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KRNY > SEC Filings for KRNY > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for KEARNY FINANCIAL CORP.

Form 10-Q for KEARNY FINANCIAL CORP.


14-Nov-2012

Quarterly Report


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. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms or variations on those terms, or the negative of those terms. The actual results of 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 the Company. 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, 2012 and June 30, 2012

General. Total assets decreased by $16.9 million to $2.92 billion at September 30, 2012 from $2.94 billion at June 30, 2012. The decrease in total assets was primarily reflected in the decline in the balance of mortgage-backed and non-mortgage-backed securities that was partially offset by an increase in the balance of cash and cash equivalents. The net decrease in total assets was complemented by a decrease in the balance of deposits that was partially offset by an increase in stockholders' equity.

Cash and Cash Equivalents. Cash and cash equivalents, which consist primarily of interest-earning and non-interest-earning deposits in other banks, increased by $32.5 million to $188.1 million at September 30, 2012 from $155.6 million at June 30, 2012. The increase in the balance of cash and cash equivalents largely reflects the repayment in full of callable agency debentures during the final month of the quarter ended September 30, 2012 coupled with accelerating prepayments of mortgage-backed securities during that quarter. Such cash flows are generally expected to be re-deployed into the investment securities portfolio during the subsequent quarter ending December 31, 2012.

In light of the historically low level of short term interest rates, the Company generally expects to continue maintaining the average balance of interest-earning cash and equivalents at comparatively lower levels than had been reported one year earlier. Management will continue to monitor the level of short term, liquid assets in relation to the expected need for such liquidity to fund the Company's strategic initiatives - particularly those relating to the expansion of its commercial lending functions. The Company may alter its liquidity reinvestment strategies based upon the timing and relative success of those initiatives.

Securities Available for Sale. Non-mortgage-backed securities classified as available for sale increased by $103,000 to $12.7 million at September 30, 2012 from $12.6 million at June 30, 2012. The net increase in the portfolio primarily reflected a decline in the net unrealized loss within the portfolio that

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was partially offset by the repayment of amortizing securities during the first three months of fiscal 2013. At September 30, 2012, the available for sale non-mortgage-backed securities portfolio consisted of $6.9 million of single issuer trust preferred securities and $5.8 million of SBA pass-through certificates with amortized costs of $8.9 million and $5.6 million, respectively.

The net unrealized loss for this portfolio decreased by $241,000 to $1.8 million at September 30, 2012 from $2.0 million at June 30, 2012. The decrease in the net unrealized loss was primarily attributable to an increase in the fair value of the Company's investment in single issuer, trust preferred securities whose unrealized losses decreased by $233,000 to $1.9 million at September 30, 2012 from $2.2 million at June 30, 2012. As discussed in greater detail in the notes to consolidated financial statements, management has concluded that the impairment within this segment of the portfolio is not "other-than-temporary" at September 30, 2012.

Additional information regarding available for sale securities at September 30, 2012 is presented in Note 7 and Note 9 to consolidated financial statements.

Securities Held to Maturity. Non-mortgage-backed securities classified as held to maturity decreased by $30.3 million to $4.4 million at September 30, 2012 from $34.7 million at June 30, 2012. The net decline in the balance of the portfolio primarily reflected the repayment of U.S. agency debentures called by the issuers prior to their maturities. At September 30, 2012, the held to maturity non-mortgage-backed securities portfolio included $2.2 million of U.S. agency debentures maturing within one to five years. Non-mortgage-backed securities held to maturity at September 30, 2012 also included $2.2 million of short term municipal obligations that mature within one year. Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio at September 30, 2012.

Additional information regarding held to maturity securities at September 30, 2012 is presented in Note 8 and Note 9 to the consolidated financial statements.

Loans Receivable. Loans receivable, net of unamortized premiums, deferred costs and the allowance for loan losses, increased by $3.9 million to $1.28 billion at September 30, 2012 from $1.27 billion at June 30, 2012. The increase in net loans receivable was primarily attributable to new loan acquisitions outpacing loan repayments during the first three months of fiscal 2013.

Residential mortgage loans, in aggregate, decreased by $17.6 million to $670.6 million at September 30, 2012 from $688.2 million at June 30, 2012. The components of the aggregate decrease included a net reduction in the balance of one-to-four family first mortgage loans of $14.1 million to $548.7 million at September 30, 2012 from $562.8 million at June 30, 2012 as well as a net reduction in the balance of home equity loans of $3.6 million to $92.2 million from $95.8 million for those same comparative periods. The noted decreases in the balance of residential mortgage loans were partially offset by a $126,000 increase in the balance of home equity lines of credit to $29.7 million at September 30, 2012 from $29.5 million at June 30, 2012.

