
|                           |                                                                                                      |   |
| Item 1:                        | Financial Statements                                                                                      |   |   |
|                           |                                                                                                      |   |
|                           | Consolidated Statements of Financial                            Condition                                 |   |   |
|                           | at September 30, 2007 and June 30, 2007                            (Unaudited)                            |   | 1 |
|                           |                                                                                                      |   |
|                           | Consolidated Statements of Income for the Three                            Months                         |   |   |
|                           | Ended September 30, 2007 and 2006 (Unaudited)                                                             |   | 2-3 |
|                           |                                                                                                      |   |
|                           | Consolidated Statements of Changes in                            Stockholders’ Equity for the Three |   |   |
|                           | Months Ended September 30, 2007 and 2006                            (Unaudited)                           |   | 4-5 |
|                           |                                                                                                      |   |
|                           | Consolidated Statements of Cash Flows for the                            Three                            |   |   |
|                           | Months Ended September 30, 2007 and 2006                            (Unaudited)                           |   | 6-7 |
|                           |                                                                                                      |   |
|                           | Notes to Consolidated Financial Statements                                                                |   | 8-12 |
|                           |                                                                                                      |   |
| Item 2:                        | Management’s Discussion and Analysis of                                                             |   |   |
|                           | Financial Condition and Results of Operations                                                             |   | 13-21 |
|                           |                                                                                                      |   |
| Item 3:                        | Quantitative and Qualitative Disclosure About Market                            Risk                      |   | 22-23 |
|                           |                                                                                                      |   |
| Item 4:                        | Controls and Procedures                                                                                   |   | 24 |
|                           |                                                                                                      |   |
|                           |                                                                                                      |   |
| PART II - OTHER INFORMATION    |                                                                                                      | 25-27  |
|                           |                                                                                                      |   |
|                           |                                                                                                      |   |
| SIGNATURES                     |                                                                                                      | 28     |
|                           |                                                                                                      |   |

 

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In            Thousands, Except Share Data, Unaudited)

 

 

|                                                                                                                                                                                                  |   | September 30, |      | June 30, |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-----------|----------|--------|
|                                                                                                                                                                                                  |   | 2007          |      | 2007     |   |
| Assets                                                                                                                                                                                                |   |          |      |     |   |   |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Cash and amounts due from depository                            institutions                                                                                                                          |   | $             | 20,853    |     | $      | 18,999 |   |
| Interest-bearing deposits in other banks                                                                                                                                                              |   |          | 111,709   |     |   | 144,342 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Cash and Cash Equivalents                                                                                                                                                                             |   |          | 132,562   |     |   | 163,341 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Securities available for sale (amortized cost $47,201                            and $90,580)                                                                                                         |   |          | 45,940    |     |   | 88,869 |   |
| Loans receivable, including net deferred loan costs of                            $1,061 and $1,511                                                                                                   |   |          | 936,385   |     |   | 866,542 |   |
| Less allowance for loan losses                                                                                                                                                                        |   |          | (6,143    | )        |   | (6,049 | ) |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Net Loans Receivable                                                                                                                                                                                  |   |          | 930,242   |     |   | 860,493 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Mortgage-backed securities available for sale (amortized                            cost $683,922 and $655,123)                                                                                       |   |          | 679,837   |     |   | 643,779 |   |
| Premises and equipment                                                                                                                                                                                |   |          | 34,959    |     |   | 35,369 |   |
| Federal Home Loan Bank of New York (“FHLB”)                            stock                                                                                                              |   |          | 8,655     |     |   | 4,162 |   |
| Interest receivable                                                                                                                                                                                   |   |          | 8,368     |     |   | 8,028 |   |
| Goodwill                                                                                                                                                                                              |   |          | 82,263    |     |   | 82,263 |   |
| Bank owned life insurance                                                                                                                                                                             |   |          | 15,289    |     |   | 15,154 |   |
| Other assets                                                                                                                                                                                          |   |          | 12,356    |     |   | 15,795 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Total Assets                                                                                                                                                                                          |   | $             | 1,950,471 |     | $      | 1,917,253 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Liabilities and Stockholders’                            Equity                                                                                                                                 |   |          |      |     |   |   |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Liabilities                                                                                                                                                                                           |   |          |      |     |   |   |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Deposits:                                                                                                                                                                                             |   |          |      |     |   |   |   |
| Non-interest bearing                                                                                                                                                                                  |   | $             | 54,916    |     | $      | 56,339 |   |
| Interest-bearing                                                                                                                                                                                      |   |          | 1,283,349 |     |   | 1,355,374 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Total Deposits                                                                                                                                                                                        |   |          | 1,338,265 |     |   | 1,411,713 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Advances from FHLB                                                                                                                                                                                    |   |          | 128,328   |     |   | 28,488 |   |
| Advance payments by borrowers for taxes                                                                                                                                                               |   |          | 5,156     |     |   | 5,460 |   |
| Other liabilities                                                                                                                                                                                     |   |          | 9,544     |     |   | 9,000 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Total Liabilities                                                                                                                                                                                     |   |          | 1,481,293 |     |   | 1,454,661 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Stockholders’ Equity                                                                                                                                                                            |   |          |      |     |   |   |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Preferred stock $0.10 par value, 25,000,000 shares                            authorized; none issuedand outstanding                                                                                  |   |          | —   |     |   | — |   |
| Common stock $0.10 par value, 75,000,000 shares                            authorized; 72,737,500 sharesissued; 71,113,937 and 71,143,337 shares outstanding,                            respectively |   |          | 7,274     |     |   | 7,274 |   |
| Paid-in capital                                                                                                                                                                                       |   |          | 199,335   |     |   | 197,976 |   |
| Retained earnings                                                                                                                                                                                     |   |          | 305,066   |     |   | 304,970 |   |
| Unearned Employee Stock Ownership Plan shares; 1,369,889                            sharesand 1,406,258 shares, respectively                                                                          |   |          | (13,699   | )        |   | (14,063 | ) |
| Treasury stock, at cost; 1,623,563 shares and 1,594,163                            shares, respectively                                                                                               |   |          | (24,754   | )        |   | (24,361 | ) |
| Accumulated other comprehensive loss                                                                                                                                                                  |   |          | (4,044    | )        |   | (9,204 | ) |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Total Stockholders’ Equity                                                                                                                                                                      |   |          | 469,178   |     |   | 462,592 |   |
|                                                                                                                                                                                                  |   |          |      |     |   |   |   |
| Total Liabilities and Stockholders’                            Equity                                                                                                                           |   | $             | 1,950,471 |     | $      | 1,917,253 |   |

 

See            notes to consolidated financial statements.

