Kearny Financial Corp.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, however, on April 1, 2015 the FASB proposed to defer the effective date by one year.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

Borrowings. The balance of borrowings increased by $157.3 million to $669.6 million at March 31, 2015 from $512.3 million at June 30, 2014. The increase in borrowings primarily reflected an additional $175.0 million of FHLB advances drawn to fund a portion of our growth in loans during the first nine months fiscal 2015.  Of these new advances, $75.0 million were drawn during the quarter ended September 30, 2014 and we utilized interest rate derivatives during that period to effectively swap the rolling 90-day maturity/repricing characteristics of these new borrowings into a fixed rate for five years.  The remaining $100.0 million in new advances represented short-term FHLB advance drawn at the end of March 2015 to fund the purchase of a pool of multi-family mortgage loans.  The Bank expects to repay this short-term advance with a portion of the net proceeds received in conjunction with the Company’s second-step stock offering.

The new advances drawn during the nine months ended March 31, 2015 were partially offset by the repayments of $17.0 million of FHLB overnight advances and a maturing $3.0 million short-term advance that were outstanding at June 30, 2014.  Borrowing activity for the period also reflected the rollover of other short-term FHLB advances during the period that coincided with the repricing of interest rate swaps that effectively converted such advances into longer-term, fixed rate funding.

In addition to the changes in non-interest income noted above, we had also recognized net security sale gains totaling $830,000 during the three months ended March 31, 2014 for which no such gains were recorded during the three months ended March 31, 2015.  Additionally, we recognized a $510,000 write down on one foreclosed property held in real estate owned during the three months ended March 31, 2015 to reflect a decline in its fair value based on an updated property appraisal and listing agreement.  The property, located in Absecon, New Jersey, had been operated as a hotel until both the property and business were abandoned by the borrower, which resulted in a rapid and severe deterioration of the property’s condition and decline in fair value.  The property has been cleaned and secured and is currently listed for sale.  By comparison, losses on sale and write down of real estate owned totaled $71,000 during the three months ended March 31, 2014.

In addition to the changes in non-interest income noted above, we also recognized net security sale gains totaling $7,000 during the nine months ended March 31, 2015 compared to $1.1 million of such gains recognized during the nine months ended March 31, 2014.  We also recognized net losses totaling $656,000 arising from the write down and sale of real estate owned during the nine months ended March 31, 2015 compared to net losses of $70,000 recognized during the earlier comparative period.  The increase in losses primarily reflected a $510,000 write down on one foreclosed property held in real estate owned during the nine months ended March 31, 2015 to reflect a decline in its fair value based on an updated property appraisal and listing agreement.  The property, located in Absecon, New Jersey, had been operated as a hotel until both the property and business were abandoned by the borrower, which resulted in a rapid and severe deterioration of the property’s condition and decline in fair value.  The property has been cleaned and secured and is currently listed for sale as of March 31, 2015.

Provision for Income Taxes. Despite an increase in pre-tax net income, the provision for income taxes decreased by $924,000 to $2.1 million for the nine months ended March 31, 2015 from $3.0 million for the nine months ended March 31, 2014.  As discussed earlier, the increase in pre-tax net income partly reflected non-recurring sources of tax-exempt income during the nine months ended March 31, 2015 that included a $1.4 million payout on bank-owned life insurance policies and a $370,000 adjustment to gain on bargain purchase. Moreover, income tax expense during the nine months ended March 31, 2015 reflected a $416,000 reduction in income tax expense arising from the exercise of stock options during the quarter ended September 30, 2014.  After adjusting for these factors and other recurring sources of tax-exempt income, the overall decrease in income tax expense largely reflected the underlying differences in the taxable portion of pre-tax income between comparative periods.