The aggregate decline in the residential mortgage loan portfolio for the quarter ended September 30, 2012 continues to reflect a diminished level of "new purchase" loan demand resulting from a weak economy and lower real estate values. The decline in the outstanding balance of the portfolio was exacerbated by accelerating refinancing activity resulting primarily from longer-term mortgage rates falling to new historical lows during the quarter. Such declines in mortgage rates were largely attributable to the Federal Reserve's efforts to stimulate the economy by driving longer term interest rates lower through quantitative easing. Through this policy, the Federal Reserve has continued to aggressively

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purchase mortgage-backed securities in the open market thereby driving the yield on such securities, and their underlying mortgage loans, to historical lows.

As a portfolio lender cognizant of potential exposure to interest rate risk, the Bank has generally refrained from lowering its long term, fixed rate residential mortgage rates to the levels available in the marketplace. Consequently, a portion of the Bank's residential mortgage borrowers may continue to seek long term, fixed rate refinancing opportunities from other market resources resulting in further declines in the outstanding balance of its residential mortgage loan portfolio.

In total, residential mortgage loan origination and purchase volume for the three months ended September 30, 2012 was $13.7 million and $4.1 million, respectively, while aggregate originations of home equity loans and home equity lines of credit totaled $7.2 million for that same period.

Commercial loans, in aggregate, increased by $22.4 million to $595.7 million at September 30, 2012 from $573.3 million at June 30, 2012. The components of the aggregate increase included an increase in commercial mortgage loans totaling $27.0 million that was partially offset by a decline in commercial business loans of $4.6 million. The ending balances of commercial mortgage loans and commercial business loans at September 30, 2012 were $512.0 million and $83.7 million, respectively. Commercial loan origination volume for the first three months of fiscal 2013 totaled $50.9 million comprising $46.5 million and $4.4 million of commercial mortgage and commercial business loans originations, respectively. No commercial loans were acquired through purchase of participations during the three months ended September 30, 2012.

The outstanding balance of construction loans, net of loans-in-process, decreased by $2.2 million to $18.1 million at September 30, 2012 from $20.3 million at June 30, 2012. Construction loan disbursements for the first three months of fiscal 2013 totaled $655,000.

Finally, other loans, primarily comprising account loans, deposit account overdraft lines of credit and other consumer loans, increased $626,000 to $4.7 million at September 30, 2012 from $4.0 million at June 30, 2012. Other loan originations for the first three months of fiscal 2013 totaled approximately $922,000.

Nonperforming Loans. At September 30, 2012, nonperforming loans decreased by $3.1 million to $30.4 million or 2.36% of total loans from $33.5 million or 2.61% of total loans as of June 30, 2012. The balance of nonperforming loans at September 30, 2012 included $29.9 million of "nonaccrual" loans and $454,000 of loans reported as "over 90 days past due and accruing". By comparison, nonperforming loans at June 30, 2012 included $32.8 million and $691,000 of "nonaccrual" loans and loans reported as "over 90 days past due and accruing", respectively.

The composition of nonperforming loans at September 30, 2012 continued to include a disproportionate balance of residential mortgage loans originally acquired from Countrywide Home Loans, Inc. ("Countrywide") which continue to be serviced by their acquirer, Bank of America through its subsidiary, BAC Home Loans Servicing, LP ("BOA"). In total, nonperforming Countrywide loans included 38 loans totaling $11.3 million or 37.3% of total nonperforming loans at September 30, 2012. As of that same date, the Bank owned a total of 111 residential mortgage loans with an aggregate outstanding balance of $52.0 million that were originally acquired from Countrywide. Of these loans, an additional eight loans totaling $2.9 million are 30-89 days past due and are in various stages of collection.

Including the Countrywide loans noted above, nonperforming residential first mortgage loans at September 30, 2012 included a total of 47 nonaccrual mortgage loans with aggregate outstanding balances of $12.8 million.

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As of that same date, nonperforming loans also included a total of 11 nonaccrual home equity loans totaling $838,000 with no home equity lines of credit reported as nonperforming as of that date.

A total of four nonaccrual construction loans with an aggregate outstanding balance of $1.8 million were reported as nonperforming at September 30, 2012.

Nonperforming commercial mortgage loans at September 30, 2012 included 17 nonaccrual loans with aggregate outstanding balances totaling $10.4 million.

Commercial business loans reported as nonperforming at September 30, 2012 included 24 loans totaling $4.6 million including four loans totaling $454,000 reported as 90 days or more past due and still accruing with the remaining 20 loans totaling $4.1 million reported as nonaccrual.

Finally, nonperforming loans at September 30, 2012 included two nonaccrual consumer loans totaling $925.