 

 

1

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In            Thousands, Except Per Share Data, Unaudited)

 

 

|                                                                           |   | Three Months EndedSeptember 30, |   |
|--------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                           |   |                            | 2007   |   |   | 2006 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Interest Income:                                                               |   |                            |   |   |   |   |   |
| Loans                                                                          |   | $                               | 13,171 |   | $ | 10,311 |   |
| Mortgage-backed securities                                                     |   |                            | 8,203  |   |   | 8,021 |   |
| Securities:                                                                    |   |                            |   |   |   |   |   |
| Taxable                                                                        |   |                            | 352    |   |   | 400 |   |
| Tax-exempt                                                                     |   |                            | 549    |   |   | 1,885 |   |
| Other interest-earning assets                                                  |   |                            | 1,138  |   |   | 2,667 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Total Interest Income                                                          |   |                            | 23,413 |   |   | 23,284 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Interest Expense:                                                              |   |                            |   |   |   |   |   |
| Deposits                                                                       |   |                            | 11,250 |   |   | 10,745 |   |
| Borrowings                                                                     |   |                            | 791    |   |   | 851 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Total Interest Expense                                                         |   |                            | 12,041 |   |   | 11,596 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Net Interest Income                                                            |   |                            | 11,372 |   |   | 11,688 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Provision for Loan Losses                                                      |   |                            | 94     |   |   | 158 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Net Interest Income after Provision for Loan                            Losses |   |                            | 11,278 |   |   | 11,530 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Non-Interest Income:                                                           |   |                            |   |   |   |   |   |
| Fees and service charges                                                       |   |                            | 335    |   |   | 228 |   |
| Gain on sale of securities available for sale                                  |   |                            | 7      |   |   | — |   |
| Miscellaneous                                                                  |   |                            | 370    |   |   | 340 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Total Non-Interest Income                                                      |   |                            | 712    |   |   | 568 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Non-interest expenses:                                                         |   |                            |   |   |   |   |   |
| Salaries and employee benefits                                                 |   |                            | 6,323  |   |   | 6,807 |   |
| Net occupancy expense of premises                                              |   |                            | 890    |   |   | 858 |   |
| Equipment                                                                      |   |                            | 1,036  |   |   | 1,076 |   |
| Advertising                                                                    |   |                            | 251    |   |   | 393 |   |
| Federal insurance premium                                                      |   |                            | 141    |   |   | 142 |   |
| Amortization of intangible assets                                              |   |                            | 159    |   |   | 159 |   |
| Directors’ compensation                                                  |   |                            | 560    |   |   | 657 |   |
| Miscellaneous                                                                  |   |                            | 1,001  |   |   | 1,004 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Total Non-Interest Expenses                                                    |   |                            | 10,361 |   |   | 11,096 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Income before Income Taxes                                                     |   |                            | 1,629  |   |   | 1,002 |   |
| Income Taxes                                                                   |   |                            | 599    |   |   | 76 |   |
|                                                                           |   |                            |   |   |   |   |   |
| Net Income                                                                     |   | $                               | 1,030  |   | $ | 926 |   |

 

 

2

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(In            Thousands, Except Per Share Data, Unaudited)

 

|                          | Three Months EndedSeptember 30, |
|-------------------------------|---------------------------------|
|                          | 2007                            |   | 2006 |
| Net Income per Common         |                            |   |   |   |   |
| Share (EPS):                  |                            |   |   |   |   |
| Basic                         | $                               | 0.01 |   | $ | 0.01 |
| Diluted                       |                            | 0.01 |   |   | 0.01 |
|                          |                            |   |   |   |   |
| Weighted Average Number of    |                            |   |   |   |   |
| Common Shares Outstanding:    |                            |   |   |   |   |
| Basic                         |                            | 68,718 |   |   | 69,751 |
| Diluted                       |                            | 68,933 |   |   | 70,097 |
|                          |                            |   |   |   |   |
| Dividends Declared Per Common |                            |   |   |   |   |
| Share                         | $                               | 0.05 |   | $ | 0.05 |

 

See            notes to consolidated financial statements.

 

 

3

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’            EQUITY

Three Months Ended September 30, 2006

(In Thousands, Except Per Share Data, Unaudited)

 

 

|                                                                                                              |   |         |   |   |   |   |        |   |   | Paid-InCapital |   |        |   | RetainedEarnings |   |   |        | UnearnedESOPShares |   |   |   | TreasuryStock |   |   |   | AccumulatedOtherComprehensiveIncome (Loss) |        |   |   |   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------|--------|--------|-------------|--------|--------|----------------|--------|-------------|--------|------------------|--------|--------|-------------|--------------------|--------|--------|--------|---------------|--------|--------|--------|--------------------------------------------|-------------|--------|--------|--------|--------|
|                                                                                                              |   | Common Stock |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |
|                                                                                                              |   | Shares       |   |   |   | Amount |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   | Total  |                                       |
|                                                                                                              |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Balance - June 30, 2006                                                                                           |   | 72,738       |   |   |   | $      | 7,274       |   |   |           | $      | 192,534     |   |             |   | $      | 306,728     |               |   |   | $      | (15,517       | )      |   |   | $                                          | —     |   |   |   | $      | (15,885 | ) |   |   | $ | 475,134 |   |
|                                                                                                              |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income:                                                                                             |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                        |   | **—**  |   |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | 926         |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | 926 |   |
| Unrealized gain on securities available for sale, net of                            deferred income tax of $5,570 |   | **—**  |   |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | 10,345 |   |   |   |   | 10,345 |   |
|                                                                                                              |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Total Comprehensive Income                                                                                        |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   | 11,271 |   |
|                                                                                                              |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| ESOP shares committed to be released (36                            shares)                                       |   | **—**  |   |   |   |   | **—** |   |   |           |   | 172         |   |             |   |   | **—** |               |   |   |   | 363           |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | 535 |   |
| Stock option expense                                                                                              |   | **—**  |   |   |   |   | **—** |   |   |           |   | 498         |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | 498 |   |
| Treasury stock purchases                                                                                          |   | (283         | )      |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | (4,251      | )      |   |   |   | **—** |   |   |   |   | (4,251 | ) |
| Restricted stock plan shares purchased (54                            shares)                                     |   | **—**  |   |   |   |   | **—** |   |   |           |   | (789        | )      |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | (789 | ) |
| Restricted stock plan shares earned (67                            shares)                                        |   | **—**  |   |   |   |   | **—** |   |   |           |   | 826         |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | 826 |   |
| Cash dividends declared ($0.05/share)                                                                             |   | **—**  |   |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | (920        | )                  |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | (920 | ) |
|                                                                                                              |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Balance – September 30, 2006 (Restated)                                                                     |   | 72,455       |   |   |   | $      | 7,274       |   |   |           | $      | 193,241     |   |             |   | $      | 306,734     |               |   |   | $      | (15,154       | )      |   |   | $                                          | (4,251      | )      |   |   | $      | (5,540 | ) |   |   | $ | 482,304 |   |

 

See            notes to consolidated financial statements.

 

 

4

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’            EQUITY

Three Months Ended September 30, 2007

(In Thousands, Except Per Share Data, Unaudited)

 

 

|                                                                                                                      |   |         |   |   |   |   |        |   |   | Paid-InCapital |   |        |   | RetainedEarnings |   |   |        | UnearnedESOPShares |   |   |   | TreasuryStock |   |   |   | AccumulatedOtherComprehensiveIncome (Loss) |        |   |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------|--------|--------|-------------|--------|--------|----------------|--------|-------------|--------|------------------|--------|--------|-------------|--------------------|--------|--------|--------|---------------|--------|--------|--------|--------------------------------------------|-------------|--------|--------|--------|--------|
|                                                                                                                      |   | Common Stock |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |
|                                                                                                                      |   | Shares       |   |   |   | Amount |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   | Total  |                                       |
|                                                                                                                      |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Balance - June 30, 2007                                                                                                   |   | 71,143       |   |   |   | $      | 7,274       |   |   |           | $      | 197,976     |   |             |   | $      | 304,970     |               |   |   | $      | (14,063       | )      |   |   | $                                          | (24,361     | )      |   |   | $      | (9,204 | ) |   |   | $ | 462,592 |   |
|                                                                                                                      |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income:                                                                                                     |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                |   | **—**  |   |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | 1,030       |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | 1,030 |   |
| Realized gain on securities available forsale, net of income tax of $3                                                    |   | **—**  |   |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | (4 | ) |   |   |   | (4 | ) |
| Unrealized gain on securities available for sale, net of                            deferred income tax expense of $2,948 |   | **—**  |   |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | 4,769 |   |   |   |   | 4,769 |   |
| Benefit plans, net of deferred income taxof $263                                                                          |   | **—**  |   |   |   |   | **—** |   |   |           |   | **—** |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | 395 |   |   |   |   | 395 |   |
| Total Comprehensive Income                                                                                                |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   | 6,190 |   |
|                                                                                                                      |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| ESOP shares committed to be released (36                            shares)                                               |   | **—**  |   |   |   |   | **—** |   |   |           |   | 104         |   |             |   |   | —     |               |   |   |   | 364           |   |   |   |                                       | —     |   |   |   |   | — |   |   |   |   | 468 |   |
| Dividends contributed for payment of ESOP                            loan                                                 |   | **—**  |   |   |   |   | **—** |   |   |           |   | 12          |   |             |   |   | **—** |               |   |   |   | **—**   |   |   |   |                                       | **—** |   |   |   |   | **—** |   |   |   |   | 12 |   |
| Stock option expense                                                                                                      |   | **—**  |   |   |   |   | **—** |   |   |           |   | 477         |   |             |   |   | —     |               |   |   |   | —       |   |   |   |                                       | —     |   |   |   |   | — |   |   |   |   | 477 |   |
| Treasury stock purchases                                                                                                  |   | (34          | )      |   |   |   | —     |   |   |           |   | —     |   |             |   |   | —     |               |   |   |   | —       |   |   |   |                                       | (469        | )      |   |   |   | — |   |   |   |   | (469 | ) |
| Treasury stock reissued                                                                                                   |   | 5            |   |   |   |   | —     |   |   |           |   | (13         | )      |             |   |   | —     |               |   |   |   | —       |   |   |   |                                       | 76          |   |   |   |   | — |   |   |   |   | 63 |   |
| Restricted stock plan shares earned (63                            shares)                                                |   | —      |   |   |   |   | —     |   |   |           |   | 771         |   |             |   |   | —     |               |   |   |   | —       |   |   |   |                                       | —     |   |   |   |   | — |   |   |   |   | 771 |   |
| Tax benefit from stock based compensation                                                                                 |   | —      |   |   |   |   | —     |   |   |           |   | 8           |   |             |   |   | —     |               |   |   |   | —       |   |   |   |                                       | —     |   |   |   |   | — |   |   |   |   | 8 |   |
| Cash dividends declared ($0.05/share)                                                                                     |   | —      |   |   |   |   | —     |   |   |           |   | —     |   |             |   |   | (934        | )                  |   |   |   | —       |   |   |   |                                       | —     |   |   |   |   | — |   |   |   |   | (934 | ) |
|                                                                                                                      |   |         |   |   |   |   |        |   |   |           |   |        |   |             |   |   |        |               |   |   |   |          |   |   |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |
| Balance – September 30, 2007                                                                                        |   | 71,114       |   |   |   | $      | 7,274       |   |   |           | **$**  | 199,335     |   |             |   | $      | 305,066     |               |   |   | $      | (13,699       | )      |   |   | $                                          | (24,754     | )      |   |   | $      | (4,044 | ) |   |   | $ | 469,178 |   |

 

 

See            notes to consolidated financial statements.

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In            Thousands, Unaudited)

 

 

|                                                                                                                               |   | Three Months EndedSeptember 30, |    |
|------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                                                               |   | 2007                            |    | 2006 |   |
| Cash Flows from Operating Activities:                                                                                              |   |                            |    |   |   |   |   |
| Net income                                                                                                                         |   | $                               | 1,030   |   | $ | 926 |   |
| Adjustments to reconcile net income to net cash provided                            by operating                                   |   |                            |    |   |   |   |   |
| activities:                                                                                                                        |   |                            |    |   |   |   |   |
| Depreciation and amortization of premises and                            equipment                                                 |   |                            | 469     |   |   | 489 |   |
| Net amortization of premiums, discounts and loan fees                            and costs                                         |   |                            | 182     |   |   | 243 |   |
| Deferred income taxes                                                                                                              |   |                            | (606    | ) |   | (151 | ) |
| Amortization of intangible assets                                                                                                  |   |                            | 159     |   |   | 159 |   |
| Amortization of benefit plans’ unrecognized net                            loss, net of gainfrom curtailment and tax effects |   |                            | 18      |   |   | — |   |
| Provision for loan losses                                                                                                          |   |                            | 94      |   |   | 158 |   |
| Realized gains on sale of securities available for                            sale                                                 |   |                            | (7      | ) |   | — |   |
| Increase in cash surrender value of bank owned life                            insurance                                           |   |                            | (135    | ) |   | (131 | ) |
| ESOP, stock option plan and restricted stock plan                            expenses                                              |   |                            | 1,716   |   |   | 1,859 |   |
| (Increase) decrease in interest receivable                                                                                         |   |                            | (340    | ) |   | 127 |   |
| Decrease (increase) in other assets                                                                                                |   |                            | 690     |   |   | (116 | ) |
| Increase (decrease) in interest payable                                                                                            |   |                            | 306     |   |   | (1 | ) |
| Increase in other liabilities                                                                                                      |   |                            | 779     |   |   | 1,180 |   |
|                                                                                                                               |   |                            |    |   |   |   |   |
| Net Cash Provided by Operating Activities                                                                                          |   |                            | 4,355   |   |   | 4,742 |   |
|                                                                                                                               |   |                            |    |   |   |   |   |
| Cash Flows from Investing Activities:                                                                                              |   |                            |    |   |   |   |   |
| Purchases of securities available for sale                                                                                         |   |                            | (104    | ) |   | (92 | ) |
| Proceeds from sale of securities available for                            sale                                                     |   |                            | 43,241  |   |   | — |   |
| Proceeds from calls and maturities of securities                            available for sale                                     |   |                            | — |   |   | 1,305 |   |
| Proceeds from repayments of securities available for                            sale                                               |   |                            | 249     |   |   | 1,011 |   |
| Purchase of loans                                                                                                                  |   |                            | (26,562 | ) |   | (13,528 | ) |
| Net increase in loans receivable                                                                                                   |   |                            | (43,326 | ) |   | (26,414 | ) |
| Purchases of mortgage-backed securities available for                            sale                                              |   |                            | (63,747 | ) |   | (19,419 | ) |
| Principal repayments on mortgage-backed securities                            available for sale                                   |   |                            | 34,811  |   |   | 35,979 |   |
| Additions to premises and equipment                                                                                                |   |                            | (59     | ) |   | (277 | ) |
| Purchase of FHLB stock                                                                                                             |   |                            | (4,500  | ) |   | — |   |
| Redemption of FHLB stock                                                                                                           |   |                            | 7       |   |   | 7 |   |
|                                                                                                                               |   |                            |    |   |   |   |   |
| Net Cash Used In Investing Activities                                                                                              |   | $                               | (59,990 | ) | $ | (21,428 | ) |
|                                                                                                                               |   |                            |    |   |   |   |   |