Allowance for Loan Losses. During the three months ended September 30, 2012, the balance of the allowance for loan losses decreased by approximately $268,000 to $9.8 million or 0.76% of total loans at September 30, 2012 from $10.1 million or 0.79% of total loans at June 30, 2012. The decrease resulted from charge offs, net of recoveries, totaling approximately $607,000 that were partially offset by additional provisions of $339,000 during the three months ended September 30, 2012.

With regard to loans individually evaluated for impairment, the balance of the Company's allowance for loan losses attributable to such loans decreased by $253,000 to $2.6 million at September 30, 2012 from $2.8 million at June 30, 2012. The balance at September 30, 2012 reflected the allowance for impairment identified on $9.0 million of impaired loans while an additional $31.5 million of impaired loans had no allowance for impairment as of that date. By comparison, the balance of the allowance at June 30, 2012 reflected the impairment identified on $10.1 million of impaired loans while an additional $31.9 million of impaired loans had no impairment as of that date. The outstanding balances of impaired loans reflect the cumulative effects of various adjustments including, but not limited to, purchase accounting valuations and prior charge offs, where applicable, which are considered in the evaluation of impairment.

With regard to loans evaluated collectively for impairment, the balance of the Company's allowance for loan losses attributable to such loans remained stable at $7.3 million at September 30, 2012 and June 30, 2012. The consistency in the balance of this portion of the allowance partly reflected the additional allowance attributable to an overall increase of $4.5 million in the non-impaired portion of the loan portfolio. This increase in the allowance was largely offset by changes in the Company's historical and environmental loss factors made in accordance with its allowance for loan loss calculation methodology as discussed earlier.

Specifically, the Company's loan portfolio experienced a net annualized average charge-off rate of 19 basis points during the three months ended September 30, 2012 representing a decrease of 40 basis points from the 59 basis points of charge offs reported for fiscal 2012. The historical loss factors used in the Company's allowance for loan loss calculation methodology were updated to reflect the effect of these charge offs on the average annualized historical charge off rates by loan segment over the two year look-back period used by that methodology. Such updates, in conjunction with the change in the balance of the unimpaired portion of the loan portfolio, resulted in a net decrease of $213,000 in the applicable portion of the allowance to $2,075,000 as of September 30, 2012 compared to $2,288,000 at June 30, 2012.

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Regarding environmental loss factors, changes to such factors during the three months ended September 30, 2012 primarily reflected increases to those factors applicable to the Company's acquired loans. All such loans were initially recorded at fair value at acquisition reflecting any impairment identified on such loans at that time. In general, the aggregate level of realized losses on the acquired impaired loans has not exceeded the level of impairment originally ascribed to the loans at the time of acquisition. However, the Bank has identified and recognized some degree of "post-acquisition" impairment and charge offs attributable to acquired loans that were performing at the time of acquisition. While the level of this "post-acquisition" impairment has generally been limited, the Bank considers such losses in developing the environmental loss factors used to calculate the required allowance applicable to the non-impaired portion of its acquired loan portfolio. In recognition of these considerations, the Company has modified the following environmental loss factors applicable to the acquired loans during the quarter ended September 30, 2012 from the those levels that were in effect at June 30, 2012:

Level of and trends in nonperforming loans: Increased (+3) from "3" to "6" reflecting continuing increases in the level of nonperforming loans and associated losses within the portfolio segment.

National and local economic trends and conditions: Increased (+3) from "3" to "6" reflecting the continuing effects of adverse national and regional economic conditions affecting the loans within the portfolio segment.

Given their prior acquisition at fair value, the environmental loss factors established for the loans acquired through business combinations generally reflect a comparatively lower level of risk than those applicable to the remaining portfolio. In accordance with the methodology described earlier, the Company has assigned risk to a total of three environmental loss factors resulting in a total of 15 basis points of allowance being allocated to the applicable loans at September 30, 2012. The level of environmental loss factors attributable to these loans will continue to be monitored and adjusted to reflect the Company's best judgment as to the level of expected losses on the acquired loans that are collectively evaluated for impairment.

In conjunction with the net changes to the outstanding balance of the applicable loans, the increase in the environmental loss factors during the three months ended September 30, 2012 resulted in a net increase of $198,000 in the applicable valuation allowances to $5.2 million at September 30, 2012 from $5.0 million at June 30, 2012.

The tables on the following pages present the historical and environmental loss factors, reported as a percentage of outstanding loan principal, that were the basis for computing the portion of the allowance for loan losses attributable to loans collectively evaluated for impairment at September 30, 2012, and June 30, 2012.