 

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In            Thousands, Unaudited)

 

|                                                                                                   |   | Three Months EndedSeptember 30, |    |
|--------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                                   |   | 2007                            |    |   | 2006 |   |
|                                                                                                   |   |                            |    |   |   |   |   |   |
| Cash Flows from Financing Activities:                                                                  |   |                            |    |   |   |   |   |   |
| Net (decrease) increase in deposits                                                                    |   | $                               | (73,360 | ) |   | $ | 22,555 |   |
| Repayment of long-term FHLB advances                                                                   |   |                            | (160    | ) |   |   | (151 | ) |
| Long-term FHLB advances                                                                                |   |                            | 100,000 |   |   |   | — |   |
| Decrease in advance payments by borrowers for                            taxes                         |   |                            | (304    | ) |   |   | (268 | ) |
| Dividends paid to minority stockholders of Kearny                            Financial Corp.           |   |                            | (934    | ) |   |   | (934 | ) |
| Purchase of common stock of Kearny Financial Corp. for                            treasury             |   |                            | (469    | ) |   |   | (4,251 | ) |
| Treasury stock reissued                                                                                |   |                            | 63      |   |   |   | — |   |
| Purchase of common stock of Kearny Financial Corp. for                            restrictedstock plan |   |                            | — |   |   |   | (789 | ) |
| Dividends contributed for payment of ESOP                            loan                              |   |                            | 12      |   |   |   | — |   |
| Tax benefit from stock based compensation                                                              |   |                            | 8       |   |   |   | — |   |
|                                                                                                   |   |                            |    |   |   |   |   |   |
| Net Cash Provided by Financing Activities                                                              |   | $                               | 24,856  |   |   | $ | 16,162 |   |
|                                                                                                   |   |                            |    |   |   |   |   |   |
| Net Decrease in Cash and Cash Equivalents                                                              |   | $                               | (30,779 | ) |   | $ | (524 | ) |
|                                                                                                   |   |                            |    |   |   |   |   |   |
| Cash and Cash Equivalents – Beginning                                                            |   |                            | 163,341 |   |   |   | 230,279 |   |
|                                                                                                   |   |                            |    |   |   |   |   |   |
| Cash and Cash Equivalents – Ending                                                               |   | $                               | 132,562 |   |   | $ | 229,755 |   |
|                                                                                                   |   |                            |    |   |   |   |   |   |
| Supplemental Disclosures of Cash Flows                            Information:                         |   |                            |    |   |   |   |   |   |
| Cash paid during the year for:                                                                         |   |                            |    |   |   |   |   |   |
| Income taxes, net of refunds                                                                           |   | $                               | — |   |   | $ | 500 |   |
|                                                                                                   |   |                            |    |   |   |   |   |   |
| Interest                                                                                               |   | $                               | 11,735  |   |   | $ | 11,597 |   |
|                                                                                                   |   |                            |    |   |   |   |   |   |

 

See            notes to consolidated financial statements.

 

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.            PRINCIPLES OF CONSOLIDATION

 

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

 

2. BASIS OF PRESENTATION

 

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

 

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

 

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

 

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

 

8

 

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

 

|                                                            |   | Three Months EndedSeptember 30, 2007  |    |
|-----------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                            |   | Income (Numerator)                    |    | Shares (Denominator) |   | Per Share Amount |   |
|                                                            |   | (In Thousands, Except Per Share Data) |    |
|                                                            |   |                                  |    |   |   |   |   |   |   |
| Net income                                                      |   | $                                     | 1,030   |   |   |   |   |   |   |
| Basic earnings per share,income available tocommon stockholders |   | $                                     | 1,030   |   | 68,718 |   | $ | 0.01 |   |
|                                                            |   |                                  |    |   |   |   |   |   |   |
| Effect of dilutive securities:                                  |   |                                  |    |   |   |   |   |   |   |
| Stock options                                                   |   |                                  | — |   | 13 |   |   |   |   |
| Restricted stock awards                                         |   |                                  | — |   | 202 |   |   |   |   |
|                                                            |   |                                  |    |   |   |   |   |   |   |
|                                                            |   | $                                     | 1,030   |   | 68,933 |   | $ | 0.01 |   |

 

 

|                                                            |   | Three Months EndedSeptember 30, 2006  |    |
|-----------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                            |   | Income (Numerator)                    |    | Shares (Denominator) |   | Per Share Amount |   |
|                                                            |   | (In Thousands, Except Per Share Data) |    |
|                                                            |   |                                  |    |   |   |   |   |   |   |
| Net income                                                      |   | $                                     | 926     |   |   |   |   |   |   |
| Basic earnings per share,income available tocommon stockholders |   | $                                     | 926     |   | 69,751 |   | $ | 0.01 |   |
|                                                            |   |                                  |    |   |   |   |   |   |   |
| Effect of dilutive securities:                                  |   |                                  |    |   |   |   |   |   |   |
| Stock options                                                   |   |                                  | — |   | 53 |   |   |   |   |
| Restricted stock awards                                         |   |                                  | — |   | 293 |   |   |   |   |
|                                                            |   |                                  |    |   |   |   |   |   |   |
|                                                            |   | $                                     | 926     |   | 70,097 |   | $ | 0.01 |   |

 

4. DIVIDEND WAIVER

 

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

 

5. STOCK REPURCHASES PLAN

 

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

 

9

 

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6.            BENEFIT PLANS – COMPONENTS OF NET PERIODIC EXPENSE 

 

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

 

|                                               |   | Three MonthsEnded September 30, |   |
|----------------------------------------------------|--------|---------------------------------|--------|
|                                               |   | 2007                            |   | 2006 |   |
|                                               |   | (In Thousands)                  |   |
|                                               |   |                            |   |   |   |   |   |
| Service cost                                       |   | $                               | 40     |   | $ | 57 |   |
| Interest cost                                      |   |                            | 81     |   |   | 85 |   |
| Curtailment (Gain)                                 |   |                            | (35    | ) |   | — |   |
| Amortization of unrecognized transitionobligation  |   |                            | 11     |   |   | 11 |   |
| Amortization of unrecognized past serviceliability |   |                            | 18     |   |   | 14 |   |
| Amortization of unrecognized net actuarialloss     |   |                            | 36     |   |   | 46 |   |
|                                               |   |                            |   |   |   |   |   |
| Net periodic benefit expense                       |   | $                               | 151    |   | $ | 213 |   |

 

 

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

 

7.            NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

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

 

10

 

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

 

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

 

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

 

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

 

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

 

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

             

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8. RESTATEMENT

 

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

 

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ITEM            2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**Forward-Looking Statements**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Interest income from securities decreased $1.4 million or 60.9%, to            $901,000 during the quarter ended September 30, 2007, from $2.3 million during the            quarter ended September 30, 2006 due to a decrease in average securities partially            offset by an improvement in yield. Average securities decreased $142.6 million to $84.0            million during the quarter ended September 30, 2007, compared to $226.6 million during            the quarter ended September 30, 2006. The decrease in the average balance was due            primarily to the sales of municipal bonds, totaling $131.4 million during the fiscal            year ended June 30, 2007, and $43.2 million during the quarter ended September 30,            2007. Average tax-exempt securities decreased $139.2 million to $60.3 million while            average taxable securities decreased $3.4 million to $23.7 million, year-over-year. To            the extent not required to fund loan originations, management reinvested the proceeds            from the sales into cash equivalents pending redeployment into other interest-earning            assets. The yield on average securities improved 26 basis points from 4.03% for the            quarter ended September 30, 2006, to 4.29% for the quarter ended September 30, 2007.            The higher yield on the securities portfolio resulted primarily from the sale of the            lower yielding municipal bonds.

 

Interest income from other interest-earning assets decreased $1.6            million or 59.3%, to $1.1 million during the quarter ended September 30, 2007, from            $2.7 million during the quarter ended September 30, 2006.

 

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The            decrease was due to a decrease in average other interest-bearing assets, primarily cash            and cash equivalents, as well as a nominal decrease in yield. There was a $123.0            million decrease in average other interest-earning assets to $92.0 million during the            quarter ended September 30, 2007, from $215.0 million during the quarter ended            September 30, 2006. For the most part, management utilized the cash and cash            equivalents to fund loan originations and deposit outflows. There was little change in            average Federal Home Loan Bank capital stock year-over-year. With the rate on federal            funds remaining unchanged until the mid-September 2007 50 basis point rate cut, there            was only a one basis point change in the yield on average interest-earning assets,            declining to 4.95%.

 

**Interest Expense.**Total interest expense            increased $445,000 or 3.8%, to $12.0 million during the quarter ended September 30,            2007, from $11.6 million during the quarter ended September 30, 2006. The cost of            average interest-bearing liabilities increased 31 basis points to 3.51%, partially            offset by a $79.5 million decrease in average interest-bearing liabilities to $1.37            billion during the quarter ending September 30, 2007 compared to $1.45 billion during            the year earlier quarter.       

 

Interest expense from deposits increased $505,000 or 4.7%, to $11.2            million during the quarter ended September 30, 2007, from $10.7 million during the            quarter ended September 30, 2006. The increase resulted primarily from an increase in            the cost of average interest-bearing deposits, partially offset by a decrease in            average interest-bearing deposits. The cost of average interest-bearing deposits            increased 36 basis points to 3.45% during the quarter ended September 30, 2007, from            3.09% during the quarter ended September 30, 2006. Average interest-bearing deposits            decreased $85.5 million to $1.30 billion during the quarter ended September 30, 2007,            from $1.39 billion during the quarter ended September 30, 2006. Average            interest-bearing demand deposit accounts increased $24.1 million to $149.0 million and            their cost increased 39 basis points to 2.09% due to tiered money market deposit            accounts previously introduced to attract core deposits. Average savings accounts            decreased $46.7 million to $314.3 million and their cost decreased five basis points to            1.09% as depositors transferred funds to alternative investments. Average certificates            of deposit decreased $62.9 million to $840.1 million while their cost increased 51            basis points to 4.58%. Management discontinued offering promotional interest rates on            certificates of deposit during the quarter ended December 31, 2006. An increase in cost            during the current quarter was inevitable due to the upward re-pricing of maturing            certificates of deposit that pre-dated those obtained by offering promotional interest            rates. Partially offsetting the increase in cost, we retained a percentage of the            certificates of deposit previously attracted by promotional interest rates, which            renewed at lower rates when they matured. At September 30, 2006, the Bank had $30.8            million of certificates of deposit with interest rates of less than 3.00%, $416.5            million of certificates of deposit with interest rates of between 3.00 – 3.99%,            $189.6 million of certificates of deposit with interest rates of between 4.00 –            4.99% and $298.3 million of certificates of deposit with interest rates of between 5.00            – 5.99%. By September 30, 2007, the stratification adjusted to $16.1 million,            $82.1 million, $622.0 million and $105.5 million, respectively. Given the Bank’s            interest rate risk profile, a reduction in interest rates and restoration of a more            normal yield curve should aid in improving our profitability. A continuation of rates            at current levels or an increase in rates with the persistence of the current flat (or            an inverted) yield curve would negatively impact our profitability

 

Interest expense from Federal Home Loan Bank (“FHLB”)            borrowings decreased $60,000 or 7.1%, to $791,000 during the quarter ended September            30, 2007, from $851,000 during the quarter ended September 30, 2006. Average borrowings            increased $6.0 million to $67.0 million during the quarter ended September 30, 2007,            from $61.0 million during the quarter ended September 30, 2006. The cost of average            borrowings decreased 86 basis points to 4.72% during the quarter ended September 30,            2007 from 5.58% during the quarter ended September 30, 2006. The increase in borrowings            resulted primarily from a need to replenish liquidity utilized to fund loan            originations and deposit outflows. The 3.99% weighted average cost of this funding            source, relative to the cost of average certificates of deposit of

 

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4.58%, encouraged management to borrow $100.0 million from the FHLB            during the quarter ended September 30, 2007.

 

**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 as required by generally accepted accounting principles and regulatory            guidelines outlined in the Interagency Policy Statement last updated in December 2006.            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

 

The            provision for loan losses decreased $64,000, to $94,000 during the quarter ended            September 30, 2007, from a $158,000 provision recorded during the quarter ended            September 30, 2006. Management attributes the decrease principally to a reduction in            the ratio of non-performing loans to total loans between the comparative quarters, from            0.14% at September 30, 2006 to 0.13% at September 30, 2007. The provisions during both            quarters resulted from growth in the loan portfolio.

 

Total loans increased to $935.3 million at September 30, 2007 from            $865.0 million at June 30, 2007. Non-performing loans were $1.3 million or 0.13% of            total loans at September 30, 2007 compared to $1.5 million or 0.17% of total loans            reported at June 30, 2007. The allowance for loan losses as a percentage of total loans            outstanding was 0.66% at September 30, 2007, 0.70% at June 30, 2007 and 0.75% at            September 30, 2006, reflecting allowance balances of $6.1 million, $6.0 million and            $5.6 million, respectively. There were no charge-offs or recoveries during the quarters            ended September 30, 2007 and 2006.

 

Management assesses the allowance for loan losses monthly. Management            uses available information to recognize losses on loans, however, additional loan loss            provisions may be necessary in the future, based on changes in economic conditions. In            addition, regulatory agencies, as an integral part of their examination process,            periodically review the allowance for loan losses and may require us to recognize            additional provisions based on their judgment of information available to them at the            time of their examination. The allowance for loan losses as of September 30, 2007 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 and service charges from the Bank’s retail operations and            other miscellaneous income increased $137,000 or 24.1%, to $705,000 during the quarter            ended September 30, 2007 compared to $568,000 during the quarter ended September 30,            2006. Fees and service charges increased $107,000 due primarily to the overdraft            privilege program introduced in May 2007. Loan fees, income from bank owned life            insurance and miscellaneous income increased $30,000 in aggregate, with a $12,000            increase in income resulting from the float on funds held by the Bank’s official            check clearing agent and a $12,000 non-recurring payment of interest from a state tax            refund the most significant items.

 

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Non-interest income attributed to the gain on sale of securities was            $7,000 during the quarter ended September 30, 2007 compared to no gains or losses            recorded during the quarter ended September 30, 2006.