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Allowance for Loan Losses Allocation of Loss Factors on Loans Collectively Evaluated for Impairment

                              at September 30, 2012
                                      Historical
                                         Loss           Environmental
          Loan Category                Factors         Loss Factors (2)     Total

Residential mortgage loans
Originated                              0.07%               0.30%           0.37%
Purchased                               2.33%               0.75%           3.08%
Acquired in merger                      0.00%               0.15%           0.15%

Home equity loans
Originated                              0.05%               0.36%           0.41%
Acquired in merger                      0.11%               0.15%           0.26%

Home equity lines of credit
Originated                              0.00%               0.36%           0.36%
Acquired in merger                      0.00%               0.15%           0.15%

Construction loans
1-4 family
  Originated                            2.04%               0.72%           2.76%
  Acquired in merger                    0.00%               0.15%           0.15%
Multi-family
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.15%           0.15%
Nonresidential
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.15%           0.15%

Commercial mortgage loans
Multi-family
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.15%           0.15%
Nonresidential
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.15%           0.15%

Commercial business loans
Secured (1-4 family)
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.15%           0.15%
Secured (Other)
  Originated                            0.03%               0.72%           0.75%
  Acquired in merger                    0.32%               0.15%           0.47%
Unsecured
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.15%           0.15%

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                    Allowance for Loan Losses
  Allocation of Loss Factors on Loans Collectively Evaluated for
                            Impairment
                at September 30, 2012 (continued)
                         Historical    Environmental
                            Loss       Loss Factors
   Loan Category          Factors           (2)             Total
SBA 7A
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       2.30%           0.15%            2.45%
SBA Express
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       4.57%           0.15%            4.72%
  SBA Line of Credit
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       0.00%           0.15%            0.15%
SBA Other
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       0.00%           0.15%            0.15%

Other consumer loans
(1)                          -               -                -
________________________________________________


(1) The Company generally maintains an environmental loss factor of 0.27% on other consumer loans while historical loss factors range from 0.00% to 100.00% based on loan type. Resulting balances in the allowance for loan losses are immaterial and therefore excluded from the presentation.

(2) "Base" environmental factors reported excluding the effect of "weights" attributable to internal credit-rating classification as follows: "Pass-1": 70%, "Pass-2": 80%, "Pass-3": 90%, "Pass-4":
100%, "Watch": 200%, "Special Mention": 400%, "Substandard": 600%, "Doubtful": 800%. (e.g. Environmental loss factor applicable to originated residential mortgage loan rated as "Substandard": 0.30% X 600% = 1.8%)

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Allowance for Loan Losses Allocation of Loss Factors on Loans Collectively Evaluated for Impairment

                                at June 30, 2012
                                      Historical
                                         Loss           Environmental
          Loan Category                Factors         Loss Factors (2)     Total

Residential mortgage loans
Originated                              0.07%               0.30%           0.37%
Purchased                               2.25%               0.75%           3.00%
Acquired in merger                      0.00%               0.09%           0.09%

Home equity loans
Originated                              0.05%               0.36%           0.41%
Acquired in merger                      0.11%               0.09%           0.20%

Home equity lines of credit
Originated                              0.00%               0.36%           0.36%
Acquired in merger                      0.00%               0.09%           0.09%

Construction loans
1-4 family
  Originated                            2.81%               0.72%           3.53%
  Acquired in merger                    0.00%               0.09%           0.09%
Multi-family
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.09%           0.09%
Nonresidential
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.09%           0.09%

Commercial mortgage loans
Multi-family
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.09%           0.09%
Nonresidential
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.09%           0.09%

Commercial business loans
Secured (1-4 family)
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.09%           0.09%
Secured (Other)
  Originated                            0.04%               0.72%           0.76%
  Acquired in merger                    0.36%               0.09%           0.45%
Unsecured
  Originated                            0.00%               0.72%           0.72%
  Acquired in merger                    0.00%               0.09%           0.09%

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                    Allowance for Loan Losses
  Allocation of Loss Factors on Loans Collectively Evaluated for
                            Impairment
                   at June 30, 2012 (continued)
                         Historical    Environmental
                            Loss       Loss Factors
   Loan Category          Factors           (2)             Total
SBA 7A
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       2.10%           0.09%            2.19%
SBA Express
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       6.10%           0.09%            6.19%
  SBA Line of Credit
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       0.00%           0.09%            0.09%
SBA Other
  Originated               0.00%           0.72%            0.72%
  Acquired in merger       0.00%           0.09%            0.09%

Other consumer loans
(1)                                -               -             -
________________________________________________


(1) The Company generally maintains an environmental loss factor of 0.27% on other consumer loans while historical loss factors range from 0.00% to 100.00% based on loan type. Resulting balances in the allowance for loan losses are immaterial and therefore excluded from the presentation.

(2) "Base" environmental factors reported excluding the effect of "weights" attributable to internal credit-rating classification as follows: "Pass-1": 70%, "Pass-2": 80%, "Pass-3": 90%, "Pass-4": . . .

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