 

**Non-Interest Expense.**Non-interest expense            decreased $735,000 or 6.6%, to $10.4 million during the quarter ended September 30,            2007, from $11.1 million during the quarter ended September 30, 2006. The decrease in            non-interest expense resulted primarily from decreases in salaries and employee            benefits, equipment expense, advertising expense and directors’ compensation            partially offset by an increase in net occupancy expense of premises.

 

Salaries and employee benefits decreased $484,000 or 7.1%, to $6.3            million during the quarter ended September 30, 2007, compared to $6.8 million during            the quarter ended September 30, 2006. The component of salaries and benefits with the            most significant reduction was pension plan expense, which decreased $369,000 to            $301,000. Effective July 1, 2007, the Company implemented a freeze on all future            benefit accruals under the Bank’s non-contributory defined benefit pension plan            and related benefit equalization plan which also resulted in a curtailment gain of            $35,000 due to the immediate recognition of the unrecognized prior service cost for the            benefit equalization plan. The freeze provides additional flexibility in controlling            the costs associated with the plans while still preserving the participants’            earned and vested benefits. Stock benefits plan expense decreased $75,000 to $933,000            due to a forfeiture of unvested restricted stock and unvested stock options. Employee            Stock Ownership Plan expense decreased $67,000 to $481,000 due to a decrease in the            average market price of the Company’s common stock. Compensation expense            increased $34,000 to $3.4 million due to normal salary increases with related payroll            taxes expense increasing $11,000 to $252,000. Benefits expense decreased $18,000 to            $1.0 million due to a change in accounting for dividends on restricted stock and lower            benefit plan administrative expense partially offset by an increase in employee health            insurance cost. Beginning in July 2007, new employees must contribute to the cost of            their health insurance and the existing staff will begin contributing in January            2008.

 

Net            occupancy expense of premises increased $32,000 or 3.7%, to $890,000 during the quarter            ended September 30, 2007 from $858,000 during the quarter ended September 30, 2006.            Rent expense, net, repairs and maintenance expense and property taxes expense increased            $10,000, $12,000 and $19,000, respectively. The increase in rent expense, net, resulted            from payment of land rent related to the Bank’s future retail branch in            Pequannock, New Jersey. Other components of net occupancy expense of premises decreased            $9,000 in aggregate.

 

Equipment expense decreased $40,000 or 3.7%, to $1.04million from $1.08            million, respectively, during the quarters ended September 30, 2007 and 2006. The            decrease in equipment expense was due to cost savings negotiated with several of the            Bank’s electronic data processing service providers.

 

Advertising expense decreased $142,000 or 36.1%, to $251,000 during the            quarter ended September 30, 2007 from $393,000 during the quarter ended September 30,            2006. Spending on newspaper advertising, magazine advertising, printed material and            promotional programs decreased $89,000, $12,000, $12,000 and $18,000, respectively.            During the current quarter, management generally devoted the Bank’s advertising            to loan products while temporarily discontinuing the marketing of deposit products.            This trend will probably change due to recent reductions in the federal funds rate,            which appear to be gradually lowering interest rates in the marketplace making our            interest rate offerings more competitive.

 

Directors’ compensation decreased $97,000 or 14.8%, to $560,000            during the quarter ended September 30, 2007, compared to $657,000 during the quarter            ended September 30, 2006. Fees decreased $22,000 to $192,000 and other directors’            compensation decreased $75,000 to zero due to freezing the directors’ incentive            compensation plan during the quarter ended December 31, 2006.

 

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Miscellaneous expense was virtually unchanged at $1.0 million during the            quarters ended September 30, 2007 and 2006. The most significant changes appeared in            the audit and accounting expense and insurance premiums expense components. Audit and            accounting expense decreased $39,000 to $93,000 due to lower costs associated with            Sarbanes-Oxley Act compliance. Insurance premiums expense increased $30,000 to $116,000            due to increases in the Bank’s commercial insurance package, particularly an            increase in worker’s compensation insurance premiums of $21,000 resulting from            the carrier’s yearly audit. All other components of miscellaneous expense            increased $6,000 in aggregate.

 

**Provision for Income Taxes.**The provision            for income taxes increased $523,000 to $599,000 during the quarter ended September 30,            2007, from $76,000 during the quarter ended September 30, 2006. The effective tax rate            was 36.8% during the quarter ended September 30, 2007, compared to 7.6% during the            quarter ended September 30, 2006. The effective tax rate increased due to a reduction            in interest from tax-exempt instruments as a percentage of pre-tax income as net income            increased. Tax-exempt interest was 33.7% of income before taxes during the quarter            ended September 30, 2007 compared to 188.1% during the quarter ended September 30,            2006. Notwithstanding an improvement in pre-tax income during the quarter ended            September 30, 2007, management continues to sell municipal bonds when opportunities            arise in an attempt to remove securities from the portfolio that do not provide a            steady cash flow.

 

**Liquidity and Capital Resources**

 

Liquidity, represented by cash and cash equivalents, is a product of its            operating, investing and financing activities. The primary sources of funds are            deposits, principal amortization, principal prepayments and maturities of            mortgage-backed securities and loans receivable; maturities of securities and funds            provided from operations. In addition, excess funds are invested in short-term            interest-earning assets such as overnight deposits, which provide liquidity to meet            lending requirements. While scheduled payments from the amortization of loans and            mortgage-backed securities and maturing 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. The Bank attempts to maintain adequate but not            excessive liquidity, and liquidity management is both a daily and long-term function of            business management. However, to the extent that the Bank does not need the funds for            loan originations, management expects to maintain liquidity at an elevated level as            long as the Treasury yield curve remains inverted or flat.

 

The            Bank reviews cash flow projections regularly and updates 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 September 30, 2007, the Bank had outstanding            commitments to originate loans of $32.9 million, commitments to fund the purchase of            loans on a flow basis of $49.0 million, construction loans in process of $6.1 million            and unused lines of credit of $28.0 million. At September 30, 2007, the Bank had $696.8            million of certificates of deposit maturing within one year.

 

Deposits decreased $73.4 million to $1.34 billion at September 30, 2007,            from $1.41 billion at June 30, 2007. During the quarter, certificates of deposit,            savings deposits and non-interest-bearing demand accounts decreased $62.3 million,            $12.0 million and $1.4 million, respectively. Interest-bearing demand deposits            increased $2.3 million. Focusing on lowering the Bank’s cost of deposits,            management reduced the interest rates available to depositors whose maturing            certificates of deposit were the product of an earlier marketing campaign designed to            attract deposits by offering promotional interest rates. The recent

 

20

 

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reductions in the federal funds rate by the Federal Reserve Board of            Governors, amounting to a 75 basis point cut in aggregate, appear to be gradually            lowering interest rates in the marketplace. As a result, management expects deposit            attrition to slow during the next quarter. At some point in the next quarter,            management may begin to advertise deposit products again as the Bank’s interest            rate offerings become more competitive.

 

Borrowings from the Federal Home Loan Bank (“FHLB”) of New            York are available to supplement the Bank’s liquidity position and to the extent            that maturing deposits do not remain with us, we may replace the funds with borrowings.            At September 30, 2007, advances from the FHLB amounted to $128.3 million following the            addition of $100.0 million in ten-year advances during the quarter. There was no need            to make use of overnight borrowings during the quarter ended September 30, 2007, due to            adequate liquidity. The Bank has the capacity to borrow additional funds from the FHLB,            through an overnight line of credit of $200.0 million or by taking additional            short-term or long-term advances. The current cost of long-term advances as a funding            source, relative to cost of retail certificates of deposit, may again encourage            management to borrow from the FHLB.

 

Consistent with its goals to operate a sound and profitable financial            organization, the Bank actively seeks to maintain its status as a well-capitalized            institution in accordance with regulatory standards. As of September 30, 2007, Kearny            Federal Savings Bank exceeded all capital requirements of the Office of Thrift            Supervision (the “OTS”).

 

The            following table sets forth the Bank’s capital position at September 30, 2007, as            compared to the minimum regulatory capital requirements:

 

|                       |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
|----------------------------|--------|--------------------------------|---------|--------|------------------------------|--------|--------|---------------------------------------------------------------------------------------------|---------|--------|---------|--------|--------|--------|---------|--------|---------|--------|
|                       |   | September 30, 2007 (Unaudited) |    |
|                       |   | Actual                         |    |   | Minimum Capital Requirements |   |   | To Be Well Capitalized Under Prompt Corrective Action                            Provisions |    |
|                       |   | Amount                         |    | Ratio  |                         |   | Amount |                                                                                        | Ratio   |   |    | Amount |   | Ratio  |    |
|                       |   | (Dollars in Thousands)         |    |
| Total Capital              |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
| (to risk-weighted assets)  |   | $                              | 368,586 |   | 42.61                        | %      |   | $                                                                                           | 69,197  |   | 8.00    | %      |   | $      | 86,496  |   | 10.00   | %      |
|                       |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
| Tier 1 Capital             |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
| (to risk-weighted assets)  |   | $                              | 362,443 |   | 41.90                        | %      |   |                                                                                        | — |   | — |   |   | $      | 51,898  |   | 6.00    | %      |
|                       |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
| Core (Tier 1) Capital      |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
| (to adjusted total assets) |   | $                              | 362,443 |   | 19.51                        | %      |   | $                                                                                           | 74,301  |   | 4.00    | %      |   | $      | 92,876  |   | 5.00    | %      |
|                       |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
| Tangible Capital           |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |
| (to adjusted total assets) |   | $                              | 362,443 |   | 19.51                        | %      |   | $                                                                                           | 27,863  |   | 1.50    | %      |   |   | — |   | — |   |
|                       |   |                           |    |   |                         |   |   |                                                                                        |    |   |    |   |   |   |    |   |    |   |

 

In            August 2007, the Bank received approval from the OTS for a $19.0 million capital            distribution to the Company. However, future dividend requests will require closer OTS            scrutiny due to the Bank’s compressed earnings. The cash dividend will be paid            during the quarter ending December 31, 2007.

 

 

21

 

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ITEM            3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET            RISK

 

**Qualitative Analysis.**The ability to            maximize net interest income is largely dependent upon the achievement of a positive            interest rate spread sustainable during fluctuations in prevailing interest rates.            Interest rate sensitivity is a measure of the difference between amounts of            interest-earning assets and interest-bearing liabilities, which either re-price or            mature within a given period. The difference, or the interest rate re-pricing            “gap”, provides an indication of the extent changes in interest rates may            affect an institution’s interest rate spread. A positive gap exists when the            amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive            liabilities, and a negative gap exists when the amount of interest rate sensitive            liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a            period of rising interest rates, a negative gap within shorter maturities would            adversely affect net interest income, while a positive gap within shorter maturities            would result in an increase in net interest income. During a period of falling interest            rates, a negative gap within shorter maturities would result in an increase in net            interest income while a positive gap within shorter maturities would result in a            decrease in net interest income.

 

Because the Bank’s interest-bearing liabilities, which mature or            re-price within short periods exceed its interest-earning assets with similar            characteristics, material and prolonged increases in interest rates generally would            adversely affect net interest income, while material and prolonged decreases in            interest rates generally would have a positive effect on net interest            income.

 

The            Bank’s Board of Directors established an Interest Rate Risk Management Committee            comprised of members of the board and management. The committee meets quarterly to            address management of the Bank’s assets and liabilities, including review of its            short term liquidity position; loan and deposit pricing and production volumes and            alternative funding sources; current investments; average lives, durations and            re-pricing frequencies of loans and securities; and a variety of other asset and            liability management topics. The committee reports the results of its quarterly review            to the full board, which adjusts interest rate risk policy and strategies, as it            considers necessary and appropriate.

 

**Quantitative Analysis.**Management using the            OTS model, which estimates the change in the Bank’s net portfolio value (the            “NPV”) over a range of interest rate scenarios, monitors the Bank’s            interest rate sensitivity. NPV is the present value of expected cash flows from assets,            liabilities, and off-balance sheet contracts. OTS defines the NPV ratio, under any            interest rate scenario, as the NPV in that scenario divided by the market value of            assets in the same scenario. The OTS produces its analysis based upon data submitted on            the Bank’s quarterly Thrift Financial Reports.

 

 

22

 

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The            following table sets forth the Bank’s NPV as of June 30, 2007, the most recent            date for which the Bank has received the Bank’s NPV as calculated by the OTS.            Management does not believe that there has been a material adverse change in the            Bank’s interest rate risk during the three months ended September 30,            2007.

 

             

|                 | At June 30, 2007            |
|----------------------|-----------------------------|
|                 |  

Net Portfolio Value | Net Portfolio Value                            as % of Present Value of Assets |
| Changes in Rates (1) |  

$ Amount            |  

$ Change |  

% Change | Net Portfolio Value Ratio | Basis Point Change |
|                 | (In Thousands)              |   |   |   |
|                 |                        |   |   |   |   |
| +300 bp              | 265,530                     | -127,718 | -32% | 15.44% | -570 bp |
| +200 bp              | 309,062                     | -84,186 | -21% | 17.48% | -365 bp |
| +100 bp              | 351.898                     | -41,350 | -11% | 19.39% | -175 bp |
| +50 bp               | 372,669                     | -20,579 | -5% | 20.28% | -86 bp |
| 0 bp                 | 393,248                     | — | — | 21.14% | — |
| +50 bp               | 412,864                     | +19,616 | +5% | 21.93% | +79 bp |
| - 100 bp             | 430,069                     | +36,821 | +9% | 22.61% | +147 bp |
| - 200 bp             | 456,941                     | +63,693 | +16% | 23.62% | +248 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, 2007 an immediate and permanent 2.0%            increase in interest rates would cause an approximately 13.4% decrease in our net            interest income.

 

Certain shortcomings are inherent in the methodology used in the above            interest rate risk measurements. Modeling changes in NPV require the making of certain            assumptions, which may or may not reflect the manner in which actual yields and costs            respond to changes in market interest rates. In this regard, the NPV model presented            assumes that the composition of the Bank’s interest sensitive assets and            liabilities existing at the beginning of a period remains constant over the measurement            period. The model also assumes that a particular change in interest rates reflects            uniformly across the yield curve regardless of the duration to maturity or re-pricing            of specific assets and liabilities. Accordingly, although the NPV measurements and net            interest income models provide an indication of the Bank’s interest rate risk            exposure at a particular point in time, such measurements are not intended to and do            not provide a precise forecast of the effect of changes in market interest rates on the            Bank’s net interest income and will differ from actual results.

 

 

23

 

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ITEM            4.

CONTROLS AND PROCEDURES

 

Based on their evaluation of the Company’s disclosure controls and            procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934            (the “Exchange Act”), the Company’s principal executive officer and            the principal financial officer have concluded that as of the end of the period covered            by this Quarterly Report on Form 10-Q 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 officer and principal financial officer, as            appropriate to allow timely decisions regarding required disclosures.

 

During the quarter under report, there was no change in the            Company’s internal control over financial reporting (as defined in Rule 13a-15(f)            under the Securities and Exchange Act of 1934) that has materially affected, or is            reasonably likely to materially affect, the Company’s internal control over            financial reporting.

 

24

 

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PART            II

 

 

| ITEM 1.  | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | At September 30, 2007, neither the Company nor the Bank                            were involved in any pending legal proceedings other than routine legal                            proceedings occurring in the ordinary course of business, which involve                            amounts in the aggregate believed by management to be immaterial to the                            financial condition of the Company and the Bank. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ITEM 1A. | Risk Factors                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | Management of the Company does not believe there has                            been any material changes with regard to the Risk Factors previously                            disclosed under Item 1A. of the Company’s Form 10-K for the year                            ended June 30, 2007, previously filed with the Securities and Exchange                            Commission.                                              |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ITEM 2.  | Unregistered Sales of Equity Securities and Use of                            Proceeds                                                                                                                                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

**ISSUER PURCHASES OF EQUITY SECURITIES**

 

The following table reports information regarding repurchases of the            Company’s common stock during the quarter ended September 30, 2007.

 

 

|                  |   | Total Numberof Sharespurchased |   | Average Price PaidPer Share |    | Total Number ofSharesPurchased asPart of PubliclyAnnounced Plansor Programs |    | Maximum Numberof Sharesthat May Yet bePurchased Underthe Plans or Programs (1) |    |
|-----------------------|--------|--------------------------------|--------|-----------------------------|---------|-----------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------|---------|
|                  |   |                           |   |                        |    |                                                                        |    |                                                                           |    |
| July 1–31, 2007 |   | 34,400                         |   | $                           | 13.65   |                                                                        | 34,400  |                                                                           | 485,634 |   |
| August 1-31, 2007     |   | —                        |   |                        | — |                                                                        | — |                                                                           | 485,634 |   |
| September 1-30, 2007  |   | —                        |   |                        | — |                                                                        | — |                                                                           | 485,634 |   |
| Total                 |   | 34,400                         |   | $                           | 13.65   |                                                                        | 34,400  |                                                                           | — |   |
|                  |   |                           |   |                        |    |                                                                        |    |                                                                           |    |   |

 

 

| ITEM 3. | Defaults Upon Senior Securities                                                |
|---------|--------------------------------------------------------------------------------|
|    |                                                                           |
|    | Not applicable.                                                                |
|    |                                                                           |
| ITEM 4. | Submission of Matters to a Vote of Security                            Holders |
|    |                                                                           |
|    | Not applicable.                                                                |

 

 

25

 

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|    |                                                                                |
|---------|-------------------------------------------------------------------------------------|
| ITEM 5. | Other Information                                                                   |
|    |                                                                                |
|    | None.                                                                               |
|    |                                                                                |
| ITEM 6. | Exhibits                                                                            |
|    |                                                                                |
|    | The following Exhibits are filed as part of this                            report: |
|    |                                                                                |
|    |                                                                                | 3.1 | Charter of Kearny Financial Corp.                            (1) |
|    |                                                                                | 3.2 | By-laws of Kearny Financial Corp.                            (1) |
|    |                                                                                | 4.0 | Specimen Common Stock Certificate of Kearny Financial                            Corp. (1) |
|    |                                                                                | 10.1 | Employment Agreement between Kearny Federal Savings Bank                            and John N. Hopkins (1) |
|    |                                                                                | 10.2 | Employment Agreement between Kearny Federal Savings Bank                            and Albert E. Gossweiler (1) |
|    |                                                                                | 10.3 | Employment Agreement between Kearny Federal Savings Bank                            and Sharon Jones (1) |
|    |                                                                                | 10.4 | Employment Agreement between Kearny Federal Savings Bank                            and William C. Ledgerwood (1) |
|    |                                                                                | 10.5 | Employment Agreement between Kearny Federal Savings Bank                            and Erika K. Parisi (1) |
|    |                                                                                | 10.6 | Employment Agreement between Kearny Federal Savings Bank                            and Patrick M. Joyce (1) |
|    |                                                                                | 10.7 | Employment Agreement between Kearny Federal Savings Bank                            and Craig L. Montanaro (2) |
|    |                                                                                | 10.8 | Directors Consultation and Retirement Plan                            (1) |
|    |                                                                                | 10.9 | Benefit Equalization Plan (1) |
|    |                                                                                | 10.10 | Benefit Equalization Plan for Employee Stock Ownership                            Plan (1) |
|    |                                                                                | 10.11 | Stock Option Plan (3) |
|    |                                                                                | 10.12 | Restricted Stock Plan (3) |
|    |                                                                                | 10.13 | Kearny Federal Savings Bank Director Life Insurance                            Agreement (4) |
|    |                                                                                | 10.14 | Kearny Federal Savings Bank Executive Life Insurance                            Agreement (4) |
|    |                                                                                | 10.15 | Kearny Financial Corp. Directors Incentive Compensation                            Plan (5) |
|    |                                                                                | 11.0 | Statement regarding computation of earnings per share                            (Filed herewith). |
|    |                                                                                | 31.0 | Certification pursuant to Section 302 of the                            Sarbanes-Oxley Act of 2002 |
|    |                                                                                | 32.0 | Certification pursuant to Section 906 of the                            Sarbanes-Oxley Act of 2002 |

 

 

 

 

26

 

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|   |   | (1) | Incorporated by reference to the identically numbered                            exhibit to the Registrant’s Registration Statement on Form S-1                            (File No. 333-118815). |
|--------|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (2) | Incorporated by reference to the exhibit to the                            Registrant’s Form 8-K filed on July 21, 2005. (File No.                            000-51093).                         |
|   |   | (3) | Incorporated by reference to the Registrant’s                            definitive proxy statement filed September 30, 2005 (File No.                            000-51093).                     |
|   |   | (4) | Incorporated by reference to the exhibits to the                            Registrant’s Form 8-K filed on August 18, 2005. (File No.                            000-51093).                      |
|   |   | (5) | Incorporated by reference to the exhibit to the                            Registrant’s Form 8-K filed on December 9, 2005 (File No.                            000-51093).                       |

 

 

 

 

27

 

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SIGNATURES

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the            registrant has duly caused this report to be signed on it behalf by the undersigned            thereunto duly authorized.

 

 

 

 

 

 

|   |             |   | KEARNY FINANCIAL CORP. |
|--------|------------------|--------|------------------------|
|   |             |   |                   |   |
| Date:  | November 6, 2007 |   | By:                    | /s/ John N. Hopkins |
|   |             |   |                   | John N. Hopkins |
|   |             |   |                   | President and Chief Executive Officer |
|   |             |   |                   | (Duly authorized officer and principal executive                            officer) |
|   |             |   |                   |   |
| Date:  | November 6, 2007 |   | By:                    | /s/ William C. Ledgerwood |
|   |             |   |                   | William C. Ledgerwood |
|   |             |   |                   | Senior Vice President and |
|   |             |   |                   | Chief Financial Officer |
|   |             |   |                   | (Principal financial officer) |

 

 

28

 

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